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 8 - Financial Claims Scheme

Outline of chapter

8.1 Schedules 1 and 2 to this Bill amend the Banking and Insurance Acts to make certain enhancements to the efficiency and operation of the FCS.

Context of amendments

8.2 The FCS was established by the Government in 2008 as two separate schemes. One is applicable to locally-incorporated ADIs and the other is applicable to general insurers. The FCS is administered by APRA.

8.3 The FCS provides an important backstop within Australia's resolution regime. While its primary function is to protect retail depositors and policyholders by providing prompt access to their funds, the FCS also contributes to financial stability, for example by limiting the potential for a destabilising 'run' on deposits in the case of ADIs, and more generally by promoting confidence in the financial system.

8.4 The FCS for ADIs provides depositors with a guarantee of their deposits up to a pre-determined limit, which is currently set at $250,000 per account-holder, per ADI. In the case of general insurers, the FCS provides compensation for most claims up to $5,000 against a failed general insurer, with claims above $5,000 also covered for eligible policyholders and certain eligible third parties.

8.5 While the legislative framework for the FCS is broadly consistent with international standards, particularly the IADI Core Principles for Effective Deposit Insurance Schemes, some of the provisions would benefit from further enhancements.

8.6 Some changes to the ADI FCS framework were the subject of the then Government's consultation paper released in May 2011 entitled 'Financial Claims Scheme: Consultation Paper'. The enhancements in this Bill build upon those changes, as well as certain proposals in relation to the FCS for general insurers from the 2012 Consultation Paper.

8.7 To date, the FCS has been declared once in respect of a small general insurer and APRA's experience in administering the FCS for that general insurer also serves as a basis for some of the enhancements in this Bill.

Summary of new law

8.8 Schedules 1 and 2 to this Bill amend the Banking and Insurance Acts to:

·
establish an additional payment mechanism to enable FCS entitlements to be satisfied when there has been a transfer of deposits to another ADI or policyholder claims to another general insurer;
·
enable APRA to obtain information from third parties in relation to the FCS;
·
facilitate the effective payout of FCS entitlements to third party claimants of a policyholder of a failed general insurer where the policyholder is in liquidation;
·
enable APRA to make interim payments to claimants under the FCS applicable to general insurers;
·
grant the Treasurer the discretion to declare the FCS at an earlier time, upon appointment of a statutory manager; and
·
reduce the reporting burden regarding withholding tax in relation to interest on amounts paid under the FCS.

Comparison of key features of new law and current law

New law Current law
Enable FCS entitlements to be satisfied by transfer of deposits or policyholder claims
The Banking and Insurance Acts allow FCS funds to be used to support a compulsory transfer of business under the Transfer Act comprising:

·
in the case of a declared ADI, all the protected accounts of the ADI (or all such accounts subject to a limit applied on a per-account-holder basis to reflect the cap that applies per account-holder under section 16AG of the Banking Act); or
·
in the case of a declared general insurer, at least one protected policy of the general insurer,

to meet the entitlements of protected account-holders or relevant policyholders by transferring their accounts or policies to a receiving body.

FCS funds cannot be used to support a compulsory transfer of business under the Transfer Act, in order to meet the entitlements of protected account-holders and policyholders under the FCS by transferring their accounts or policies to a receiving body.
Enable APRA to obtain information from third parties in relation to the FCS
APRA may obtain information from any other person (in addition to those specified in the current law) relevant to determining and paying amounts under the FCS. APRA may obtain only from specified persons (for example, a statutory manager of an ADI) information relevant to determining and paying amounts under the FCS.
Ensure the effective payout of FCS entitlements to third-party claimants of the policyholder of a failed general insurer when the policyholder is in liquidation
If APRA makes payment under the FCS to an insolvent corporate policyholder, it will be clear that a third party claiming against the insolvent policyholder will be accorded priority in liquidation, under section 562 of the Corporations Act, for the amount claimed and paid to the insolvent policyholder. If APRA makes payment under the FCS to an insolvent corporate policyholder, it uncertain whether a third party claiming against the insolvent policyholder will be accorded priority in liquidation, under section 562 of the Corporations Act, for the amount claimed and paid to the insolvent policyholder.
Enable APRA to make interim payments to claimants under the FCS
APRA may determine interim claims as they come in, rather than having to wait for the final claim to come in before making a determination. It is uncertain whether APRA can make a series of interim determinations allowing additional payments under the insurance FCS. This may be desirable where, for example, the losses insured by a protected policy materialise, and become payable, on multiple occasions over a period of time or where it is expedient to make an initial payment of an undisputed amount and further payments following assessors' reports.
Granting the Treasurer discretion to declare the FCS at an earlier time
The Treasurer may now declare the FCS in relation to an ADI or general insurer once a statutory manager has taken control of the ADI or general insurer, in addition to the existing preconditions in the law. The Treasurer may declare the FCS in relation to an ADI only when APRA has applied to wind up the ADI, and in relation to a general insurer only when it is under judicial management or an external administrator has been appointed.
Reducing the reporting burden in relation to withholding tax
APRA is no longer required to report to the ATO any interest paid and withholding tax applicable on amounts paid out to account-holders or policyholders protected under the FCS. APRA is required to report to the ATO any interest paid and withholding tax applicable on amounts paid out to account-holders or policyholders protected under the FCS.

Detailed explanation of new law

Enable FCS entitlements to be satisfied by transfer of deposits or policyholder claims

8.9 The Banking and Insurance Acts currently provide APRA with various methods to meet an account-holder's or policyholder's entitlement under the FCS, such as by opening a new account for an account-holder, or paying the amount to the policyholder or applying the amount for the person's benefit.

8.10 The May 2011 Consultation Paper recommended an additional payment mechanism to facilitate the transfer of protected deposit accounts from a failed ADI to a receiving ADI. This new mechanism would enable the account to be transferred with all direct debit and credit facilities in a way that would allow it to continue to be used seamlessly as if it were still with the failed ADI. APRA would determine whether the transfer option would provide a cost-effective and efficient option based on the circumstances in each case. A similar proposal in respect of the FCS applicable to general insurers was included in the September 2012 Consultation Paper.

8.11 APRA already has extensive powers under the Transfer Act to effect a transfer of business from one ADI to another. This is also the case with a transfer of business from one general insurer to another.

8.12 Transfer of an ADI's protected accounts may have the advantage of preserving arrangements such as direct debit facilities, and therefore be less disruptive than the alternative of APRA making direct FCS payments to the account-holders. In the context of general insurers, a transfer of business, especially long-tail insurance claims, may be either the only practical or the most cost-effective means of maintaining an insured policyholder's protection.

8.13 The Bill therefore amends the Banking and Insurance Acts to create an additional payment mechanism for the FCS by allowing APRA to use FCS funds to facilitate a transfer of business from a declared ADI or from a declared general insurer to a receiving body.

Transferred liabilities determination

8.14 The Bill amends the Banking and Insurance Acts to allow APRA to make a transferred liabilities determination, which will facilitate the transfer of business and the meeting of FCS entitlements.

8.15 APRA may only make a transferred liabilities determination if all of the following apply:

·
the Minister has made a declaration under section 16AD of the Banking Act in relation to an ADI (the 'declared ADI'), or a declaration under section 62ZZC of the Insurance Act in relation to a general insurer (the 'declared general insurer');
·
APRA has made, or proposes to make, a compulsory transfer determination under section 25 of the Transfer Act that there is to be a total or partial transfer from the declared ADI or general insurer to a receiving body;
·
where the transferring body is a declared ADI, the transfer of business will transfer the liabilities in respect of every protected account kept by an account holder with the ADI (or the liabilities of the declared ADI in respect of every protected account-holder up to their FCS limit - note that if this approach is taken APRA will need to apportion the FCS liability between protected accounts where there are multiple accounts for the account holder which, in aggregate, exceed the FCS limit, as explained below);
·
where the transferring body is a declared general insurer, the transfer of business will transfer the liabilities of the general insurer in respect of one or more protected policies issued by the general insurer;
·
APRA is satisfied that it will be able to identify those protected accounts or policies;
·
APRA has worked out a reasonable estimate of the total amount to which account-holders and policyholders of those protected accounts or policies will be entitled to under the FCS (defined as the FCS amount);
·
APRA has worked out a reasonable estimate of the total amount of the costs that would have been incurred by APRA in relation to the exercise of its powers and the performance of its functions if it had administered the FCS in relation to the declared ADI or general insurer instead of making a transferred liabilities determination (defined as the administration amount);
·
APRA has worked out a total payment amount being the sum of an FCS payment amount and an administration payment amount (see 8.22 to 8.25 for information about calculating the total payment amount); and
·
APRA considers it reasonable in the circumstances to make the determination.

8.16 If APRA makes a transferred liabilities determination in respect of an ADI, it will either transfer all of each protected account-holder's balance to the receiving body, or transfer the balance of each protected account-holder up to the FCS limit. In each case the FCS entitlement of each account-holder would be reduced to nil when a certificate of transfer comes into force under the Transfer Act. If the second approach (transfer of accounts up to the FCS limit) is taken, the FCS entitlement of each account-holder would be reduced to nil as outlined in the following two examples:

·
Example 1: if an account holder has a single protected account with a balance over the FCS limit of $250,000 (say $400,000), then, applying the current limit under section 16AG, only $250,000 of that account would transferred to the receiving body with the remainder ($150,000 in the example) left behind to be claimed by the account-holder in the insolvency of the declared ADI.
·
Example 2: if an account-holder has two or more protected accounts with an aggregate balance of over $250,000, then their balances totalling $250,000 would be transferred to the receiving ADI with APRA having the discretion to split the accounts to achieve this purpose. The remainder of the balance of the accounts would be left behind to be claimed in the insolvency of the declared ADI [Schedule 1, item 218, paragraph 16AIA(1)(c)(ii) of the Banking Act]

8.17 The amendments also require that this determination be made in writing, and that various details (including details of the declared ADI or general insurer, the receiving body, and any other information that APRA considers appropriate) be specified in the determination. [Schedule 1, item 218, subsection 16AIA(4) of the Banking Act; Schedule 2, item 84, subsection 62ZZMA(4) of the Insurance Act]

8.18 In order to ensure that transfers of business made under the Transfer Act are certain, the Bill provides that, if APRA has already issued a certificate of transfer under section 33 of the Transfer Act, APRA may not then make a transferred liabilities determination with respect to the protected accounts or protected policies of the declared ADI or general insurer. [Schedule 1, item 218, subsection 16AIA(2) of the Banking Act; Schedule 2, item 84, subsection 62ZZMA(2) of the Insurance Act]

8.19 The Bill provides that transferred liabilities determinations 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 218, section 16AIA of the Banking Act; Schedule 2, item 84, section 62ZZMA of the Insurance Act]

8.20 The Bill defines a 'transferred liability determination' in the Banking and the Insurance Acts to refer to determinations made under sections 16AIA of the Banking Act or 62ZZMA of the Insurance Act (as appropriate). [Schedule 1, item 10, subsection 5(1) of the Banking Act; Schedule 2, item 7, subsection 3(1) of the Insurance Act]

8.21 A key difference between the Banking and Insurance Acts regarding transferred liability determinations is that APRA may make a transferred liability determination with respect to a declared general insurer that is only a partial transfer of the protected policies of that general insurer. The intention is to give APRA the option to make a partial transfer, or multiple partial transfers, to one or more insurers. This will allow APRA to assign protected policies to insurers that are best positioned to accept and manage particular lines of insurance business It will also be possible to transfer some but not all policies. Policies not transferred would be dealt with by applying the FCS payment processes in the existing provisions. [Schedule 1, item 218, paragraph 16AIA(1)(c) of the Banking Act; Schedule 2, item 84, paragraph 62ZZMA(1)(c) of the Insurance Act]

Determining a payment amount

8.22 As part of making a transferred liability determination, the Bill amends the Banking and Insurance Acts to allow APRA to calculate a 'total payment amount' that will be paid to the receiving body of the protected accounts or policies. This amount is the sum of two further payment amounts determined by APRA; the 'FCS payment amount' and the 'administration payment amount'. These two amounts should not be confused with the FCS amount and the administration amount. The FCS amount is APRA's reasonable estimate of the total amount to which protected account-holders would be entitled if the FCS were administered without there being a transferred liabilities determination. The administration amount is APRA's reasonable estimate of the total amount of administration costs that APRA would incur if it administered the FCS without the transferred liabilities determination. These figures are used to set a ceiling for the purposes of working out the amount to the paid to the receiving body, as described below. [Schedule 1, item 218, paragraph 16AIB(1)(c) of the Banking Act; Schedule 2, item 84, paragraph 62ZZMB(1)(c) of the Insurance Act ]

8.23 The FCS payment amount must be equal to or less than the FCS amount. The FCS payment amount will be an amount APRA considers to be appropriate. It must be deducted from the appropriation in the Financial Claims Scheme Special Account established in Division 2 of Part 5 of the APRA Act. Section 54C of the APRA Act is amended to provide for the debiting of the FCS payment amount from that account. [Schedule 6, items 3 and 4, section 54C of the APRA Act]

8.24 When determining an appropriate FCS payment amount and administration payment amount, APRA must consider:

·
the total value of the assets that will be transferred from the declared ADI or general insurer to the receiving body in accordance with the transfer of business;
·
the total value of the liabilities that will be transferred from the declared ADI or general insurer to the receiving body in accordance with the transfer of business; and
·
any other matter that APRA considers appropriate. [Schedule 1, item 218, and subsection 16AIB(2) of the Banking Act; Schedule 2, item 84, subsection 62ZZMB(2) of the Insurance Act]

8.25 The administration payment amount must be equal to or less than the administration amount. As this amount relates to the cost of administering the FCS, rather than the cost of meeting entitlements under the FCS, the administration payment amount is to be paid out of the APRA Special Account appropriation created by existing section 54 of the APRA Act. In this regard it should be noted that existing section 54 of the APRA Act provides that the APRA Special Account may be debited in making any payments which APRA is authorised or required to make under law of the Commonwealth. This excludes payments that must be deducted from the Financial Claims Scheme Special Account established under section 54C of the APRA Act. As noted above, section 54C of the APRA Act is amended to provide for the debiting of the FCS payment amount from that account, but not the administration payment amount. Accordingly, the administration payment amount may be deducted from the APRA Special Account. This is appropriate because that special account general provides for APRA's administration expenses. [Schedule 1, item 218, paragraph 16AIB(1)(b) of the Banking Act; Schedule 2, item 84, paragraph 62ZZMB(1)(b) of the Insurance Act; Schedule 6, items 3 and 4, section 54C of the APRA Act]

8.26 The amendments also allow APRA to specify a nil amount for the FCS payment amount and/or the administration payment amount. This is intended to cover circumstances where APRA has calculated the FCS amount and administration amount but does not consider it appropriate to pay the receiving body any amount with respect to either or both of the FCS amount or administration amount.

8.27 The most likely circumstance in which APRA would consider that both of these amounts should be specified as nil would be that the value of other assets that are also being transferred to the receiving body will be sufficient to cover transferred liabilities, including liabilities in respect of protected accounts.

8.28 The intention of these amendments is to ensure that APRA has discretion to determine an appropriate amount to pay to a receiving body of protected accounts or policies. As a result of these amendments, and reflecting the fact that a transfer of business will usually include assets, APRA may determine that it is to pay a lower amount through a transferred liabilities determination than the amount that it has calculated as the total FCS liability of the transferred accounts/policies. This approach may provide a better financial outcome for the Commonwealth and may also provide continuity for depositors and policyholders.

Effect of a transferred liabilities determination

8.29 The Bill amends the Banking and Insurance Acts to entitle the receiving body, in respect of a transferred liabilities determination, to receive the total payment amount specified in the determination (see 8.22) once APRA has issued the relevant certificate of transfer under section 33 of the Transfer Act.

8.30 These amendments provide that, once APRA has made a transferred liabilities determination, and has issued certificate of transfer, the receiving body is entitled to be paid by APRA an amount equal to the total payment amount. The declared ADI or general insurer is then liable to pay APRA an amount equal to the total payment amount. [Schedule 1, item 218, section 16AIC(1) of the Banking Act; Schedule 2, item 84, section 62ZZMC(of the Insurance Act]

8.31 Note that the Bill also provides that the assets of an insolvent ADI are available to meet an amount owed to APRA under section 16AIC before any other liabilities. [Schedule 1, item 66, paragraph 13A(3)(a) of the Banking Act]

8.32 This is because the total payment amount determined by APRA is effectively the entitlement under the FCS of the protected account-holders of the insolvent ADI and should be treated in the same way in the winding up of the insolvent ADI.

8.33 There is no similar provision in the Insurance Act. Subsection 116(3) of the Insurance Act requires that assets in Australia of an insurer be applied first to liabilities in Australia in the winding up of the insurer. Amounts paid by APRA under the FCS, including those paid in connection with a transferred liabilities determination, will (under section 62ZZL) become liabilities of the insurer to APRA. They will be primarily payable in Australia, and will fall within the protection of subsection 116(3).

8.34 The Bill also ensures that the protected account-holder or policyholder is no longer entitled to any amount under the FCS with respect to any protected account in the case of a declared ADI, or with respect to the relevant transferred policy in the case of a declared general insurer. [Schedule 1, item 218, subsection 16AIC(3) of the Banking Act; Schedule 2, item 84, subsection 62ZZMC(3) of the Insurance Act]

8.35 This is because, as a result of the transferred liabilities determination, the FCS entitlement of the protected account-holder or policyholder will effectively be provided for by the receiving body following the transfer of their account or policy to the receiving body.

8.36 If APRA has made a transferred liability determination with respect to a declared ADI or general insurer, APRA is not entitled to also rely on the existing FCS provisions that allow APRA to recover the cost of meeting individual entitlements of protected account or policyholders under the FCS from the declared ADI or general insurer. However, the declared ADI or general insurer is then liable to pay APRA an amount equal to the total payment amount (as noted in 8.30). [Schedule 1, item 218, subsection 16AIC(6) of the Banking Act; Schedule 2, item 84, subsection 62ZZMC(6) of the Insurance Act]

Enable APRA to obtain information from third parties in relation to the FCS

8.37 APRA may currently under the Banking or Insurance Acts require certain persons to give specified information in relation to the FCS. Those persons are:

·
an ADI or general insurer (under section 16AK of the Banking Act and section 62ZZP of the Insurance Act); or
·
a statutory manager or liquidator appointed to the ADI (under section 16AK of the Banking Act);
·
a judicial manager or liquidator appointed to a general insurer (under section 62ZZP of the Insurance Act); or
·
an insurance claimant (under section 62ZZR of the Insurance Act).

8.38 However, these provisions do not enable APRA to require information to be sought from other persons who may hold information that facilitates the administration of the FCS.

8.39 In the ADI context, these persons may include third party service providers to whom APRA may delegate FCS functions under section 16AN of the Banking Act, or any other persons (for example, providers of data warehouse facilities, data processing facilities and IT services) who may have provided or may still be providing certain services to the failed ADI.

8.40 In the general insurance context, one issue that has emerged from experience in administering the FCS is that third parties may hold the relevant information, such as claims files. These third parties may include a co-insurer, insurance broker, claims manager or another general insurer to whom liabilities may have been purportedly transferred by the failed general insurer without complete novation.

8.41 The Bill ensures that, in addition to the persons currently listed, APRA may obtain information from a statutory manager appointed (under the Insurance Act), or any other person (under both the Banking Act and the Insurance Act). The Bill also makes amendments to ensure that the purposes for which APRA may obtain information, as set out in existing subsection 16AK(4) of the Banking Act and subsection 62ZZP(4) of the Insurance Act, cover all relevant FCS-related matters. Currently, as a result of an oversight, two matters are omitted. First, for the purpose of preparing or giving a statement or report required by section 16AHA of the Banking Act or section 62ZZKA of the Insurance Act as the case may be (these require an annual statement of FCS payments to be given to account-holders/claimants). Secondly, for the purpose of complying with an obligation under a law relating to taxation. The amendments will ensure that information can be obtained for these purposes. [Schedule 1, items 221, 222 and 224, subsection 16AK(1)) and paragraph16AK(4)(g) of the Banking Act; Schedule 2, items 88, 89 and 91, subsection 62ZZP(1) and paragraph 62ZZP(4)(e) of the Insurance Act]

8.42 These amendments extend the scope of persons that APRA can obtain information from regarding the determination and payment of entitlements under the FCS.

8.43 The Bill also extends the current civil penalty provision, punishable by 200 penalty units, to capture any other person. [Schedule 1, item 227, subsection 16AL(8) of the Banking Act; Schedule 2, item 94, subsection 62ZZQ(11) of the Insurance Act]

Ensure the effective payout of FCS entitlements to third party claimants of a policyholder of a failed general insurer where the policyholder is in liquidation

8.44 The Insurance Act currently provides for different types of claimants under the FCS framework. Persons who may claim under the FCS are those entitled to claim under insurance cover provided under a protected policy (for example, the policyholder or someone to whom the policy is expressed to apply), and those permitted to recover an amount from a general insurer under legislation such as the Insurance Contracts Act 1984 and the Corporations Act. Given the scope of persons who may claim under the FCS, it is possible that a claimant may not be a policyholder of a failed general insurer but, rather, a person claiming against such a policyholder.

8.45 The Bill inserts a regulations-making power into the Insurance Act to enable the specification, for the purposes of section 62ZZJ, of any other law providing cut-through rights for third party insurance claimants in addition to those already specified in section 62ZZJ (that is, section 51 of the Insurance Contracts Act 1984 and section 601AG of the Corporations Act). [Schedule 2, items 78 to 80, subsection 62ZZJ(3) and paragraphs 62ZZJ(4)(a) and 62ZZJ(4B)(a) to 62ZZJ(4B)(c) of the Insurance Act]

8.46 The reason for this amendment is to have the flexibility to prescribe other statutory third party rights in relation to insurers, including under State and Territory legislation, in addition to section 51 of the Insurance Contracts Act 1984 and section 601AG of the Corporations Act.

8.47 The use of the regulation-making power ensures that any current or future legislation that is relevant to cut-through rights for third party insurance claimants can be captured if necessary. This power will be useful if (for example) if legislation prescribing third-party claimant rights is amended or relocated to other legislation. See 8.53 for more detail about payments by APRA to third party claimants.

8.48 Section 562 of the Corporations Act provides that, where a company in liquidation had a policy covering liability to a third party, and the company or its liquidator has 'received' from the insurer an amount in respect of that liability, the amount must be paid by the liquidator (after deducting expenses of getting that amount) to the third party in priority to all payments under section 556 of the Corporations Act.

8.49 An example of such a circumstance would be where a company has taken out an insurance policy against the risk of compensation to members of the public, who have suffered loss as a result of negligence of the company, under a public liability policy, and the company is in liquidation with outstanding claims for such compensation at the time that the FCS is declared.

8.50 The existing section 62ZZM of the Insurance Act has the effect of ensuring that in the above scenario (and in relation to FCS payments generally) the FCS payment to the insolvent company (or other claimant) will discharge the liability of the general insurer to company. This means that the company, once it receives the payment under the FCS, cannot 'double dip' by claiming against the insurer for the same amount.

8.51 However, there is nothing in the current legislation putting the insolvent company or its liquidator under an obligation to pay the FCS amount to the third party in the same way that it would have to, under section 562, if the payment had been received from the insurer in this scenario. Upon receiving the FCS payment, the liquidator may feel obliged to treat the circumstances as falling outside section 562, because the money was not 'received' from the insurer. In that event the third party may have no section 562 rights and their claim against the insolvent company which would rank under section 556 of the Corporations Act with general creditors.

8.52 To overcome this, the Bill amends the Insurance Act to provide, for the avoidance of doubt, that for the purposes of subsection 562(1) of the Corporations Act, the FCS amount will be taken to have been 'received' by the person (that is, by the insolvent company) from the general insurer, and therefore the liquidator will be obliged to deal with the payment in accordance with section 562 as if it had been received from the insurer. [Schedule 2, item 83, subsection 62ZZM(1A) of the Insurance Act]

8.53 To provide further certainty that third party claimants are able to access the entitlements under the FCS in appropriate situations, further amendments have been made to the existing section 62ZZK. These are intended to ensure that if, APRA makes a payment directly to a person (a third party claimant), that payment will be taken to be made for the benefit of the protected policy holder. [Schedule 2, item 81, subsection 62ZZK(1A) of the Insurance Act]

Enable APRA to make interim payments to claimants under the FCS

8.54 Currently, under the FCS, where APRA becomes aware that a person has made a claim under insurance cover provided under a protected policy, section 62ZZI of the Insurance Act places an obligation upon APRA to determine whether a general insurer is liable to the person in respect of the claim and the amount of that liability. Once a determination is made, APRA may make payments to the person, subject to the person meeting the eligibility requirements for claims of $5,000 or more.

8.55 APRA has encountered difficulties in administering these provisions where personal injury claims have been litigated. While the legal obligation to pay out under a claim may not arise until the quantum of the claim is determined, payments for personal injury claims are often made by general insurers to meet medical and legal costs arising in the interim. It is arguable that APRA has the ability to make such interim payments under the FCS, however it is not clear under the current legislation.

8.56 The Bill addresses this issue by amending the Insurance Act to allow APRA to determine, in accordance with any regulations, interim claims for payment of part or parts of that liability. These provisions apply to claims made by protected policy holders and to claims made by third party claimants with respect to a protected policy. [Schedule 2, items 71 and 75, sections 62ZZFA and 62ZZGA of the Insurance Act]

8.57 If APRA determines that an interim claim or claims ought to be accepted, the claimant is entitled to be paid in respect to the interim claim or claims. These payments reduce the person's total entitlement under the FCS in relation to the protected policy. [Schedule 2, items 71 and 75, subsections 62ZZFA(4), 62ZZFA(5), 62ZZGA(5) and 62ZZGA(6) of the Insurance Act]

8.58 For the avoidance of doubt, it should be noted that a claimant may make more than one interim claim.

8.59 Any regulations made under these provisions may prescribe conditions that must be met before a payment of an interim claim is made. This regulations-making power is intended to allow the Government to establish rules and criteria that APRA must apply and consider when making a determination about the eligibility of an interim claim and the amount to be paid by APRA in respect of that interim claim. It is anticipated that the regulations will ensure that the eligibility requirements currently applicable to claims above $5,000 will apply where cumulative interim claims will exceed that amount. [Schedule 2, items 71 and 75, subsections 62ZZFA(3) and 62ZZGA(3) of the Insurance Act]

Granting the Treasurer the discretion to declare the FCS at an earlier time

8.60 The FCS is currently activated at the discretion of the Treasurer once APRA has formed the view that the ADI or general insurer is insolvent and, in the case of an ADI, has applied to the Federal Court for an ADI to be wound up, or in the case of a general insurer, is under judicial management or an external administrator has been appointed.

8.61 The May 2011 Consultation Paper noted the CFR's recommendation that it should be possible for the FCS to be activated earlier in the resolution process, where there is no prospect of the failing ADI being restored to a sound financial condition or being transferred to another ADI. Under the CFR proposal, rather than having to wait until an application has been made by APRA to windup a distressed ADI, the Treasurer would have discretion to activate the FCS as soon as APRA has appointed a statutory manager.

8.62 To this end, the Bill amends the Banking and Insurance Acts to include the statutory management of an ADI or a general insurer as preconditions that allow the Minister to declare the FCS. [Schedule 1, item 215, subsection 16AD(1) of the Banking Act; Schedule 2, item 69, subsection 62ZZC(1) of the Insurance Act]

8.63 The existing preconditions for the Minister to declare the FCS (that is, on APRA's application to wind up the ADI or where an external administrator or judicial manager has been appointed to the general insurer) has not changed. It is noted that a separate amendment in the Bill will enable APRA to apply for the winding-up of an ADI without first having to appoint a statutory manager (see Chapter 9).

8.64 These amendments will assist in managing the resolution of a distressed ADI or general insurer. In particular, in the case that a statutory manager is appointed, it would enable the nature of the intended resolution (if this is clear) to be announced, including the declaration of the FCS, at the same time as the statutory manager is appointed. This would provide depositors and policyholders with greater certainty as to the status of their deposits and ability to claim on their policies, and the intended arrangements with respect to accessing their deposits or making claims.

Reducing the reporting burden in relation to withholding tax

8.65 Under existing section 16AHA of the Banking Act, APRA is required to report to the ATO any interest paid (and withholding tax applicable) on amounts paid to account-holders protected under the ADI FCS. A similar provision exists in section 62ZZKA of the Insurance Act with respect to the FCS for general insurers. APRA's previous experience of administering the FCS identified these requirements as unnecessary and inefficient.

8.66 This reporting obligation imposes costs for ADIs and general insurers, which may have to pre-position to report these amounts to APRA under the FCS. Further, APRA's obligation to collect information on these amounts and report to the ATO duplicates the ATO's existing business processes in the annual investment income report (AIIR). This means that the FCS amounts can be reported to the ATO by the liquidator in due course using the AIIR, rather than by a separate report from APRA.

8.67 The Bill therefore amends the Banking and Insurance Acts to remove the obligation that APRA report to the ATO the amounts paid to and withheld from account-holders or policyholders protected under the FCS. [Schedule 1, item 217, subsection 16AHA(3) of the Banking Act; Schedule 2, item 82, subsection 62ZZKA(3) of the Insurance Act]

8.68 These amendments will improve the efficiency of administering the FCS.

8.69 The Bill also makes consequential amendments to the Banking and Insurance Acts to remove references to the reports. [Schedule 1, item 223, paragraph 16AK(4)(ea) of the Banking Act; Schedule 2, item 90, paragraph 62ZZP(4)(da) of the Insurance Act]

Consequential amendments

Objectives of the FCS

8.70 The Bill makes consequential amendments to the Banking and Insurance Acts to include statutory management of an ADI or general insurer (as appropriate; see 8.60 to 8.64) as one of the potential preconditions to the declaration of the FCS; as well as including the additional payment mechanism (see 8.9 to 8.35) as part of the objectives of the FCS. [Schedule 1, items 213 and 214, section 16AB of the Banking Act; Schedule 2, items 67 and 68, section 62ZW of the Insurance Act]

Clarifying effect of a transferred liabilities determination under the Insurance Act

8.71 The Bill makes consequential amendments to the Insurance Act to ensure that, where a transferred liabilities determination results in a receiving body receiving a total payment amount (see 8.9 to 8.35), sections 62ZZK, 62ZZKA, 62ZZL, and 62ZZM (which relate to the method of paying entitlements) do not apply in relation to the entitlement of the receiving body. [Schedule 2, item 84, section 62ZZMD of the Insurance Act]

8.72 The Bill also amends the Income Tax Assessment Act 1997 to exclude the additional payment mechanism (see 8.9 to 8.35) from the operation of these provisions. [Schedule 7, item 7, paragraph 322-30(b) of the Income Tax Assessment Act 1997 and the note to that section]

Amending notes to the Insurance Act FCS provisions

8.73 The Bill makes consequential amendments to the Insurance Act to reflect the expanded scope of laws that APRA may consider when determining whether to pay an amount under the FCS to a claimant (see 8.44). [Schedule 2, items 72 and 73, subsections 62ZZG(2) and 62ZZG(3) of the Insurance Act]

Consequential amendments relating to interim payments

8.74 The insertion of the new provisions enabling interim payments require consequential amendments to be made to section 62ZZH of the Insurance Act and a Note to that section. Section 62ZZH provides for notionally extended insurance cover from the date of the FCS declaration of the insurer to 28 days after that. In simple terms this provisions mean that for FCS purposes the relevant insurance policy is treated as though it continued in force for that period even if it did not. This gives policyholders breathing space to arrange alternate insurance but keeps them covered under the FCS in the interim. The amendments to section 62ZZH ensure that this notionally extended cover protection applies not only in relation to substantive claims under existing sections 62ZZF and 62ZZG, but also to interim claims under the new interim claim provisions. [Schedule 2, items 76 and 77, section 62ZZH of the Insurance Act]

APRA requiring assistance from a statutory manager

8.75 The Bill adds administrators appointed to take control of a general insurer's business to the list of individuals that APRA may seek assistance from in the administration of the FCS under the Insurance Act. [Schedule 2, item 86, paragraph 62ZZO(d) of the Insurance Act]


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