Chapter 3
Issues raised in Evidence
Transfer of friendly societies to companies limited by shares
3.1 The Australian Friendly Societies Association raised the issue of
the lack of a provision in the legislation for the transfer of friendly
societies to companies limited by shares. The Association, while fully
supporting the legislation in all other respects, advised the Committee
that the Treasury had not provided an adequate explanation of why such
a provision was not included.
3.2 Representing the Association, Mr Martyn Pickersgill explained the
nature of the Friendly Societies' difficulties with the legislation in
the following terms:
As friendly societies moved into the broader investment field, they
have used financial planners, accountants and other advisers to increase
their distribution profile. Friendly societies are true mutuals with
one member having one vote, regardless of the number of products that
the member may contribute to. Friendly societies operate through benefit
funds which are similar to statutory funds operated by life companies.
As with life companies, the financial accounts of a friendly society
sometimes can be difficult to understand. As a result of this difficulty,
there are a number of financial advisers and research companies that
also do not understand, or do not try to understand, the structure of
friendly societies.
One of the by-products of the move to Corporations Law is the ability
to have a structure that is well recognised and well understood—and
by this we mean a company limited by shares. We do not believe that
a company limited by guarantee is as well understood as a company limited
by shares. As noted in our correspondence, the shares we mean are membership
shares as detailed in subdivision B, section 12 of the bill. This does
not mean that we view becoming a company limited by shares as a demutualisation
but it will give friendly societies that wish to demutualise in the
future experience in controlling a share register, which would certainly
make that process much easier. [1]
3.3 Mr Pickersgill concluded that the Friendly Societies considered that
a relatively simple amendment to the legislation would satisfy their requirements.
He pointed out that the bill already caters for institutions without shares
on offer, other than building societies that convert to a company limited
by shares in subdivision B, section 12D. [2]
3.4 Mr Andrew Sellars, Manager, Corporate Govenance and Accounting Division,
Department of the Treasury, provided a detailed response to the Friendly
Societies' request for an amendment. The key points he raised were as
follows:
- the option proposed in the bill to a company limited by guarantee
(or shares and guarantee) provides a mechanism for transition to a company
form which is akin to their current form and simple to apply to friendly
society members;
- the concerns which have been expressed about the guarantee option
are not well founded - there is no history of any such concerns with
the many thousands of existing and past companies limited by guarantee,
many of which have conducted similar activities to friendly societies;
- there are a number of complexities involved in permitting a limited
by shares structure as an option on transfer for friendly societies
as opposed to other transferring entities. These arise out of the benefit
fund structure and the status of friendly societies under other laws;
- any friendly societies that, despite the above factors, wish to convert
to limited by shares form will have that option after transfer under
existing procedures in the Corporations Law; and
- the steps required to provide friendly societies with a direct transition
to a company limited by shares structure are more complex than a one-line
amendment to the Bill. [3]
3.5 The full text of Mr Sellars' letter, which more fully explains the
situation in respect of friendly societies, is reproduced in Appendix
3 of this report.
Transfer of employees from the Insurance and Superannuation Commission
and the Reserve Bank to the Australian Prudential Regulation Authority
3.6 The Committee received extensive representations by way of written
submission and in oral evidence from the Community and Public Sector Union
(CPSU), the Finance Sector Union of Australia (FSU) and the Reserve Bank
Officers' Section of the Finance Sector Union of Australia concerning
the terms and conditions under which former employees of the Reserve Bank,
the Insurance and Superannuation Commission and new employees are to be
employed within the Australian Prudential Regulation Authority (APRA).
3.7 The representatives of these organisations argued that the Board
of APRA had reneged on previous undertakings and had instead unilaterally
imposed a new set of terms of conditions on staff. The CPSU and FSU argued
that the actions of APRA are a complete reversal of undertakings given
in writing on 1 July 1998 by the Chair of the APRA board. In its submission,
the CPSU and FSU stated that the Chair of the Board, Mr Carmichael, had
signed determinations which, inter alia indicated:
- the terms and conditions of ISC transferee's contract of employment
with the Commonwealth prevail to the extent of inconsistency with the
APRA's staff handbook;
- the Award and Agreements applying to RBA transferees transmitted and
are binding on APRA; and
- the terms and conditions in the (APRA) handbook reflecting ISC and
RBA agreements/awards would apply until a certified agreement is made
with APRA employees. [4]
3.8 Allegations raised by the CPSU and the FSU, in summary, were as follows:
- unilateral action taken by the APRA board in relation to existing
and incoming employees seeks to undermine legislative protection provided
by the Financial Sector Reform Act 1988 and, more immediately, the Finance
Sector Reform (Amendments and Transitional Provisions) Bill (No. 1)
1999;
- the APRA board is choosing to ignore provisions made under section
170MB of the Workplace Relations Act 1996 in relation to successor employees
[5].
- APRA is attempting to pre-empt legislative protections in the bills
in respect of new staff transferring to APRA under the bills. [6]
3.9 In support of their allegations, the representatives noted:
- APRA's refusal to negotiate a certified agreement, with staff advised
they must be engaged under an Australian Workplace Agreement (AWA) or
common Law contract;
- substantial loss of conditions;
- a "spill" of all positions in APRA with existing staff having
to apply for new positions in APRA; and
- APRA has chosen to disregard a petition signed by 65 per cent of affected
employees seeking a certified agreement.
3.10 Ms Margaret Gillespie of the CPSU contended that the legislation
passed by the Parliament last year establishing APRA does not provide
the protection for employees that Parliament may have intended and has
wider implications for other employees transferring to statutory authorities:
One of the things we are very anxious to draw to the attention of the
committee and the Senate is the fact that the legislature, the parliament,
can pass legislation in good faith, as it did in relation to the first
group of 11 bills last year which established the APRA board and the
framework, and can put into law clauses which seek to protect the interests
of transferring employees. We are trying to point out to the committee
that amongst the legislation you have at the moment are transitional
provisions which purport to protect the interests of transferring employees
from state and territory judiciary bodies.
It is our experience to date that the actions of the employer and the
interpretations that the employer is placing on legislation you passed
last year do not in effect protect the interests of those employees,
as senators may have thought when voting for that legislation. Therefore,
we felt it incumbent on us to point out to the Senate that you may wish
to address this issue in this legislation, and also look at the fact
that there are provisions within the Workplace Relations Act—which
the parliament has passed—to which we have drawn the attention
of the committee, which are being interpreted by this employer in a
way which does not keep within the spirit and intent of what we would
suggest those clauses set out to achieve by, again, protecting the interests
of transferring employees and successor employees, and that this in
turn not only affects the interests of these employees currently in
APRA, the ones who are to transfer under the legislation before you,
but also potentially any other group of public sector employees whose
current functions are transferred into a statutory authority. These
issues go not just to the APRA employees at the moment, but are far
wider in their implications. [7]
3.11 The representatives tendered a letter written by Mr Alistair Waters,
National Organiser, CPSU to Mr Graeme Thompson, CEO, APRA, during the
hearing, in support of their position. This letter is incorporated in
the report at Appendix 4.
3.12 The Committee pursued these issues with APRA representatives at
the public hearing. Representing APRA, Dr Darryl Roberts, General Manager,
Policy Development and Statistics, rejected the suggestion that APRA had
breached any employment requirements for its staff. [8] Dr Roberts undertook to provide the Committee with
written responses to questions raised by Committee members concerning
the allegations raised by the CPSU and FSU about the employment conditions
affecting APRA staff.
3.13 In its response to the Committee's questions, APRA acknowledged
that its preferred position is that staff who join APRA from 1 July 1999
will be employed on AWAs in accordance with Part V1D of the Workplace
Relations Act. However, no APRA staff member will be obliged to enter
into an AWA. APRA will offer those staff who do not wish to sign an AWA
the option of an individual common law contract which will operate in
conjunction with determinations made under s.45 of the APRA Act.
3.14 APRA considers that despite staff preferences, its primary responsibility
is to deliver an organisational structure and operational arrangements
that will best achieve the charter as set out in the APRA. APRA has made
a decision in accordance with the workplace Relations Act to favor the
making of AWAs as being able to best deliver its charter and at the same
time provide on-going protection for staff. APRA also made the point that
Part V1D of the Workplace Relations Act encourages employers and employees
to enter into AWAs.
3.15 In respect of the determinations and undertakings on which the unions
allege APRA has reneged, APRA advised the Committee that the determination
made by the APRA board on 1 July 1998 was made in the discharge of obligations
under the APRA Act and the Financial Sector Reform (Amendment and Transitional
Provisions) Act. APRA emphasised that this determination was always intended
to be of an interim nature, to operate pending the implementation of APRA's
organisational restructure. APRA asserted that this was made clear to
APRA staff and FI scheme employees. As APRA has now moved beyond the interim
phase, the July 1 determination is no longer relevant. [9]
3.16 The written responses are attached at Appendix 5 for the information
of the Senate.
Adequacy of safeguards concerning mergers and transfers of business
3.17 In its submission and in oral evidence, the Finance Sector Union
expressed support for the consolidation of various regulatory and prudential
arrangements, as broadly outlined in the proposed legislation. However,
the Union qualified this support, expressing concern about the adequacy
of safeguards within the legislation to prevent "unwelcome and ill-considered
change" that it thought might result from the proposed extension
of fast-tracking mechanisms for transfer between building societies, credit
unions and friendly societies to other deposit taking institutions. [10]
3.18 Giving evidence on behalf of the FSU, Mr Rodney Masson identified
a number of areas of concern including:
- Possible reductions in the primacy of the Treasurer's existing power
to approve or reject a merger;
- absence of parameters for the exercise of the minister's discretion
concerning whether his or her consent of a transfer of business is required.
3.19 Mr Masson argued that these merger approval powers were central
to the continuation of the Government's four pillars policy on mergers
between the four major banks. [11] He suggested that these features of the legislation
would lead to a lessening of ministerial scrutiny and Government accountability:
It suggests a lessening of the ministerial scrutiny and, therefore,
government accountability on the issues of mergers in the finance industry.
It is not sufficient for the government or for Treasury officials to
assert that there will be no wavering of responsibility of the Treasurer
to approve a transfer of deposit taking institutions. If this is the
case, why legislate the option? We submit that the bills need to compel
the Treasurer to consent or refuse proposed transfers, or at the very
least to quarantine those transfers that the Treasurer may choose to
waive. We would ask that specific criteria be established under which
that quarantine might occur.
3.20 The FSU sought amendments to the legislation to reinforce the current
roles played by both the Treasurer and the ACCC in relation to mergers,
especially between major finance institutions, submitting that "such
legislation should be framed in such a way as to allow for the consideration
of the interests of all stakeholders in a rigorous and accountable manner".
[12]
3.21 The FSU also recommended that the bill be amended to tighten the
criteria by which APRA applies the fast tracking transfer mechanisms,
and insert a requirement for a full public interest test to be undertaken
and applied to mergers or takeovers amongst major finance companies. scrutiny
of mergers under the new legislation. [13]
3.22 The Australian Consumers' Association (ACA) acknowledged that the
Bill would provide substantial benefits, particularly in relation to the
prudential regulation of building societies and credit unions. However,
in its submission, the ACA also expressed concerns about the proposals
in the legislation for the oversight of business transfers. The ACA raised
two specific concerns:
- it appears that the legislation will permit transfers of business
at the discretion of APRA without any consultation with the ACCC - the
Financial Sector (Transfers of Business) Bill 1999,at Part 3, Division
2, S12 states that APRA "may" consult with the ACCC; and
- it also appears that the legislation will not require such transfers
to be subject to the relevant provisions of the Trade Practices Act.(TPA)
3.23 The ACA accordingly recommended that the legislation be amended
to guarantee both the application of S50 and other relevant sections of
the TPA, along with the involvement of the ACCC. [14]
3.24 Representatives of the FSU raised similar concerns in evidence concerning
the role of the ACCC in evaluating mergers. [15]
Treasury and APRA response
3.25 The Committee questioned APRA and Treasury representatives about
these issues. In relation to the issue of Ministerial scrutiny of mergers,
Dr Roberts advised the Committee APRA's view is that it should always
comply with government policy and that the Treasurer would certainly be
consulted on any major proposals, sensitive proposals or contentious proposals.
However, he confirmed that it is the intention of the legislation to allow
for ministerial discretion.
3.26 Mr Paul Lindwall, Manager, Superannuation and Insurance Financial
Institutions Division, Commonwealth Treasury elaborated:
Firstly, the heart of this concern is, as I think you mentioned, about
the minister's consent being waived. It is worth pointing out that,
for example, the other four pillars legislation, such as the Financial
Sector (Shareholdings) Act, the Banking Act and the Insurance Acquisitions
and Takeovers Act, all provide the ability for the Treasurer or the
minister to delegate responsibilities.
For example, section 44 of the Financial Sector (Shareholdings) Act
provides an explicit delegation power to APRA in relation to acts under
that particular act. It is a similar situation with section 69 of the
Insurance Acquisitions and Takeovers Act. Section 63 of the Banking
Act is delegated to APRA in certain cases. All of those delegations
are made by written instruments by the Treasurer or the minister, as
the case may be, and they are not subject to be tabled in parliament
or anything like that. So the consent requirement in the transfers of
business bill—in clause 15, for example—that consent is not
required is not dissimilar in effect, therefore, to the sections that
are in these other acts.
The voluntary transfer mechanism, which is basically part III of the
transfers of business bill, requires a number of conditions to be met
before APRA can approve a voluntary transfer. Before I go on, let us
not forget that the purpose of this is as a prudential regulation tool,
and therefore it is protecting the depositors' interests in the case
of DTIs. APRA cannot approve a voluntary transfer unless the interests
of the depositors or policy owners of the transferring body, when viewed
as a group, have been met.
There are also the interests of the receiving body, the interests of
the financial sector as a whole and other matters that it can consider.
Also, it has to be satisfied that it is adequately adopted. What that
means is that APRA will be required to put an instrument into parliament—which
is disallowable—which will set out the conditions that constitute
adoption by the transferring body and the receiving body. For example,
it might be how much notice is needed to be given to the members of
a building society or it might be how many votes are needed by the members
to constitute approval of that type of process. All of those conditions
have to be met. [16]
3.27 Mr Lindwall emphasised that substantial safeguards, including the
possibility of involvement of the ACCC, are provided for:
Subclause 11(2) of the transfers of business bill states:
Furthermore, the effect of such prescription under 43(4) ensures that
those particular acts operate independently of these acts. So, even
if APRA did not follow this rule—don't forget that it says `must
not approve' but let us say hypothetically it did approve something—it
would still be subject to section 50 of the Trade Practices Act, and
therefore the ACCC could void a divestiture. [17]
3.28 Mr Lindwall also explained why the Transfer of Business bill provides
for a discretion concerning consultation with the ACCC and other groups:
It is basically because—if you recall that there are a large number
of institutions of varying size, some very small and some very large—there
are cases where you can envisage that it would not be something that
the ACCC would be interested in, nor the RBA. The Reserve Bank is interested
in overall systemic issues. A transfer involving two small credit unions
is not raising any systemic issues for the financial sector as a whole.
It is not something the Reserve Bank would be interested in and, in
the case of the ACCC, it also does not substantially lessen competition.
But because they are prescribed—remember that subclause 11(2)
means that APRA must not approve the transfer of business—clearly,
if APRA is in doubt as to whether it might, then it is incumbent on
APRA to consult that. It would therefore, I would expect—I might
ask APRA to confirm this—consult as necessary. [18]
3.29 The Treasury also agreed to respond in writing to a number of questions
on these issues and other related issues that were placed on notice by
a participating member of the Committee, Senator Stephen Conroy. In view
of the potential usefulness of the responses provided by Treasury, in
particular the clear statement of Government policy on these issues which
is included, the Committee has included them in the report at Appendix
6. The issues covered in these questions are as follows:
- Start-up date;
- Treasurer's consent;
- Minister Hockey's letter to the Australian Financial Review concerning
consent requirements;
- Transfer mechanism policy rationale;
- APRA consultation with ACCC, ASIC and RBA;
- Operation of the Transfers Bill;
- APRA's powers in relation to ADIs and non-callable deposits;
- Friendly Societies;
- Life Insurance companies;
- Employment;
- Possible removable of offence; and
- Possible drafting error.
Transition of credit unions to federal legislation
3.30 The Credit Union Services Corporation (CUSCAL) made representations
to the Committee strongly urging the Senate not to delay the transition
of credit unions to federal legislation, as provided for in the bills.
3.31 Representing CUSCAL, Mr Luke Lawler emphasised that any further
delay would create uncertainty and disadvantage consumers:
APRA has now been operating for a bit more than nine months. At this
stage, the only deposit-taking institutions that it is supervising are
the banks. The two other major players in that market—credit unions
and building societies—are still in their old regulatory system,
which was the subject of some criticism in the Wallis report.
You may be aware that there was an attempt to bring forward the transfer
by six months, which fell through. Any further delay creates further
uncertainty for the industry and also for the current regulators. It
also, obviously, denies consumers the benefit of the Wallis reforms,
which is a more competitive marketplace. [19]
3.32 Mr Lawler explained that under current regulatory arrangements,
CUSCAL effectively has to deal with eight state or territory regulators,
plus AFIC. While he was unable to estimate the extra costs associated
with this arrangement, he made the point that the cumbersome nature of
the regulatory structure imposes opportunity costs:
The second point is the opportunity costs and the simple commercial
opportunities forgone by having this cumbersome regulatory system which
requires a lot of hoops to be leapt through for approvals to engage
in certain business. [20]
Footnotes
[1] Evidence, p. E17.
[2] Evidence, p. E17.
[3] Correspondence dated 7 May 1999.
[4] Joint submission by CPSU and FSU, RBA officers
section, p. 2.
[5] Evidence, p. E19.
[6] Evidence, p. E21.
[7] Evidence, p. E22.
[8] Evidence, p. E31.
[9] Correspondence dated 4 May 1999.
[10] Evidence, p. E24.
[11] Evidence, p. E24.
[12] Evidence, p. E25.
[13] Evidence, p. E25.
[14] Submission, p. 1.
[15] See Evidence, p. E24.
[16] Evidence, p. 35.
[17] Evidence, p. E35.
[18] Evidence, p. E36.
[19] Evidence, p. E29.
[20] Evidence, p. E29.
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