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 9 - Wind-up and other matters

Outline of chapter

9.1 Schedules 1 to 3 to this Bill amend the Industry Acts to enhance the operation and scope of APRA's powers in the context of wind-up and other external administration. The Bill also enhances APRA's powers to impose conditions on, or revoke, a regulated entity's authorisation.

Context of amendments

9.2 APRA's winding up powers under the Industry Acts are an important part of the crisis management toolkit, enabling it to act in situations where a regulated entity is insolvent or about to become insolvent. The ability to initiate the winding up of a regulated entity in a timely manner may assist to prevent further financial deterioration, improve outcomes for depositors and policyholders, and minimise impacts on the financial system more broadly.

9.3 In many cases, proceeding straight to the wind-up of a regulated entity will not be an appropriate way of protecting beneficiaries and minimising impacts on the financial system, even if the entity is or is likely to become insolvent. APRA will usually need to use its other crisis management powers, such as the appointment of a statutory or judicial manager to stabilise the entity's critical operations and facilitate an orderly resolution such as a recapitalisation or transfer. In some cases, with or without use of other powers such as statutory or judicial management, all or part of the failed entity's business could be put into wind-up, with declaration of the FCS as appropriate.

9.4 Although the external administration and winding up provisions in the Industry Acts generally operate satisfactorily, past experience in the application of some of these powers, for example in the general insurance sector, has identified further areas where the regime could be enhanced.

9.5 There are also gaps and a lack of uniformity in APRA's powers in relation to provisional liquidators and certain external administrators, and in the circumstances in which a person applying for the appointment of an external administrator to a regulated entity must provide APRA with notice.

9.6 Making enhancements to address these issues will create a more consistent and effective legislative basis for APRA's involvement in the winding up or other external administration of regulated entities.

9.7 There are also gaps and a lack of consistency between the Industry Acts in relation to APRA's ability to impose conditions on, or to revoke, e entity's authorisation. The Bill makes amendments to ensure that APRA has appropriate powers to impose conditions and revoke authorities if certain grounds are met.

Summary of new law

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

·
harmonise the Industry Acts with regard to APRA's involvement in external administration of regulated entities;
·
ensure that APRA's existing powers in the winding up of a regulated entity extend to where a provisional liquidator is appointed;
·
enable APRA to apply for the winding up of an ADI without the ADI having first been placed in statutory management;
·
provide APRA with notice of proposed applications for external administration of regulated entities;
·
ensure that the institution of offence proceedings is no bar to judicial management or winding up of a regulated entity;
·
enhance APRA's ability to impose, vary and revoke conditions of authorisation in certain circumstances; and
·
enable APRA to revoke authorisations on certain additional grounds under the Industry Acts.

Comparison of key features of new law and current law

New law Current law
APRA's involvement in external administration
APRA's powers in the winding up of a regulated entity are extended to where a provisional liquidator is appointed. It is uncertain that APRA has standing to apply to the Court in relation to the exercise of a provisional liquidator's powers in the same way that APRA has power to do so in relation to a liquidator in a substantive winding up.
Under each of the Industry Acts:

·
APRA may apply to the Court for directions regarding any matter arising under the winding up (or proposed winding up, where a provisional liquidator has been appointed) of a regulated entity;
·
liquidators (including provisional liquidators) are required to notify APRA in writing prior to making an application to the Court in relation to a winding up matter; and
·
APRA may request information from a liquidator (including provisional liquidators) regarding the winding up of a regulated entity.

Under the Insurance and Life Insurance Acts:

·
APRA may apply to the Court for directions regarding any matter arising under the winding up of a regulated entity;
·
liquidators must notify APRA in writing prior to making an application to the Court in relation to a winding up matter; and
·
APRA may request information from a liquidator regarding the winding up of a regulated entity.

Conversely, under the Banking Act, only the second bullet point above applies.

APRA's involvement in external administration is expanded to capture regulated entities, authorised NOHCS, and subsidiaries of regulated entities or authorised NOHCs. APRA's involvement in external administration is limited to regulated entities only.

APRA's ability to apply for winding up of ADI without it having been placed in statutory management
APRA may apply for the winding up of an ADI without the ADI having first been placed in statutory management on certain grounds. APRA may apply for the winding up of an ADI only if a statutory manager has first been appointed to the ADI.
Providing APRA with notice of proposed applications for external administration of regulated entities
A person applying to the Court, or using any other process (such as appointment under a deed or statutory power), for the appointment of an external administrator to a regulated entity or authorised NOHC, must provide APRA with notice prior to making the application. A person applying to the Court for the appointment of an external administrator to an ADI or insurer must provide APRA with notice prior to making the application.
Institution of offence proceedings no bar to judicial management or winding up
The institution of offence proceedings is no bar to judicial management under the Insurance and Life Insurance Acts or winding up of a regulated entity. There is no equivalent provision of subsection 248(2) of the Life Insurance Act in the Banking or Insurance Acts, which provides that the institution of offence proceedings is no bar to the judicial management or winding up of a life company.
Imposing, varying and revoking conditions of authorisation
Under each of the Industry Acts, APRA may impose, vary and revoke conditions of authorisation.

It is an offence to breach a condition of registration under the Life Insurance Act.

Uniform penalties (based on section 14 of the Insurance Act) will apply.

The general structure of the provisions relating to conditions on authorisation are brought into line with the Insurance Act model.

The provisions in the Industry Acts differ in relation to APRA's ability to impose, vary and revoke conditions of authorisation.

Under the Life Insurance Act, it is not an offence if a condition of registration is breached under that Act.

The penalty provisions for breach of authorisation differ significantly between the Industry Acts.

The structure of the provisions relating to conditions on authorisation varies between the Industry Acts.

Revoking an authorisation
Under each of the Industry Acts, APRA may revoke the authorisation of a regulated entity in certain circumstances, including certain breaches of laws and prudential requirements. The Banking and Insurance Acts allow APRA to revoke authorisations in certain circumstances. Equivalent grounds are not included in the Life Insurance Act, under which APRA may only cancel a life company's registration if a life company has ceased to carry on a life insurance business in Australia or if the life company voluntarily requests for its registration to be cancelled.

Detailed explanation of new law

APRA's involvement in external administration

9.9 APRA currently has the power to apply for a winding up order in respect of a regulated entity. In making such an application, it may be necessary for APRA to seek that the Court appoint a provisional liquidator pending the final hearing of the winding up application. [7]

9.10 APRA may seek to appoint a provisional liquidator where there is a need to protect a regulated entity's assets from dissipation during this period and the entity's assets cannot be preserved by appropriate undertakings. For example, this may be the case where there is not already a statutory or judicial manager in place.

9.11 Further, the Industry Acts currently include provisions enabling APRA to be involved in the liquidation of a regulated entity. These include provisions:

·
giving APRA power to apply to the Court for directions regarding any matter arising under the winding up of a regulated entity (under the Insurance and Life Insurance Acts);
·
requiring a liquidator of a regulated entity to notify APRA in writing before the liquidator makes an application to the Court regarding the winding up of a regulated entity (under the Industry Acts); and
·
giving APRA power to request information from a liquidator regarding the winding up of a regulated entity (under the Insurance and the Life Insurance Acts).

9.12 These existing powers reflect the significance of APRA's role in the liquidation of a regulated entity so as to ensure that the interests of depositors and policyholders, and the stability of the financial system, are protected.

Definitions

9.13 The Bill inserts a new definition of 'liquidator' into the Industry Acts to make certain that the definition includes a provisional liquidator. The Bill also amends the definition of 'external administrator' to remove the reference to 'provisional liquidator' as it will be redundant given its inclusion in the definition of 'liquidator'. [Schedule 1, items 5 and 7, subsection 5(1) of the Banking Act; Schedule 2, items 2 and 4, subsection 3(1) of the Insurance Act; Schedule 3, items 111 and 113, the Schedule Dictionary of the Life Insurance Act]

9.14 These amendments provide the mechanism to extend APRA's powers in external administration to instances where provisional liquidators are appointed, as detailed in the sections below.

9.15 The Bill also extends the application of these powers by using the term 'entity', which covers the following:

·
a regulated entity;
·
an authorised NOHC; or
·
a subsidiary of a regulated entity or authorised NOHC. [Schedule 1, item 243, subsection 62C(4) of the Banking Act; Schedule 2, item 61, subsection 62ZR(4) of the Insurance Act; Schedule 3, item 57, subsection 183(4) of the Life Insurance Act]

Notice of application

9.16 The Industry Acts currently require a liquidator of a regulated entity to notify APRA in writing before they propose to make an application to the Court regarding the winding up of a regulated entity and APRA has the right to be heard in such an application.

9.17 The Bill amends the Industry Acts to insert 'or the proposed winding-up' of an entity in a number of provisions. [Schedule 1, item 242, subsection 62C(1) of the Banking Act; Schedule 2, item 60, subsection 62ZR(1) of the Insurance Act; Schedule 3, items 56 and 58, subsection 183(1) and paragraph 183B(2)(a) of the Life Insurance Act]

9.18 These amendments, when read with the new definition of 'liquidator', ensure that a provisional liquidator must also give APRA written notice if the provisional liquidator proposes to make an application to the court in relation to a matter regarding the entity.

Directions

9.19 APRA currently has the power under the Insurance and Life Insurance Acts to apply to the Court for directions regarding any matter arising under the winding up of an insurer.

9.20 However, there are no equivalent provisions within the Banking Act. The Bill therefore amends the Banking Act to address this inconsistency and harmonise the position across the Industry Acts. [Schedule 1, item 244, section 62D of the Banking Act]

9.21 Further, the Bill also amends the Insurance and Life Insurance Acts to extend APRA's ability to apply to the Court for directions regarding the winding up, or proposed winding up, of an entity. [Schedule 2, item 62, subsection 62ZS(1) of the Insurance Act; Schedule 3, item 59, subsection 184(1) of the Life Insurance Act]

9.22 These amendments when read with the new definition of 'liquidator', ensure that APRA may apply to the Court for directions when an entity is under the control of either a liquidator or a provisional liquidator.

Information gathering

9.23 APRA currently has the power under the Insurance and Life Insurance Acts to request information from a liquidator of a regulated entity regarding the winding up of a regulated entity.

9.24 However, there are no equivalent provisions within the Banking Act. The Bill therefore amends the Banking Act to address this inconsistency and harmonise the position across the Industry Acts. [Schedule 1, item 244, section 62E of the Banking Act]

9.25 Further, the Bill amends the Insurance and Life Insurance Acts to extend APRA's ability to request specific information from a liquidator regarding the winding up, or proposed winding up, and the other affairs of the entity. [Schedule 2, item 63, subsection 62ZT(1) of the Insurance Act; Schedule 3, item 60, subsection 185(1) of the Life Insurance Act]

9.26 These amendments when read with the new definition of 'liquidator', ensure that APRA may request information from a liquidator or a provisional liquidator.

APRA's ability to apply for winding up of an ADI without it having been placed in statutory management

9.27 Section 14F of the Banking Act currently empowers APRA to apply to the Court for an ADI, where it is under statutory management, to be wound up where APRA considers that the ADI is insolvent, and cannot be restored to solvency within a reasonable period.

9.28 It will often be desirable for APRA to first appoint a statutory manager before proceeding to a winding up, given that a statutory manager may assist APRA to assess the ADI's solvency or to take actions required to facilitate the resolution of the ADI's affairs.

9.29 However, where APRA has already formed the view that the ADI is insolvent, having to appoint a statutory manager first before applying for a winding up order may not always be the optimal course of action, particularly where APRA is satisfied that the entity can be wound-up without other resolution actions being required. The approach taken by APRA will depend on an assessment of the circumstances and options for resolution, even if the ADI is insolvent.

9.30 The Bill repeals section 14F and inserts a new provision to provide for APRA to apply for the winding up of a locally-incorporated ADI. This section does not apply to a foreign ADI as, under the Bill, there is a separate section applying to the winding up of a foreign ADI (see 7.43).

9.31 The only ground that must be satisfied before APRA applies for a winding up order is that APRA considers the ADI is insolvent and could not be restored to solvency within a reasonable period. This amendment clarifies APRA's existing power to apply for the winding up of a locally-incorporated ADI, without the ADI first having been placed under statutory management.

9.32 The amendments preserve the existing requirements in subsections 14F(2) and (3) that the winding up of the ADI is to be conducted in accordance with the Corporations Act, and that APRA must inform the Minister as soon as possible if it makes an application for the ADI to be wound up. [Schedule 1, item 212, subsections 16AAA(4) and 16AAA(5) of the Banking Act]

9.33 The Bill also clarifies that the application is to be made under existing section 459P of the Corporations Act which provides for certain persons, including APRA, to apply for a company to be wound up in insolvency. [Schedule 1, item 212, subsection 16AAA(3) of the Banking Act]

Providing APRA with notice of proposed applications for external administration of regulated entities and authorised NOHCs

9.34 Sections 62ZQ of the Insurance Act and 179C of the Life Insurance Act were amended by the Financial Sector Legislation Amendment (Prudential Refinements and Other Measures) Act 2010 to compel a person applying to a Court for the appointment of an external administrator to an insurer to provide APRA with notice of the proposed application. This amendment aligned the Insurance and Life Insurance Acts with existing section 62B of the Banking Act.

9.35 These provisions mean that APRA must be given information about any prospective appointment of an external administrator to a regulated entity before the external administrator is appointed. This allows APRA to understand the circumstances giving rise to the proposed appointment and to take appropriate and timely action, if necessary, to protect the interests of depositors and policyholders, and to promote financial system stability.

9.36 However, there are certain circumstances in which an external administrator may be appointed without an application to the Court, for example, the appointment of a receiver or voluntary administrator via a non-court process under a deed or other instrument.

9.37 The rationale behind the current legislative provisions applies equally whether an external administrator is appointed via the court process or outside the court process.

9.38 The Bill amends the Industry Acts to extend the requirement to capture additional modes of appointment outside of a court. For example, where a receiver is appointed under a contractual power or a voluntary administrator is appointed under a statutory power.

9.39 Accordingly, under the Bill a person must give written notice to APRA, at least one week before they make:

·
a court application under Chapter 5 of the Corporations Act for the appointment of an external administrator of a regulated entity or an authorised NOHC; or
·
another kind of application (whether or not to a court) for the appointment of an external administrator of a regulated entity or an authorised NOHC; or
·
an appointment of an external administrator of a regulated entity or an authorised NOHC (otherwise than as the result of an application made by another person). [Schedule 1, item 240, subsection 62B(1) of the Banking Act; Schedule 2, item 59, subsection 62ZQ(1) of the Insurance Act; Schedule 3, item 53, subsection 179C(1) of the Life Insurance Act]

9.40 The requirement to give one week's written notice does not apply if APRA gives the person written notice, before the person makes the application or appointment, that APRA consents to the person making the application or appointment. For example, APRA may consent to the application being commenced immediately, with or without consenting to the actual order sought (APRA might still oppose the application, and would still be entitled to be heard on the application). [Schedule 1, item 240, subsection 62B(1A) of the Banking Act; Schedule 2, item 59, subsection 62ZQ(3) of the Insurance Act; Schedule 3, item 53, subsection 179C(3) of the Life Insurance Act]

9.41 Further, the Bill repeals the requirements in section 62ZQ of the Insurance Act and section 179C of the Life Insurance Act that the person to give APRA a copy of the application and all the documents that will be filed in support of the application. The requirement in the amended provisions will be to provide APRA with written notice of the application or appointment. This must be in approved form, if any, and an approved form may require the provision of relevant information or documents. After receiving notice, APRA will have power to request the person to provide details of the application. [Schedule 2, item 59, subsection 62ZQ(5) of the Insurance Act; Schedule 3, item 53, subsection 179C(4) of the Life Insurance Act]

9.42 The Bill applies the existing strict liability offence, punishable by 60 penalty units, to appointment breach of the new provisions. A person will commit an offence if (a) they make a relevant application or appointment of an external administrator, and (b) APRA did not consent to the person making the application without providing the required one week's notice and (c) the person failed to give written notice in the approved form or, if not form has been approved, failed to give written notice. [Schedule 1, item 241, subsection 62B(4) of the Banking Act; Schedule 2, item 59, subsection 62ZQ(6) of the Insurance Act; Schedule 3, item 53, subsections 179C(6)and 179C(7) of the Life Insurance Act]

9.43 A strict liability offence is considered appropriate in this instance as failure to comply would undermine the integrity of the regulatory regime. If APRA is not given advance notice of the appointment of an external administrator or receiver, APRA will be unable to take appropriate and timely action, if necessary, to protect the interests of depositors and policyholders, and to promote financial stability.

9.44 It is well within the control of the person to whom the offence applies to notify APRA of the appointment as this person will either be making an application, possibly to a court, to appoint the person or making the appointment directly.

9.45 The penalty for the offence complies with the requirements of the Government's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers. That is, the maximum penalty is no more than 60 units for an individual and does not include a term of imprisonment.

Institution of offence proceedings no bar to judicial management or winding up

9.46 Existing subsection 248(2) of the Life Insurance Act provides that the institution of proceedings against a company for an offence against that Act or the FSCODA does not prevent the institution of proceedings for the judicial management or the winding-up of the company on a ground that relates to the matter that constitutes the offence. There are no equivalent provisions in the Banking and Insurance Acts.

9.47 The Bill amends the Banking and Insurance Acts to replicate the position in the Life Insurance Act with appropriate modifications. [Schedule 1, item 249, section 69BA of the Banking Act; Schedule 2, item 138, section 129AA of the Insurance Act]

9.48 These amendments are not intended to imply that administrative proceedings not mentioned in those respective sections, or other court proceedings (including for injunctions or disqualification), are prevented by the institution of proceedings for an offence based on the same matter.

Imposing, varying and revoking conditions of authorisation

9.49 Currently, provisions in the Industry Acts allow APRA to impose, vary and revoke conditions of authorisation, or registration (in the case of the Life Insurance Act).

9.50 However, the provisions in the Banking and Life Insurance Acts are not as clearly set out or comprehensive as those in the Insurance Act. For example, it is not an offence if a condition of registration is breached under the Life Insurance Act.

9.51 Existing section 13 of the Insurance Act provides a comprehensive model for imposing, varying and revoking conditions of authorisation. These provisions allow APRA, at any time and by written notice, to impose conditions, or additional conditions, on an insurer's authorisation. They also enable APRA to vary or revoke conditions imposed on a general insurer's authorisation. Other subsections in section 13 provide for a number of ancillary matters, including that conditions are to have effect despite anything in the prudential standards; allowing APRA to make an authorisation conditional on a parent entity of the general insurer being an authorised NOHC; providing for notice of an action under section 13 to be given to the insurer and published in the Gazette (although noting that a failure to give such notice does not invalidate the action); and confirming that relevant decisions under the section are reviewable.

9.52 Existing section 14 of the Insurance Act provides that an insurer commits a strict liability offence if it does, or fails to do, an act that results in a contravention of a condition of the insurer's authorisation. The maximum penalty for the company is 300 penalty units and for the individual the maximum penalty is 60 penalty units.

9.53 The Bill replicates sections 13 and 14 of the Insurance Act into the Banking and Life Insurance Acts with appropriate modifications to harmonise the position across the Industry Acts. [Schedule 1, items 13 and 14, subsections 9(4) to 9(6) and sections 9AA and 9AB of the Banking Act; Schedule 3, item 7, sections 22 and 23 of the Life Insurance Act]

9.54 The Bill inserts strict liability offence provisions in the Banking and Life Insurance Acts. Where a company or individual fails to act, or acts in such a way, as to contravene a condition of an authorisation or registration, as the case may be, the company or individual will be subject to a maximum penalty of 300 penalty units and an individual a maximum of 60 penalty units. [Schedule 1, item 14, section 9AB of the Banking Act; Schedule 3, item 7, section 23 of the Life Insurance Act]

9.55 A strict liability offence is considered appropriate in this instance as failure to comply would undermine the integrity of the regulatory regime. The circumstances that justify the imposition of conditions reflect a significant prudential concern. Compliance with conditions of an entity's authorisation or registration is a key element of APRA's prudential supervision of regulated entities and are intended to protect the interests of depositors and policy holders and to ensure the stability of the Australian financial system.

9.56 Given the significance of the potential harm to depositors, policy holders and financial stability if the conditions are not met, establishing fault should not be an element of the offence.

9.57 The penalty for the offence complies with the requirements of the Government's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers. That is, the maximum penalty is no more than 60 units for an individual, 300 units for a company does not include a term of imprisonment.

9.58 Currently, sections 9A of the Banking Act and 15 of the Insurance Act allow APRA to revoke an authorisation for various reasons, including a range of prudential reasons and where the regulated entity has failed to comply with the requirements of the respective Acts.

9.59 There are no equivalent grounds in the Life Insurance Act. Currently APRA only has the power to revoke a life company's registration only if:

·
it has ceased to carry on a life insurance business in Australia under section 26 of that Act; or
·
it has requested that its registration be cancelled and certain conditions are met.

9.60 The absence of a wider range of grounds in the Life Insurance Act is inconsistent with the other two Industry Acts and potentially ineffective for dealing with the resolution of a life insurer.

9.61 The Bill therefore addresses this anomaly by replicating the provisions of sections 15 and 17 of the Insurance Act in the Life Insurance Act with appropriate modifications. This includes adapting the existing subsections 15(3) to 15(7) of the Insurance Act into the Life Insurance Act, which covers the process by which APRA may revoke the registration of a life insurer, including;

·
giving written notice to the life insurer that it is revoking or considering revoking its registration;
·
requiring APRA to consider any submissions that the life insurer provides within 90 days of the notice;
·
allowing APRA to override the requirement to give notice or consider submissions on the revocation if that is in the public interest; and,
·
requiring the notice of revocation to be published in the Gazette (though a failure to do so will not invalidate the revocation)
·
providing that revocation of registration is merits reviewable, including in the Administrative Appeals Tribunal [Schedule 3, item 8, subsections 26(2) to 26(7) of the Life Insurance Act; Schedule 3, item 104, paragraph 236(1)(g) of the Life Insurance Act]

9.62 The amendments ensure that APRA has the power to revoke a life company's registration if APRA is satisfied that: (1) the company has no liabilities in respect of life insurance business carried on by it in Australia; and (2) one of certain other listed conditions is met such as failure to comply with a regulatory requirement, failure to comply with a Commonwealth law specified in the regulations, insolvency or, in the case of a foreign life insurer, revocation of its authorisation in a foreign country.

Direction to transfer liabilities to facilitate revocation of registration

9.63 As provided for in existing section 17 of the Insurance Act in the same context, a new provision in the Life Insurance Act will provide that, if APRA considers that it would, under section 26, revoke a life company's registration if it had no liabilities, APRA may direct the life company to arrange an assignment of those liabilities to one or more other life companies registered under the Act. [Schedule 3, items 8 and 11, sections 26 and 27A of the Life Insurance Act]

9.64 If APRA makes the direction, it is the responsibility of the life insurer who receives the direction to arrange for the transfer. APRA may approve and impose conditions on the transfer having considered a number of relevant factors described in the new provisions. [Schedule 3, items 9, subsection 27A(4) of the Life Insurance Act]

9.65 By adapting the existing provisions of section 17 of the Insurance Act into the Life Insurance Act, APRA has the power to direct a life insurer to transfer those liabilities to one or more other life companies registered under the Act. The provisions include the following;

·
the direction is to effect despite section 190 of the Life Insurance Act (this is because subsection 190(1) provides that no part of the life insurance business of a life company may be transferred or amalgamated except under a scheme approved by the Court under Part 9. The new provision inserted by the Bill will operate as an exception to this. The business of a life company can also be transferred under the Transfer Act.);
·
transferred policies to be treated as though the policies were transferred by novation to the transferee;
·
the rights of policy owners against the transferor, and the rights of the transferor against policy owners, are to be treated as though they were transferred by novation to the transferee;
·
the assignment of liabilities may include the assignment of rights or benefits in connection with policies in respect of the life insurance business carried on in Australia by the transferor; and
·
the direction has effect despite anything in the Insurance Acquisitions and Takeovers Act 1991. [Schedule 3, item 11, subsections 27A(2), 27A(3), 27A(5), 27A(7) and 27A(8) of the Life Insurance Act]

9.66 Although the intended purpose of this direction-making power is to address circumstances where a life insurer's registration ought to be revoked despite the fact that it continues to have liabilities, APRA may instead (or, in combination) use any of the other available powers that are appropriate to its resolution objectives (for example, effecting a compulsory transfer of business under the Transfer Act, or appointing a statutory manager to take control of the business of the life insurer).

9.67 These provisions also create a new offence in relation to the direction to assign liabilities in order to facilitate the revocation of a life company registration under the Life Insurance Act. The new offence mirrors equivalent provisions in the Insurance Act. The offence is a strict liability offence and applies where a company or individual fails to act as directed by APRA. [Schedule 3, item 11, subsections 27A(9) to 27A(11) of the Life Insurance Act]

9.68 A strict liability offence is considered appropriate because significant delays in revoking a registration to carry on life insurance business in Australia may adversely affect policy holders and financial system stability. The circumstances that would justify the revocation of such a registration are sufficiently serious that a significant criminal deterrent is justified to prevent any such delay, and ought not to depend on whether the life company intended for the delay to occur.

9.69 The penalty for the offence complies with the requirements of the Government's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers. That is, the maximum penalty is no more than 60 units for an individual, 300 units for a body corporate and does not include a term of imprisonment.

9.70 The Bill also makes consequential amendments to the Life Insurance Act to accommodate the new revocation grounds by adding the following decisions as reviewable decisions under section 236:

·
a decision to revoke registration under subsection 26(1);
·
a refusal to revoke the registration of a company under section 27;
·
a decision to give a direction to assign liabilities under subsection 27A(1);
·
a refusal to approve a proposed assignment under subsection 27A(4); and
·
a decision to impose conditions on an approval under subsection 27A(4). [Schedule 3, item 104, subsection 236(1) of the Life Insurance Act]

9.71 Separately, the Bill inserts an additional ground into the Industry Acts to allow APRA to revoke the authorisation of a foreign-regulated entity if the entity's authorisation is revoked by a foreign regulator, including its home regulator (see 7.51). This ground for revocation, like the others, is subject to the notice requirements in the existing subsection 9A(3) of the Banking Act, subsection 15(3) of the Insurance Act and the new Life Insurance Act revocation provision (see 9.61). Those processes apply unless APRA determines that national or public interest considerations mean that they should not apply.

9.72 Further, the Bill inserts a supplementary ground into the Banking Act to allow APRA to revoke the authorisation if a body corporate, that is a foreign corporation within the meaning of paragraph 51(xx) of the Constitution, is unlikely to be able to meet its liabilities in Australia and is unlikely to be able to do so within a reasonable period of time. [Schedule 1, item 16, paragraph 9A(2)(j)(i) of the Banking Act]

9.73 Finally, the Bill inserts an additional ground into the Industry Acts to allow APRA to revoke the authorisation of a regulated entity if the entity fails to comply with a requirement of a provision of Commonwealth law that is prescribed in regulations for this purpose. [Schedule 1, item 16, paragraph 9A(2)(b)(iv) of the Banking Act; Schedule 2, item 10, paragraph 15(1)(a)(iia) of the Insurance Act; Schedule 3, item 8, paragraph 26(1)(a)(iii) of the Life Insurance Act]

9.74 The Government's intended use for this regulation-making power is to prescribe Commonwealth laws which, if a regulated entity was found to be in breach of those prescribed laws, would raise significant prudential concerns about the entity that may warrant the revocation of its authority to conduct regulated business. Although regulated entities are expected to comply with all relevant Commonwealth laws, the Government may wish to specify certain laws that are considered particularly important, for example, from the perspective of protecting depositors and policy holders or the stability of the Australian financial system, or on other public interest grounds.

Conditions on a NOHC registration under the Life Insurance Act

9.75 The Bill adapts several of the existing provisions in the Banking and Insurance Acts (as amended by this Bill) relating to conditions on NOHC authorisation and breaches of those conditions into the Life Insurance Act. The purpose of these amendments is to harmonise these provisions across the Industry Acts to the extent that it is appropriate and beneficial to do so. [Schedule 3, items 12 to 14, sections 28B and 28BA of the Life Insurance Act]

9.76 These amendments provide that any conditions on the registration of NOHC under the Life Insurance Act must relate to prudential matters. This change is a safeguard on the use of APRA's powers to impose conditions on NOHC registration, and aligns with what is currently the case in the equivalent provisions of the Banking and Insurance Acts. [Schedule 3, item 12, subsection 28B(1) of the Life Insurance Act]

9.77 The amendments also provide that, if APRA imposes, varies or revokes the conditions on a NOHC registration, APRA must give written notice to the registered NOHC and ensure that the notice that this action has been taken is published in the Gazette. In doing so, the amendments do not change the existing provisions with respect to notice to the registered NOHC, and align with what is currently the case in the equivalent provisions of the Banking and Insurance Acts. [Schedule 3, item 13, subsection 28B(3) of the Life Insurance Act]

9.78 The amendments also create new strict liability offence provisions in the Life Insurance Act regarding the breach of conditions on a NOHC registration. Where a company or individual fails to act, or acts in such a way, as to contravene a condition of an authorisation or registration, as the case may be, the company or individual will be subject to a maximum penalty of 300 penalty units and an individual a maximum of 60 penalty units. [Schedule 3, item 14, section 28BA of the Life Insurance Act]

9.79 As is the case for breaches of conditions on an ADI or insurer's authorisation or registration, this is a strict liability offence. Strict liability is considered appropriate in this instance as failure to comply would undermine the integrity of the regulatory regime. The circumstances that justify the imposition of conditions reflect a significant prudential concern. Compliance with conditions on a NOHC's registration is a key element of APRA's prudential supervision of regulated entities that are subsidiaries of the registered NOHC, and important in order to protect the interests of policy holders and ensure the stability of the Australian financial system.

9.80 The penalty for the offence complies with the requirements of the Government's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers. That is, the maximum penalty is no more than 60 units for an individual, 300 units for a body corporate and does not include a term of imprisonment

9.81 Finally, the Bill inserts an additional ground into the Life Insurance Act to allow APRA to revoke the authorisation of a registered NOHC if it fails to comply with a requirement of a provision of Commonwealth law that is prescribed in regulations for this purpose. [Schedule 3, item 15, paragraph 28C(1)(a)(iia) of the Life Insurance Act]

9.82 This power is equivalent to the new regulations-making power described at 9.73 to 9.74, and its purpose is substantially the same.

Consequential amendments

9.83 Consequential amendments are made to the Banking and Insurance Acts to remove certain existing references to 'a provisional liquidator' in light of the new definition of 'liquidator'. [Schedule 1, items 219, 220, 225 and 226, paragraph 16AK(1)(c), subsections 16AJ(9)16AL(5) and 16AL(7) of the Banking Act; Schedule 2, item 85, 87, 92 and 93, paragraphs 62ZZO(b) and 62ZZP(1)(b), and subsections 62ZZQ(5) and 62ZZQ(7) of the Insurance Act]

9.84 The Bill also makes consequential amendments to the Banking Act to update references to the new section 16AAA which gives APRA power to wind up an ADI that is incorporated in Australia (in place of the existing section 14F). [Schedule 1, items 12, 215 and 216, subsections 5(6), 16AD(1) and 16AD(2) of the Banking Act]

9.85 In order to minimise ambiguity and use consistent terms throughout the Industry Acts, minor changes have been implemented to harmonise the use of key terms;

·
replaced 'cancel' with 'revoke' regarding the revocation of registration under the Life Insurance Act; [Schedule 3, items 9, 10 and 16, subsections 27(1) and 27(2), and section 28 of the Life Insurance Act]

NOHC authorisations and registrations

9.86 The Bill makes changes to the legislative provisions relating to NOHC authorisations and registrations, as well as conditions on those authorisations and registrations.

9.87 Existing section 11AA of the Banking Act serves three functions. First, it gives APRA power to grant a NOHC authority. Secondly, it gives APRA power to impose conditions on such an authority. Thirdly it sets out the consequences of a breach of such a condition. The amendments separate these provisions into three sections. Section 11AA will continue to give APRA power to authorise a NOHC. imposing new section will contain APRA's power to impose conditions on a NOHC authority. A third section establishes the consequences for a NOHC breaching these conditions. [Schedule 1, items 17 and 18, sections 11AA, 11AAA and 11AAB of the Banking Act]

9.88 Existing section 11AA provides for a fault liability offence punishable by a penalty of up to 200 penalty units for a breach of a NOHC authorisation condition. The new penalty provision will provide for a penalty of up to 60 penalty units for an individual and 300 penalty units for a body corporate. It will apply on a strict liability basis. The quantum of the penalty and the strict liability basis of the offence is consistent with other provisions in the Industry Acts (as amended by this Bill) relating to breaches of licence conditions. [Schedule 1, item 18, section 11AAB of the Banking Act]

9.89 Strict liability is considered appropriate as failure to comply would undermine the integrity of the regulatory regime. The circumstances that justify the imposition of conditions reflect a significant prudential concern. Compliance with conditions on NOHC authorisation is a key element of the prudential framework for protecting the interests of depositors and the stability of the Australian financial system.

9.90 The penalty for the offence complies with the requirements of the Government's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers. That is, the maximum penalty is no more than 60 units for an individual, 300 units for a body corporate and does not include a term of imprisonment.

9.91 The Bill does not replicate existing subsection 11AA(5B) of the Banking Act which provides that a NOHC that commits an offence under subsection 11AA(5) commits that offence on every day during which the conditions of its authority have been breached. This change has been introduced because the repealed section duplicates the effect of section 4K of the Crimes Act 1914 with respect to the offence in subsection 11AA(5).

Winding up a life insurer

9.92 Existing subsection 181(2) of the Life Insurance Act provides that APRA may only make an application to wind up a life company if, having regard to the conclusions reached by APRA as a result of an investigation under existing Division 3 of Part 7, APRA is satisfied that it is necessary or proper that the application be made. The Bill amends this provision so that APRA can also make an application if satisfied that it is necessary or proper to do so having regard to what APRA has found out as a result of any statutory management of the life company. This will be relevant where, for example, an administrator recommends that APRA make that application, if it is considering whether it is necessary or proper to apply to wind up a life insurer. This is a consequential change as a result of creating a statutory management regime in the Life Insurance Act. [Schedule 3, item 54, subsection 181(2) of the Life Insurance Act]

Application and transitional provisions

9.93 A condition in effect under subsection 9(4) of the old Banking Act is taken to be in effect on and after the commencement time under section 9AA of the new Banking Act. A condition in effect under subsection 22(1) of the old Life Insurance Act is taken to be in effect on and after the commencement time under section 22 of the new Life Insurance Act. To avoid doubt, this does not prevent the variation or revocation of a condition on or after the commencement time. [Schedule 1, item 256 Saving - conditions on section 9 authority; Schedule 3, item 121 Saving - conditions on registration under section 21]

9.94 The amendments made by the Bill in relation to conditions on an authority or registration apply to the imposition of new conditions on a body corporate's authority under section 9 of the Banking Act or registration under section 21 of the Life Insurance Act on or after the commencement time. The amendments apply to the variation or revocation of conditions on a body corporate's authority under section 9 of the Banking Act or registration under section 21 of the Life Insurance Act on or after the commencement time, even if the conditions were imposed before the commencement time. The amendments also apply to the doing of an act on or after the commencement time, or the failure to do an act on or after the commencement time, resulting in a contravention of such a condition. [Schedule 1, item 257 Application - conditions on section 9 authority; Schedule 3, item 122 Application - conditions on registration under section 21]

9.95 A condition in effect under subsection 11AA(3) of the old Banking Act is taken to be in effect on and after the commencement time under section 11AAA of the new Banking Act. A condition in effect under subsection 28B(1) of the old Life Insurance Act is taken to be in effect on and after the commencement time under section 28B of the new Life Insurance Act. To avoid doubt, this does not prevent the variation or revocation of a condition on or after the commencement time. [Schedule 1, item 259 Saving - conditions on NOHC authority; Schedule 3, item 124 Saving - conditions on NOHC registration]

9.96 The amendments made by the Bill in relation to conditions on a NOHC authority or NOHC registration apply to the imposition of new conditions on a body corporate's NOHC authority under the Banking Act or NOHC registration under the Life Insurance Act on or after the commencement time. The amendments apply to the variation or revocation of conditions on a body corporate's NOHC authority under the Banking Act or NOHC registration under the Life Insurance Act on or after the commencement time, even if the conditions were imposed before the commencement time. The amendments also apply to the doing of an act on or after the commencement time, or the failure to do an act on or after the commencement time, resulting in a contravention of such a condition. [Schedule 1, item 260 Application - conditions on NOHC authority; Schedule 3, item 125 Application - conditions on NOHC registration]

9.97 As explained above at 9.49 to 9.53 and 9.75 to 9.82, , the provisions of the Bill create new offences and amend existing offences in relation to conditions on a regulated entity's authorisation or registration to conduct regulated business and in relation to conditions on a NOHC authority or NOHC registration. As a matter of natural justice, the imposition of strict liability for these offences is intended only to apply in respect of offences committed after the commencement time.

9.98 The provisions of the Bill that amend APRA's powers to revoke an authority or registration apply to an authorisation under section 9 of the Banking Act or section 12 of the Insurance Act, or a registration under section 21 of the Life Insurance Act, whether the authority or registration was granted or made before, on or after the commencement time. The amendments apply in relation to a matter mentioned in a paragraph of subsection 9A(2) of the new Banking Act, subsection 15(1) of the new Insurance Act or subsection 26(1) of the new Life Insurance Act that occurs on or after the commencement time (including such a matter that starts before the commencement time and continues on or after the commencement time). [Schedule 1, item 258 Application - revocation of section 9 authority; Schedule 2, item 142 Application - revocation of authorisation under section 12; Schedule 3, item 123 Application - revocation of registration under section 21]

9.99 The provisions of the Bill that amend APRA's powers to revoke a NOHC authority or registration apply to a body corporate's NOHC authority or registration under the Banking Act, the Insurance Act or Life Insurance Act, whether the authority or registration was granted or made before, on or after the commencement time. The amendments apply in relation to a matter mentioned in a paragraph of subsection 11AB(2) of the new Banking Act, subsection 21(1) of the new Insurance Act or subsection 28C(1) of the new Life Insurance Act that occurs on or after the commencement time (including such a matter that starts before the commencement time and continues on or after the commencement time). [Schedule 1, item 261 Application - revocation of NOHC authority; Schedule 2, item 143 Application - revocation of NOHC authorisation; Schedule 3, item 126 Application - revocation of NOHC registration]

9.100 The provisions of the Bill that amend APRA's powers to revoke an authority or registration apply to an authorisation under section 9 of the Banking Act or section 12 of the Insurance Act, or a registration under section 21 of the Life Insurance Act, whether the authority or registration was granted or made before, on or after the commencement time. The amendments apply in relation to a matter mentioned in a paragraph of subsection 9A(2) of the new Banking Act, subsection 15(1) of the new Insurance Act or subsection 26(1) of the new Life Insurance Act that occurs on or after the commencement time (including such a matter that starts before the commencement time and continues on or after the commencement time). [Schedule 1, item 258 Application - revocation of section 9 authority; Schedule 2, item 142 Application - revocation of authorisation under section 12; Schedule 3, item 123 Application - revocation of registration under section 21]

9.101 The provisions of the Bill that amend APRA's powers to revoke an regulated entity's authorisation or registration apply to an authorisation under section 9 of the Banking Act or section 12 of the Insurance Act, or a registration under section 21 of the Life Insurance Act, whether the authority or registration was granted or made before, on or after the commencement time to conduct regulated business apply from the commencement of the Bill. The amendments apply in relation to a matter mentioned in a paragraph of subsection 9A(2) of the new Banking Act, subsection 15(1) of the new Insurance Act or subsection 26(1) of the new Life Insurance Act that occurs on or after the commencement time (including such a matter that starts before the commencement time and continues on or after the commencement time). APRA may not revoke an authorisation as a result of a matter that is grounds for revocation under the new provisions if that matter occurred before the commencement of the Bill, unless that matter continues on or after commencement. [Schedule 1, item 258 Application - revocation of section 9 authority; Schedule 2, item 142 Application - revocation of authorisation under section 12; Schedule 3, item 123 Application - revocation of registration under section 21]

9.102 A minor amendment has been made to subsection 254(5) of the Life Insurance Act as a result of changes to the provisions that allow APRA to revoke the registration of a life insurer. Section 254 of the Life Insurance Act is a transitional section that makes provisions for life insurers that were registered under a previous version of that Act. The subsection has been amended to ensure that an existing reference in that section to section 26 of the Life Insurance Act remains correct. [Schedule 3, item 109, subsection 254(5) of the Life Insurance Act]


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