House of Representatives

Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)

Chapter 3 - Directions powers

Outline of chapter

3.1 Schedules 1 to 3 to this Bill amend the Industry Acts to enhance the scope and efficacy of APRA's directions powers.

Context of amendments

3.2 The Industry Acts enable APRA to issue enforceable directions to regulated entities and authorised NOHCs in specified circumstances.

3.3 In most situations, APRA is able to address any prudential concerns that arise in relation to regulated entities by working cooperatively with the board and management and, where applicable, their authorised NOHC. In these instances, the board and senior management maintain full responsibility for decisions made by the regulated entity and, where applicable, the group of which it may be part.

3.4 However, there may be times when APRA considers it necessary to use more direct tools, such as its directions powers, to rectify or manage prudential concerns.

3.5 Directions powers enable APRA to compel a regulated entity to take specific action to address particular prudential issues that have been identified. Directions powers may also be necessary to limit further deterioration in the financial condition of a regulated entity in a period of emerging stress, and to facilitate the resolution of a distressed regulated entity.

3.6 By international standards, APRA's directions powers are reasonably comprehensive. However, refining and, where appropriate, enhancing the triggers that allow the issue of directions will help ensure that APRA can respond in a more timely and decisive way to emerging prudential concerns that affect an entity.

3.7 Equally, broadening the scope of the directions powers, both in respect of the matters on which directions may be given and the entities to which directions may be given, will assist APRA to respond effectively and promptly to resolve a distressed regulated entity.

3.8 A related issue is that in complying with an APRA direction, an entity, its directors or other officers may breach what would (but for the existence of the direction) normally be their obligations or duties under the Corporations Act or other law. Such a potential conflict of duties could give rise to delay and impede the effectiveness of APRA's direction powers, particularly in a crisis. The Bill therefore addresses this issue by introducing a specific immunity provision for an entity, its directors and management when complying with an APRA direction. This is consistent with the Key Attributes, which note the need for directors and other key officers of financial institutions to be protected from liability arising from compliance with directions.

Summary of new law

3.9 Schedules 1 to 3 to this Bill amend the Industry Acts to:

·
extend APRA's ability to issue directions to subsidiaries of authorised NOHCs and subsidiaries of regulated entities;
·
clarify the scope of APRA's 'catch-all' directions power;
·
clarify that APRA may issue directions requiring entities to take specified actions to facilitate resolution, whether in normal times or during a crisis;
·
clarify that APRA may give directions despite external support being in place;
·
extend APRA's ability to issue recapitalisation directions to a regulated entity's authorised NOHC and certain other holding companies;
·
harmonise recapitalisation directions powers with general directions powers;
·
ensure that complying with an APRA direction will not be grounds for an entity, its directors or management to be held liable under any other law (subject to a good faith and reasonableness test);
·
harmonise the protection from liability provisions in the Industry Acts; and
·
provide for APRA to determine that the giving of a direction should be confidential.

Comparison of key features of new law and current law

New law Current law
Directions to subsidiaries
APRA may give directions to subsidiaries of authorised NOHCs and subsidiaries of regulated entities. APRA does not have the power to give directions directly to subsidiaries of authorised NOHCs and subsidiaries of regulated entities.
Catch-all directions power
APRA may give directions about other matters regarding the affairs of the regulated entity (including in relation to specific transactions and other matters). It is unclear whether APRA has the power under the 'catch-all' ground to give directions regarding specific transactions involving the regulated entity.
Pre-positioning directions power
APRA may give directions to require entities to take specified actions to facilitate resolution, whether during normal times or in an emerging stress. It is unclear whether APRA has the power to give directions, or all the kinds of directions that might reasonably be necessary, to require regulated entities to take specified actions to facilitate resolution, both in normal times or in an emerging stress.
Power to give directions despite external support being in place
APRA may give directions to insurers despite external support being in place. It is unclear whether APRA may disregard external support for an insurer in deciding whether to give a direction.
Scope of recapitalisation directions powers
Where APRA is giving a recapitalisation direction to a regulated entity, a corresponding direction may be given to the entity's authorised NOHC and any subsidiary of the authorised NOHC which is also a holding company of the regulated entity. APRA does not have the power to give recapitalisation directions to authorised NOHCs or other holding companies of regulated entities.
Harmonise recapitalisation directions powers with general directions powers
APRA may give a recapitalisation direction that can:

·
deal with some or a particular class of matters;
·
specify time for compliance;
·
be varied by notice in writing if APRA considers that the variation is necessary and appropriate; and
·
be later revoked if APRA considers that the direction is no longer necessary or appropriate.

In relation to a recapitalisation direction, APRA does not have express power in the Industry Acts to:

·
deal with some or a particular class of matters;
·
specify time for compliance;
·
vary the direction; or
·
revoke the direction.

Protection from liability when complying with an APRA direction
An entity, its directors or management will not be held liable for actions or omissions in good faith that are reasonable in order to achieve the purpose of complying with an APRA direction. It is unclear that the general immunity provision in section 70A of the Banking Act provides an entity, its directors or management with the requisite level of immunity when complying with an APRA direction.
Streamline the protection from liability provisions in the Industry Acts
A person will be protected from liability if they act in good faith and without negligence in the exercise or performance of powers, functions or duties under the Insurance and Life Insurance Acts. (This is separate from the special protection afforded for compliance with a direction.) No equivalent provision of section 70A of the Banking Act is in the Insurance or Life Insurance Acts; although various provisions under the Insurance and Life Insurance Acts provide some protection for auditors and actuaries.
Confidentiality of certain directions
APRA may make a determination that the giving of a direction should be confidential in certain circumstances. Currently only APRA staff are subject to legislative secrecy obligations in relation to directions.

Detailed explanation of new law

3.10 To assist with the operation of APRA's directions powers under the Industry Acts, the Bill inserts a definition of 'direction under this Act' to mean a direction under any of the following provisions:

·
sections 11CA, 11CC, 13E, 17, 23, 29 and 31F of the Banking Act;
·
sections 17, 27, 49R, 74, 76, 78, 103B and 104 of the Insurance Act; or
·
sections 27A, 125A, 230AB or 230B of the Life Insurance Act. [Schedule 1, item 4, subsection 5(1) of the Banking Act; Schedule 2, item 1, subsection 3(1) of the Insurance Act; Schedule 3, item 110, Schedule Dictionary of the Life Insurance Act]

General directions powers

Triggers for issuing directions to a regulated entity or authorised NOHC

3.11 Paragraphs 11CA(1)(c) of the Banking Act, 104(1)(b) of the Insurance Act, and 230B(1)(b) of the Life Insurance Act currently provide that APRA may give a direction to a body corporate if APRA has reason to believe that the body corporate is likely to contravene any one of certain listed laws and 'such a contravention is likely to give rise to a prudential risk'.

3.12 The Bill amends these provisions to replace the condition that 'such a contravention is likely to give rise to a prudential risk' with 'the direction is reasonably necessary for one or more prudential matters relating to the body corporate'. [Schedule 1, item 33, paragraph 11CA(1)(c) of the Banking Act; Schedule 2, item 113, paragraph 104(1)(b) of the Insurance Act; Schedule 3, item 83, paragraph 230B(1)(b) of the Life Insurance Act]

3.13 This amendment reflects that the term 'prudential matters' is specifically defined in the Industry Acts and so provides greater clarity to the relevant grounds for APRA's directions powers. In addition, given the amendments to the definition of 'prudential matters' (see 10.14 to 10.17), this clarifies that APRA can direct a body corporate to take actions to address issues concerning their resolvability (or the resolvability of a group of which it is a member) for resolution purposes.

3.14 The Bill amends the grounds under the Industry Acts to enhance APRA's ability to give a direction to a body corporate (a regulated entity or authorised NOHC) as a result of the conduct or circumstances of its subsidiaries. The new grounds are:

·
APRA has reason to believe that:

-
a subsidiary has contravened a provision of the relevant Industry Act, a regulation (in the case of the Banking Act, a prudential requirement regulation), a prudential standard or the FSCODA; or
-
a subsidiary is likely to contravene an Industry Act, a regulation (in the case of the Banking Act, a prudential requirement regulation), a prudential standard or the FSCODA; or
-
a subsidiary is conducting its affairs in a way that may cause it to be unable to continue to supply services to the body corporate (IT or treasury functions for example); and

·
APRA considers that the direction is reasonably necessary for one or more prudential matters relating to the regulated entity or authorised NOHC (prudential matters test).

3.15 The Bill also inserts additional grounds to enable APRA to give a direction to a body corporate (a regulated entity or authorised NOHC), if:

·
APRA has reason to believe that:

-
the direction is in respect of a subsidiary and is necessary in the interests of depositors or policyholders of the regulated entity; or
-
the direction is in respect of a subsidiary and the failure to issue such a direction would materially prejudice the interests of depositors or policyholders of the regulated entity.

3.16 The Bill provides that these grounds, as well as the existing ground that a subsidiary is conducting its affairs in a way that may cause or promote instability in the Australian financial system, are not subject to the additional prudential matters test. This is because a prudential element is implicit in each of these three grounds themselves. [Schedule 1, item 34, subsections 11CA(1AA) and 11CA(1AB) of the Banking Act; Schedule 2, item 114, subsections 104(1A) and 104(1B) of the Insurance Act; Schedule 3, item 84, subsections 230B(1AA) and 230B(1AB) of the Life Insurance Act]

3.17 The amendments reflect the various circumstances in which the conduct of a subsidiary of a regulated entity or authorised NOHC may necessitate APRA giving a direction to the regulated entity or authorised NOHC. The amended triggers described in 3.14 also provide grounds for APRA to give directions directly to subsidiaries (see 3.22).

3.18 The Bill amends the Banking Act to provide that a decision of APRA to give a direction to an ADI or authorised NOHC to take action in relation to a subsidiary under subsection 11CA(1AA) as a result of the ground referred to in paragraph (1AA)(a), (b), (c) or (d), is reviewable internally and upon application to the Administrative Appeals Tribunal if the person disagrees with the internal review outcome. These grounds apply where APRA believes that: a subsidiary of the ADI/NOHC has contravened the Banking Act or FSCODA; a subsidiary of the ADI/NOHC has contravened a prudential requirement regulation or prudential standard; a subsidiary of the ADI/NOHC is likely to contravene any of these; or the direction in respect of the subsidiary is necessary in the interests of relevant depositors. These grounds broadly correspond to similar grounds for the giving of a direction to an ADI or an authorised NOHC which may currently be subject to such a review under the Banking Act. Equivalent changes are made to the Insurance Act and the Life Insurance Act. [Schedule 1, item 42, subsection 11CA(5A) of the Banking Act; Schedule 2, item 119, subsection 104(10) of the Insurance Act; Schedule 3, item 106, subsection 236(1) of the Life Insurance Act]

Directions to subsidiaries

3.19 APRA currently does not have power under the Industry Acts to issue a direction directly to subsidiaries of regulated entities or subsidiaries of authorised NOHCs.

3.20 APRA can instead indirectly influence the activities of other entities in the group by giving directions to the regulated entity or authorised NOHC to give instructions to their respective subsidiaries.

3.21 However, there is a risk of delay in the directions being acted on by the subsidiary, particularly if the board of the subsidiary in question is uncooperative or slow to comply with instructions. Time may be of the essence in resolving a failing regulated entity. It may therefore be important to avoid delays that could compromise the resolution of a regulated entity. The ability for APRA to issue a direction directly to a relevant subsidiary in certain circumstances could help avoid delay and improve the effectiveness of APRA's directions power.

3.22 The Bill amends the Industry Acts to enable APRA to issue a direction to a body corporate that is a subsidiary of the regulated entity, or of an authorised NOHC.

3.23 APRA may issue such a direction only if it has already given, or would otherwise be entitled to give, the regulated entity or authorised NOHC a direction under the subsections identified at 3.14 due to one or more of the grounds having been satisfied in respect of the subsidiary. [Schedule 1, item 34, subsection 11CA(1AC) of the Banking Act; Schedule 2, item 114, subsection 104(1C) of the Insurance Act; Schedule 3, item 84 , subsection 230B(1AC) of the Life Insurance Act]

3.24 The Bill enables regulations to be made under the Industry Acts to specify that a particular body corporate that is a subsidiary cannot be given such a direction. For example, regulations might carve out entities that are regulated under other legislation and subject to a separate directions powers regime. [Schedule 1, item 34, subsection 11CA(1AD) of the Banking Act; Schedule 2, item 114, subsection 104(1D) of the Insurance Act; Schedule 3, item 84, subsection 230B(1AD) of the Life Insurance Act]

3.25 The Bill also amends the Industry Acts to clarify that the different subsections setting out the triggers for directions do not limit each other. [Schedule 1, item 34, subsection 11CA(1AE) of the Banking Act; Schedule 2, item 114, subsection 104(1E) of the Insurance Act; Schedule 3, item 84, subsection 230B(1AE) of the Life Insurance Act]

3.26 The Bill amends the Banking Act to provide that a decision of APRA to give a direction to a subsidiary under subsection 11CA(1AC) as a result of the ground referred to in paragraph (1AC)(a) or (b), to the extent that the paragraph relates to a ground referred to in paragraphs (1AA)(a), (b), (c) or (d), is reviewable internally and upon application to the Administrative Appeals Tribunal if the person disagrees with the internal review outcome. These grounds apply where APRA believes that: the subsidiary has contravened the Banking Act or FSCODA; the subsidiary has contravened a prudential requirement regulation or prudential standard; the subsidiary is likely to contravene any of these; or the direction to the subsidiary is necessary in the interests of relevant depositors. These grounds broadly correspond to similar grounds for the giving of a direction to an ADI or an authorised NOHC which may currently be subject to such a review under the Banking Act. Equivalent changes are made to the Insurance Act and the Life Insurance Act. [Schedule 1, item 42, subsection 11CA(5A) of the Banking Act; Schedule 2, item 119, subsection 104(10) of the Insurance Act; Schedule 3, item 106, subsection 236(1) of the Life Insurance Act]

Catch-all directions power

3.27 The general directions powers in the Industry Acts provide a non-exhaustive list of the different kinds of directions that APRA may give to a regulated entity or authorised NOHC where the relevant pre-conditions are met.

3.28 Since the circumstances under which APRA may need to make a direction are difficult to identify before the event, the list currently also includes a 'catch-all' power for APRA to make a direction to do 'anything else as to the way in which the affairs of the body corporate are to be conducted or not conducted' (current paragraph 11CA(2)(p) of the Banking Act) or 'to do, or refrain from doing, an act that relates to the way in which the affairs of the body corporate are to be conducted or not conducted' (current paragraphs 104(3)(u) of the Insurance Act and 230B(2)(v) of the Life Insurance Act).

3.29 These 'catch-all' directions powers are intended to provide APRA with the flexibility to make directions about other matters regarding the affairs of the regulated entity that are not contemplated by the other kinds of general directions listed in the Industry Acts.

3.30 However, the reference to 'the way' in which the affairs of the body corporate are to be conducted could be interpreted narrowly to mean that directions under the 'catch-all' power are limited to the general manner in which a regulated entity carries on its business (for example, the regulated entity's systems and processes). On this narrow interpretation, the 'catch-all' might not necessarily extend to directions regarding specific transactions involving the regulated entity.

3.31 The Bill therefore amends the 'catch-all' directions power under the Industry Acts by deleting the reference to 'the way'. [Schedule 1, item 37, paragraph 11CA(2)(r) of the Banking Act; Schedule 2, item 117, paragraph 104(3)(w) of the Insurance Act; Schedule 3, item 87, paragraph 230B(2)(x) of the Life Insurance Act]

3.32 This amendment is intended to put beyond doubt that APRA has the power to make directions about particular matters or transactions of a regulated entity (as well as directions as to the 'way' in which such matters are conducted generally).

3.33 As with the other paragraphs in subsection 11CA(2) of the Banking Act (and the equivalent subsections 104(3) of the Insurance Act and 230B(2) of the Life Insurance Act), the reference to the 'body corporate' in the 'catch-all' power (and in the new paragraphs referred to under 'Pre-positioning directions power' in 3.34 to 3.39) is intended to refer either to the body corporate to which the direction is given or, if the direction is to cause a subsidiary to take an action, to the subsidiary.

Pre-positioning directions power

3.34 APRA's supervision of regulated entities includes working with them to ensure that viable contingency plans are in place for managing a crisis affecting the relevant ADI or insurer, and the group of which it may be part. Along with a wide and flexible set of crisis management powers, planning for resolution during normal times is an integral part of ensuring appropriate crisis preparedness. Consistent with the amendments in the Bill, APRA will further develop its framework for resolution planning, including formally reflecting this in its prudential framework through standards and guidance, following appropriate consultation (see Chapter 10).

3.35 Resolution planning will include an assessment of whether APRA's crisis management powers can be used to resolve a relevant entity or group in a credible and orderly manner, and whether APRA considers there to be any existing obstacles to resolution. In cases where obstacles to resolution are identified through the planning process, APRA's supervision of regulated entities would include working with the relevant entity to address these obstacles in an appropriate way.

3.36 In order to provide an appropriate legislative basis for the resolution planning process, it is necessary for APRA to have a clear power to make prudential standards on resolution (see 10.17) and the power to enforce these prudential standards or otherwise require actions to facilitate resolution, through directions where necessary. As such, the Bill clarifies that APRA's directions powers allow it to require a regulated entity to implement appropriate pre-positioning measures to address obstacles to resolution.

3.37 The Bill amends the Industry Acts to empower APRA to give a direction to a regulated entity, authorised NOHC and subsidiaries to do any one or more of the following:

·
to make changes to the body corporate's systems, business practices or operations; or
·
to reconstruct, amalgamate or otherwise alter all or part of the business, structure or organisation of the body corporate or of the group constituted by the body corporate and its subsidiaries. [Schedule 1, item 37, paragraphs 11CA(2)(p) and 11CA(2)(q) of the Banking Act; Schedule 2, item 117, paragraphs 104(3)(u) and 104(3)(v) of the Insurance Act; Schedule 3, item 87, paragraphs 230B(2)(v) and 230B(2)(w) of the Life Insurance Act]

3.38 These amendments are intended to clarify that, where an appropriate precondition for the exercise of APRA's general directions power is met (for example, breach of a prudential standard), APRA can direct a regulated entity, authorised NOHC or their subsidiaries to take the necessary actions required to facilitate resolution. The wording is intended to cover a wide range of potential pre-positioning measures that APRA could direct, for example including changes to business processes or the operational structure of a group in order to facilitate continuity of critical functions of the regulated entity, or the continued provision of critical intra-group shared services, during a resolution. Such a direction could be given, in line with the prudential framework for resolution planning noted above, during normal times or in response to an emerging stress.

3.39 The Bill also amends the Industry Acts to clarify that:

·
the kinds of direction that may be given are not limited by any other provision in the respective Parts (apart from subsection 11CA (2AA) of the Banking Act, which affords protection to holders of covered bonds); and
·
the kinds of direction that may be given under a particular paragraph are not limited by any other paragraph in that subsection. [Schedule 1, item 38, subsections 11CA(2AAA) and 11CA(2AAB) of the Banking Act; Schedule 2, item 118, subsections 104(4B) and 104(4C) of the Insurance Act; Schedule 3, item 88, subsections 230B(3B) and 230B(3C) of the Life Insurance Act]

Power to give directions despite external support being in place

3.40 The Financial Sector Legislation Amendment (Prudential Refinements and Other Measures) Act 2010 inserted subsections 11CA(1B) and (1C) in the Banking Act to ensure that APRA may give a direction to an ADI or authorised NOHC despite any external support being in force. This was intended to ensure that the provision of external support to a stressed entity, for example some form of temporary public support, would not fetter the ability of APRA to determine that the preconditions are met for giving a direction to the entity.

3.41 However, corresponding amendments were not made to the Insurance and Life Insurance Acts for this purpose, even though the directions powers under the Industry Acts are generally aligned.

3.42 The Bill amends the Insurance and Life Insurance Acts to clarify that APRA may disregard external support for an insurer in giving a direction. These amendments ensure consistency in the directions powers across the Industry Acts. [Schedule 2, item 116, subsection 104(2A) of the Insurance Act; Schedule 3, item 86, subsection 230B(1B) of the Life Insurance Act]

3.43 The Bill also enables regulations to be made under the Insurance and Life Insurance Acts to specify that a particular form of support is not external support. This enables the regulations to clarify any types of external support that are not to be disregarded by APRA in deciding to give a direction under the Insurance and Life Insurance Acts. This is consistent with the approach in the equivalent provision of the Banking Act. [Schedule 2, item 116, subsection 104(2B) of the Insurance Act; Schedule 3, item 86, subsection 230B(1C)of the Life Insurance Act]

Recapitalisation directions powers

Scope

3.44 The current Part II, Division 2, Subdivision AA of the Banking Act, Part IX, Division 1 of the Insurance Act, and Part 10A, Division 2, Subdivision A of the Life Insurance Act empower APRA to direct a regulated entity that is not subject to statutory or judicial management to increase its level of capital.

3.45 Presently, where APRA has given such a direction to a regulated entity, it could not use the recapitalisation directions powers to issue a corresponding direction to the regulated entity's authorised NOHC or other relevant holding companies.

3.46 In cases where a regulated entity is a subsidiary of an authorised NOHC, APRA's inability to issue a recapitalisation direction to the authorised NOHC or other relevant holding companies could significantly restrict the effectiveness of the recapitalisation direction power in facilitating the resolution of the regulated entity.

3.47 In particular, this becomes an issue where the direction would have the effect of requiring the regulated entity to seek additional capital from its holding company and these funds were unavailable at the holding company. The regulated entity's authorised NOHC, and any subsidiary of the authorised NOHC which is also a holding company of the regulated entity, would not be able to rely on the relevant provisions in the Industry Acts (including, for example the provisions overriding contracts and listing rules) to facilitate raising additional capital with which to recapitalise the regulated entity.

3.48 The Bill amends the Industry Acts to extend the definition of 'recapitalisation direction' to allow APRA to issue a recapitalisation direction to an authorised NOHC and any other intermediate holding company of the regulated entity. [Schedule 1, item 9, subsection 5(1) of the Banking Act; Schedule 2, item 6, subsection 3(1) of the Insurance Act; Schedule 3, item 114, the Schedule Dictionary of the Life Insurance Act]

Definitions - NOHC/NOHC subsidiary

3.49 The Bill inserts a new definition of 'NOHC/NOHC subsidiary' in the Industry Acts to mean a body corporate that is any of the following:

·
an authorised NOHC; or
·
a subsidiary of an authorised NOHC. [Schedule 1, item 7, subsection 5(1) of the Banking Act; Schedule 2, item 4, subsection 3(1) of the Insurance Act; Schedule 3, item 113, the Schedule Dictionary of the Life Insurance Act]

3.50 The Bill amends the Industry Acts to ensure that the recapitalisation divisions apply to the NOHC/NOHC subsidiary in the same way that it does for a regulated entity in certain circumstances. [Schedule 1, item 90, section 13D of the Banking Act; Schedule 2, item 96, section 103A of the Insurance Act; Schedule 3, item 66, section 230AA of the Life Insurance Act]

3.51 The result of these amendments is that the existing sections governing valuation requirements, compliance and non-compliance, supply of information, offences and exceptions to Part IV of the Competition and Consumer Act 2010, amongst other things, apply in respect of the new power to direct a NOHC/NOHC subsidiary to facilitate the recapitalisation of a regulated entity.

Recapitalisation direction by APRA to a NOHC/NOHC subsidiary

3.52 The precondition for issuing a recapitalisation direction to a NOHC/NOHC subsidiary is that APRA has firstly given a recapitalisation direction to a regulated entity, which is the 'primary recapitalisation direction'.

3.53 For the purposes of facilitating compliance with the primary recapitalisation direction, APRA may then give the NOHC/NOHC subsidiary (or, if appropriate, several entities, for example a NOHC and a holding company of the ADI that is a subsidiary of the NOHC) a recapitalisation direction that requires it to do anything that is specified in the direction, provided that:

·
the regulated entity to which the primary recapitalisation direction was given is a subsidiary of the NOHC/NOHC subsidiary; and
·
the NOHC/NOHC subsidiary is registered as a company under the Corporations Act, and has share capital; and
·
the business of the NOHC/NOHC subsidiary is not under the control of a statutory manager. [Schedule 1, item 91, subsections 13E(1A) and 13E(1B) of the Banking Act; Schedule 2, item 98, subsections 103B(1A) and 103B(1B) of the Insurance Act; Schedule 3, item 68, subsections 230AB(1A) and 230AB(1B) of the Life Insurance Act]

Additional contents of a recapitalisation direction

3.54 The Bill amends the Industry Acts to facilitate down streaming of the capital raised by the NOHC/NOHC subsidiary to the regulated entity.

3.55 To achieve this, the recapitalisation direction may direct the NOHC/NOHC subsidiary to do any of the following:

·
issue shares, or rights to acquire shares, in the NOHC/NOHC subsidiary, or other capital instruments in the NOHC/NOHC subsidiary of a kind specified in the direction; or
·
acquire shares, or rights to acquire shares, in the regulated entity, or other capital instruments in the regulated entity of a kind specified in the direction; or
·
acquire shares, or rights to acquire shares, in a NOHC/NOHC subsidiary which is a subsidiary of the directed NOHC/NOHC subsidiary and of which the regulated entity is a subsidiary, or other capital instruments in that body corporate of a kind specified in the direction. [Schedule 1, item 93, subsection 13F(1A) of the Banking Act; Schedule 2, item 101, subsection 103C(1A) of the Insurance Act; Schedule 3, item 71, subsection 230AC(1A) of the Life Insurance Act]

Harmonisation of recapitalisation directions powers with general directions powers

3.56 The Financial Sector Legislation Amendment (Prudential Refinements and Other Measures) Act 2010 empowered APRA to issue a recapitalisation direction to an ADI or insurer. However, certain provisions relating to general directions powers were not extended to recapitalisation directions powers, even though these provisions are equally relevant.

3.57 The Bill amends the Industry Acts to replicate existing subsections from the general directions powers in the recapitalisation directions powers, so that APRA is able to give a recapitalisation direction which can:

·
deal with some or a particular class of matters;
·
specify time for compliance;
·
be varied by notice in writing if APRA considers that the variation is necessary and appropriate; and
·
be later revoked if APRA considers that the direction is no longer necessary or appropriate. [Schedule 1, items 92 and 93, subsections 13E(5) to 13E(7) and 13F(1C) of the Banking Act; Schedule 2, items 100 and 101, subsections 103B(4) to 103B(6) and 103C(1C) of the Insurance Act; Schedule 3, items 70 and 71, subsections 230AB(4) to 230AB(6) and 230AC(1C) of the Life Insurance Act]

3.58 The Bill amends the Insurance and Life Insurance Acts to clarify that APRA may disregard external support for an insurer in giving a general direction, and the Bill allows regulations to be made under the Insurance and Life Insurance Acts to specify that a particular form of support is not external support (see 3.40 to 3.43). Consequential amendments were also made to clarify that APRA may disregard external support for an insurer in giving a recapitalisation direction, and to enable regulations to be made to specify that a particular form of support is not to be considered external support. [Schedule 2, items 97 and 99, paragraph 103B(1)(b) and subsection 103B(2A) of the Insurance Act; Schedule 3, items 67 and 69, paragraph 230AB(1)(b) and subsection 230AB(2A) of the Life Insurance Act]

Immunities

Protection from liability when complying with an APRA direction

3.59 In recognition of the seriousness of situations in which directions may be given, the Industry Acts provide that non-compliance with a direction gives rise to criminal sanction. Consequently, a regulated entity, its directors and other officers, employees and agents must take reasonable steps to ensure compliance with a direction.

3.60 The Corporations Act imposes certain duties and obligations on a company and its directors and other officers, including the requirement for directors and other officers to exercise their powers and discharge their duties in the best interests of the company and for a proper purpose.

3.61 In addition to the duties and liabilities of a company and its directors and other officers under the Corporations Act, common law and equity, there may be other legislation that imposes both civil and criminal personal liability on company directors, officers, employees and agents for some actions taken on behalf of their companies. Some of these provisions may impose sanctions on a strict liability basis; others may deem a director liable for breaches by the company.

3.62 Given the range of duties imposed on a company and its directors and other officers (and, in some cases, on other employees and agents), there is a risk (or at least perceived risk) that a regulated entity or its directors, officers, employees or agents could be held liable for actions they take to ensure compliance with directions from APRA. This could result in reluctance to promptly comply with an APRA direction if there is a concern that, in doing so, they could potentially breach their duties, including those under the Corporations Act.

3.63 These potential conflicts of duty could cause delay in the implementation of an APRA direction, which could be particularly problematic in a stress scenario.

3.64 Section 70A of the Banking Act provides that a person is not subject to any liability to any person in respect of anything done, or omitted to be done, in good faith and without negligence in the exercise or performance, of powers, functions or duties under the Act. However, the actions of a regulated entity, its directors or officers in complying with an APRA direction may involve a choice of possible courses and as such may not all necessarily constitute actions that are in the performance of duties or functions under the Act for the purposes of section 70A, and therefore may not provide clear protection from liability under the Corporations Act or other law. There is no equivalent provision of section 70A in the Insurance or Life Insurance Acts. Protection from liability

3.65 The Bill amends the Industry Acts to provide protection from liability for a regulated entity, its directors and other officers, senior managers, other employees and agents when complying with an APRA direction. The protection extends to directors and other officers, senior managers, other employees and agents of a body corporate that is in the same relevant group of bodies corporate (that is, a subsidiary of the directed body corporate, or a subsidiary of an authorised NOHC of the directed body corporate).

3.66 For a person to benefit from protection in relation to a direction given to a body corporate, the person must be one of the following:

·
an officer or senior manager of the body corporate or of a member of a relevant group of bodies corporate of which the body corporate is also a member, with 'officer' having the same meaning as in section 9 of the Corporations Act; or
·
an employee or agent of the body corporate, or of a member of a relevant group of bodies corporate of which the body corporate is also a member, with 'employee' being further defined to include a person engaged to provide advice or services;
·
the body corporate or a member of a relevant group of bodies corporate of which the body corporate is also a member. [Schedule 1, item 252, section 70AA of the Banking Act; Schedule 2, item 137, section 127C of the Insurance Act; Schedule 3, item 107, section 246B of the Life Insurance Act]

3.67 The amendments provide that any reasonable steps taken by such a person, acting in good faith, for the purpose of either complying with a direction (see 3.10), or the provisions related to the confidentiality of certain directions under the Industry Acts (see 3.87 to 3.92), will not expose that person to any civil or criminal liability. The 'reasonableness' standard applies to the course of action taken by the person to facilitate the direction. The amendments provide that it is to be treated as reasonable for a person to do a thing, or omit to do a thing, in order to achieve a purpose unless no reasonable person in that person's position would do the thing, or omit to do the thing, in order to achieve that purpose. [Schedule 1, item 252, section 70AA of the Banking Act; Schedule 2, item 137, section 127C of the Insurance Act; Schedule 3, item 107, section 246B of the Life Insurance Act]

3.68 The reference to acting in 'good faith' means that in some respects the scope of the immunity is narrower than that provided to statutory managers (see 2.95). Immunity is provided to a statutory manager (or a person acting on behalf of a statutory manager) unless their act or omission is in 'bad faith'. This distinction is appropriate because a statutory manager will be a professional appointed by APRA and, given the important role they would be likely to play in a resolution, they need to be provided with a level of immunity equivalent to that which APRA itself has under section 58 of the APRA Act. [Schedule 1, item 149, section 14C of the Banking Act; Schedule 2, items 56 and 58, sections 62ZM and 62ZOK of the Insurance Act; Schedule 3, items 51 and 52, sections 179AK and 179 of the Life Insurance Act]

3.69 The amendments also clarify that this immunity is not limited by, and does not itself limit, any of the other immunities in the Industry Acts, nor section 58 of the APRA Act. [Schedule 1, item 252, section 70AB of the Banking Act; Schedule 2, item 137, section 127D of the Insurance Act; Schedule 3, item 107, section 246C of the Life Insurance Act]

Harmonise the protection from liability provisions in the Industry Acts

3.70 The Industry Acts currently provide protection from liability for certain persons when they exercise powers or discharge functions under the Acts. However, the provisions differ among the Acts in terms of scope and level of protection.

3.71 For example, as noted in paragraph 3.64, existing section 70A of the Banking Act provides protection from liability where a person acts in good faith and without negligence in the exercise of duties under the Act. This protection covers, for example, auditors who are under an obligation to provide information to APRA about the ADIs to which they have been appointed.

3.72 Under the Insurance and Life Insurance Acts there is no provision equivalent to section 70A of the Banking Act. However, existing section 49C of the Insurance Act does offer some protection for auditors and actuaries (where they act in good faith and without negligence), but it is limited to the provision of information to APRA.

3.73 Similarly, the Life Insurance Act protects auditors and actuaries in circumstances limited to the voluntary provision of information to APRA. Further, existing sections 89 and 99 of that Act protect auditors and actuaries by specifically providing for the conferral of qualified privilege (which is mainly relevant in a defamation context) in respect of statements made by them in certain circumstances.

3.74 As noted in paragraph 3.63, providing appropriate protection from liability for persons exercising powers or discharging functions under the Acts is important in ensuring that the relevant powers and functions are effective, particularly in a crisis situation where delays could be most problematic.

3.75 The Bill harmonises the general liability provisions in the Industry Acts by replicating section 70A of the Banking in the Insurance and Life Insurance Acts with appropriate modifications. [Schedule 2, item 137, section 127B of the Insurance Act; Schedule 3, item 107, section 246A of the Life Insurance Act]

3.76 As a result, the Bill repeals section 49C of the Insurance Act, and subsections 88A(2) and 98A(2) of the Life Insurance Act, respectively, as these specific immunities are made redundant by the introduction of a general immunity provision that provides broader protection for auditors and actuaries. [Schedule 2, item 23, section 49C of the Insurance Act; Schedule 3, items 20 and 22, subsections 88A(2) and 98A(2) of the Life Insurance Act]

3.77 The amendments also clarify that these immunities are not limited by, and do not themselves limit, any of the other immunities in the Industry Acts, nor section 58 of the APRA Act. [Schedule 2, item 137, section 127D of the Insurance Act; Schedule 3, item 107, section 246C of the Life Insurance Act]

Confidentiality of certain directions

3.78 The Industry Acts currently purport to include a secrecy requirement in relation to directions through a reference to Part 6 of the APRA Act. For example, section 11CF of the Banking Act provides that 'information relating to directions and revocation of directions is subject to the secrecy requirements in Part 6 of the [APRA Act], unless the information has been published in the Gazette...'. This reference appears to be erroneous because Part 6 of the APRA Act does not operate to impose any confidentiality obligations on regulated entities or their employees, officers or contractors. Part 6 of the APRA Act operates to impose secrecy obligations upon APRA and its employees, who are bound by these provisions in any event without the need for such a cross-reference.

3.79 The Bill therefore repeals the following provisions:

·
section 11CF, and subsections 13P(9), 29(9) and 31F(9) of the Banking Act;
·
subsection 103L(9) and section 107 of the Insurance Act; and
·
subsection 230AK(9) and section 230E of the Life Insurance Act;

to correct this error and to introduce a substantive new secrecy regime for regulated entities. [Schedule 1, items 48, 103, 230 and 234, section 11CF, and subsections 13P(9), 29(9) and 31F(9) of the Banking Act; Schedule 2, items 111 and 125, subsection 103L(9) and section 107 of the Insurance Act; Schedule 3, items 81 and 94, subsection 230AK(9) and section 230E of the Life Insurance Act]

Application

3.80 The new secrecy provisions apply if APRA has firstly given an entity (the 'directed entity') a direction under an Industry Act (see 3.10).

3.81 APRA may then make a determination that the direction is covered by the secrecy provision if APRA considers that such a determination is necessary to protect depositors/policyholders or to promote financial system stability in Australia.

3.82 This reflects the fact that in certain circumstances it may be appropriate to keep the giving of a direction confidential for a limited period in order to meet the aforementioned objectives. APRA may subsequently revoke the determination once it is no longer required.

3.83 As soon as practicable after making it, APRA must give the directed entity a copy of the determination.

3.84 The Bill provides that such determinations made by APRA are not legislative instruments. The provision is included to assist readers, as such a determination is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003. [Schedule 1, item 56, section 11CH of the Banking Act; Schedule 2, item 135, section 109 of the Insurance Act; Schedule 3, item 102 section 231 of the Life Insurance Act]

3.85 APRA must also consider whether it is appropriate in the circumstances to make an additional determination to allow further disclosure within the regulated entity under the 'Disclosure allowed by APRA' exception (see 3.95). [Schedule 1, item 56, subsection 11CH(5) of the Banking Act; Schedule 2, item 135, subsection 109(5) of the Insurance Act; Schedule 3, item 102, subsection 231(5) of the Life Insurance Act]

3.86 In the unlikely circumstances that a determination may put the secrecy provision in potential conflict with the Privacy Act 1988, APRA would consider additional safeguards. For example, if a determination is made restricting disclosure of the fact that a direction was made, and the direction constituted or contained personal information about an individual, APRA would consider whether it is appropriate to make a determination allowing disclosure of relevant information about the direction to that individual in order to allow the individual access to the information consistent with Australian Privacy Principle 12.

Offence provision

3.87 The Bill amends the Industry Acts to introduce a criminal offence, punishable by imprisonment for two years, if a 'person' discloses information and the information reveals the fact that the direction was made.

3.88 A 'person' is defined as either:

·
the directed entity;
·
an officer, employee or contractor of the directed entity at a time on or after APRA gave the direction to the directed entity; or
·
any other person who in the course of their employment has acquired information that reveals the fact that the direction was made.

3.89 The offence provision applies if APRA has made a determination that the direction is covered by the secrecy provision (see 3.81). Fault liability applies to the offence, meaning that in order to commit the offence it must be shown that a fault (or mental) element exists for each physical element. In relation to this offence, the person must have intended to disclose information. They must also have been aware that a determination had been made in relation to that information or have been reckless as to that possibility.

3.90 However, the offence provision does not apply if:

·
the disclosure is authorised by another section of the secrecy provision (detailed below); or
·
the disclosure is required by an order or direction of a court or tribunal. [Schedule 1, item 56, section 11CI of the Banking Act; Schedule 2, item 135, section 109A of the Insurance Act; Schedule 3, item 102, section 231A of the Life Insurance Act]

3.91 The evidentiary burden of the showing the matters in 3.90 rests on the person bound by the secrecy provision because they are best positioned to provide the evidence as it is within their knowledge. There is no broad-based exception to the offence for people bound by the secrecy provision who are authorised to disclose information under a Commonwealth or other law. In order to avoid a potential conflict between different laws, a person covered by the secrecy provision may approach APRA to seek a variation of the determination.

3.92 For clarity, paragraph 14.1(2)(b) of the Criminal Code Act 1995 (standard geographical jurisdiction) would capture regulated entities operating internationally within the scope of the secrecy provision to the extent that their disclosure of information overseas has an impact in Australia, such as by precipitating market concerns about the financial soundness of the entity.

Authorised disclosure

3.93 The Bill inserts various grounds into the Industry Acts to allow the disclosure of information that reveals the fact that a direction covered by the secrecy provision was made, as outlined below.

Disclosure of publicly available information

3.94 The Bill amends the Industry Acts to allow a person captured by the secrecy provision to disclose information that reveals the fact that the direction was made if the information has already been lawfully made available to the public. [Schedule 1, item 56, section 11CJ in of the Banking Act; Schedule 2, item 135, section 109B of the Insurance Act; Schedule 3, item 102, section 231B of the Life Insurance Act]

Disclosure allowed by APRA

3.95 The Bill amends the Industry Acts to allow a person captured by the secrecy provision to disclose information that reveals the fact that the direction was made if APRA has made a determination allowing such disclosure.

3.96 In making such a determination, APRA can allow a specified person, in relation to a specified direction, or class of directions, to disclose specified information. As soon as practicable after making it, APRA must give the directed entity, and the specified person, a copy of the determination.

3.97 The Bill provides that such determinations made by APRA are not legislative instruments. The provision is included to assist readers, as such a determination is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003.

3.98 APRA may also make a determination, by legislative instrument, for a specified class of persons, to disclose specified information in relation to a specified class of directions.

3.99 In giving a determination to allow disclosure, APRA may include conditions relating to any of the following:

·
the kind of entities to which the disclosure may be made;
·
the way in which the disclosure is to be made; or
·
any other matter that APRA considers appropriate. [Schedule 1, item 56, section 11CK of the Banking Act; Schedule 2, item 135, section 109C of the Insurance Act; Schedule 3, item 102, section 231C of the Life Insurance Act]

Disclosure to legal representative for purpose of seeking legal advice

3.100 The Bill amends the Industry Acts to allow a person captured by the secrecy provision to disclose information that reveals the fact that the direction was made if:

·
the disclosure is to the person's legal representative; and
·
the purpose of disclosing such information is for the legal representative to provide legal advice, or another legal service, in relation to the direction. [Schedule 1, item 56, section 11CL of the Banking Act; Schedule 2, item 135, section 109D of the Insurance Act; Schedule 3, item 102, section 231D of the Life Insurance Act]

Disclosure allowed by APRA Act secrecy provision

3.101 The Bill amends the Industry Acts to allow a person captured by the secrecy provision to disclose information that reveals the fact that the direction was made if:

·
the person is an APRA member, an APRA staff member, or a Commonwealth officer within the meaning of the Crimes Act 1914 who has received information about the direction in the course of their employment and is therefore an 'officer' within paragraph (c) of the definition of that term in section 56 of the APRA Act; and
·
the information is protected information, or is contained in a protected document within the meaning of section 56 of the APRA Act (APRA's secrecy provision); and
·
the disclosure is in accordance with subsections 56(3), (4), (5), (5AA), (6), (6A), (7), (7A), (7B) or (7C) of the APRA Act.

3.102 The Bill also clarifies that disclosure of information in relation to a direction is not an offence under section 56 of the APRA Act if the disclosure is authorised by a particular section under the new secrecy provisions in the Industry Acts. [Schedule 1, item 56, section 11CM of the Banking Act; Schedule 2, item 135, section 109E of the Insurance Act; Schedule 3, item 102, section 231E of the Life Insurance Act]

Disclosure in circumstances set out in the regulations

3.103 The Bill inserts a regulations-making power into each of the Industry Acts to allow a person captured by the secrecy provision to disclose information if it is made in circumstances specified in the regulations. The penalty of imprisonment for 2 years is high so it is important to provide a regulations-making power to address circumstances that were unforeseen as at the time of the passage of this Bill. [Schedule 1, item 56, section 11CN of the Banking Act; Schedule 2, item 135, section 109F of the Insurance Act; Schedule 3, item 102, section 231F of the Life Insurance Act]

Disclosure for purpose

3.104 The Bill amends the Industry Acts to allow a person covered by the secrecy provision to disclose information that reveals the fact that the direction was made if:

·
another person covered by the regime disclosed that information in accordance with the allowable grounds; and
·
the disclosure by the relevant person is for the same purpose. [Schedule 1, item 56, section 11CO of the Banking Act; Schedule 2, item 135, section 109G of the Insurance Act; Schedule 3, item 102, section 231G of the Life Insurance Act]

3.105 As an example, this ground would allow disclosure by a solicitor who discloses to a barrister for the purposes of getting legal advice.

Exceptions operate independently

3.106 The Bill amends the Industry Acts to ensure that the grounds allowing disclosure under the secrecy provision do not limit each other. [Schedule 1, item 56, section 11CP of the Banking Act; Schedule 2, item 135 section 109H of the Insurance Act; Schedule 3, item 102, section 231H of the Life Insurance Act]

Consequential and minor amendments

Directions to subsidiaries

3.107 Consequential amendments are made due to the extension of the directions power to subsidiaries. [Schedule 1, item 35, paragraph 11CA(1A)(b) of the Banking Act; Schedule 2, item 115, paragraph 104(2)(b) of the Insurance Act; Schedule 3, item 85, paragraph 230B(1A)(b) of the Life Insurance Act]

3.108 Consequential amendments are made to the provisions in the Industry Acts relating to the supply of information about the issue and revocation of directions due to the extension of the directions power to subsidiaries. [Schedule 1, items 44 to 47, section 11CE, of the Banking Act; Schedule 2, items 121 to 124, section 106 of the Insurance Act; Schedule 3, items 90 to 93, section 230D of the Life Insurance Act]

3.109 Consequential amendments are made to the offence provisions in the Industry Act relating to non-compliance with a direction due to the extension of the directions power to subsidiaries. [Schedule 1, items 49 to 55, section 11CG of the Banking Act; Schedule 2, items 126 to 134, section 108 of the Insurance Act; Schedule 3, items 95 to 101, section 230F of the Life Insurance Act]

3.110 Further consequential amendments are made to section 65 of the Banking Act to capture subsidiaries, with the result being that subsidiaries may also be directed to comply with the Banking Act. That section currently provides that where an ADI or an authorised NOHC is convicted of an offence against this Act or the regulations, the Full Court of the Federal Court may, upon the application of the Attorney-General by motion, direct the ADI or NOHC to comply with the provision. Should the ADI or NOHC fail to comply, the Court may authorize APRA to assume control of, and to carry on, the business of the entity. As noted, this provision will be extended to subsidiaries. [Schedule 1, items 246, 247 and 248, subsections 65(1) to 65(4) of the Banking Act]

Recapitalisation directions power

3.111 Consequential amendments are made to the Industry Acts to capture a recapitalisation direction given to a NOHC/NOHC subsidiary. [Schedule 1, items 94 and 95, subsections 13F(2) and 13F(3) of the Banking Act; Schedule 2, items 102 and 103, subsections 103C(2) and 103C(3) of the Insurance Act; Schedule 3, items 72 and 73, subsections 230AC(2) and 230AC(3) of the Life Insurance Act]

3.112 Further consequential amendments are made to the Industry Acts to ensure that references to depositors, policyholders and policy owners, respectively, are correct. [Schedule 1, items 100 and 101, subsections 13H(1A) and 13H(4) of the Banking Act; Schedule 2, items 108 and 109, subsections 103E(1A) and 103E(4) of the Insurance Act; Schedule 3, items 78 and 79, subsections 230AE(1A) and 230AE(4) of the Life Insurance Act]

Clarification

3.113 Section 7 of the Life Insurance Act sets out the parts and provisions of the Life Insurance Act that APRA has general administration of. It does not clearly provide that APRA administers the part of the Life Insurance Act where the general directions power, recapitalisation directions powers and the prudential standard making power reside. The Bill clarifies that APRA has general administration over Part 10A 'Prudential standards and directions'. [Schedule 3, item 2, paragraph 7(1)(a)(iiia) of the Life Insurance Act]

Application and transitional provisions

3.114 The amendments made by Schedule 1 of the Bill to section 11CA of the Banking Act (the general directions power in the Banking Act), subdivision AA of Division 2 of Part II of the Banking Act (recapitalisation directions) and section 65 of the Banking Act (directions by the Court) apply to directions given on and after the Bill receives Royal Assent. [Schedule 1, items 253 and 254]

3.115 The amendments made by Schedule 2 of the Bill to section 104 of the Insurance Act (general directions power) and Division 1 of Part IX of the Insurance Act (recapitalisation directions) apply to directions given on and after the Bill receives Royal Assent. [Schedule 2, items 139 and 140]

3.116 The amendments made by Schedule 3 of the Bill to section 230B of the Life Insurance Act (general directions power) and Subdivision A of Division 2 of Part 10A (recapitalisation directions) apply to directions given on and after the Bill receives Royal Assent. [Schedule 3, items 118 and 119]


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