Scrutiny of Bills Sixth Report of 1998

27 May 1998

ISSN 0729-6258

MEMBERS OF THE COMMITTEE

Senator B Cooney (Chairman)

Senator W Crane (Deputy Chairman)

Senator J Ferris

Senator S Macdonald

Senator A Murray

Senator J Quirke

TERMS OF REFERENCE

Extract from Standing Order 24

(1)

(a) At the commencement of each Parliament, a Standing Committee for the Scrutiny of Bills shall be appointed to report, in respect of the clauses of bills introduced into the Senate, and in respect of Acts of the Parliament, whether such bills or Acts, by express words or otherwise:

(i) trespass unduly on personal rights and liberties;

(ii) make rights, liberties or obligations unduly dependent upon insufficiently defined administrative powers;

(iii) make rights, liberties or obligations unduly dependent upon non-reviewable decisions;

(iv) inappropriately delegate legislative powers; or

(v) insufficiently subject the exercise of legislative power to parliamentary scrutiny.

(b) The Committee, for the purpose of reporting upon the clauses of a bill when the bill has been introduced into the Senate, may consider any proposed law or other document or information available to it, notwithstanding that such proposed law, document or information has not been presented to the Senate.

SIXTH REPORT OF 1998

The Committee presents its Sixth Report of 1998 to the Senate.

The Committee draws the attention of the Senate to clauses of the following bills which contain provisions that the Committee considers may fall within principles 1(a)(i) to 1(a)(v) of Standing Order 24:

Commonwealth Rehabilitation Service Reform Bill 1998

Financial Sector Reform (Amendments and Transitional

Provisions) Bill 1998

Financial Sector (Shareholdings) Bill 1998

Payment Systems (Regulation) Bill 1998

Commonwealth Rehabilitation Service Reform Bill 1998

This bill was introduced into the House of Representatives on 26 March 1998 by the Minister for Family Services. [Portfolio responsibility: Health and Family Services]

The bill proposes to provide transitional arrangements to facilitate the restructuring of the Commonwealth Rehabilitation Service as a Commonwealth company and makes consequential amendments to eight other Acts.

The Committee dealt with this bill in Alert Digest No. 4 of 1998, in which it made various comments. The Minister for Family Services has responded to those comments in a letter dated 14 May 1998. A copy of that letter is attached to this report, and relevant parts of the response are discussed below.

Insufficient Parliamentary scrutiny

Clause 18

In Alert Digest No. 4 of 1998, the Committee noted that clause 18 of the bill provides that no instrument made under the bill (with the exception of any regulations made under section 19) is a legislative instrument for the purposes of the Legislative Instruments Act 1998. Such a clause is clearly not necessary in relation to instruments which are administrative in nature, and so must relate to instruments which are legislative in nature. The Committee noted that the intention underlying the proposed Legislative Instruments Act is that all such instruments should be scrutinised by the Parliament. Accordingly, the Committee sought the advice of the Minister on the reason for excluding such instruments from scrutiny.

Pending the Minister's advice, the Committee drew Senators' attention to this provision, as it may be considered to insufficiently subject the exercise of legislative power to parliamentary scrutiny, in breach of principle 1(a)(v) of the Committee's terms of reference.

The Minister has responded as follows:

The Commonwealth Rehabilitation Service Reform Bill 1998 provides for the transfer of assets, liabilities and contracts relevant to the Commonwealth Rehabilitation Service (CRS), currently operating as a Division of the Department of Health and Family Services, to a new fully owned Commonwealth company limited by shares without conveyance or assignment.

The instruments referred to in clause 18 of the Commonwealth Rehabilitation Service Reform Bill 1998 facilitate this transfer and are described below:

a. clause 5 which provides for the Minister to nominate in writing that a specified company is the nominated company for the purposes of the Bill. Any declarations must be notified in the Gazette;

b. clause 10, which provides for a declaration to be signed by the Minister specifying that particular assets used by CRS vest in the nominated company. The clause also allows the Minister to declare in writing that the company becomes the Commonwealth's successor in law in relation to those assets (subclauses 2 and 3). Any declarations must be notified in the Gazette;

c. clause 11, which provides a mechanism to substitute the nominated company for the Commonwealth in contracts (other than contracts of employment) relating to CRS (subclause 1). It also allows for a declaration to be made by the Minister that the company becomes the Commonwealth's successor in law in relation to the rights and obligations under the contract (subclause 5). Any declarations must be notified in the Gazette;

d. clause 12, which provides a mechanism to transfer Commonwealth liabilities, relating to CRS to the nominated company. It also allows the Minister to declare that the company becomes the Commonwealth's successor in law in relation to those liabilities. Any declarations must be notified in the Gazette; and

e. clause 13, which provides for the Minister to sign a certificate, identifying particular land and which states that the right, title and interest has become vested in the company under this legislation and for that certificate to be lodged with a land registration official.

It is believed these instruments will be administrative in character. Clause 18 has been included in the Bill to avoid any uncertainty which could conceivably arise about their status under the proposed Legislative Instruments Act.

Once again thank you for writing on this issue.

The Committee thanks the Minister for this response.

Financial Sector Reform (Amendments and Transitional Provisions) Bill 1998

This bill was introduced into the House of Representatives on 26 March 1998 by the Treasurer. [Portfolio responsibility: Treasury]

One of a package of bills to effect the introduction of the new regulatory framework for the financial system, this bill proposes to amend the following Acts:

Australian Securities Commission Act 1989 to:
- change the name of the Australian Securities Commission to the Australian Securities and Investments Commission (ASIC);
- provide the ASIC with additional functions, particularly in relation to the consumer protection and market integrity aspects of insurance and superannuation regulation; and
- make consequential amendments;
Banking Act 1959 to extend the coverage of the Act so that the banking and deposit-taking sector will be administered by the Australian Prudential Regulation Authority (APRA);
Financial Corporations Act 1974 to require that authorised deposit-taking institutions provide certain data to both the Reserve Bank of Australia and the APRA;
Insurance Acquisitions and Takeovers Act 1991 to facilitate integration with the proposed Financial Sector (Shareholdings) Act 1998 and transfer regulatory responsibility to the APRA;
Insurance Act 1973, Insurance (Agents and Brokers) Act 1984 and Insurance Contracts Act 1984 to transfer regulatory responsibility to the APRA;
Life Insurance Act 1995, Retirement Savings Accounts Act 1997 and Superannuation Industry (Supervision) Act 1993 to separate responsibility for the administration of the Acts between the ASIC and the APRA;
Reserve Bank Act 1959 to:
- establish the Payments System Board to operate as the policy making board in relation to the payments system;
- reduce the Reserve Bank Board from 11 to nine members; and
- make consequential amendments;
Superannuation (Resolution of Complaints) Act 1993 to transfer regulatory responsibility to the ASIC; and

repeals six Acts and makes consequential and transitional amendments to other Acts.

The Committee dealt with this bill in Alert Digest No. 4 of 1998, in which it made various comments. The Parliamentary Secretary to the Treasurer has responded to those comments in a letter dated 25 May 1998. A copy of that letter is attached to this report, and relevant parts of the response are discussed below.

Non-availability of merits review

Schedule 2, Items 29-40

In Alert Digest No. 4 of 1998, the Committee noted that items 29 to 40 of Schedule 2 to the bill propose substantial changes to section 9 of the Banking Act 1959, and add new sections 9A, 9B and 9C to that Act. The effect of these amendments would be to give to the newly established Australian Prudential Regulation Authority (APRA) the power, currently exercised by the Governor-General, to issue and revoke the authority to carry on banking business in Australia. The exercise of such a power clearly has considerable commercial implications, yet the bill seems to make no provision for AAT review of APRA decisions. Accordingly, the Committee sought the advice of the Treasurer on the reason for excluding such decisions from independent review on the merits.

Pending the Treasurer's advice, the Committee drew Senators' attention to this provision, as it may be considered to make rights, liberties or obligations unduly dependent upon non-reviewable decisions, in breach of principle 1(a)(iii) of the Committee's terms of reference.

The Parliamentary Secretary to the Treasurer has responded as follows:

Decisions relating to who and who may not engage in banking business may have profound effects on the stability of the financial system. While it is true that such decisions have direct implications for the commercial interests of the parties concerned, the broader consequences of such decisions for depositors and the financial system as a whole are also of concern.

The most competent authority in Australia to assess these implications will be the Australian Prudential Regulation Authority (APRA), which will be required under its legislation to balance the objectives of financial safety and efficiency, competition, contestability and competitive neutrality. It would be undesirable to have APRA's decisions in this critical area altered by another body that is unlikely to be as competent or to have a similar interest and expertise in the public interest dimension of the financial system. For example, there may be times when decisions relating to the issue and revocation of such authorities form part of a broader intervention strategy to resolve a crisis and maximum certainty of outcome will be highly desirable.

That said, decisions relating to the issue and revocation of an authority will, nevertheless, be subject to judicial review. Moreover, in the case of revocation of an authority, where the prospect of private loss is more immediate, grounds for revocation are clearly specified in the Bill as a guard against arbitrary decision making and to guide such review. Taking this into account, together with the wider concerns outlined above, judicial review is seen as providing an appropriate balance between private and public protections in this case.

Insufficient Parliamentary scrutiny

Schedule 2, Item 49

In Alert Digest No. 4 of 1998, the Committee noted that item 49 of Schedule 2 to the bill inserts a proposed new section 11AF in the Banking Act 1959. This section will permit APRA to make prudential standards for authorised deposit-taking institutions. These standards appear to be legislative in character. However, there seems to be no provision for parliamentary scrutiny. The Committee noted that the intention underlying the proposed Legislative Instruments Act is that all such instruments should be scrutinised by the Parliament. Accordingly, the Committee sought the advice of the Minister on the reason for omitting such instruments from scrutiny.

On this issue, the Parliamentary Secretary to the Treasurer has responded as follows:

APRA needs to be an independent and operationally autonomous regulator to ensure the financial safety of depositors and to maintain stability in the financial system. The Committee of International Banking Supervisory Authorities (the Basle Committee) noted that these requirements are essential for effective banking supervision. Consistent with this approach, prudential standards should not be disallowable by the Parliament.

Certain and flexible standards powers will allow APRA to respond very quickly and continuously to developments in financial products or the system, as a whole, or in a crisis to prevent contagion effects in the financial system. Recent events in some of the Asian countries have shown that events in financial markets can move unpredictably and with great speed, and that the regulatory environment must respond quickly, and with certainty, to these changes.

Building societies and credit unions, which will in due course be covered under the Banking Act 1959, are already subject to prudential standards that are not disallowable by State Parliaments. The standards making powers proposed for APRA are similar to those currently available to the Australian Financial Institutions Commission.

I note that when the Legislative Instruments Bill is passed, then the standards referred to above would become disallowable. For the reasons set out above, the Government will be seeking an exemption from that Bill for the prudential standards.

APRA will, of course, still be required to appear before parliamentary committees on request and be accountable to the Parliament.

The Committee thanks the Parliamentary Secretary for this response.

Financial Sector (Shareholdings) Bill 1998

This bill was introduced into the House of Representatives on 26 March 1998 by the Treasurer. [Portfolio responsibility: Treasury]

One of a package of bills to effect the introduction of the new regulatory framework for the financial system, this bill proposes to regulate the ownership and acquisitions of prudentially regulated financial institutions.

Non-availability of merits review

Subclause 14(1)

In Alert Digest No. 4 of 1998, the Committee noted that subclause 14(1) of the bill granted to the Treasurer the discretion to determine whether an applicant may hold a stake of more than 15% in a financial sector company. However, the bill seemed to make no provision for review on the merits by the Administrative Appeals Tribunal of any exercise of that discretion. Accordingly, the Committee sought the advice of the Treasurer on the reason for excluding such decisions from independent review on the merits.

Pending the Treasurer's advice, the Committee drew Senators' attention to this provision, as it may be considered to make rights, liberties or obligations unduly dependent on non-reviewable decisions, in breach of principle 1(a)(iii) of the Committee's terms of reference.

The Parliamentary Secretary to the Treasurer has responded as follows:

In considering whether an applicant will be permitted to hold a stake of more than 15 per cent in a financial sector company, the Treasurer is only able to exercise discretion on national interest grounds. The national interest is a broad concept encompassing such concerns as the consequences for depositors, the health of the financial system and the broader economy, and the international financial system, although such decisions by the Treasurer would also have commercial repercussions for the parties involved. It would be undesirable to have a decision of the Treasurer altered by another body that is unlikely to be as competent or to have a similar interest and expertise in the public interest dimension of shareholdings in financial institutions. Further, similar to this Bill, there is no provision for a merit review of decisions in the Foreign Acquisitions and Takeovers Act 1975. That said, decisions under this subclause will, nevertheless, be subject to judicial review, which is seen as providing an appropriate balance between private and public protections in this case.

Non-availability of merits review

Clauses 23 and 31

In Alert Digest No. 4 of 1998, the Committee noted that clause 23 of the bill would permit the Treasurer to declare that a person has practical control of a financial sector company. On the making of such a declaration, clause 24(1) requires the person to give up that control. By virtue of clause 24(3), a failure to give up that control is a criminal offence.

Clause 31 of the bill would permit the Treasurer to issue a direction to a stakeholder to reduce his or her stake in a financial sector company if “it would be concluded” (by an unspecified person or persons) that the stakeholder was seeking to avoid other provisions in the bill. A failure to comply with such a direction issued by the Treasurer is, again, a criminal offence.

Since the commission of each of these offences depends, initially, on the exercise of a discretion by the Treasurer, it may be considered that the Treasurer can, in effect, create criminal liability in another person. Accordingly, the Committee sought the advice of the Treasurer on whether the exercise of discretions which may create criminal liability should be subject to independent review on the merits.

Pending the Treasurer's advice, the Committee drew Senators' attention to these provisions, as they may be considered to make rights, liberties or obligations unduly dependent on non-reviewable decisions, in breach of principle 1(a)(iii) of the Committee's terms of reference.

On this issue, the Parliamentary Secretary to the Treasurer has responded as follows:

The Treasurer is only able to exercise discretion (to declare whether a person has practical control of a financial sector company or to require a stakeholder to reduce their stake in a financial sector company) on national interest grounds. The national interest is a broad concept encompassing such concerns as the consequences for depositors, the health of the financial system and the broader economy, and the international financial system, although such decisions by the Treasurer would also have commercial repercussions for the parties involved. It would be undesirable to have a decision of the Treasurer altered by another body that is unlikely to be as competent or to have a similar interest and expertise in the public interest dimension of the control of financial sector companies. Further, similar to this Bill, there is no provision for a merit review of decisions in the Foreign Acquisitions and Takeovers Act 1975. That said, decisions under these clauses will, nevertheless, be subject to judicial review, which is seen as providing an appropriate balance between private and public protections in this case.

The Committee thanks the Parliamentary Secretary for this response.

Payment Systems (Regulation) Bill 1998

This bill was introduced into the House of Representatives on 26 March 1998 by the Treasurer. [Portfolio responsibility: Treasury]

One of a package of bills to effect the introduction of the new regulatory framework for the financial system, this bill proposes to provide that the Reserve Bank has the power to designate payment systems; to impose access regimes; make standards; arbitrate disputes; and give directions to participants in designated systems.

Insufficient scrutiny by Parliament of legislative power

Subclause 9(3) and clause 18

In Alert Digest No. 4 of 1998, the Committee noted that subclause 9(3) of the bill would permit the Reserve Bank to issue notices declaring that the Act would not apply to specified facilities. Clause 18 would permit the Bank to make standards for designated payment systems. In each case, the provisions appear to grant the bank a legislative power, with no corresponding provision for Parliamentary scrutiny of the exercise of that power. Accordingly, the Committee sought the advice of the Treasurer as to the reasons for not subjecting the exercise of these powers to Parliamentary scrutiny.

Pending the Treasurer's advice, the Committee drew Senators' attention to these provisions, as they may be considered to trespass unduly on personal rights and liberties, in breach of principle 1(a)(i) of the Committee's terms of reference.

The Parliamentary Secretary to the Treasurer has responded as follows:

Subclause 9(3) provides that the RBA may, by notice in writing, declare that the provisions of the Bill do not apply to a specified facility or to facilities included in a specified class of facilities if the RBA considers that such a declaration is appropriate having regard to the nature of said facilities. The effect of this subclause is to exempt specified purchased payment facilities (such as smart cards and electronic cash) from regulations under clauses 22 to 25 (that is, part 4). A holder of the stored value of a purchased payment facility must be an authorised deposit-taking institution (ADI), or authorised or exempted under Part 4. Subclause 9(3) provides an additional means for the RBA to not apply the regulatory powers of the Bill to specified facilities. This subclause will be used by the RBA for very small and/or isolated purchased payment facilities that operate within a closed environment. The nature of such facilities is such that parliamentary disallowance of a declaration of the RBA under this subclause would be impractical and increase the level of uncertainty within the financial system. In addition, any declaration by the RBA under this subclause would be subject to judicial review.

Clause 18 allows the RBA to make standards, subject to a public interest test, for designated payment systems. The RBA is required, except in urgent circumstances, to consult widely with interested parties while formulating such standards, and decisions by the RBA under this clause are subject to judicial review. The payments system is considered to be one of the main sources of systemic risk in the economy. Standards will allow the RBA to control this risk and to respond very quickly and continuously to developments in financial products or the system, as a whole, or in a crisis to prevent contagion effects in the payments system. Recent events in some of the Asian countries have shown that events in financial markets can move unpredictably and with great speed and that the regulatory environment must have the capacity to respond quickly to these changes.

The RBA will, of course, still be required to appear before parliamentary committees on request and be accountable to the Parliament.

Non-availability of merits review

Clauses 21 and 24

In Alert Digest No. 4 of 1998, the Committee noted that clauses 21 and 24 would allow the Reserve Bank to issue directions to various financial institutions. Failure to comply with these directions would be a criminal offence. Such provisions appear to permit the Bank to, in effect, create criminal liability – something which is appropriately the domain of Parliament. Accordingly, the Committee sought the advice of the Treasurer on whether the exercise of discretions which may create criminal liability should be subject to independent review on the merits.

On this issue, the Parliamentary Secretary to the Treasurer has responded as follows:

Directions under clause 21 relate to designated payment systems while directions under clause 24 relate to authorised holders of the stored value of a purchased payment facility (such as smart cards or electronic cash). In the case of clause 21, directions by the RBA are required to be consistent with the applicable access regime and any applicable standards. In the case of clause 24, directions by the RBA are required to be consistent with the conditions of the applicable authority.

In both instances, a decision by the RBA will be subject to judicial review. In addition, to enforce the directions powers, the RBA would need to take Court action against a corporation which the RBA considers has not complied with a lawful direction (it should be noted that directions under these clauses apply only to corporations).

Given the overall national economic and urgent nature of the exercise of the directions power, and the strategic role of the payments system in a crisis, the RBA is the most competent authority. It would be undesirable to have a direction of the RBA altered by another body that is unlikely to be as competent or to have a similar interest and expertise in the public interest dimension of the payments system.

Non-availability of merits review

Clauses 23 and 25

In Alert Digest No. 4 of 1998, the Committee noted that clause 23 of the bill would permit the Reserve Bank to authorise a corporation to be a holder of the stored value of a class of purchased payment facilities. Clause 25 of the bill permits the Bank to exempt a corporation from the need to have such an authority. In neither case is the exercise of this discretion subject to review on the merits by the Administrative Appeals Tribunal. Accordingly, the Committee sought the advice of the Treasurer on whether the exercise of such discretions should be subject to independent review on the merits.

On this issue, the Parliamentary Secretary to the Treasurer has responded as follows:

Purchased payment facilities (such as smart cards and electronic cash) embody the unique characteristic that consumers pay for the facility using conventional means (eg, cash) and rely on the holder of the stored value backing that facility to subsequently redeem that value. A holder of the stored value of a purchased payment facility must be an authorised deposit-taking institution, or authorised or exempted under clauses 23 and 25 respectively.

Decisions relating to who and who may not be a holder of the stored value of a purchased payment facility may have profound effects on consumer confidence in electronic payment systems more generally and hence on the stability of the financial system. While it is true that such decisions have direct implications for the commercial interests of the parties concerned, the broader consequences of such decisions for consumers and the financial system as a whole are also of concern.

The most competent authority in Australia to assess these implications will be the RBA, which will be required under its legislation to be satisfied that a corporation, which is granted an authority (under clause 23), or an exemption (under clause 25), is able to meet its obligations as the holder of the stored value of a purchased payment facility. It would be undesirable to have the RBA's decisions in this critical area altered by another body that is unlikely to be as competent or to have a similar interest and expertise in the public interest dimension of the payments system. In addition, these decisions by the RBA are subject to judicial review.

I trust the above explanations are of assistance to the Committee.

The Committee thanks the Parliamentary Secretary for this response.

Barney Cooney

Chairman