Explanatory Memorandum(Circulated by authority of the Minister for Financial Services and Regulation, the Honourable J.B. Hockey, MP)
7 Schedule 4 - Amendment of the Life Insurance Act 1995
The purpose of Schedule 4 to the Bill is to establish a competitively neutral prudential regime for financial institutions providing life insurance products. This will be achieved by regulating both life insurance companies and benefit fund friendly societies under the Life Insurance Act. Friendly societies are presently regulated under a State and Territory regime.
All friendly societies will also become registered as companies under the Corporations Law - see Schedule 3 - but those that do not have benefit funds will not require prudential regulation under the Life Insurance Act. Friendly societies that only offer health insurance business will only be regulated under the National Health Act. A small number of friendly societies that presently undertake benefit fund business and registered health insurance business will be jointly regulated under the Life Insurance Act and the National Health Act.
The proposed amendments to the Life Insurance Act will increase the flexibility and overall efficiency of the regulatory arrangements to appropriately cover friendly societies. The Life Insurance Act and its subordinate legislation will recognise the distinct characteristics of friendly societies, in particular, the benefit fund structure and the rights of members. The proposed changes include:
- additional flexibility in the application of actuarial standards to recognise differences in the operations of friendly societies;
- a new actuarial standard to provide for adequate capitalisation outside statutory funds (or benefit funds). This will serve a similar objective to the existing management fund capital standard for friendly societies and will replace the fixed initial and continuing capital requirements for life companies;
- a new provision to allow a life company to seek an APRA declaration to have its insurance business (other than health insurance business or insurance against loss of, or damage to, property) and annuity business regulated as 'life insurance business';
- a new provision to allow a life company to seek an APRA declaration to have business consisting of the provision of eligible financial benefits regulated as 'life insurance business';
- a new provision to allow a life company to restructure or terminate a statutory fund subject to APRA's approval. At present a statutory fund may only be restructured through a process of division or amalgamation;
- additional powers for APRA to make prudential standards in order to protect the interests of policy owners. APRA may also direct a life company to take an action if the company has contravened the Act or the direction is necessary in the interests of policy owners. These powers will enable APRA to impose specific corrective action and facilitate early intervention to prevent a crisis from emerging; and
- provision for APRA to give relief from certain financial reporting requirements.
It is also proposed that friendly societies be able to continue to use the voluntary wind up mechanisms established in the Corporations Law. The amendments also transfer to the Commonwealth the administration of unclaimed moneys that accrue to friendly societies.
The proposed amendments will restrict the assumption or use of the expression 'friendly society' in relation to a financial business carried on by a body corporate. That is, a body corporate that is not a friendly society for the purposes of the Life Insurance Act will need to seek APRA's consent to use the expression in respect to its financial business. This measure will protect the use of the expression 'friendly society' so as to reduce market confusion about whether financial business undertaken by the body corporate is prudentially regulated.
Another consequence of friendly societies becoming life insurance companies under the Life Insurance Act is that they will be able to seek approval to be an RSA institution under the Retirement Savings Account Act 1997 . Proposed amendments to taxation legislation are included in this Bill (Schedule 7) to provide competitively neutral taxation treatment for the RSA business of friendly societies. The taxation rates for this business will be set in the accompanying Income Tax Rates Amendment (RSAs Provided by Registered Organizations) Bill 1999.
A number of related or minor amendments have been included to update the Life Insurance Act.
7.1 The amendments in this Schedule will commence on the transfer date.
Amended Section 3 - Object
Items 1 - 4
7.2 An additional object of the Life Insurance Act will be to protect the interests of persons entitled to other kinds of benefits provided in the course of carrying on life insurance business. An example is to protect owners of eligible financial benefits declared by APRA (under section 12B of the amended Life Insurance Act) to be life insurance business.
7.3 The objects section of the Life Insurance Act will also make it clear that there will be a number of special provisions that apply only to friendly societies.
Amended Section 9A - Continuous disability policy
7.4 As the Dictionary in the Schedule will include a definition of health insurance business (see item 73), these words may be omitted from subsection 9A(7).
Amended Section 11 - Life Insurance Business
Items 6 - 8
7.5 The existing section 11 of the Life Insurance Act defines what is and what is not life insurance business for the purposes of the Life Insurance Act. The notes inserted by Items 6 and 8 make it clear that declarations made under sections 12A and 12B will extend the kinds of business that are life insurance business and limit the kinds of business that are not life insurance business for the purposes of the Life Insurance Act.
7.6 The reference to 'friendly society' will be omitted from paragraph 11(3)(a). This will remove the exclusion from the Life Insurance Act for friendly societies.
Amended Section 12 - Classes of Life Insurance Business
7.7 Subsection 12(2) will be rephrased to retain the effect of existing paragraph 12(2)(a). This will provide that APRA may declare that business included in one class of life insurance business (ordinary or superannuation) may be treated for the purposes of the Life Insurance Act as if it were included in the other class of life insurance business.
Items 10 and 12
Proposed Section 12A - Declarations that insurance or annuity business is life insurance business
7.8 Proposed section 12A will enable a life company to seek a declaration from APRA that certain insurance or annuity business is life insurance business for the purposes of the Life Insurance Act. Consideration cannot be given under this provision to the business of health insurance or insurance against loss of, or damage to, property. This provision replaces the existing declaration power in paragraph 12(2)(b).
7.9 This will allow APRA to consider treating as life insurance business certain insurance or annuity business that does not fall clearly within the section 9 definition of 'life policy'. In making such a declaration, APRA may have regard to a number of criteria specified in subsection 12A(4). For instance, APRA may consider whether the business is similar in nature to life insurance business, whether it would be appropriate for the business to be regulated under the Life Insurance Act or whether it would be more appropriate for the business to be regulated under some other law.
7.10 APRA may use the power to declare a certain insurance or annuity product to be life insurance if it does not satisfy the definition of life policy in section 9. Examples of the types of products that may be declared under this power are interim short-term accidental death policies, short-term income protection policies, or short term annuity products. However, it is intended that APRA will not use the section 12A declaration power in respect of an insurance or annuity product that would be more appropriately regulated under other legislation, such as the Insurance Act 1973 .
Proposed Section 12B - Declaration that other financial business is life insurance business
7.11 Proposed section 12B will operate on a similar basis to section 12A but enables a company to seek a declaration from APRA that an eligible financial benefit is to be treated as life insurance business for the purposes of the Life Insurance Act. To be considered an eligible financial benefit, the conditions in subsection 12B(1) must be satisfied. For example, the benefit needs to be provided in accordance with a contract, it needs to involve an amount of money rather than the provision of a service or facility and is not excluded by being regulated under other specified legislation or regulations.
7.12 A declaration made under sections 12A or 12B will only apply to the company that has made the application and would not broaden the general concept of a life policy. Therefore, a similar product offered by another provider would not be life insurance business unless that other provider also obtains a declaration under sections 12A or 12B.
7.13 Under both sections 12A and 12B, where the company making the application is not yet a life company a separate application for registration would also need to be lodged and accepted by APRA for the company to be able to operate any declared business as life insurance business. Subsection 17(4) makes this clear by stating that a company must not intentionally carry on business that has been declared to be life insurance under sections 12A or 12B unless the company is registered under the Life Insurance Act (item 12).
7.14 Under sections 12A and 12B existing life insurance companies and new entrants will have opportunities to develop new products that are prudentially regulated as life insurance business. This provides scope for life companies to broaden the range of products offered to consumers.
Proposed Part 2A (Divisions 1 - 5) - Special provisions relating to life companies that are friendly societies
Proposed Division 1 - Preliminary
Proposed Section 16A - Overview
7.15 Proposed section 16A provides an overview of the application of the amended Life Insurance Act to friendly societies. The section refers to the amendments that define the concept of a friendly society. It also clarifies that a friendly society will be a life company if it carries on life insurance business in Australia. In determining whether a company carries on life insurance business, the effect of the modified operation of key concepts and the declaration powers (sections 12 and 12B) must be taken into account.
7.16 The overview also notes that the amended Life Insurance Act will apply to life companies that are friendly societies by taking into account the following: the modified operation of key concepts (Division 3); the modifications relating to statutory funds (Division 4); other modifications including those made by regulations (Division 5); and special provisions in relation to friendly societies (including provisions about auditors and winding up).
7.17 Subsection 16A(6) will ensure that where a provision of the Life Insurance Act has been modified (for example, by the regulation making power under proposed section 16ZC or existing section 261), references to that provision will be taken to mean references to the modified provision.
Proposed Section 16B - Definitions
7.18 Proposed section 16B introduces definitions that are required for the application of the special friendly society provisions.
7.19 Subsection 16B(2) establishes the concept of 'adequately adopted' which is the process by which a friendly society must adopt benefit fund rules or amendments to benefit fund rules before seeking APRA approval. The rules will need to be adopted by the company in a way set out in the Prudential Rules. The level of adoption required will vary depending on the nature of the proposed rules or amendments and could be by resolution of the Board of Directors of a friendly society or by special resolution of the members of a friendly society. APRA will make a judgement about whether the level of adoption adequately takes into account the interests of members of the relevant company. Given ASIC's corporate governance and consumer protection roles, APRA may consult ASIC on this matter.
Proposed Division 2 - Friendly societies and how this Act applies to them
Proposed Section 16C - What is a friendly society?
7.20 For the purposes of the Life Insurance Act, a friendly society will be a company that either:
- becomes registered under the Life Insurance Act from the transfer date under the transitional arrangements (see Item 11 of Schedule 8); or
- that APRA determines to be a friendly society under subsection 16C(2).
7.21 APRA may vary or revoke a determination that a company is a friendly society for the purposes of the Life Insurance Act.
7.22 Prudential Rules may be established about the circumstances in which APRA may exercise its powers to determine a company to be a friendly society or to vary or revoke such a determination. It is expected that the Prudential Rules establishing when a company is a friendly society will focus on companies that gain registration under the Life Insurance Act to conduct life insurance business (including that determined under sections 12A and 12B) and reflect the special characteristics of friendly societies. It is intended that APRA will not make determinations under subsection 16C(2) in the absence of Prudential Rules. As Prudential Rules are disallowable instruments the matters that APRA will consider in making a determination that a company is a friendly society will be subject to Parliamentary scrutiny. However, for administrative convenience, the application of those rules, in the form of a determination under section 16C that a company is a friendly society, will not be a disallowable instrument. The determinations will be subject to judicial review.
7.23 APRA will not need to make a determination in respect of a transferring friendly society that becomes registered under the transitional arrangements (see Item 11 of Division 5 of Schedule 8).
Proposed Section 16D - Act applies to friendly societies in accordance with this Part
7.24 The Life Insurance Act will apply to friendly societies subject to the provisions of Part 2A, including the modifications in Divisions 3 and 4 and any other modifications that may be made under regulations.
Proposed Section 16E - Restriction on use of the expression friendly society
7.25 It is intended to restrict the assumption or use of the expression 'friendly society' by making it an offence for certain bodies corporate to use the expression in relation to a financial business they carry on in Australia. A friendly society registered under the Life Insurance Act can use the expression without seeking APRA's consent. Any other body corporate will require APRA's consent to use the expression 'friendly society' in respect to its financial business. This measure will protect the use of the expression 'friendly society' so as to reduce market confusion about whether financial business undertaken by an entity is prudentially regulated. This measure is consistent with the 1998 amendment to the Banking Act (section 66A) that restricts the use of expressions such as authorised deposit taking institution .
7.26 The maximum penalty for failure to comply with these requirements will be 50 penalty units. If a body corporate is convicted of an offence then, under subsection 4B(3) of the Crimes Act 1914 , the body corporate may be liable for a fine of up to five times the maximum that would be applicable to a natural person. However, a natural person may also be guilty of an offence under this section if he or she aids or abets, directly or indirectly, or is party to, the body corporate in committing the said offence. (Other maximum penalties introduced by the amendments will apply on the same basis.)
7.27 A company that was a friendly society under the FS Code prior to the transfer date will not need to seek APRA's approval to use the expression 'friendly society' if it continues to undertake service or fraternal friendly society activities. For example, such an entity will be able to continue to market itself as a friendly society and will only require APRA's consent if it subsequently commences to undertake some form of financial business.
7.28 A related matter dealt with in the amendments to the Corporations Law is the use of the expression 'friendly society' in the registered company name.
Proposed Division 3 - Modified operation of key concepts
Proposed Section 16F - Issue, ownership etc of policies
7.29 To enable the Life Insurance Act to apply appropriately to the benefit fund business of friendly societies, proposed section 16F will provide key concepts. These concepts will also apply to all other laws of the Commonwealth unless a contrary intention appears (subsection 16F(4)). Significant concepts developed in the section are:
- a friendly society will be taken to issue a policy to a person when it accepts an interest in a benefit fund in accordance with the benefit fund rules;
- the benefit fund rules are taken to be the terms of the policy;
- the owner of the policy is taken to be the person that applies for an interest in a benefit fund or the person that has received those rights by assignment or transfer;
- the amount required to be paid under the benefit fund rules as a condition of entitlement to the rights is taken to be a premium; and
- the policy is taken to be referable to the benefit fund.
Proposed Division 4 - Modified operation of provisions relating to statutory funds
Proposed subdivision 1 - Modifications
Proposed Section 16G - References to a statutory fund are references to an approved benefit fund
7.30 This section generally provides for regulatory neutrality, in that the provisions of the Life Insurance Act that apply to the statutory funds of life companies also apply to the approved benefit funds of friendly societies. However, there are some exceptions to this principle stated in other provisions in Subdivision 1 of Division 4 (see discussion of sections 16H - 16K) or if there is a contrary intention in a particular provision or brought about by regulations (see proposed section 16ZC). These exceptions reflect the different nature of benefit fund business, including the provision of a single product and the significance of benefit fund rules.
Proposed Section 16H - Modification of section 34
7.31 Proposed section 16H modifies the operation of section 34 of the Life Insurance Act which describes what money, assets and investments constitute assets of a statutory fund. Section 34 will apply to a friendly society as if existing subsections 34(2), 34(3) and 34(4) were omitted and the provisions in section 16H were substituted.
7.32 The modifications require a friendly society to keep the assets of an approved benefit fund distinct and separate from the assets of other approved benefit funds and from all other money, assets, or investments of the friendly society. There are two exceptions to this:
- a friendly society may invest assets of two or more approved benefit funds in a single investment if the investment is in accordance with the approved benefit fund rules of each of the funds and any applicable Prudential Rules. In such a joint investment, the asset will be regarded as an asset of each of the contributing approved benefit funds in proportion to their respective contribution; and
- a friendly society may maintain a single bank account for money that constitutes assets of two or more approved benefit funds if the account is maintained in accordance with any applicable Prudential Rules.
7.33 These modifications are based on similar provisions in the FS Code (sections 99 and 103) and will thus allow friendly societies to maintain their existing investments after the transfer. As benefit funds are intended to manage the assets of a single product, the ability to jointly invest the assets provides additional investment opportunities. The present Life Insurance Act requires assets to be maintained within the statutory fund, but since one statutory fund can contain a large number of different life insurance products the scope for asset pooling between products already exists under these provisions.
Proposed Section 16I - Modification of section 38
7.34 Section 16I modifies the operation of section 38 of the Life Insurance Act that deals with the expenditure and application of statutory funds. The modification adds an additional requirement to section 38 as it will apply to a friendly society. The additional requirement is that a friendly society may only apply assets of an approved benefit fund or mortgage or charge such assets in accordance with the approved benefit fund rules. This modification is based on a similar provision in the FS Code (section 101).
Proposed Section 16J - Modification of section 43
7.35 Section 16J modifies the operation of section 43 of the Life Insurance Act that deals with the investment of statutory funds. The modification adds an additional requirement to section 43 as it will apply to a friendly society. This requirement is that the investment of the assets of an approved benefit fund must be in accordance with the approved benefit fund rules and comply with any applicable Prudential Rules. This modification is based on a similar provision in the FS Code (section 103).
Proposed Section 16K - Modification of section 45
7.36 Section 16K modifies the operation of section 45 of the Life Insurance Act that deals with the transfer of assets between funds. The modification adds subsection 45(5) that will allow a friendly society to transfer assets between the management fund and approved benefit funds in accordance with the requirements of section 45 (eg on a fair assets value basis).
Proposed subdivision 2 - Approved benefit fund rules
Proposed Section 16L - Approval of benefit fund rules
7.37 Section 16L and subsequent provisions in subdivision 2 of Division 4 of Part 2A provide the process for APRA to approve benefit fund rules, amendments to approved benefit fund rules and amendments to a company's constitution that are consequential upon such changes. Once APRA approval has been attained, these provisions require the lodgement of the rules or amendments with ASIC and establish that the changes form part of the company's constitution. (See Part 2 of Schedule 3 of the Bill, including the amendments to the definition of constitution , sections 136 and 137 and Part 2F.2 of the Corporations Law.)
7.38 The processes established in subdivision 2 replace the requirements in Part 4A of the FS Code for the SSA to approve the establishment of the benefit fund and register the benefit fund rules if they have been established in accordance with the Code and AFIC standards. Under the FS Code, a single regulator served both a corporate governance and prudential role for friendly societies. In comparison, the Commonwealth regime has been developed to take into account a joint APRA and ASIC regulatory regime for life companies. Accordingly, the provisions reflect the following roles for the two regulators: prudential regulation by APRA, and corporate governance and disclosure regulation by ASIC.
7.39 As the benefit fund rules establish the rights of the benefit fund members it is desirable to have an independent regulator scrutinise new benefit fund rules or amendments to approved benefit fund rules. For instance, the approval process (in particular, the adequately adopted process - see section 16C) could require a special resolution of members to adopt the proposed changes of the benefit fund rules. APRA might consider this appropriate if, for example, the amendments being considered by the friendly society involved significant changes to the financial entitlements of the benefit fund members or the riskiness of their investment. In the absence of this process, there is a possibility that the friendly society would be able to make substantial changes to benefit fund entitlements without involving benefit fund members in the decision-making process.
7.40 The approval process is appropriate for friendly societies because the financial products offered by this industry are established by the benefit fund rules (and are exempted from the operation of the Insurance Contracts Act 1984 by Part 9 of that Act). In comparison, other life companies issue a policy when they enter into contracts that constitute the policy. Such contracts are not easily changed after they are issued.
7.41 The proposed process for the approval of benefit fund rules requires a company to apply in writing to APRA for approval of benefit fund rules for a benefit fund operated, or to be operated, by the company. The application will need to comply with Prudential Rules. A company that makes an application will either be a friendly society already registered under the Life Insurance Act or a company seeking to be registered. Transitional provisions will deem the existing benefit funds and benefit fund rules of friendly societies that become registered under the transfer arrangements to be approved in accordance with the requirements of these provisions (items 11(7) and (8) of the transitional provisions - Division 5 in Schedule 8).
7.42 Subsection 16L(3) provides that APRA must approve benefit fund rules if a written application has been made in accordance with any applicable Prudential Rules and if APRA is satisfied that:
- the carrying on of the activities will constitute the carrying on of life insurance business. Life insurance business includes life policies under section 9 and business declared to be life insurance under sections 12A or 12B;
- the benefit rules are consistent with the Life Insurance Act (defined to include regulations, actuarial standards, prudential standards and Prudential Rules made under that Act); and
- the rules have been adequately adopted (in accordance with proposed subsection 16B(2)).
7.43 A company will be guilty of an offence if it is required by Prudential Rules to notify members of the approved benefit fund rules and fails to do so. The maximum penalty for a failure to comply with these requirements will be 50 penalty units.
Proposed Section 16M - Lodging approved benefit fund rules with ASIC
7.44 A company must lodge a copy of its approved benefit fund rules with ASIC in accordance with any ASIC requirements. Approved benefit fund rules will form part of a friendly society's constitution. This will enable individuals to obtain a copy of the constitution from ASIC offices.
7.45 The company will be guilty of an offence if it does not lodge the approved benefit fund rules with ASIC within 14 days after the day on which APRA approved the rules (under section 16L). The maximum penalty for a failure to comply with these requirements will be 5 penalty units.
Proposed Section 16N - When approved benefit fund rules come into force
7.46 This section establishes when approved benefit fund rules come into force. If the rules specify the date of effect, the rules will come into force from that day. Otherwise, for an existing friendly society the rules will come into effect from the day they are lodged with ASIC. If a company is not yet a friendly society under the Life Insurance Act, the rules will come into force on the day it becomes a friendly society for these purposes (ie, it is registered under the Life Insurance Act and is determined to be a friendly society under section 16C).
Proposed Section 16O - Approved benefit fund rules form part of a company's constitution
7.47 Approved benefit fund rules that come into force will become part of the constitution of a company. This preserves the FS Code position that benefit funds are established under the rules of a society.
7.48 Amendments to the Corporations Law will recognise the requirements of the amended Life Insurance Act for the adoption of benefit fund rules by friendly societies as part of their companys' constitutions, modification of benefit fund rules and consequential amendments to other parts of the constitutions.
Proposed Sections 16P - 16T - Amending approved benefit fund rules
7.49 These provisions require a similar approval (proposed section 16Q) and lodgement process (section 16S) for the amendment of approved benefit fund rules as for the initial approval of the rules. If a friendly society does not follow this process, the amendment will not be effective (proposed section 16P). The matters that APRA will consider in approving the amendment, and the relevant offence provisions, are also consistent with those in section 16L.
7.50 Proposed section 16R will establish a process for APRA to seek action if it considers that approved benefit fund rules are deficient because they are inconsistent with the Life Insurance Act. APRA may require a friendly society to propose an amendment of the approved benefit fund rules to rectify the deficiency and to submit the amendment for APRA's approval (under section 16Q).
- If the friendly society submits a proposed amendment within the reasonable period specified by APRA in its notice (under subsection 16R(2)), APRA can approve the amendment under section 16Q and the friendly society will then lodge the amendment with ASIC in accordance with section 16S. An approved amendment will come into force in accordance with proposed section 16T.
- If APRA refuses to approve the amendment under section 16Q or the friendly society fails to submit an amendment within the specified time, APRA may amend the rules to rectify the deficiency (subsection 16Q(4)). APRA must give the friendly society written notice of the amendment (subsection 16Q(5)). The amendment will come into force from the day it is lodged (by APRA) with ASIC (section 16T). If APRA makes such an amendment, the friendly society will be guilty of an offence if it is required (by Prudential Rules) to notify its members of the amendment (subsection 16Q(6)) and does not do so. The maximum penalty for a failure to notify is 50 penalty units.
7.51 An amendment of approved benefit fund rules that is in force under section 16T takes effect as an amendment of the constitution of the friendly society by force of section 16P. This is consistent with the section 16O treatment of approved benefit fund rules.
Proposed Sections 16U - 16Y - Approval of consequential amendments of company's constitution
7.52 Consistent with the processes established to approve the benefit fund rules, the provisions will enable APRA to approve amendments to a company's constitution that are consequential upon the approval or amendment of its benefit fund rules. This will enable a friendly society to undertake a single process to amend its benefit fund rules and related parts of its constitution - rather than having to also pursue the Corporations Law requirements to amend its constitution in relation to minor consequential matters.
7.53 Proposed section 16U will provide for a friendly society to seek APRA's approval of consequential amendments as part of the same application for approval of benefit fund rules (under section 16L) or amendments to the approved benefit fund rules (under section 16Q). The application for consequential amendments must be in accordance with Prudential Rules. APRA may approve the consequential amendments if satisfied that the amendments are consequential on the proposed benefit fund rules or the amendment of benefit fund rules and do not also deal with other matters. APRA may consult ASIC in considering these matters. The same offence provisions as those under sections 16L and 16Q will apply if the friendly society is required to notify members of the amendments and fails to do so.
7.54 Section 16U will only be used by APRA to approve minor changes to a company's constitution that flow from new or amended benefit fund rules. For example, the approval process may be appropriate where the addition of a new benefit fund to the company's constitution requires additional cross-references to other parts of the constitution.
7.55 Proposed section 16V applies if APRA considers that the constitution of a company is deficient because, as a result of the adoption or amendment of approved benefit fund rules, the constitution is inconsistent with those rules. Section 16V applies in a similar manner to section 16R (see above) that enables APRA to seek amendments to approved benefit fund rules. That is, APRA may give a company a written notice requiring the company to submit for approval consequential amendments (in accordance with the requirements in Prudential Rules) to rectify deficiencies in its constitution.
- APRA may approve the consequential amendments if satisfied that the amendments rectify the deficiency. APRA must give the company written notice of its decision.
- If APRA refuses to approve the proposed amendments or the company fails to submit consequential amendments, APRA may, in writing, determine consequential amendments of the constitution to rectify the deficiency. APRA must immediately give the company written notice of the amendments.
- The company will be guilty of an offence if APRA has either approved or made consequential amendments to the company's constitution and Prudential Rules require the company to notify some or all of its members of the consequential amendments and the company fails to do so. Failure to notify members attracts the same maximum penalty as that applying under the notification provisions of sections 16L, 16Q and 16R.
7.56 If APRA approves consequential amendments of a company's constitution (under sections 16U or 16V), the company will need to lodge a copy of the consequential amendment with ASIC (proposed section 16W). This provision is consistent with the requirements that a company lodge with ASIC a copy of approved benefit fund rules (section 16M) and approved amendments to approved benefit fund rules (section 16S) and applies a similar maximum penalty as those sections.
7.57 Proposed section 16X provides that consequential amendments approved by APRA under either section 16U or section 16V come into force on the day lodged with ASIC or a later day if specified in the amendments. This provision is consistent with the application of section 16T (that deals with when an amendment of approved benefit fund rules come into effect).
7.58 Section 16X ensures that a consequential amendment of a company's constitution which has been approved or determined by APRA under the process described above will take effect as an amendment of the constitution of the company. This is consistent with the outcome for benefit fund rules approved by APRA under the process established by the proposed amendments in this Bill and amendments to approved benefit fund rules. Proposed amendments to the Corporations Law (see Part 2 of Schedule 3 of the Bill - the amendments to the definition of constitution , sections 136 and 137 and Part 2F.2) will expressly acknowledge the proposed Life Insurance Act process for amending the benefit fund component of a company's constitution.
Proposed Section 16Z - Contractual effect of approved benefit fund rules and policies
7.59 Proposed section 16Z provides that approved benefit fund rules of a friendly society will have effect as a contract between the friendly society and each person who is the owner of a policy referable to the benefit fund. One of the consequences of the contractual effect is stated in subsection 16Z(2) - that is, the contract will have effect and be able to be enforced as a contract between a friendly society and a person who is the owner of the policy. If the friendly society that issued the policy transfers or assigns the liabilities to another company, subsection 16Z(2) provides that the contract will have effect and may be enforced with that other company.
7.60 The contractual effect established in this provision is in addition to the contractual relationship established in the Corporations Law between each company member (including benefit fund members) and the company, and each company member to every other company member. The provision in the Life Insurance Act will ensure that a full range of contractual remedies will be available to members if there is a breach of benefit fund rules - there may otherwise be limitations to the remedies available under the Corporations Law.
7.61 In combination, the Corporations Law provisions and section 16Z of the Life Insurance Act will have a similar effect as section 71 of the FS Code.
Proposed Division 5 - Other modifications
Proposed Section 16ZA - Assignment of a benefit fund interest
7.62 Section 200 of the present Life Insurance Act establishes the right for a policy owner to assign the policy to another person in accordance with the requirements of that section. For an assignment of an interest in a benefit fund, the requirements in subsection 200(2) will be replaced with the requirements in proposed section 16ZA. In particular, to be effective, the assignment must be made in accordance with the requirements in the relevant benefit fund rules. The remainder of section 200 will apply to the assignment of a benefit fund interest. The assignment of benefits is presently dealt with in section 124 of the FS Code.
Proposed Section 16ZB - Jointly regulated friendly societies
7.63 Proposed section 16ZB will enable a friendly society that becomes regulated under the Life Insurance Act because of the transitional arrangements and that was carrying on health insurance business immediately before the transfer date to continue to carry on that health insurance business. Section 234 of the Life Insurance Act otherwise prohibits a life company from undertaking mixed insurance business (though a similar exception was allowed for existing life companies that undertook general insurance before the Life Insurance Act commenced in 1995). The effect of the provision is that the friendly society's life insurance business would be regulated under the amended Life Insurance Act and its health insurance would continue to be regulated under the National Health Act. This is described as a jointly regulated friendly society . The section makes it clear that the application of the Life Insurance Act to these friendly societies may be modified by regulations made under proposed section 16ZC.
7.64 As section 234 of the Life Insurance Act will not permit other life companies to undertake mixed insurance business, there will be no other life companies, other than a small number of transferring friendly societies, undertaking both life insurance and health insurance business through the same entity. The amended Life Insurance Act will also ensure that the new declaration powers in sections 12A and 12B do not deal with health insurance business. The Dictionary in the Schedule will include a definition of health insurance business and will give it the same meaning as in section 67 of the National Health Act.
Proposed Section 16ZC - Modifications by regulations
7.65 In addition to the modifications set out in Part 2A, it is intended that the application of the Life Insurance Act to friendly societies will be able to be modified by regulations. The regulations making power is needed to deal with further modifications that may become apparent over time, to adapt procedures that cannot be applied to friendly societies immediately but may be able to be applied after a suitable transition period or to deal with detailed technical matters. For example, the concepts of a policy document and participating and non-participating policies are not easily translatable in law for friendly societies, but can be modified in the regulations.
7.66 It is envisaged that regulations under proposed section 16ZC will be used to deal with matters including:
- to provide that a memorandum of transfer for assignment of a life policy taken out with a friendly society is made in accordance with a prescribed form;
- to provide that a register of benefit fund members is to be kept by a friendly society;
- to apply different surplus distribution provisions for friendly societies;
- to clarify references to the term 'policy document' as applicable to friendly society business;
- to focus actuarial reporting requirements for friendly societies on individual benefit fund operations;
- to modify the operation of the Life Insurance Act in relation to a jointly regulated friendly society (see section 16ZB); and
- to modify certain directions provisions so that the directions cease to have effect once the voluntary winding-up of a friendly society commences.
7.67 The introduction of a regulation making power to provide for modifications of the Life Insurance Act for friendly societies is similar to the approach that was used to deal with existing life companies when that Act commenced in 1995 (see section 261).
Proposed amendments to sections 21, 23 and 24
Items 13 - 16
7.68 At present APRA may refuse an application for registration of a company if the applicant does not meet the capital requirements set out in paragraphs 21(3)(a), (b), (c) or (ca). Once registered, section 23 requires a life company to continue to meet the prescribed capital requirements.
7.69 The proposed amendments will repeal the existing initial and continuing capital requirements for life companies (paragraphs 21(3)(a), (b), (c) or (ca) and section 23) and the powers to modify the continuing capital requirements (section 24). These are to be replaced with requirements introduced by other amendments (Division 3 of Part 5 dealing with a new management capital standard) for the life company to have adequate capitalisation outside its statutory funds.
7.70 A minor amendment to paragraph 21(3)(e) will reword the paragraph to make its intention clearer.
Items 17 and 19 - 22
Amended sections 52 and 53 - Restructure and termination of statutory funds
7.71 At present the Life Insurance Act provides for the division and amalgamation of statutory funds. It is proposed that the Life Insurance Act be made more flexible by allowing for the restructure and termination of statutory funds. The broader provisions are consistent with those available under Divisions 3 and 4 of Part 4A of the FS Code.
7.72 The principal provisions will be set out in amended Division 3 of Part 4 (new sections 52 and 53) dealing with the restructure or termination of statutory funds. The existing Division 3 will be repealed (see item 22).
7.73 Proposed new section 52 provides for the restructure of statutory funds. Prudential Rules may provide that a life company can apply to APRA to restructure its statutory funds by making one or more policies that are referable to a statutory fund or funds become referable to another statutory fund or funds of the company (whether existing or proposed). If APRA approves the application, the restructure is to take place. The Prudential Rules will be able to deal with a range of matters including requirements for making the application, criteria for APRA to approve or refuse to approve the application, notification requirements, matters connected with how the restructure takes place, and information requirements by APRA following the restructure.
7.74 Subsection 52(4) will provide that APRA cannot approve the application where:
- the restructure will result in unfairness to the groups of policy owners of a transferring or receiving fund;
- the solvency standard will not be met by a transferring or receiving fund after the restructure; or
- in comparison to existing subsection 52(4), the capital adequacy standard is not required to be satisfied by the transferring and receiving funds immediately after the restructure. This recognises the possible benefits of the restructure to the operations of the life company. However, the standard will subsequently need to be satisfied by each fund;
- the company is being wound up when the application is made.
7.75 Proposed new section 53 provides for the termination of statutory funds. Prudential Rules may provide that a life company may apply to APRA to terminate one or more of its statutory funds. If the application is approved the termination is to take place. Subsection 53(2) provides an indication of the types of matters that may be dealt with in the Prudential Rules.
7.76 Subsection 53(3) will provide that APRA cannot approve the application in any of the following circumstances:
- the restructure will result in unfairness to the groups of policy owners of the fund or funds; or
- the company is being wound up when the application is made.
7.77 As a consequence of these changes, a number of amendments to linking provisions will also be made:
- the references in paragraph 30(e) will be changed to 'restructured or terminated'; and
- the heading for section 46 and the words of this provision will be amended to make it clear that there are only two ways that life company can change the statutory fund or fund to which a policy is referable or terminate a statutory fund. That is, the restructure or termination provisions of Division 3 need to be followed, or in the case of a change in the statutory fund, the subsection 35(4) process can be followed.
7.78 Subsection 46(2) will provide that a liquidator is able to restructure or terminate statutory funds without following the processes in Division 3. It is not necessary for APRA to be involved in approving the restructure or termination of statutory funds once a liquidator has been appointed to the life insurance company. That is, the liquidator will have the power to restructure or terminate the statutory funds without observing the procedures required for an operating life insurance company.
Proposed section 54 - Prudential Rules may deal with transitional matters
7.79 The present section 54 is no longer required because the notification procedures for a restructure or termination of a statutory fund will be established by the Prudential Rules under section 52 and 53. Item 22 repeals the existing section 54 because it is part of Division 3.
7.80 The new section 54 provides that Prudential Rules may be established to deal with transitional, saving or application matters arising from the amendments to Division 3 and the transfer for friendly societies to the Life Insurance Act. The two circumstances that are envisaged requiring coverage in the Prudential Rules are, where at the date the amendments to the Life Insurance Act take effect, an application had been submitted or an approval received:
- for the division of one or more statutory funds of a life company under the existing Division 3 provisions of the Life Insurance Act; or
- for the restructure or termination of a benefit fund under the FS Code.
7.81 This will ensure a smooth transition to the amended Life Insurance Act as it will enable actions taken under the present Division 3 of the existing Life Insurance Act or similar provisions of the FS Code to continue to have effect for the purposes of the amended Division 3.
Amended section 55 - Additional requirement for transfer of policies between statutory funds by endorsement
Items 18, 23 - 25
7.82 As the amendments in new Division 3 (restructure and termination provisions) will have a broader application than the existing Division 3 (division and amalgamation provisions), it is necessary to make clearer the role of the process in subsection 35(4), which allows a policy document to be endorsed so as to change the statutory fund or funds to which the policy is referable. This clarification will occur in the following ways:
- a note will be inserted in subsection 35(4) to make it clearer that if a policy is endorsed as prescribed in the subsection, it will also be necessary to comply with section 55 (see item 18);
- section 46 will clarify that APRA's approval is not required if the restructure is in accordance with subsection 35(4) and section 55; and
- additional words will be inserted in paragraph 55(2)(b) and subsection 55(3) to make it clearer that if a policy is transferred from one statutory fund to one or more statutory funds by the process of endorsement of the policy document established in subsection 35(4), then assets must be transferred in accordance with the section 55 requirements. The life company must notify the policy owner in accordance with the section 55 requirements.
7.83 In combination these amendments and those relating to Division 3 have the following effects:
- A policy will be able to be transferred from one statutory fund to one or more statutory funds if the policy document is endorsed to that effect. This process of transfer of policies by endorsement will not require a Division 3 approval from APRA. It would not be expected that this process would be utilised other than for transfers of one or a few policies at a time. The requirements of section 55 will need to be satisfied for these types of transfers.
- For transfers that extend beyond one or a few policies at a time, the restructure provisions of section 52 will need to be followed by the life company. Section 55 will not apply to restructures that attain approval under the section 52 process.
Proposed amendments to Part 5 - Solvency and capital standards
Items 26 - 28
7.2 Part 5 of the present Life Insurance Act deals with two actuarial standards applied to life companies - solvency and capital adequacy standards. The title of Part 5 will be broadened (item 26) to refer to 'capital standards' so that it can accommodate a new Division 3 providing for a management capital standard (see item 29).
7.3 Division 2 of Part 5 provides for a capital adequacy standard applicable to statutory funds. The application of this actuarial standard will be made more flexible by allowing it to be expressed as to set different standards of capital adequacy:
- for statutory funds of different companies;
- for different classes of statutory funds; or
- to have effect in relation to a statutory fund in circumstances specified in the capital adequacy standard.
7.4 This amendment will provide equal flexibility in the establishment of the capital adequacy standard and the solvency standard (Division 1 of Part 5). Under subsection 70(1B), the actuarial standard may provide that a life company may be taken to comply with the capital adequacy standard in respect of a statutory fund if it complies with the solvency standard in respect of the statutory fund.
7.5 In the first instance, these provisions enable the AFIC prudential standard 6.2.1 to be reimposed for friendly societies in satisfaction of the solvency and capital adequacy requirements. This will enable a smooth transition for friendly societies transferring into the Life Insurance Act. This is particularly appropriate given that the industry is still in a period of transition under the FS Code (most States joined the Code in October 1997).
7.6 Overall, the actuarial approach in the Life Insurance Act and under the FS Code are intended to produce a similar prudential outcome with the AFIC standards developed by reference to the solvency and capital adequacy standards set by the Life Insurance Actuarial Standards Board (LIASB). Any differences in the actuarial approaches under the two regimes predominantly reflect structural and operational differences in the respective industries. For example, the different industry approaches to meeting expenses- that is, friendly societies meet expenses for their life insurance business out of the management fund whereas most life insurance companies meet such expenses out of the statutory funds.
- AFIC prudential standard 6.2.1 applies broadly the same calculation method for solvency as the existing Life Insurance Act actuarial standards for solvency and capital adequacy. As a general comment, the solvency requirement under the AFIC standard is set at a level between the Life Insurance Act solvency and capital adequacy standards.
- AFIC prudential standard 6.2.6 is a management fund capital requirement. The expense component of this standard is based on the expense requirements of the business (the friendly society's management fund meets the expenses of the benefit funds) and thus serves a similar role to the expense reserve component in the LIASB standards. Under the Life Insurance Act, such a requirement will be reimposed on friendly societies by the new management capital standard (see below).
7.7 In the longer term, it is proposed to harmonise the requirements in the solvency, capital adequacy and management capital standards to the extent appropriate given structural differences in the way the two industries operate.
7.8 The minor amendment to subsection 73(1) ensures that APRA will be able to take into account the interests of prospective policy owners as well as existing policy owners in giving a capital direction to a life company.
Proposed Division 3 - Management capital standard
7.9 Division 3 of Part 5 will introduce a proposed new actuarial standard to provide for the setting of a management capital standard. The purpose of the new management capital standard is to ensure that:
- the financial position of the life company reflects an appropriate capital commitment to its life insurance business outside the statutory fund; and
- a life company will be able to meet its obligations in respect of any business it conducts that is not life insurance business as those obligations fall due.
7.10 This new actuarial standard will:
- serve a similar objective to the existing management fund capital standard for friendly societies that provides an expense component (see above) and an asset component that addresses risks in respect of asset quality (AFIC's prudential standard 6.2.6);
- in time??replace the fixed initial and continuing capital standards for life companies presently imposed through sections 21 and 23 respectively; and
- allow different standards of management capital to be set for different classes of companies or in different circumstances (as set out in the standard).
7.11 It is intended that the commencing management capital standard will reimpose the AFIC standard on friendly societies and reimpose the section 21 and 23 shareholder capital requirements on other life companies.
7.12 Proposed section 73D reintroduces the powers available in the present section 24 (that will be repealed under item 16). This is consistent with the removal of the continuing capital requirements (present section 23) and its replacement with the management capital standard for life companies. This provision will enable the Treasurer to make a written declaration that the management capital standard is to have effect in relation to a particular company with the modifications specified in the declaration. A declaration can only be made if the conditions in paragraphs 73D(2)(a) and (b) are met.
7.13 It will be a requirement of proposed new section 73E for every life company to comply with the management capital standard at all times.
7.14 APRA will be able to give management capital directions to particular life companies in the circumstances set out in proposed section 73F and a life company must comply with such a direction (subsection 73F(4)). This directions power serves a similar purpose to APRA's directions powers under section 68 (the power to give solvency directions) and section 73 (the power to give capital directions). APRA will be able to give management capital directions in either the circumstances described in subsection 73F(1) or in subsection 73F(2). APRA will only be able to make such a direction to a life company with the Treasurer's agreement. The decisions will become 'reviewable decisions' for the purposes of section 236 (see items 62 and 64) from 1 July 2002 at which time Treasurer's agreement will no longer be required. These arrangements are designed to be consistent with the application of the directions powers contained in sections 68 and 73. (The Financial Laws Amendment Act 1997 amended sections 68 and 73 to require the Treasurer to agree to directions given and amended the merit review provisions with respect to such decisions.)
Items 30 - 33
7.15 At present, the Life Insurance Act requires a life company to appoint an approved auditor (section 84) and APRA may approve a person to audit life companies (section 85). It is proposed that section 85 be broadened to allow two classes of approved auditors to be established: a person may be approved to audit friendly societies and/or other life companies. This will allow APRA to apply different requirements (such as the nature of audit experience) to a person seeking to be approved to audit life companies (other than friendly societies) vis-a-vis friendly societies.
7.16 Having two groups of approved auditors that are appropriate to the requirements of these two classes of life companies enables the services provided by the auditors to be tailored to the circumstances of their client life companies. For example, the audit requirements of a small regional friendly society, and thus the level of experience and expertise required of the auditor, will differ from that of a large, nationally or internationally focussed life company. Further, these provisions accommodate a continuity in friendly societies' present audit arrangements (refer to the transitional provisions of auditors - item 15, Division 5 of Schedule 8)
Proposed Division 8 of Part 6 - APRA's power to make exemption orders
7.17 It is proposed that Part 6 of the Life Insurance Act be expanded to include a new Division 8 that allows APRA to exempt life companies from certain financial reporting requirements of the Life Insurance Act. These provisions are based on the exemptions and modifications powers of Part 2M.6 of the Corporations Law. Amongst other things, these provisions will ensure that exemptions provided by an SSA (under section 361 of the FS Code) with respect to the financial reporting for one or more benefit funds of a friendly society can be re-imposed by APRA if appropriate.
7.18 APRA will be able to make specific exemption orders on an application by a life company as authorised by the company's directors (proposed section 125A) or make class exemption orders (proposed section 125B). The order will relieve the directors of the life company, the life company, the approved auditor or the appointed actuary from compliance with a financial reporting requirement specified in one of the sections listed in subsection 125A(1) or any other provision prescribed by the regulations for the purposes of the sections. APRA must not make an order unless it considers it appropriate to do so having regard to any criteria specified in Prudential Rules.
7.19 The order may be made subject to conditions and be indefinite or limited to a specified period. Non-compliance with a condition, imposed under subsection 125A(4)(a) will not be an offence. However it may lead to a direction being given to the life company by APRA under proposed section 230B.
7.20 APRA must give ASIC notice of the making, revocation or suspension of an order made under section 125A or section 125B.
7.21 The exemption powers for certain financial reporting requirements will allow APRA to tailor its reporting requirements to the particular circumstances of certain life companies or classes of life companies. For example, several provisions require separate reports for 'participating' and 'non participating' business. As these concepts are not used by friendly societies, APRA may consider using the class exemption orders in respect to such requirements. Further, APRA may accept that it is more efficient, but sufficiently robust, for certain types of business to be audited less frequently (eg small benefit funds that are closed to new business). Decisions made by APRA under sections 125A and B will not be disallowable by the Parliament but will be 'reviewable decisions' for the purposes of section 236 (see item 63). This is consistent with the status of decisions made by ASIC under Part 2M.6 of the Corporations Law.
Items 35 - 40
7.22 At present the Life Insurance Act allows life companies to be wound up only by order of the Court on an application of a judicial manager (under subsection 175(6)) or on application by APRA (under section 181). It is proposed that an additional method for winding up be allowed for a life company that is a friendly society. Voluntary winding up is available to friendly societies under the FS Code. Proposed subsection 180(2) will provide that a friendly society may be wound up voluntarily if each person with an interest in a benefit fund of the society is a member of the society and each member has only one vote on a special resolution to wind up the society. If a special resolution of the friendly society is passed, the wind up will take place in accordance with the voluntary winding up procedures of the Corporations Law subject to any additional or conflicting requirements established in the Life Insurance Act. Such an additional requirement will be that the friendly society lodges a copy of the special resolution with APRA within 7 days. The maximum penalty for contravention of this requirement will be 30 penalty units.
7.23 Proposed section 183A will allow a liquidator to apply to the Court for directions regarding any matter arising under the voluntary winding up of a friendly society. The liquidator must give APRA written notice of an intention to apply to the Court for directions.
7.24 Section 186 sets out some requirements for a liquidator to determine whether a life company has a policy liability to the policy owner and the amount of such a liability. Subsection 186(2) provides that a liquidator must make such determinations in accordance with "the directions of the Court". Since it is proposed to introduce a process of voluntary winding up for friendly societies, and the Court may not be involved in such a process, subsection 186(2) will be amended slightly to provide for "any directions of the Court".
7.25 Subsection 186(2A) will be inserted to require a liquidator to take into account the approved benefit fund rules of a friendly society in determining whether there is a policy liability and the amount of the liability. The liquidator need only take into account the benefit fund rules to the extent those rules are consistent with any directions of the Court. This provision will apply in any winding up of a friendly society, that is, whether it is by order of a Court or a voluntary winding up. One of the effects of subsection 186(2A) will be that a liquidator, in establishing the amount of the policy liability, will take into account whether the policy owner is entitled to a distribution of surplus by virtue of the benefit fund rules.
7.26 Having determined the policy liability under section 186, the liquidator will then apply the assets of the statutory funds in accordance with the requirements of section 187. Section 187 provides for the assets of the statutory fund to be applied in the following order of priority (to the extent that there are sufficient assets remaining after each step): the discharge of debts and claims referable to the business of the statutory fund - in accordance with subsection 556(1) of the Corporation Law; the policy liabilities of the statutory fund; other liabilities referable to that fund; and in such manner as the Court directs and considers equitable having regard to matters in paragraph 187(3)(d). These provisions will place a higher priority on assets being used to discharge policy liabilities than under the FS Code that allows the liabilities of the benefit fund to be met ahead of the policy liabilities. (Most friendly society liabilities fall against the management fund, rather than the benefit fund, so this legal difference will not have much practical effect.) The proposed treatment will ensure that the policy owners of all life companies including friendly societies receive the same priority in a winding up. The change is consistent with depositor priority under the Banking Act (section 13A).
7.27 The outcome of these provisions is that the policy liability of each member will be determined in accordance with the benefit fund rules. For example, a member that is entitled to a distribution of surplus would have that right reflected as a policy liability and the assets would be applied to meet that liability ahead of meeting other liabilities (except those required under section 556 of Corporations Law).
Transfer of Life Insurance Business
7.28 Part 9 of the Life Insurance Act provides for the transfer and amalgamation of life insurance business under a scheme confirmed by the Court. Subsection 190(5) will provide that Court approval for such a scheme will not be required if the transfer of the life insurance business is made under separate legislation. The proposed legislation - the Financial Sector (Transfers of Business) Bill 1999 - was introduced into Parliament concurrently with this Bill.
Provisions relating to policies
Items 42 - 49 and 51 - 56
7.29 Part 10 of the Life Insurance Act contains provisions relating to such matters as the general issue of policies, their assignment and mortgage and protection of policy owners' interests. Amendments to certain provisions of Part 10 (sections 199, 200, 206, 210, 211, 212, 216, 218, 226, 227 and 230) are required because the concept of life insurance business will be broadened to include business declared by APRA to be life insurance (under sections 12A and 12B).
7.30 The amendments will ensure that the Part 10 provisions apply to all policies, where appropriate, not only 'life policies'. This will provide a more neutral treatment of policy owners and life companies, irrespective of the nature of the product acquired from a life company. It is also consistent with the application of similar provisions of the FS Code to all benefit funds of friendly societies.
7.31 Transitional provisions relate to the assignment of interests in benefit funds and the registration of policies under section 227 (items 12 and 13 of Division 5 of Schedule 8).
7.32 Given that responsibility for prudential regulation of life insurance business will be amalgamated and vested in the Commonwealth, this item removes any claims or requirements that friendly societies could otherwise face under residual State and Territory legislation with respect to unclaimed monies.
Proposed Part 10A - Prudential standards and directions
7.33 Consistent with amendments introduced to the Banking Act as part of the Financial Sector Reform (Amendments and Transitional Provisions) Act 1998 , it is proposed that the Life Insurance Act be amended to provide APRA with general standards and directions powers. These amendments draw upon similar provisions in the FI Code.
7.34 APRA needs to be an independent and operationally autonomous regulator to ensure the financial safety of depositors and to maintain stability and confidence in the financial system. 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. For this reason, it is proposed that a prudential standard will be a non-disallowable instrument.
7.35 Any direction would ultimately be subject to judicial review processes, but in order to preserve the integrity of directions as a prudential tool, they will not be subject to merit review processes nor disallowance by the Parliament. This is consistent with the standards and direction making powers of APRA under the Banking Act.
Proposed Division 1 - Prudential standards
Proposed Section 230A - Prudential standards
7.36 Proposed section 230A will give APRA the power to make standards on prudential matters for life companies (and to vary or revoke a standard). These prudential standards will specify the requirements to be met by life companies in order to protect the interests of policy owners and prospective policy owners of life companies. A prudential standard may require compliance by all companies, a specified class of companies or one or more life companies and may impose different requirements in different situations or in respect of different activities. Non-compliance with a prudential standard is not, by itself, an offence under the Life Insurance Act, but may result in a direction being given. The prudential standards will formalise aspects of APRA's existing practices, such as the issuance of circulars to provide guidance on emerging industry practice.
Proposed Division 2 - Directions
Proposed Section 230B - Directions by APRA
7.37 Proposed section 230B will enable APRA to give directions to life companies if it considers the company has contravened the Life Insurance Act or conditions imposed under the Life Insurance Act or if it is in the interests of policy owners or prospective policy owners. Section 230B will be a general directions power and will not replace the role of specific directions powers in the Life Insurance Act (ie solvency and capital directions) or the proposed management capital directions (section 73F).
7.38 The primary function of the directions power is intended to prevent institutional failure and thereby maintain financial system stability. Clearly, if a life company does not comply with the Life Insurance Act (including subordinate legislation, such as a prudential standard or regulation) an APRA direction will be an important trigger to correct its behaviour and ensure that the institution remains sound. Early corrective action may be appropriate in the interests of policy owners and prospective policy owners even if the Life Insurance Act has not been breached.
7.39 The types of directions that may be given by APRA are set out in subsection 230B(2). These include a number of specific directions that may be given (eg a direction not to issue any policy or collect any premium) and a broad power to make a direction regarding the way in which the affairs of a life company are to be conducted or not conducted. The direction may deal with the time by which compliance is required and the directions will have effect until it is revoked in writing by APRA. APRA will also be given the power to revoke a direction, thereby providing flexibility, eg, if there are changed circumstances or there is a valid objection by the institution concerned.
7.40 Subsection 230B(5) authorises the life company to comply with the direction despite anything in its constitution or any contract or arrangement to which it is a party. However, to ensure the independence of a judicial manager or a liquidator, APRA must not give a direction in relation to any part of a life insurance business that is under external control.
Proposed Section 230C - Direction not a ground for denial of contractual obligations
7.41 Because there is a risk that a direction from APRA may trigger conditions in contracts that could destabilise an already fragile institution, proposed section 230C provides that a direction by APRA under section 230B should not provide a ground for any other party to deny its contractual obligations, accelerate any debt or close out any transaction with the institution. However, a party to a contract is relieved from obligations to a life company if the life company is prevented from fulfilling its obligations under the contract (except if APRA has directed the life company not to discharge any policy or other liability). A party to a contract affected by a direction under section 230B may apply to the Federal Court for an order to deal with the matter (but not in a way that would contravene the direction). Section 230C is consistent with section 11CD of the Banking Act.
Proposed Sections 230D and 230E - Information about Directions and Secrecy requirements
7.42 Proposed subsection 230D will allow APRA to publish information relating to any direction it has issued in the Commonwealth Gazette . However, APRA will be under no obligation to do so since this may, in particular circumstances, cause needless concern in the community about the soundness of the institution involved. If it has previously published a direction and then revokes that direction, APRA must also publish the revocation. Accountability is addressed by requiring APRA to report to the Treasurer on directions when requested. However, this does not prevent APRA reporting to the Treasurer at any other time.
7.43 Information relating to directions will be subject to the secrecy requirements of the APRA Act unless the information has been published in the Commonwealth Gazette .
Proposed Section 230F - Non-compliance with a direction
7.44 A life company will be guilty of an offence if it does not comply with a direction given to it by APRA under section 230B. The maximum penalty for a body corporate will be up to 250 penalty units per day that the offence is committed. An officer of a life company is guilty of an offence if the officer fails to take reasonable steps to ensure that the company complies with a direction and the officer's duties include ensuring such compliance. The maximum penalty for an officer will be up to 50 penalty units per day that the offence is committed.
Amendments to subsections 236(1) and 236(1A) - Reviewable decisions
Items 58 - 64
7.45 Subsection 236(1) outlines the decisions made under the Life Insurance Act that are reviewable by APRA and that may subsequently be reconsidered by the Administrative Appeals Tribunal. The section sets out the process and the period within which a request for review must be made and also the period to make a decision.
7.46 To ensure consistency with the existing merit review provisions of the Life Insurance Act, the proposed amendments will expand the list of provisions that are reviewable decisions for the purposes of section 236. The amendments will add the following decisions to subsection 236(1):
- a declaration under subsection 12A(1) or 12B(2) that certain insurance or annuity business is, or other eligible financial benefits are, life insurance business;
- a decision under section 16E that a body corporate may assume or use the expression friendly society ;
- a refusal to give approval under subsection 16L(3) for benefit fund rules, under subsection 16Q(3) for a proposed amendment of approved benefit fund rules, or under subsection 16U(3) for the consequential amendments of a company's constitution;
- a management capital direction under subsection 73F(1) or (2), or a decision to vary, or a refusal to revoke or vary, such a direction under subsection 73F(6) or (7); and
- a decision to make a specific or class exemption order under subsection 125A(2) or 125B(2).
7.47 Subsection 236(1A) provides that certain decisions will not be reviewable decisions for a five year period (from 1 July 1997 when this provision took effect). To ensure consistency with existing provisions relating to solvency and capital adequacy directions, the Treasurer's agreement will be sought for decisions made under section 73F prior to 1 July 2002. After that date, it will no longer be necessary to obtain the agreement of the Treasurer and the decision will become a reviewable decision under section 236.
Proposed Section 251 - Compensation for acquisition of property
7.48 Section 251 provides certainty that the Constitutional requirement in section 51(xxxi) - that any acquisition of property or removal of property rights be on just terms - is satisfied by the Life Insurance Act. If an acquisition is not on just terms, the affected person may apply for compensation from the Commonwealth. There is, however, no expectation that the operation of the Life Insurance Act will lead to an acquisition of property other than on just terms. A similar provision was included in the 1998 amendments to the Banking Act.
Items 66 - 68
7.49 This Bill provides an opportunity for the Life Insurance Act to be tidied up by removing certain provisions that were transitional on the replacement of the Life Insurance Act 1945 . The provisions that will be repealed relate to the capital arrangements for companies registered overseas or life companies incorporated overseas. These provisions are not required because the capital requirements referred to are to be replaced by the new management capital standard. The following provisions will be repealed on this basis: paragraph 254(7)(a), subsection 254(9) and section 255.
Amendments to the Dictionary in the Schedule
Items 69 - 78
7.50 New definitions will be added, and existing definitions removed or amended as a result of the amendments to the Life Insurance Act.
7.51 The following definitions will be inserted:
- actuarial standards - the definition has been inserted to ensure that the distinction between actuarial standards (those made under Division 4 of Part 6) and the new prudential standards are recognised;
- prudential standards - APRA will be able to make prudential standards for life companies under the Division 1 of Part 10A of the Life Insurance Act; and
- section 12A or 12B policy - a policy that is issued in the course of carrying on business declared to be life insurance under new sections 12A or 12B.
- The following definitions will be amended:
- approved auditor - to distinguish an approved auditor in relation to a life company that is a friendly society from an approved auditor of a life company other than a friendly society.
- friendly society - to reflect that friendly societies will be regulated under the Life Insurance Act rather than under State and Territory legislation;
- policy - the definition has been expanded to take into account section 12A or 12B policies (see above);
- policy document - as above; and
- this Act - the definition has been changed to reflect other amendments to the Life Insurance Act including new types of subordinate legislation and the modifications to the Life Insurance Act (and the subordinate instruments) that apply to friendly societies.
7.52 The definition of eligible assets will be repealed as the concept will no longer be relevant once sections 21 and 23 of the Life Insurance Act are repealed and replaced with the new management capital standard.