Chapter 2
Issues concerning the bill
Regulation of non-operating holding companies of life insurers
2.1
The bill amends the Life Insurance Act 1995 to regulate the
non-operating holding companies (NOHCs) of life insurers.
2.2
The prudential requirements that will apply to life insurance NOHCs are
consistent with those that apply to life insurers. The scope of the prudential
regulation is closely modelled on the existing regulation of the NOHCs of
general insurers and authorised deposit-taking institutions (ADIs).
2.3
Life insurance NOHCs will be required to be registered under the Life
Insurance Act 1995 and will be subject to supervision by the Australian Prudential
Regulation Authority (APRA). They will be required to comply with prudential
standards, reporting obligations, directions issued by APRA and investigations
authorised by the Act. APRA will be able to seek the disqualification of the
holders of specified positions in the companies.[1]
2.4
The Government says that 'APRA is expected to consult with industry
before determining or amending prudential standards.'[2]
Need for, and urgency of, the bill
2.5
Two companies to whom the bill will apply have questioned the need for
it. AXA Asia Pacific Holdings Ltd (AXA) claims that the Life Insurance Act
already gives APRA sufficient powers to protect the interests of policyholders.[3]
ING Australia Ltd (ING) argues that regulation of life insurers is already
considerably stricter than regulation of general insurers - for example, in the
rules about statutory funds, and the requirement for directors to give priority
to the interests of policyholders over the interests of shareholders. ING
claims that the proposed regime fails to recognise the nature and effectiveness
of the present controls.[4]
2.6
ING also believes the bill has been introduced hastily with inadequate
consultation with stakeholders. It calls for a six-month consultation period
followed by a transitional period of at least two years.[5]
2.7
In response, Treasury pointed out that the 1997 Wallis Review of the
financial system recommended allowing NOHCs to head financial groups, but
subject to the regulator having suitable power to monitor the group as a whole.
Treasury also noted there were comparable provisions for policyholder
protection in the Insurance Act 1973 and depositor preference in the Banking
Act 1959. This principle is supported by recent statements by international
bodies.[6]
2.8
Treasury also stressed that consistent regulation across industries was
desirable to avoid regulatory arbitrage.[7]
2.9
Treasury noted that principles-based legislation allows scope for
application by APRA in a way that is appropriate in the circumstances and for
the entity.[8]
2.10
Treasury noted that the Treasurer's press release 61 of 2 June 2008, and
the Minister for Superannuation and Corporate Law's press release 18 of 2 March
2009 announced the intention to introduce prudential regulation of life
insurance NOHCs.
2.11
Treasury said that APRA has indicated that it intends to undertake
industry consultation on proposed amendments to its prudential standards for
life companies. APRA expects to issue a consultation package in May or June 2009.
Any future reviews or proposed changes to the prudential group-level
supervisory arrangements are expected to be undertaken through consultation
that would provide sufficient opportunity for all players to put forward their
views.[9]
2.12
APRA also supports the bill. APRA regards the amendments as essential
for the prudential supervision of life companies and the protection of
policyholders. In particular, the amendments are critical for the development
of a consistent and workable regulatory framework for the supervision of
conglomerate groups which may include one or more life companies as part of
their business.[10]
2.13
APRA points out that all APRA prudential standards, being legislative
instruments, are subject to a due process that involves: a period of public
consultation; a cost benefit analysis; and the possibility of disallowance by
Parliament.[11]
Definition of NOHCs
2.14
AXA regards the definition of an NOHC as too narrow and inflexible. It
may result in AXA being required to divest assets and cease certain activities.
This would be costly. AXA also believes the meaning of 'carry on a business'
(the core concept in the definition) is not clear enough.[12]
2.15
Treasury submitted that the definition follows that for ADIs and general
insurers. APRA's authorisation guidelines for general insurance NOHCs provides
guidance on APRA's view of the definition. There is some flexibility in the
proposed framework that enables APRA to apply the NOHC supervision at a level
that is appropriate to the corporate structure.[13]
Compliance costs
2.16
ING argues that compliance costs are likely to be substantial.[14]
2.17
In response Treasury quoted additional material from the regulatory
impact statement:
The prudential standards for fit and proper and governance
would be as similar as possible to those that apply to life companies and NOHCs
of ADIs and general insurers. The prudential standard on capital would be
different to that applying to NOHCs of ADIs and general insurers reflecting the
different risks facing the industry. While the exact costs cannot be quantified
it is expected that the costs will not be significant as well run NOHCs of life
insurance groups are already likely to meet most of the requirements....All NOHCs
of life companies would be regulated thereby providing a level playing field.
That is, NOHCs regulated by APRA under the Banking and Insurance Acts would no
longer be at a competitive disadvantage compared to unregulated NOHCs.[15]
Regulation of subsidiaries
2.18
Where appropriate, prudential standards and reporting obligations will
also apply to the subsidiaries of NOHCs and life insurers. AXA opposes this on the
grounds that it will greatly increase the regulatory burden (as it will cover
subsidiaries that have nothing to do with insurance) without additional
protection to policyholders.
2.19
Treasury submitted that the provision is consistent with recommendations
of the Wallis Review and with internationally accepted principles. Treasury
submitted that the provision ensures timely information flow to the regulator:
For example, related entities in a corporate group may move
capital within the group to support a subsidiary, and this may have an impact
on the life insurer's capital adequacy or liquidity. Deterioration in a
subsidiary's financial position may prompt an examination of intra-group
financial or risk management.[16]
2.20
Treasury noted recent reforms to the notice of breach requirements, made
by the Financial Sector Legislation Amendment (Simplifying Regulation and
Review) Act 2007, to ensure that only significant breaches must be
reported. Treasury said that the breach reporting framework introduced by this
Act will be applied to the breach reporting obligations of life insurance NOHCs
and the subsidiaries of life insurers and their NOHCs.[17]
APRA's power to make standards
2.21
APRA will be able to make prudential standards for life companies, their
NOHCs and the subsidiaries of NOHCs.[18]
AXA argues that the power to make standards for NOHCs should be limited to
standards relating to governance, fitness and propriety.
2.22
Treasury submitted that prudential standards for NOHCs of life insurers
and their subsidiaries are expected to be similar to the existing prudential
standards for NOHCs and subsidiaries of general insurers and ADIs (except in
relation to capital). The present standards for general insurance NOHCs and
subsidiaries refer to group level matters.
2.23
Treasury noted that existing group level prudential standards for
general insurers and ADI groups were finalised after extensive consultation
with the industry:
APRA has indicated that it would prepare a consultation
package in relation to the proposed changes for life insurers, their NOHCs and
subsidiaries.[19]
Provisions on directions
2.24
APRA may give directions to a life company on any of ten specified
grounds.[20]
Under the bill this will also apply to their NOHCs. Decisions made on the first
four grounds, but not the others, are reviewable by the Administrative Appeals
Tribunal.[21]
2.25
AXA regards the grounds on which APRA can make directions as various and
speculative. In AXA's view, directions should be limited to actions that will
protect the interests of policyholders, and all directions should be reviewable
by the Administrative Appeals Tribunal. Directions should only be published
where the subject does not seek review (given the possible damage to
reputation).[22]
2.26
Treasury submitted that the provisions on directions, and the scope of
merits review, is consistent with that applying to life companies, general
insurers and their NOHCs, and ADIs and their NOHCs. This scheme dates from 2008
amendments made by the Financial Sector Legislation Amendment (Review of
Prudential Decisions) Act 2008 (before then APRA's power to give directions
was narrower, and was not subject to merits review). The 2008 amendments were
developed in response to Rethinking Regulation: report of the taskforce on
reducing regulatory burdens on business, and were the subject of industry
consultation.
2.27
Treasury submitted that the scope of merits review aims to balance
procedural fairness with the need to ensure that APRA can act promptly and
decisively when policyholders' or depositors' interests or the stability of the
financial system are at risk.[23]
2.28
APRA submits that it needs the power to issue directions, which is used
in situations where risks to policyholders have emerged.[24]
Investigatory powers
2.29
ING questions the need for APRA to have a broad power to investigate the
business of a registered NOHC if it is satisfied it is 'in the public
interest'.[25]
ING argues that this should be restricted to refer to the interests of
policyholders.[26]
A similar view is expressed by AXA, who adds that an NOHC would be an 'associated
company' which could already be investigated under section 138 of the Life
Insurance Act 1995.
2.30
Treasury noted that the provision mirrors existing provisions of the Insurance
Act 1973 and the Banking Act 1959. The scope of the 'public
interest' will be limited by the objects sections of the Life Insurance Act
and the APRA Act.
2.31
Treasury submitted that:
The ‘public interest’ trigger for commencing an investigation
is intended to create a broad but appropriate trigger where the other, more
specific triggers under section 230B of the Life Insurance Act may not cover
all situations where the interest of the Australian public requires APRA to
investigate. The key policy considerations are balancing the rights and
interests of the regulated entities with avoiding inappropriately proscribing
the circumstances in which an investigation may be undertaken.[27]
2.32
APRA submitted that most of the investigation powers are intended to be
available to APRA only when risks to policyholders have already been
identified. The powers are constrained by procedures which APRA must already
follow, including the 'show cause' notice.[28]
Strict liability offences
2.33
AXA argues that strict liability offences do not promote business taking
sensible commercial risks, but rather encourage a risk-averse and overly
cautious approach. AXA believes that failure to comply with a direction under
s230B should not be a criminal offence.[29]
2.34
Treasury submitted that the penalty provisions in the bill reflect
existing provisions that apply to life insurers and general insurance/ADI
NOHCs, to maintain consistency:
This approach maintains consistency for the life industry, as
it applies the same offence to equivalent breaches that may be committed by a
NOHC under the proposed Bill, and makes the same defences available for the
equivalent breaches. Some holding companies of life insurers are also the
authorised NOHC for a general insurer and/or an ADI, and the proposed Bill
seeks to maintain consistency in the offences and defences for offences across
the prudentially regulated industries where it is appropriate to do so.[30]
Injunctions in prudential legislation
2.35
Schedule 2 of the bill amends the Banking Act 1959, Insurance
Act 1973, Life Insurance Act 1995 and Superannuation Industry
(Supervision) Act 1993 to provide harmonised power for APRA to seek court
injunctions against breaches or contraventions of a provision of these Acts or
breaches of conditions or directions issued under these Acts.[31]
These provisions were not mentioned in submissions.
Committee comment
2.36
The Committee notes that the overriding policy of the bill is to align
regulation of life insurers with regulation of general insurers and ADIs. To
amend the bill in the ways suggested by the submitters would fundamentally
conflict with this.
2.37
The Committee is sympathetic to the submitters' concerns about the lack
of stakeholder consultation before the bill was introduced. However it
understands why, in the current economic environment, the Government may want
to act promptly to fill gaps in the prudential architecture. The Committee also
notes the Government's undertakings that APRA will undertake industry
consultation on consequential changes to prudential standards.
Recommendation 1
2.38
The Committee recommends that the Senate pass the bill.
Senator Annette Hurley
Chair
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