House of Representatives

Financial Sector Legislation Amendment (Prudential Refinements and Other Measures) Bill 2010

Explanatory Memorandum

Circulated By the Authority of the Minister for Financial Services, Superannuation and Corporate Law, the Hon Chris Bowen MP

Chapter 3 - Amendments to APRA's and the ATO's investigation powers

Outline of chapter

3.1 Schedules 1 to 4 of the Bill contain amendments relating to APRA's and the ATO's investigation powers.

3.2 The schedules amend the Banking, Insurance, Life Insurance, Superannuation Industry (Supervision), Retirement Savings Accounts, and APRA Acts to:

·
clarify APRA's and the ATO's investigation powers during the winding-up of a regulated entity;
·
respond to the High Court's decision in Rich v ASIC;
·
harmonise record keeping provisions for APRA-regulated entities with respect to their accessibility by APRA; and
·
enhance the protection and sharing of information by APRA.

Context of amendments

Investigations during wind-up

3.3 APRA currently has the power to investigate, or appoint an inspector to investigate, the affairs of all APRA-regulated institutions. The ATO has similar powers in relation to the superannuation entities which it regulates. However, there is uncertainty as to whether APRA and the ATO may commence or continue an investigation once such an entity enters external administration or, in the case of a superannuation entity, the entity is wound up, dissolved or terminated or the trustee becomes externally-administered or insolvent under administration.

3.4 This uncertainty is undesirable. Investigation powers are important for gathering information and evidence for the purposes of administering and enforcing relevant laws.

Disqualification

3.5 The High Court's decision in Rich v ASIC [2] overturned the view that disqualification proceedings were protective and not penal in nature.

3.6 Amendments have been made to the Corporations Act and the Trade Practices Act to overcome the potential implications of the High Court's decision. However, no such amendments have been made to relevant laws administered by APRA, or in the case of certain superannuation entities, the ATO.

3.7 Similar amendments to those applying in the Corporations and Trade Practices Acts contexts, should also apply in the context of the Banking, Insurance, Life Insurance and Superannuation Industry (Supervision) Acts. Persons subject to disqualification proceedings under these Acts are in a position of considerable responsibility with respect to the assets of others and the stability of Australia's financial system. It would not be desirable, for example, if such a person was able through the relevant privilege to retain their position with a financial institution in circumstances where they are in fact not a fit and proper person to do so.

Record-keeping by financial institutions

3.8 The Insurance, Life Insurance, and Superannuation Industry (Supervision) Acts currently contain provisions with respect to the keeping of records by regulated entities. The Banking Act does not contain such provisions. Entities regulated under the Banking Act are, however, subject to the record keeping requirements in the Corporations Act.

3.9 The current record keeping provisions are not consistent with respect to their accessibility by APRA. It is important that APRA can efficiently access records kept by financial institutions where required to further the administration of prudential laws.

Protection and sharing of information

3.10 Section 56 of the APRA Act provides for the protection and sharing of protected information and documents by APRA.

3.11 Currently, the definitions of protected information and documents in section 56 covers much but not all information collected under prudential laws in relation to financial sector entities (as defined in the FSCODA). All such information and documents should be subject to the protection of section 56 and the information sharing regime it contains.

Summary of new law

3.12 Schedules 1 to 4 of the Bill contain amendments relating to APRA's investigation powers. In particular, the schedules:

·
amend the Banking, Insurance, Life Insurance, and Superannuation (Supervision) Acts to clarify that APRA's investigation powers apply to a regulated entity that is, or becomes, externally administrated or insolvent under external administration;
·
amend the Banking, Insurance, Life Insurance, Superannuation (Supervision) and RSA Acts so that a person cannot refuse to provide information or documents under relevant laws or during relevant proceedings on the grounds that the information or documents might tend to make the person liable to a penalty by way of disqualification;
·
amend the Banking, Insurance, Life Insurance, and Superannuation (Supervision) Acts to harmonise the record keeping provisions for APRA-regulated entities with respect to their accessibility by APRA; and
·
amend the definitions of protected information and documents in section 56 of the APRA Act so that they capture all information or documents collected under prudential laws from a financial sector entity within the meaning of the FSCODA.

Comparison of key features of new law and current law

New law Current law
Clarifies that APRA's investigation powers under the Banking, Insurance, and Life Insurance Acts apply to a regulated entity that is, or becomes, externally administrated.
Clarifies that APRA's and the ATO's investigation power under the Superannuation Industry (Supervision) Act applies to a superannuation entity that is wound up, dissolved or terminated or whose trustee becomes externally administrated or insolvent under external administration.
It is not clear that APRA's investigation powers under the Banking, Insurance, and Life Insurance Acts apply to a regulated entity that is, or becomes externally administered.
It is not clear that APRA's and the ATO's investigation power under the Superannuation Industry (Supervision) Act applies to a superannuation entity that is wound up, dissolved or terminated or whose trustee becomes externally administrated or insolvent under external administration.
A person is not entitled to refuse to provide information or documents under relevant laws or during relevant proceedings on the grounds that it might tend to make the person liable to a penalty by way of disqualification A person is entitled to refuse to provide information or documents under relevant laws or during relevant proceedings on the grounds that it might tend to make the person liable to a penalty by way of disqualification.
APRA-regulated entities are required to keep their records in Australia; notify APRA of their location and any change to that location within 28 days; and keep the records in English or in a form readily convertible into English. The record keeping provisions applying to APRA-regulated entities are inconsistent with respect to their accessibility by APRA. Various features of the new law apply to some but not all such entitles.
Section 56 (Secrecy-general obligations) of the APRA Act applies to any information or documents collected by APRA under prudential laws relating to the affairs of a financial sector entity within the meaning of the FSCODA. Section 56 (Secrecy-general obligations) of the APRA Act applies to much of the information or documents collected by APRA under prudential laws relating to the affairs of a financial sector entity within the meaning of the FSCODA.

Detailed explanation of new law

Investigations during wind-up

3.13 The Bill amends sections 13, 13A, 61 and 62 of the Banking Act, section 52 of the Insurance Act, and section 137 of the Life Insurance Act to provide, for the avoidance of doubt, that the sections apply to a relevant institution that is, or becomes, an externally administered body corporate (within the meaning of the Corporations Act) in the same way as the sections applies to any other relevant institution . [Schedule 1, items 19, 24, 43 and 44, schedule 2, item 46, and schedule 3, item 40, sections 13, 13A, 61 and 62 of the Banking Act 1959, section 52 of the Insurance Act 1973 and section 137 of the Life Insurance Act 1995]

3.14 An equivalent amendment is also made to section 263 of the Superannuation Industry (Supervision) Act. That amendment provides, for the avoidance of doubt, that the section applies to a superannuation entity, in the same way as it applies to any other superannuation entity, if: the superannuation entity is wound up, dissolved or terminated; or, the trustee of the superannuation entity is or becomes an externally-administered body corporate (within the meaning of the Corporations Act 2001), or insolvent under administration . [Schedule 4, item 36, section 263 of the Superannuation Industry (Supervision) Act 1993]

3.15 The amendments clarify that APRA may commence or continue an investigation after an ADI, general insurer or life insurer enters external administration, or, in the case of a superannuation entity, after the entity is wound up, dissolved or terminated or its trustee enters external administration or becomes insolvent under external administration.

Disqualification

3.16 The Bill amends the Banking Act, Insurance Act, Life Insurance Act, Superannuation Industry (Supervision) Act and RSA Act to provide that a person is not entitled to fail to comply with a requirement under those respective Acts:

·
to answer a question or give information;
·
to produce books, accounts or other documents; or
·
to do any other act whatever;

on the grounds that the answer or information, production of the book or other thing, or doing that other act, as the case may be, might tend to make the person liable to a penalty by way of a disqualification under relevant laws . [Schedule 1, item 40 , schedule 2, item 14, schedule 3, item 58, and schedule 4, items 28, and 34, subsection 22A(3) of the Banking Act 1959, subsection 26A(3) of the Insurance Act 1973, subsection 245C(3) of the Life Insurance Act 1995, subsection 67AA(3) of the Retirement Savings Accounts Act 1997, and subsection 126L(3) of the Superannuation Industry (Supervision) Act 1993]

3.17 The Bill further amends the Acts to provide that in any proceeding under, or arising out of, them, a person is not entitled to refuse or fail to comply with a requirement:

·
to answer a question or give information;
·
to produce books, accounts or other documents; or
·
to do any other act whatever;

on the ground that the answer or information, production of the book or other thing, or doing that other act, as the case may be, might tend to make the person liable to a penalty by way of a disqualification under the Acts. This applies whether or not the subject person is a defendant in, or a party to, the proceeding or any other proceeding . [Schedule 1, item 40 , schedule 2, item 14, schedule 3, item 58, and schedule 4, items 28, and 34, subsections 22A(1) and 22A(2) of the Banking Act 1959, subsections 26A(1) and 26A(2) of the Insurance Act 1973, subsections 245C(1) and 245C(2) of the Life Insurance Act 1995, subsections 67AA(1) and 67AA(2) of the Retirement Savings Accounts Act 1997, and subsections 126L(1) and 126L(2) of the Superannuation Industry (Supervision) Act 1993]

3.18 Amendments are also made by the Bill to facilitate the operation of the above amendments.

3.19 The relevant Acts presently contain various provisions relating to the admissibility of information or documents obtained from a person under them as evidence against that person in a criminal proceeding or a proceeding for the imposition of a penalty. The Bill provides that these provisions do not apply to a proceeding for the imposition of a penalty by way of disqualification under the respective Acts. This prevents any inconsistency arising between those present provisions and the new provisions inserted by the Bill.

3.20 Similarly, to facilitate the operation of the new provisions the Bill provides that they have effect despite anything in any provision of the respective Acts or the Administrative Appeals Tribunal Act 1975. This includes, in the case of the Banking, Insurance, and Superannuation Industry (Supervision) Acts, the provisions in those Acts that provide that the Federal Court is to apply the rules of evidence and procedure for civil matters when hearing proceedings for a pecuniary penalty order . [Schedule 1, item 40 , schedule 2, item 14, schedule 3, item 58, and schedule 4, items 28, and 34, subsections 22A(4) and 22A(5) of the Banking Act 1959, subsections 26A(4) and 26A(5) of the Insurance Act 1973, subsections 245C(4) and 245C(5) of the Life Insurance Act 1995, subsections 67AA(4) and 67AA(5) of the Retirement Savings Accounts Act 1997, and subsections 126L(4) and 126L(5) of the Superannuation Industry (Supervision) Act 1993]

3.21 Finally, for the purposes of the new provisions, the Bill defines penalty as including forfeiture . [Schedule 1, item 40 , schedule 2, item 14, schedule 3, item 58, and schedule 4, items 28, and 34, subsection 22A(6) of the Banking Act 1959, subsection 26A(6) of the Insurance Act 1973, subsection 245C(6) of the Life Insurance Act 1995, subsection 67AA(6) of the Retirement Savings Accounts Act 1997, and subsection 126L(6) of the Superannuation Industry (Supervision) Act 1993]

3.22 The amendments respond to the High Court's decision in Rich v ASIC, which overturned the view that disqualification proceedings were protective and not penal in nature. The amendments are modelled on the amendments made to the Corporations Act in 2007. Similar amendments have also been made to the Trade Practices Act.

3.23 In the case of the Superannuation Industry (Supervision) Act, the amendments are inserted into Subdivision C of Division 3 of Part 15 of that Act. As a result, the heading to that section is changed from 'Offences relating to disqualified persons' to 'Other matters relating to disqualification'. The amended heading better reflects the provisions in the subdivision after the relevant amendments are inserted . [Schedule 4, item 33 , Subdivision C of Division 3 of Part 15 (heading) of the Superannuation Industry (Supervision) Act 1993]

Record-keeping

3.24 The Insurance, Life Insurance, and Superannuation Industry (Supervision) Acts currently contain provisions with respect to the keeping of records by regulated entities. The Banking Act does not contain such provisions. Entities regulated under the Banking Act are, however, subject to the record keeping requirements in the Corporations Act.

3.25 The Bill makes amendments to the above-mentioned Acts to harmonise the record keeping provisions for APRA-regulated entities with respect to their accessibility by APRA. In particular, the amendments require that the records are kept in Australia; that APRA is notified, in the approved form, of their location and any change to that location within 28 days; and that the records are kept in English or in a form in which they are readily convertible into writing in English. Each of these requirements, with the exception of the requirement to notify APRA of the location at which records are kept, currently applies to some but not all APRA-regulated entities . [Schedule 1, item 42 , schedule 2, items 40, and 41, schedule 3, item 9, and schedule 4, items 30 to 32, subsections 60(1) and 60(3) to 60(5) of the Banking Act 1959, paragraphs 49Q(1)(a) and 49Q(1)(b) and subsections 49Q(1B) to 49Q(1D) of the Insurance Act 1973, subsections 76A(1) and 76A(3) to 76A(5) of the Life Insurance Act 1995, and paragraph 35A(2)(b) and subsections 35A(2B) to 35A(2D) of the Superannuation Industry (Supervision) Act 1993]

3.26 The Bill provides APRA with discretion to approve an entity keeping its records in a country other than Australia. This approval may be given subject to specified conditions and is reviewable on its merits by the Administrative Appeals Tribunal . [Schedule 1, item 42 , schedule 2, items 41 and 43, schedule 3, items 9 and 57, and schedule 4, items 30 and 32, subsections 60(2) and 60(7) of the Banking Act 1959, subsections 49Q(1A) and 49Q(3) of the Insurance Act 1973, subsections 76A(2) and 263(1) of the Life Insurance Act 1995, and subsections 10(1) and 35A(2A) of the Superannuation Industry (Supervision) Act 1993]

3.27 The Bill amends the Banking and Life Insurance Acts to make it an offence (penalty 200 penalty units) for a relevant entity to contravene the requirements to keep their records in Australia (or other approved country) and in English or in a form in which they are readily convertible into writing in English. In the case of the Insurance Act and the Superannuation Industry (Supervision) Act, the present offences in sections 49Q and 35A of those respective Acts apply . [Schedule 1, item 42 , schedule 2, item 42, and schedule 3, item 9, subsection 60(6) of the Banking Act 1959, subsection 49Q(2) of the Insurance Act 1973, and subsection 76A(6) of the Life Insurance Act 1995]

3.28 To support the notification requirements referred to above, the Bill inserts a definition of 'approved form' into the Banking, Insurance and Life Insurance Act. The term is defined for relevant purposes to mean a form approved, in writing, by APRA. The term is already defined in the Superannuation Industry (Supervision) Acts . [Schedule 1, item 3, schedule 2, item 1, and schedule 3, item 59, subsection 5(1) of the Banking Act 1959, subsection 3(1) of the Insurance Act 1973, and dictionary in the schedule to the Life Insurance Act 1995]

Protection and sharing of information

3.29 Section 56 of the APRA Act provides for the protection and sharing of protected information and documents by APRA.

3.30 The Bill amends the definitions of protected information and documents in section 56 of the APRA Act so that they include any information or documents obtained or produced under a prudential law which relates to the affairs of a financial sector entity within the meaning of the FSCODA . [Schedule 4, item 1, subsection 56(1) of the Australian Prudential Regulation Authority Act 1998]

3.31 The amendment ensures that information and documents collected from such financial sector entities are subject to the protection of section 56 and the information sharing regime it contains. At present, some but not all financial sector entities are covered by section 56.


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