Chapter 2 - The bill

Chapter 2 - The bill

Introduction

2.1        This is an omnibus bill containing a range of measures, including proposed changes intended to streamline and simplify prudential regulation of the financial sector, and changes intended to ensure that where a superannuation fund has suffered loss as a result of fraudulent conduct or theft, financial assistance is made available on a more equitable basis. An overview of the bill's four schedules follows.

Schedule 2 – Streamlining prudential measures

2.2        Schedule 1 of the bill implements the Government commitments relating to prudential regulation in response to the Regulation Taskforce report (Rethinking Regulation: The report of the Taskforce on Reducing Regulatory Burdens on Business).[1] The Government released this report on 7 April 2006 and announced its final response to the report on 15 August 2006.

2.3        The Government accepted all of the recommendations that were relevant to prudential regulation in the report. The Explanatory Memorandum (EM) advises that the bill also contains additional measures to streamline and simplify the prudential Acts[2] in a manner that is consistent with the Regulation Taskforce's findings.[3]

2.4        The measures in the bill have been subject to extensive consultation[4] through the release of a proposals paper on 4 December 2006,[5] an exposure draft of the bill on 11 May 2007,[6] and an industry roundtable discussion on the draft bill which was held on 28 May 2007.

2.5        Significant measures in the bill include the following:

  • Changes to breach reporting requirements;
  • Consistent protection for whistleblowers[7];
  • Changes to APRA’s exemption powers;
  • APRA to gain powers in relation to discretionary decisions under prudential standards;
  • Simplified requirements in relation to APRA consultation on general insurance prudential standards;
  • New APRA power to accept court enforceable undertakings;
  • Powers to appoint actuaries and auditors relegated to boards;
  • APRA will have the power to refer matters relating to actuaries and auditors to their professional bodies; and
  • other changes, as described in the table below.

2.6        The following table showing the changes and comparing the new law with the old law is derived from the EM.

Table 2.1: Comparison of key features of new law and current law

New Law

Current Law

Only significant breaches need to be reported under the prudential Acts. A written report on significant breaches needs to be made to APRA as soon as practicable, and in any event, no later than 10 business days after the entity becomes aware of the breach. Some breaches will need to be notified in writing to APRA immediately.

Where an actuary or auditor identifies a breach and is required to notify APRA and the regulated entity of a breach, the ADI, general or life insurer or superannuation trustee is not also required to report the breach to APRA. The reverse also applies.

Where a breach was previously reported to APRA and ASIC, the breach is only required to be reported to APRA.

All breaches need to be reported under the prudential Acts.

There are inconsistent and ambiguous timing requirements under the prudential Acts and the Corporations Act for the reporting of breaches.

Overlapping reporting requirements between responsible persons and officers, actuaries and auditors may be creating the need for multiple reporting of breaches.

There may be unnecessary breach reporting where a breach is required to be reported to both APRA and ASIC.

Consistent protection is provided for whistleblowers and persons who report information under the prudential Acts. These persons enjoy ‘use immunity’ in relation to reported information.

Inconsistent protection for whistleblowers and persons who report information. 

APRA’s exemption powers have been expanded under the SIS and Life Acts while reduced under the Banking and Insurance Acts. It is clarified that decisions relating to classes of persons are legislative in nature while those relating to a particular person are administrative in nature and are reviewable decisions.

There is lack of a flexibility in the prudential regime which may impose unnecessary compliance costs.

APRA will gain the power under the Banking and Life Acts to make discretionary decisions under its prudential standards. It is clarified that decisions relating to classes of persons are legislative in nature while those relating to a particular person are administrative in nature and are reviewable decisions.

APRA’s ability to tailor prudential requirements to particular circumstances under prudential standards is limited, and these requirements are not transparent.

Section 33 of the Insurance Act has been repealed, so APRA only needs to comply with the consultation requirements under Legislative Instruments Act 2003.

APRA currently must comply with two sets of legislative requirements with respect to consultation on general insurance prudential standards.

APRA has the power to accept court enforceable undertakings under the Banking and Life Acts.

APRA is unable to enforce cooperative agreements made with entities to address prudential concerns under the Banking and Life Acts.

The Board will have responsibility for the appointment of the actuary or auditor of the entity. There will be no requirement for APRA approval. Under the Insurance and SIS Acts, APRA can direct a regulated entity to remove the auditor or actuary who does not meet the fit and proper requirements or has been disqualified. Under Life Act, APRA can declare the auditor or actuary ineligible for appointment.

Entities are required to seek APRA approval for the appointment of its actuaries and auditors, which is inconsistent with a principles based legislative framework.

APRA has the power to refer matters relating to actuaries and auditors to their professional bodies under the Banking, Insurance and Life Acts. This will improve industry self-regulation and enhance co-operation between APRA and industry professional bodies.

APRA does not have the power to share information regarding actuary and auditor conduct with appropriate professional bodies under the Banking and Life Acts and its power under the Insurance Act is limited.

Prudential rules will be phased out by 30 June 2011.

Prudential rules add prescription and unnecessary complexity to the prudential framework

The LIASB will be abolished. The requirements currently found under actuarial standards in the Life Act will be prescribed under prudential standards.

The Life Act provides that APRA may determine standards on prudential matters for life companies under section 230A but grants actuarial standards-making powers to the LIASB under section 101.

The eligibility requirements for appointed actuaries under the Life Act will be replaced by principles based legislation, with further requirements prescribed under prudential standards.

Requirements with respect to actuaries in the Life Act are prescriptive and inflexible.

Duplication in reporting requirements has been removed and replaced by a process of information sharing between APRA and ASIC.

Duplication in reporting requirements under the Life Act.

Sections 123 and 125 of the Life Act, relating to reinsurance contracts, have been repealed.

Reinsurance reporting requirements are under the Life Act rather than responsibility of the Board of the life company.

Subsections 20(2), (3) and (4), sections 25 and 28 of the Life Act and Part 3 of the Life Regulations have been repealed. Section 21 of the Life Act has been amended so that APRA would no longer issue a certificate but would provide ‘authorisation in writing’.

The Life Act and Life Regulations contain prescriptive requirements with respect to registration of life insurers, and requirements to notify changes to information provided in a registration application. These requirements overlap with other information gathering processes.

ABNs will become a uniform business identifier. All RSE licensees and superannuation entities are required to obtain and display an ABN.

There is a requirement under the SIS Act to display RSE licence and registration numbers on certain documents.

The obsolete provisions have been repealed from the Life and SIS Acts.

Several transitional arrangements in the Life and SIS Acts are obsolete and add to complexity.

Schedule 2 - Financial assistance for certain superannuation entities

2.7        Part 23 of the Superannuation Industry (Supervision) Act 1993 (the SIS Act) provides a grant of financial assistance for certain superannuation entities that suffer loss as a result of fraudulent conduct or theft, subject to certain conditions. Pooled superannuation trusts (PSTs) and self managed superannuation funds (SMSFs) are not eligible for Part 23 financial assistance.

2.8        In 2004, the Government released the outcomes of a review conducted the previous year into Part 23.[8] The amendments in Schedule 2 of the bill implement the Government's response to the review. They are intended to expand eligibility for financial assistance under Part 23 and provide it on a more equitable basis.

2.9        The bill amends the Financial Institutions Supervisory Levies Collection Act 1998 and the Superannuation Industry (Supervision) Act 1993 to:

  • allow a superannuation fund that was eligible for financial assistance under Part 23 at the time an eligible loss was suffered to make a Part 23 application despite subsequently restructuring to a SMSF;
  • allow former beneficiaries of a fund who suffered an eligible loss to obtain financial assistance;
  • provide equitable access to financial assistance under Part 23 irrespective of whether the fund is a defined benefit fund or an accumulation fund;
  • clarify the definition of 'eligible loss' so that any deficit in a superannuation fund arising from the failure to pay contributions is not covered under Part 23;
  • allow the Minister to delegate certain administrative functions to reduce the length of time taken to consider applications; and
  • abolish the Special Protection Account which was established to pay grants of financial assistance to superannuation funds which suffer losses due to theft or fraud, and to hold funds collected from the superannuation industry. In practice, the account has never been used as all grants of financial assistance made under the Part 23 framework are firstly paid by the Government from consolidated revenue. The amount paid is then recovered from the superannuation industry through the imposition of the Financial Assistance Levy on all APRA-regulated superannuation funds.

Schedule 3 - Accounts, audit and reporting obligations

2.10      The Superannuation Industry (Supervision) Act 1993 (the SIS Act) is the principal legislation establishing the prudential framework for the regulation of the superannuation industry, including the prudential reporting requirements of superannuation entities.[9] These requirements are located in four Parts of the SIS Act and associated regulations. According to the EM, this creates complexity and is potentially confusing. Additionally, by referring to 'superannuation entities', the SIS legislation can make it difficult to determine which reporting obligations relate to SMSFs and which relate to APRA-regulated superannuation entities. The distinction is important as the reporting obligations of these two types of superannuation vehicle differ.

2.11      Schedule 3 of the bill consolidates and rationalises the prudential reporting requirements in the SIS Act. It repeals the current Part 4 and replaces it with a new Part 4 which integrates the reporting obligations for registrable superannuation entities (RSEs) and self managed superannuation funds (SMSFs) that were previously found in Parts 4 and 13 of the SIS Act.

2.12      The new Part 4 includes requirements for superannuation entities:

  • to keep accounting records;
  • to prepare reporting documents/accounts and statements; and
  • to lodge annual returns and audit reports.

It also contains requirements for trustees of superannuation entities to appoint an approved auditor to report on the operations, and the RSE licensee (if any), of the entity.

2.13      Additionally, Part 4 clarifies which reporting requirements apply to RSEs and which apply to SMSFs.

2.14      Schedule 3 of the bill also amends the SIS Act to close the regulatory gap that currently exists for the reporting of contraventions of the market conduct and disclosure provisions in the Corporations Act 2001.

2.15      Finally, Schedule 3 makes consequential amendments to the SIS Act, the Superannuation (Self Managed Superannuation Funds) Taxation Act 1987 and the Income Tax Assessment Act 1936.

Schedule 4 - Technical amendments relating to legislative instruments

2.16      Schedule 4 of the bill makes amendments to various Acts that are consequential on the enactment of the Legislative Instruments Act 2003. The Legislative Instruments Act was assented to on 17 December 2003. Certain provisions of the Act commenced on that date but the bulk of provisions were to commence on a date to be fixed by proclamation which was 1 January 2005.

2.17      The amendments in the bill replace various references and requirements that relate to the Acts Interpretation Act, with the relevant references and requirements of the Legislative Instruments Act.

2.18      Some amendments also specify that a legislative instrument may take effect before it is registered on the Federal Register of Legislative Instruments (the FRLI), notwithstanding section 12(2) of the Legislative Instruments Act which, in certain circumstances, prevents a legislative instrument from taking effect before it is registered.

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