House of Representatives

Financial Sector Reform (Amendments and Transitional Provisions) Bill (No. 1) 1999

Explanatory Memorandum

(Circulated by authority of the Minister for Financial Services and Regulation, the Honourable J.B. Hockey, MP)

11 Schedule 8 - Transitional, Saving and Application Provisions

The purpose of Schedule 8 is to provide the necessary transitional, saving and application provisions required to smoothen passage to the new regulatory/legislative framework outlined in this Bill and the Financial Sector (Transfers of Business) Bill 1999. This Schedule includes transitional provisions relating to the transfer of staff to APRA, the transfer of assets and liabilities from the SSAs and AFIC to APRA and ASIC (as appropriate), the granting of authorities and approval for using business names, and transitional provisions relating to unclaimed moneys. This Schedule also includes transitional provisions relating to the operation of the Life Insurance Act, including: the transfer of certain friendly societies into that Act; transitional provisions relating to auditors and actuaries; the continued effect of declarations made under the Life Insurance Act before its amendment; and the effect of amendments on taxation legislation. It also includes a regulation making power to cover off any transitional, saving or other matters necessary to effect a smooth transfer of State and Territory financial institutions that cannot be detailed in primary law.

Commencement

11.1 Schedule 8 commences on the day on which this Bill receives Royal Assent.

Part 1 - Transitional provisions relating to transfer from State and Territory regulatory regimes

Division 1 - Interpretation

Item 1

11.2 Item 1 contains the definitions used throughout Schedule 8.

11.3 FIC body covers building societies, credit unions and special service providers that were previously regulated under the FI Codes. It does not capture associations as these institutions will not be subject to prudential regulation.

Division 2 - Transitional Provisions relating to staff

11.4 The following items are transitional provisions for the transfer of staff from the SSAs and AFIC to APRA.

Item 2

11.5 This item requires APRA to employ staff previously employed by an SSA or AFIC as specified in a transfer agreement between, or on behalf of, the Treasurer and the relevant State or Territory minister(s). The transfer agreement has effect only to the extent that it is within the Commonwealth's legislative power.

Items 3 and 4

11.6 These items are similar to those relating to the transfer of Insurance and Superannuation Commission and RBA staff to APRA, and require staff transferred from an SSA or AFIC to APRA to be:

·
employed on terms and conditions relating to remuneration that are no less favourable than those which they were employed under immediately before the agreed date;

-
for the purposes of this provision, remuneration should be interpreted broadly, looking at the total value of a remuneration package, having regard to benefits such as superannuation and motor vehicles.

·
entitled to retain all the benefits they had accrued as an employee of an SSA or AFIC in respect of length of service up to the agreed date as if those benefits had been accrued as an APRA employee;

-
a statement of accrued benefits must be recognised by APRA if given, but the lack of a statement will not have any affect on an employee's entitlements as a transferred employee;

·
taken to have continuous service as an APRA employee, for all purposes - that is, a person's service immediately prior to the agreed date as recognised by the State or Territory SSA or AFIC is recognised as service with APRA; and
·
subject to having their terms and conditions of employment varied by APRA after the agreed date in accordance with those terms and conditions or by or under a law, award, determination or agreement.

11.7 As SSA and AFIC staff transferring to ASIC will become Commonwealth employees, a separate transfer provision for these staff is not required. These staff will be transferred under section 81B of the Public Service Act 1922 , which already contains mechanisms to protect accrued rights and entitlements.

11.8 The agreement may specify that staff are to be transferred on or after the transfer date. It may be necessary for some staff to transfer after the transfer date to enable time for AFIC and the SSAs to be wound up and to finalise other matters.

Division 3 - Transfer of assets and liabilities

Items 5 and 6

11.9 Relevant assets (including records) and liabilities are to be transferred to APRA or ASIC (as appropriate) from the SSAs and AFIC as specified in a transfer agreement between, or on behalf of, the Treasurer and the relevant State or Territory minister(s). The two items provide for the unrestricted transfer of assets and liabilities to the Commonwealth provided it is within the Commonwealth's legislative power.

Division 4 - Transitional provisions relating to the operation of the Banking Act 1959

Item 7

11.10 All building societies, credit unions and special service providers currently supervised under the FI Code of a State or Territory will be automatically granted authorities to carry on banking business, under subsection 9(3) of the Banking Act, by APRA on the transfer date. From that date, these institutions will be classified as ADIs.

11.11 Subject to Ministerial agreement, APRA will also automatically grant the CCWPSBL an authority to carry on banking under subsection 9(3) of the Banking Act.

11.12 APRA will have the power to subject the authorities to conditions, which may be revoked or varied over time as the circumstances of an institution changes.

11.13 APRA must given written notice to each institution of the granting of its authority to carry on banking business and any conditions attached.

Item 8

11.14 Currently, under the Financial Institutions Code 1992 , building societies, credit unions, service providers and associations may trade or carry on business under a name containing the words 'building society', 'credit union', 'credit society', 'credit cooperative' or words of similar meaning.

11.15 This item will automatically grant consent to these institutions on the transfer date under section 66 of the Banking Act to continue to trade or operate under the name and title that the had been trading or operating. Any conditions that were attached to the approval of business names will continue to apply. APRA will be able to insert or vary the conditions attached to the use of any of these business names in the future at any stage.

11.16 Exemptions granted by the SSAs under subsection 144(4) of the Financial Institutions Code 1992 will be continued as if granted by APRA under section 66 of the Banking Act. Any existing conditions associated with any of these exemptions will also be preserved.

Item 9

11.1 Under section 69 of the Banking Act, ADIs will be required to pay certain unclaimed money amounts at 31 December into Commonwealth consolidated revenue that have not been operated on by either deposit or withdrawal for seven years or more.

11.2 Inconsistencies exist in the definitions and timing between State and Territory unclaimed money laws and section 69. These differences would require transferring deposit-taking institutions to submit two unclaimed money statements within a very short period of time in the transfer year and others to pay a substantial catch-up payment when transferring from a jurisdiction with an unclaimed money period greater than seven years.

11.3 These transitional issues arise from inconsistencies in definitions and timing between State and Territory unclaimed money laws and the unclaimed money provisions in the Banking Act. These provisions also make accommodations for transferring entities with the view to easing the burden resulting from the transfer.

11.4 Under subitem 9(2), if, previous to the transfer of State and Territory regulated deposit-taking institutions, monies have been paid to the States and Territories in line with their unclaimed money laws, then those monies are to remain with the States and Territories and will not be transferred to the Commonwealth.

11.5 Subitem 9(2) defines unclaimed monies as excluding amounts where notification action has occurred prior to the transfer date under State and Territory unclaimed money laws even if these amounts have not actually been paid.

11.6 Due to the difference in cut-off dates for compiling unclaimed money statements under the State and Territory laws and Commonwealth laws, in the transfer year there may be a gap between the cut-off date for the last statement to the States and Territories and the cut-off date for the first statement to go to the Commonwealth. Subitem 9(3) clarifies that any unclaimed monies that accrue over this gap will be payable to the Commonwealth.

11.7 Moreover, monies that would not have qualified as unclaimed under the State and Territory laws prior to the transfer but qualify under section 69 of the Banking Act immediately after the transfer are liable to be paid to the Commonwealth.

11.8 The requirement to catch-up may subject the transferring institution to an unreasonable adjustment burden. In order to assist institutions, all transferring institutions will be given the option of additional time in which to comply with the Commonwealth provisions.

11.9 Subitem 9(4) provides an optional hiatus of one year for all transferring entities. A transferring institution is only required to submit its first statement to the Treasurer on or before the second 31 March following the transfer date, although, if so desired, the institution is permitted to submit a statement in the first year.

11.10 If a transferring entity chooses to exercise the option of the hiatus, it is not required to notify the Treasurer but the amounts that would have been included in this first statement must (if they are still unclaimed monies) be included in the next unclaimed money statement delivered.

11.11 Subsection 69(5) of the Banking Act requires that the total amount shown in the statement shall be paid by the ADI to the Commonwealth at the time of delivering the statement. Subitem 9(5) allows the Treasurer, or an authorised officer, to make a determination that a transferring entity has, subject to subitem 9(6), satisfied the requirements of that subsection. This determination can apply to an individual ADI or class of ADIs.

11.12 Any accommodations made under subitem 9(5) do not exempt the transferring entity from lodging a complete unclaimed money statement.

11.13 The arrangements made in subitem 9(5) can only have a maximum duration of five years after the date upon which the first unclaimed monies would otherwise have been required to be paid - that is when the statement is lodged as under subsection 69(3) of the Banking Act after allowing for the hiatus of one year. Subitem 9(6) is intended to cap the duration of the operation of these transitional provisions so that all institutions will be fully compliant with section 69 of the Banking Act by, at the latest, 31 March of the seventh year after the transfer date (sixth year if the transfer date is before 31 March in a particular calendar year).

11.14 Subitem 9(9) provides definitions of the expressions 'Commonwealth unclaimed money statement' and 'notification action'. This subitem also lists the names of the State and Territory unclaimed money acts that are meant by the expression 'unclaimed money law'.

Division 5 - Transitional provisions relating to the operation of the Life Insurance Act 1995

11.15 Division 5 of Schedule 8 provides transitional provisions relating to the operation of the Life Insurance Act, particularly provisions relating to the transfer of friendly societies into this regime.

Item 10

11.16 Item 10 defines the following terms for use in Division 5 of Schedule 8: amended Act, eligible benefit fund, existing benefit fund rules, health insurance business, old Act, and transferring friendly society.

Companies taken to be registered

Item 11

11.17 This item will provide a mechanism for registering friendly societies under the Life Insurance Act. The transferring friendly societies will be specified in regulations (either by name, by inclusion in a specified class or in some other way) and must meet the following criteria:

·
immediately before the transfer date the company was a friendly society;
·
the company carried on business through one or more eligible benefit funds (an eligible benefit fund had approval under the FS Code or was deemed to have been established under the transitional provisions of the Code and does not relate to health insurance business);
·
therefore, a friendly society that only operated health insurance business through benefit funds will not be subject to the transfer mechanism; and
·
the company was not winding up immediately before the transfer date (ie, a liquidator was not in force in accordance with the FS Code).

11.18 Where a company is taken to be in winding up immediately before the transfer date, that process will continue to be governed by the relevant provisions of the Corporations Law rather than the amended Act. Clause 11 of Item 1 of Schedule 3 provides transitional provisions for transferring financial institutions that are under external administration.

11.19 The regulations may provide for the company to cease to be registered (subitem 11(4)). The existing deregistration mechanisms are limited because cancellation of registration may only occur after a 12 month lead time (section 26) or at the request of a company (section 27). Subitem 11(4) will provide a more appropriate and timely way of reversing registrations that should not have occurred under the transitional provisions (eg, if a friendly society that only conducts health insurance business is inadvertently registered).

11.20 The company will receive a certificate of registration from APRA (under section 21(5) of the amended Act) as soon as it is practicable. Subitem 11(3) provides that the friendly society's registration may be dealt with as if it had actually been granted under section 21 of the amended Act. For example, APRA will be able to impose conditions on registrations under section 22 of the Act.

11.21 Subitem 11(5) will deem APRA to have made a declaration under section 12A if, immediately before the transfer date, the transferring friendly society carried on certain insurance or annuity business that was not otherwise life insurance business. The effect of this transitional provision is that the deemed business will be treated as if it were life insurance business.

11.22 Subitem 11(6) will deem APRA to have made a declaration under section 12B if, immediately before the transfer date, the transferring friendly society carried on business to which section 12B would have applied (ie eligible financial benefit business) and that was not otherwise life insurance business. The effect of this transitional provision is that the deemed business will be treated as if it were life insurance business.

11.23 Under subitem 11(7) the eligible benefit funds of the company are taken to be established in accordance with the requirements of the amended Life Insurance Act. Under subitem 11(8) the existing benefit fund rules for those funds are taken to be approved (under proposed section 16L) and to have come into force (under proposed section 16N). There are two possible qualifications to the deemed approval:

·
subitem 11(9) - if a provision of the existing benefit fund rules is inconsistent with the amended Act or any instrument made under the amended Act, the provision is not effective to the extent that it is inconsistent;

-
The rules of a friendly society that transferred into the FS Code were required to comply with that Code, the regulations and standards made under the Code within a two year period. As this transitional period will not have expired at the time friendly societies transfer into the Life Insurance Act regime, transitional arrangements for benefit fund rules will be continued through the Prudential Rules developed by APRA. Provided the friendly society meets the transitional requirements of the Prudential Rules subitem 11(9) will not be triggered during that transitional period.

·
subitem 11(10) - the deemed approval of the existing benefit fund rules may be revoked by a written determination made by APRA if APRA considers that the inconsistency (dealt with in subitem 9) is detrimental to the interests of owners or prospective owners of policies. Such a determination may only be made during the 12 month period that commences 18 months after the transfer date. The rules cease to have effect from the day of APRA's determination. The determination will be a reviewable decision under the amended Life Insurance Act (subitem 11(12)).

11.1 Subitem 11(13) preserves the financial year of the company that applied under the FS Code. A friendly society will be able to seek APRA's agreement to change the financial year under subsection 77(6) of the amended Act.

11.2 Subitem 11(14) enables APRA to give notice of a range of transitional matters to the friendly society, eg notice that the friendly society is taken to have been granted registration.

Assignment of interests in benefit funds

Item 12

11.3 Item 12 will provide that an interest in an eligible benefit fund of a transferring friendly society that was assigned under the FS Code will be taken to be an assignment for the purposes of the amended Life Insurance Act (ie, in accordance with subsection 200(2)).

Registration of policies

Item 13

11.4 Item 13 will provide that the registration requirements of section 227 will not need to apply to a policy issued before the transfer date that was not a life policy under the old Act. That is, the amendments to subsections 227(1), (2) and (3) that change references from 'life policy' to 'policy' (see item 55 of Schedule 4) will not require life companies to retrospectively register policies that were not previously required to be registered. However, all policies issued after the transfer date will need to be registered. (It is intended that a regulation will be made, under proposed section 16ZC, to modify the application of section 227 so that friendly societies continue to maintain registers of benefit fund members rather than policies.)

11.5 The difference between these two terms is that 'life policy' has the meaning given in section 9 whereas policy will be defined in the Dictionary in the Schedule to mean 'a life policy, a sinking fund policy, or a section 12A or 12B policy'.

Continued effect of existing section 12 declarations

Item 14

11.6 As noted earlier, the existing declaration powers in paragraph 12(2)(a) allowing APRA to declare certain insurance or annuity business to be life insurance will be repealed and replaced with the declaration power in section 12A. Item 14 will ensure that a declaration made for the purposes of paragraph 12(2)(a) of the old Act will continue to have effect as if it were a declaration under subsection 12A(1) of the amended Act.

Auditors

Item 15

11.7 Subitem 15(1) provides that the approval of a person as a life company auditor (under subsection 85(1) of the old Act) will be taken to be an approval (under the amended Act) for the person to audit both life companies other than friendly societies (see subsection 85(1)(a)) and friendly societies (see subsections 85(1)(b)).

11.8 Subitem 15(2) provides that if an appointment of a person as an auditor of a transferring friendly society is in force under any of the FS Codes immediately before the transfer date, the person will be taken on the transfer date to be:

·
approved by APRA to audit friendly societies (under paragraph 85(1)(b)); and
·
the appointed auditor of the transferring friendly society in accordance with section 84 of the amended Act.

11.9 An approval or appointment taken to be granted under subitem 15(2) will be dealt with under the amended Act as an actual approval under paragraph 85(1)(b) and an actual appointment under section 84. The written notification normally required under section 87(1) when a life company appoints an auditor will not be required for such appointments (subitem 15(5)).

11.10 The FS Code allows the appointment of a firm of auditors and recognises each member of the firm to be an appointed auditor (subsection 340(6) of that Code). Therefore, the effect of the transitional provision for a transferring friendly society that had appointed a firm of auditors is that:

·
each member of the firm at the transfer date will be taken to be approved by APRA to audit friendly societies under paragraph 85(1)(b); and
·
each member of the firm will be taken to be the appointed auditor of the transferring friendly society under section 84 of the amended Act (ie there will be several persons that are the appointed auditor of that friendly society - see proposed subitem 15(3)).

Actuaries

Item 16

11.1 Subitem 16(1) provides that if an appointment of a person as an actuary to a transferring friendly society is in force under any of the FS Codes immediately before the transfer date the person is taken, on the transfer date, to have been:

·
granted approval under subsection 93(6) of the amended Act; and
·
appointed as actuary of the transferring friendly society in accordance with section 93 of the amended Act.

11.2 An approval and appointment made in this manner will be able to be dealt with as if an approval had actually been granted under subsection 93(6) of the amended Act and an appointment had been made in accordance with section 93 of the amended Act. The written notification normally required under subsection 95(1) when a life company appoints an actuary will not be required for such appointments (subitem 16(3)).

Unclaimed money

Item 17

11.3 Under section 216 of the Life Insurance Act, a life company must each year give an annual statement of unclaimed money (other than unclaimed money in RSA accounts). The life company must, at the same time, pay unclaimed monies to the Commonwealth. Unclaimed money means all sums of money that have become legally payable by the life company in respect of policies and which have not been claimed within seven years after the maturity date of the policy.

11.4 Inconsistencies arise in the operation of this provision and State and Territory unclaimed money laws. In the absence of transitional arrangements, these differences would require transferring friendly societies to submit two unclaimed money statements within a very short period of time in the transfer year. Item 17 will provide time for friendly societies to adjust to the new arrangements.

11.5 The transitional arrangements being provided for friendly societies are consistent with those being provided for building societies and credit unions described above.

11.6 Subitem 17(1) excludes as unclaimed money for the purpose of section 216 an amount of money where notification action has occurred prior to the transfer date under State and Territory unclaimed money laws even if these amounts have not actually been paid as at the transfer date. Therefore, monies that have been paid to the States and Territories by friendly societies in line with their unclaimed money laws will remain with the States and Territories and will not be claimed by the Commonwealth.

11.7 In the transfer year it would be possible for a gap to arise between the cut-off date for the last statement to the States and Territories and the cut-off date for the first statement to the Commonwealth. Subitem 17(2) clarifies that any unclaimed monies that accrue over this gap will be payable to the Commonwealth. Amounts that would not have qualified as unclaimed money under the State and Territory laws but qualify under section 216 immediately after the transfer are liable to be paid to the Commonwealth.

11.8 Despite these transitional arrangements, the requirement to catch-up may be onerous on transferring friendly societies. In order to assist institutions, all transferring institutions are to be given the option of additional time in which to comply with the Commonwealth provisions. Subitem 17(3) provides an optional hiatus of one year for all transferring friendly societies. This means that the first statement is only required to be submitted with ASIC on or before the second 31 March following the transfer date (though the institution is permitted to submit a statement in the first year). Under this option, the amounts that would have been included in this first statement must (if still unclaimed money) be included in the next unclaimed money statement provided to ASIC.

11.9 Subsection 216(3) of the Life Insurance Act requires the total amount shown in the unclaimed money statement to be paid by a life company to the Commonwealth at the time the statement is made. Subitem 17(4) allows ASIC to make a determination that a transferring entity has, subject to subitem 17(5), satisfied payment requirements. Such a determination will not exempt the transferring entity from lodging a complete unclaimed money statement.

11.10 The determination made by ASIC can only have a maximum duration of five years after the date upon which the first unclaimed monies would otherwise have been required to be paid. (That is, when the statement is lodged as under subsection 216(1) after allowing for the hiatus of one year.) Subitem 17(5) will cap the operation of these transitional provisions so that all institutions will be fully compliant with section 216 before 31 March of the seventh year after the transfer date (sixth year if the transfer date is before 31 March in a particular calendar year).

Effect of amendments on taxation legislation

Item 18

11.11 The purpose of this provision is to clarify the tax treatment of the business of friendly societies that become registered under the Life Insurance Act at the transfer date. The effect of the provision is that business undertaken by friendly societies that, immediately before the transfer date, was not 'eligible insurance business' will not be taken to be 'eligible insurance business' for tax purposes merely because of the transfer arrangements. 'Eligible insurance business' is presently taxed at 33 per cent to the entity whereas other friendly society activities might be exempt from tax.

Transfer of engagements and mergers

Item 19

11.12 Subitems 19(1) and 19(2) will provide that where a transfer of engagements or a merger is underway prior to the transfer date, it may be completed in accordance with the relevant State or Territory law, despite anything in the Banking Act, the Life Insurance Act or any other Commonwealth law prescribed by the regulations.

11.13 Subitem 19(3) specifies that regulations may deal with how specified laws of the Commonwealth apply in relation to the situation resulting from a transfer of engagements or a merger completed in accordance with a State or territory law.

11.14 Subitem 19(4) specifies the circumstances in which a transfer of engagements will be taken to have commenced prior to the transfer date for the purposes of this item by referring to the relevant approval, determination and direction provisions of the State or Territory's FI or FS Codes.

11.15 Subitem 19(5) specifies the circumstances in which a merger will be taken to have commenced prior to the transfer date for the purposes of this item by referring to the relevant approval and determination provisions of the State or Territory's FI or FS Codes.

Treatment of determinations under section 29 of the Social Security Act 1991

Item 20

11.16 Approvals made under section 29 of the Social Security Act 1991 prior to the transfer date with respect to friendly societies will be continued as if made under the amended legislation.

Part 2 - Transitional provision related to amendments of the High Court of Australia Act 1979

Item 21

11.17 This item ensures that approvals of banks and authorisations of persons given before the commencement of Schedule 6, which amends the High Court of Australia Act 1979 so it is consistent with the extension of the Banking Act to ADIs that occurred during the first stage of the financial system reforms, are taken to be in force after that commencement.

Part 3 - Regulations

Item 22

11.18 This item defines the scope of regulations that may be made for matters of a transitional, saving or application nature associated with the transition of building societies, credit unions, friendly societies, associations, special service providers or the CCWPSBL. It covers regulations associated with the APRA Act, Banking Act, Financial Sector (Shareholdings) Act 1998 , Life Insurance Act and the proposed Financial Sector (Transfers of Business) Act 1999 .

11.19 Regulations will enable the continuation, in part or full, of many instruments and things done under the replaced State and Territory legislation, including the FI and FS Codes as appropriate. The regulation may also include applying, with or without modification, the provisions of the repealed State or Territory law before it was repealed.

11.20 The regulations may permit all or some of the matters specified in subitem 22(4) to be determined by a specified person or specified class of persons. This will enable a person to determine identify, continue or modify a thing done or instrument made or class of things or instruments.

11.21 It is envisaged that most regulations will not be retrospective and will take effect from the transfer date. However, there will be scope to apply regulations retrospectively to the transfer date if necessary to cover any matters that may have accidentally been overlooked. This retrospectivity is necessary to ensure a smooth transition for transferring institutions and their members, depositors and policyholders in the event that a matter was not identified and dealt with prior to the transfer date or the regulation made had unintended and undesirable other consequences.

Regulations

Item 23

11.22 A general regulation making power has been included at item 23 to allow the Governor-General to make regulations, not inconsistent with the legislation.


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