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 10 - Resolution planning

Outline of chapter

10.1 Schedules 1 to 3 to this Bill amends the Industry Acts to clarify and strengthen APRA's powers in relation to resolution planning.

Context of amendments

10.2 It is important that APRA has the powers it needs, not only to implement an orderly resolution of a failed regulated entity, but to set appropriate prudential requirements for resolution planning and addressing potential barriers to resolution, in advance of any crisis occurring.

10.3 An important lesson from the global financial crisis was that effective resolution requires an advanced level of preparedness through contingency planning, before a failure or crisis event materialises. This has been reflected in the increased international focus on recovery and resolution planning, including in the Key Attributes which provide that authorities should have, at their disposal, a broad range of resolution powers, and to put in place an ongoing process for recovery and resolution planning. Both the BCBS and IAIS have also taken steps to incorporate requirements for recovery and resolution planning into their core principles for supervision.

10.4 APRA's supervision of regulated entities includes working with them to ensure that viable contingency plans are in place for managing a crisis affecting the entity, and to address potential impediments to such plans where necessary. To support amendments in the Bill, APRA will further develop its framework for resolution planning, including where appropriate reflecting this in its prudential framework through standards and guidance, following appropriate consultation.

10.5 In a cross-border context, resolution planning will include working with authorities in other jurisdictions to enable resolution actions to be taken in a coordinated manner where appropriate. This will include consideration of how the application of powers by APRA might be supported by, or itself support, the application of similar powers by other authorities in other jurisdictions. Without this, there is a risk that APRA's resolution powers and other related provisions in the Bill (such as those relating to immunity and confidentiality in Chapter 3 or the stay provisions referred to in Chapter 6) may have reduced effectiveness in a cross-border context or may conflict with the actions or requirements of authorities in other jurisdictions. Such cross-border coordination is consistent with APRA's current approach of working closely with supervisors in other jurisdictions where relevant.

10.6 The amendments in the Bill clarify the legislative framework for resolution planning, in particular to ensure APRA has clear powers to make and enforce prudential standards on resolution.

10.7 Under the Industry Acts, the term 'prudential matters' is important in determining the scope of the prudential standard-making powers of APRA and the matters for which regulations may be made. However, this term is currently defined differently between the Banking and Insurance Acts, and the Life Insurance Act does not contain a definition (meaning it is not completely clear which matters APRA may make prudential standards on). None of the Industry Acts currently contain any specific reference to resolution, which may lead to uncertainty regarding APRA's ability to make prudential standards relating to a resolution. In addition, although depositor and policyholder protection is a fundamental objective for the prudential supervision of ADIs and insurers, the definition of 'prudential matters' in the Industry Acts does not explicitly reflect this.

10.8 The Bill therefore makes amendments to harmonise the definition of 'prudential matters' across the Industry Acts as applicable, including incorporating a specific reference to resolution and explicitly referring to protecting the interests of depositors or policyholders (as applicable) in each Industry Act.

10.9 The Bill also harmonises the Banking Act and the Life Insurance Act with the Insurance Act by clarifying that entities must comply with prudential standards applicable to them.

10.10 As noted above, resolution planning includes identifying and addressing barriers to resolution which may arise during the planning process. While addressing such issues would be expected to be part of the normal supervisory process between APRA and a regulated entity (with due account given to the relative costs / benefits and other consequences of the potential measures that could be taken), it is important that APRA has the power to enforce its prudential standards or otherwise require actions to facilitate resolution, through directions where necessary (see 3.34 to 3.39 for further details).

10.11 A specific example of a potential barrier to resolution in a group context would be where certain critical parts of a group are found to be outside the scope of APRA's resolution powers. While the various powers available to APRA to implement a resolution (as amended by this Bill) apply to a regulated entity, an authorised NOHC and subsidiaries of the regulated entity or authorised NOHC, they do not generally apply to an unauthorised holding company or its subsidiaries (which are not themselves regulated entities or subsidiaries of a regulated entity or authorised NOHC).

10.12 The Bill ensures that APRA is able to address this situation directly by providing it with the power to require a holding company to ensure that a regulated entity has an authorised NOHC where appropriate. In certain circumstances, this may help minimise prudential risks and make it more credible for APRA to use its powers to ensure an orderly resolution of the regulated entity.

Summary of new law

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

·
refine and harmonise the definition of 'prudential matters'(which includes inserting a definition of this term in the Life Insurance Act for the first time);
·
clarify which entities must comply with prudential standards; and
·
enable APRA to require a holding company to ensure a regulated entity has an authorised NOHC, where appropriate.

Comparison of key features of new law and current law

New law Current law
Refinement and harmonisation of prudential standards
The definition of 'prudential matters' is harmonised across the Industry Acts, and includes specific reference to facilitating the resolution of a regulated entity and its group in the definition. 'Prudential matters' is defined differently between the Banking and Insurance Acts, and contains no explicit reference to resolution. The Life Insurance Act does not contain a definition of 'Prudential matters'.
APRA may determine prudential standards in relation to the subsidiaries of ADIs and subsidiaries of authorised NOHCs of ADIs (and particular classes of these subsidiaries). Unlike the Insurance and Life Insurance Acts, the Banking Act does not explicitly empower APRA to determine prudential standards in relation to the subsidiaries of ADIs and subsidiaries of authorised NOHCs of ADIs (and particular classes of these subsidiaries).
The definition of 'prudential matters' in the Industry Acts explicitly refers to protecting the interests of depositors or policyholders. The definition of 'prudential matters' in the Banking and Insurance Acts implicitly includes, but does not explicitly refer to, protecting the interests of depositors or policyholders.
Harmonise provisions creating obligation for entities to comply with prudential standards
Each of the Industry Acts states that regulated entities, authorised NOHCs, and subsidiaries of regulated entities or authorised NOHCs are obliged to comply with prudential standards made in relation to them. Unlike the Insurance Act, the Banking and Life Insurance Acts do not state clearly that regulated entities, authorised NOHCs, and subsidiaries of regulated entities or authorised NOHCS are obliged to comply with prudential standards made in relation to them.
Enabling APRA to require a holding company of a regulated entity to ensure the regulated entity has an authorised NOHC
APRA can require a holding company of a regulated entity to either become an authorised NOHC or to ensure that one of its subsidiaries becomes an authorised NOHC of the regulated entity in accordance with the conditions set by APRA.

(APRA will still be able to require, as a condition of initial authorisation or registration of an ADI or insurer, that it be a subsidiary of an authorised NOHC, and be able to impose a condition on an ADI's or insurer's authority/registration to this effect.)

APRA can authorise or register a holding company as an authorised NOHC upon their application, but APRA cannot require a holding company that is not authorised, to be authorised. APRA can also require, as a condition of initial authorisation or registration of an ADI or insurer, that it be a subsidiary of an authorised NOHC, and can impose a condition on an ADI or insurer's authority/registration to this effect.

Detailed explanation of new law

Refinement and harmonisation of prudential standards

Refined and harmonised definition of 'prudential matters'

10.14 The Bill harmonises the definition of 'prudential matters' in the Banking Act and Insurance Act (as applicable), and adds an equivalent definition to the Life Insurance Act, subject to appropriate industry-specific amendments. [Schedule 1, item 8, subsection 5(1) of the Banking Act; Schedule 2, item 5, subsection 3(1) of the Insurance Act; Schedule 3, item 113, Schedule Dictionary of the Life Insurance Act]

10.15 The Bill also harmonises the Insurance and Life Insurance Acts with the existing position under the Banking Act by referring in the new definitions of 'prudential matters' to a 'group of bodies corporate' (as well as to the regulated entity, its authorised NOHC and subsidiaries). Given that prudential matters may relate to groups as a whole, as well as to the regulated entity, its authorised NOHC and subsidiaries, it is important that the definition of 'prudential matters' refers to 'relevant group(s) of bodies corporate' under all the Industry Acts.

10.16 The Bill further amends the definition of 'prudential matters' to clarify that it refers to not just the 'conduct' of a regulated entity and its group, but to the 'structure or organisation' of a regulated entity and its group. This would include how a regulated entity, its group or members of the group are structured in a legal ownership sense or organised from a business or operational perspective.

10.17 The Bill further amends the definition of 'prudential matters' to clarify that it includes matters that facilitate the resolution of the regulated entity and its group. This amendment clarifies that APRA can make prudential standards that relate to planning for resolution, and addressing barriers to resolution whether during normal times or in a time of emerging stress. For this purpose, the Bill inserts a new definition of 'resolution' into the Industry Acts. This definition refers to the process by which APRA and other relevant persons - which includes, for example the agencies in the CFR, other State/Territory or Commonwealth agencies, and foreign regulators - may manage or respond to an entity: being, or being considered likely to be or to become unable to meet its obligations; or suspending or being considered likely to suspend payment. This includes managing or responding through the exercise of functions and powers under the relevant Industry Act, or a State/Territory or Commonwealth law or the law in a foreign jurisdiction. This would include any actions by APRA and other relevant persons to manage or respond to such a situation in order to achieve an orderly resolution, including in APRA's case the use of any of its powers and its role in administering the FCS. [Schedule 1, item 10, subsection 5(1) of the Banking Act; Schedule 2, item 7, subsection 3(1) of the Insurance Act; Schedule 3, item 117, Schedule Dictionary of the Life Insurance Act]

10.18 The references to being considered likely to be or to become unable to meet obligations or being considered likely to suspend payment in the definition of resolution are intended to refer broadly to situations in which the on-going viability of an entity is in jeopardy, which may be prior to the point at which the entity is insolvent as normally defined. This reflects that to achieve an orderly resolution of a distressed entity, it may be necessary for APRA and other relevant persons to intervene as early as possible, and before insolvency. [Schedule 1, item 10, subsection 5(1) of the Banking Act; Schedule 2, item 7, subsection 3(1) of the Insurance Act; Schedule 3, item 117, Schedule Dictionary of the Life Insurance Act]

Harmonise provisions creating obligation for entities to comply with prudential standards

10.19 The Bill amends the Banking Act to enable APRA to determine prudential standards in relation to prudential matters to be complied with by the subsidiaries of ADIs, and subsidiaries of authorised NOHCs (and particular classes of ADIs, authorised NOHCs, or subsidiaries of ADIs or authorised NOHCs). [Schedule 1, items 23, 24, 27, 28 and 30, sections 11AF and 11A of the Banking Act]

10.20 The Bill also amends the Insurance Act and Life Insurance Act to clarify explicitly that APRA can require a subsidiary of an insurer or of an authorised NOHC (and particular classes of the subsidiaries) (Subsidiary A) to ensure that its subsidiaries, or Subsidiary A and its subsidiaries, satisfy the particular requirements in relation to prudential matters. Corresponding amendments are also made to the Banking Act. These amendments harmonise the Industry Acts. [Schedule 1, items 25 and 26, subsection 11AF(1AA) of the Banking Act; Schedule 2, items 15 and 16, subsection 32(3) of the Insurance Act; Schedule 3, item 62, subsection, 230A(3A) of the Life Insurance Act]

10.21 The Bill inserts provisions corresponding to section 35 of the Insurance Act (obligation to comply with prudential standards) in the Banking Act and Life Insurance Act. This clarifies that an ADI, life company, authorised NOHC, or subsidiaries of the ADI or life company or authorised NOHC must comply with the prudential standards applying to them. This amendment harmonises the Industry Acts and is for clarification purposes. It is not intended to substantively change the impact or consequences of an entity failing to comply with a prudential standard that is applicable to it. [Schedule 1, item 29, section 11AG of the Banking Act; Schedule 3, item 63, section 230AAA of the Life Insurance Act.]

10.22 Failure to comply with a prudential standard may result in certain consequences under the respective Industry Acts, including the following (existing) consequences:

·
Banking Act: APRA giving a direction under section 11CA, or the Federal Court granting an injunction under section 65A. In the case of an ADI, such a failure may result in APRA revoking its section 9 authority under subsection 9A(2). In the case of an authorised NOHC, such a failure may result in APRA revoking its NOHC authority under subsection 11AB(2).
·
Insurance Act: APRA giving a direction under section 104, or the Federal Court making an order for judicial management under Part VB or granting an injunction under section 129D. In the case of a general insurer, such a failure may result in APRA revoking the section 12 authorisation under subsection 15(1). In the case of an authorised NOHC, such a failure may result in APRA revoking its NOHC authorisation under subsection 21(1).
·
Life Insurance Act: APRA giving a direction under section 230B, or the Federal Court making an order for judicial management under Part 8 or granting an injunction under section 235. In the case of a life company, such a failure may result in APRA revoking its registration under section 26. In the case of an registered NOHC, such a failure may result in APRA revoking its NOHC registration under subsection 28C(1).

Enabling APRA to require a holding company of a regulated entity to ensure the regulated entity has an authorised NOHC

10.23 The Bill amends the Industry Acts to enable APRA to give a notice to a body corporate that is a holding company of a regulated entity, to require it to ensure, in accordance with the conditions (if any) specified by APRA in the notice, either of the following occurs:

·
the body corporate becomes an authorised NOHC of the regulated entity, or
·
one of its subsidiaries becomes an authorised NOHC of the regulated entity.

10.24 The notice may deal with the time by which, or period during which, it is to be complied with. APRA may vary the notice if APRA considers that necessary or appropriate, or revoke the notice if APRA considers that the notice is no longer necessary or appropriate. [Schedule 1, item 21, section 11AE of the Banking Act; Schedule 2, item 14, section 23A of the Insurance Act; Schedule 3, item 17, section 28AA of the Life Insurance Act]

10.25 The decision by APRA to give such a notice is reviewable internally and upon application to the Administrative Appeals Tribunal if the person disagrees with the internal review outcome. [Schedule 1, item 21, subsection 11AE(7); Schedule 2, item 14, subsection 23A(7) of the Insurance Act; Schedule 3, item 105, paragraph 236(1)(gf) of the Life Insurance Act]

10.26 The amendments in the Industry Acts provide that, in accordance with any conditions set out by APRA, the body corporate has power to comply with APRA's notice despite anything in its constitution or any contract or arrangement to which it is a party. The existing Part 4A of the Transfer Act already provides for a mechanism that may be used to comply with such a notice given by APRA. [Schedule 1, item 21, subsection 11AE(4) of the Banking Act; Schedule 2, item 14, subsection 23A(4) of the Insurance Act; Schedule 3, item 17, subsection 28AA(4) of the Life Insurance Act]

10.27 Part 4A of the Transfer Act was enacted in 2007 to address certain identified impediments to the adoption of a NOHC structure by financial groups. The enactment of Part 4A removes these impediments arising under particular requirements of the Corporations Act. When Part 4A was enacted in 2007, related amendments were also made to the Income Tax Assessment Act 1997.

10.28 Failing to comply with APRA's notice would attract the application of the existing sections 11CG of the Banking Act, 108 of the Insurance Act and 230F of the Life Insurance Act, which set out the consequences of non-compliance with a direction (an offence with a maximum penalty of 50 penalty units). However, these non-compliance sections do not apply if the contravention of a requirement in an APRA notice happens merely because APRA refuses to grant the body corporate (or its subsidiary) an authority to become an authorised NOHC, and APRA's reasons for that refusal do not include the reason that one or more conditions specified in the notice are not satisfied. [Schedule 1, item 21, subsections 11AE(8) and 11AE (9) of the Banking Act; Schedule 2, item 14, subsections 23A(8) and 23A (9) of the Insurance Act; Schedule 3, item 17, subsections 28AA(7) and 28AA(8) of the Life Insurance Act]

10.29 The severance clauses in the Industry Acts are amended for the purposes of the NOHC notice provisions. These provisions are intended to create a constitutional safety net for the avoidance of doubt by providing that each Act has effect as if references to a holding company of an ADI or insurer (as the case may be) has effect as if it were limited to a holding company that is a corporation to which paragraph 51(xx) of the Constitution applies or a holding company that carries on banking business. [Schedule 1, item 250, subsection 69F(4A) of the Banking Act; Schedule 2, item 136, subsection 127(5) of the Insurance Act; Schedule 3, item 1, subsection 4(4) of the Life Insurance Act]

Consequential amendments

10.30 The Bill amends the Banking Act to enable APRA to determine prudential standards in relation to prudential matters to be complied with by the subsidiaries of ADIs, and subsidiaries of authorised NOHCs (and particular classes of ADIs, authorised NOHCs, or subsidiaries of ADIs or authorised NOHCs). As a result, the Bill amends the Banking Act to explicitly state that prudential standards may impose different requirements to be complied with by different classes of ADIs, authorised NOHCs or subsidiaries of ADIs or authorised NOHCs, in different situations or in respect of different activities. This harmonises the Banking Act with the Insurance Act and Life Insurance Act. [Schedule 1, items 23 and 24, subsections 11AF(1)and 11AF(1A) of the Banking Act]

10.31 The Bill amends the Banking Act to enable APRA to determine prudential standards to be complied with by, and to issue directions to, the subsidiaries of ADIs and subsidiaries of authorised NOHCs. As a result the Bill makes consequential amendments to the provisions of the Banking Act relating to Auditors of ADIs and authorised NOHCs and their subsidiaries to incorporate appropriate reference to subsidiaries to whom prudential standards may apply and to subsidiaries to which a direction is given. [Schedule 1, items 228 and 229, sections 16AV and 16BA of the Banking Act]

10.32 To be consistent with the existing section 35 of the Insurance Act, the Bill amends the Life Insurance Act by adding an obligation to comply with prudential standards. The existing section 7A of the Life Insurance Act sets out that APRA may determine that certain provisions of the Life Insurance Act do not apply to a person while the determination is in force. To be consistent with the existing section 7 of the Insurance Act, the new section 230AAA is added to the list of provisions that APRA may determine to not apply to a person while the determination is in force. [Schedule 3, item 3, paragraph 7A(1)(j) of the Life Insurance Act]

Application and transitional provisions

10.33 For the avoidance of doubt, the amendments made by Schedule 1 of the Bill will not affect the validity of a prudential standard made under section 11AF of the Banking Act in force immediately before the Bill receives Royal Assent . [Schedule 1, items 253 and item 255 Continuation of prudential standards]

10.34 For the avoidance of doubt, the amendments made by Schedule 2 of the Bill will not affect the validity of a prudential standard made under section 32 of the Insurance Act in force immediately before the Bill receives Royal Assent. [Schedule 2, items 139 and item 141 Continuation of prudential standards]

10.35 For the avoidance of doubt, the amendments made by Schedule 3 of the Bill will not affect the validity of a prudential standard made under section 230A of the Life Insurance Act in force immediately before the Bill receives Royal Assent. [Schedule 3, items 118 and 120 Continuation of prudential standards]


View full documentView full documentBack to top