House of Representatives

Explanatory Memorandum

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

Chapter 12 - Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

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

12.1 This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

12.2 The Bill amends the Banking Act 1959 (Banking Act), Insurance Act 1973 (Insurance Act), Life Insurance Act 1995 (Life Insurance Act), Australian Prudential Regulation Authority Act 1998 (APRA Act), Payment Systems and Netting Act 1998 (PSN Act), Financial Sector (Business Transfer and Group Restructure) Act 1999 (Transfer Act), Corporations Act 2001 (Corporations Act) and Income Tax Assessment Act 1997.

12.3 For the purposes of this Bill, the Banking Act, Insurance Act and Life Insurance Act are collectively referred to as the Industry Acts.

12.4 The Schedules to this Bill make amendments in relation to crisis resolution to:

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enhance APRA's statutory and judicial management regimes to ensure their effective operation in a crisis;

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enhance the scope and efficacy of APRA's existing directions powers;

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improve APRA's ability to implement a transfer under the Transfer Act;

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ensure the effective conversion and write-off of capital instruments to which the conversion and write-off provisions in APRA's prudential standards apply;

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enhance stay provisions and ensure that the exercise of APRA's powers does not trigger certain rights in the contracts of relevant entities within the same group;

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enhance APRA's ability to respond when an Australian branch of a foreign regulated entity (foreign branch) may be in distress;

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enhance the efficiency and operation of the Financial Claims Scheme and ensure that it supports the crisis resolution framework; and

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enhance and simplify APRA's powers in relation to the wind-up or external administration of regulated entities under the Industry Acts, and other related matters.

12.5 Schedules 1 to 3 to this Bill also make amendments to the Industry Acts to ensure that APRA has clear powers to make appropriate prudential standards on resolution planning and ensure that regulated entities and their groups put in place measures to improve their preparedness for resolution.

Human rights implications

12.6 The Bill engages the following human rights:

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the imposition of strict liability in relation to some criminal offences;

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the right against self-incrimination under article 14(3)(g) of the International Covenant on Civil and Political Rights (ICCPR);

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the right to protection from arbitrary or unlawful interference with privacy under article 17 of the ICCPR; and

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the right to freedom of expression and to seek information under article 19(2) of the ICCPR.

Strict liability offences

12.7 The Bill imposes strict liability for offences relating to:

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a failure to comply with a direction by APRA to assign a life insurance business' liabilities to another entity (see paragraphs 9.63 to 9.69 and 12.9 to 12.12);

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a failure to notify APRA where a receiver is appointed under a contractual power or a voluntary administrator is appointed under a statutory power (see paragraphs 9.34 to 9.45 and12.13 to 12.18); and

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breaches of a condition of authorisation or registration under the Banking and Life Insurance Acts (see paragraphs 9.49 to 9.57 (conditions on regulated entity authorisations), 9.75 to 9.80 (NOHC conditions), 9.86 to 9.91 (NOHC conditions) and 12.19 to 12.24).

12.8 The Bill also extends the application of existing strict liability offences relating to directions given under the Insurance Act and the Life Insurance Act to cover where the direction is given to a subsidiary of an insurer or subsidiary of an authorised NOHC of an insurer (see paragraphs 3.19 to 3.26 for a general discussion of these amendments and 12.25 to 12.28 for consideration of the strict liability offence).

Failures to comply with a direction by APRA

12.9 The Bill amends the Life Insurance Act to allow APRA to direct a life company to arrange an assignment of its liabilities to one or more other life companies registered under the Act (to facilitate APRA's ability to revoke a life company's registration).

12.10 There is a strict liability offence that applies to failures to comply with a direction that is given by APRA. By providing for a strict liability offence, the Bill provides that it will not be necessary for the prosecution to prove fault as part of the offence. This approach is appropriate in this instance as an entity's failure to, or delay in complying with a direction, would undermine the integrity of the regulatory regime and adversely affect policy holders and financial system stability.

12.11 It is appropriate to have strict liability for this offence because there would otherwise be potential for significant delays in APRA's ability to revoke an entity's registration to carry on a life insurance business in Australia which could adversely affect policy holders and financial system stability. The circumstances that would justify the revocation of a registration are so sufficiently serious that a significant criminal deterrent is justified to prevent any delay in compliance with a direction from APRA, and ought not to depend on whether the life company intended for the delay to occur or not.

12.12 The penalty for the offence complies with the requirements of the Government's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers as:

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the offence is not punishable by imprisonment;

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the maximum penalty is at the maximum allowable for strict liability offences (60 penalty units for individuals and 300 penalty units for companies); and

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the harm to policy holders and financial stability is so significant that fault should not be an element of the offence; and

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an entity subject to a direction should be on notice to guard against the possibility of any contraventions of the direction.

Failures to notify APRA where certain receivers are appointed

12.13 The Bill amends the Industry Acts to require relevant entities to notify APRA when a receiver is appointed under a contractual power or a voluntary administrator is appointed under a statutory power. The provisions extend the existing requirement for entities to notify APRA of proposed applications for the appointment of an external administrator.

12.14 The existing strict liability offences that apply under the Industry Acts to failures to notify APRA about proposed applications for the appointment of an external administrator are extended to also apply in relation to the new provisions requiring disclosure of the appointment of a receiver under a contractual power or a voluntary administrator under a statutory power. A failure to provide the required notification to APRA is publishable by 60 penalty units.

12.15 By providing for a strict liability offence, the Bill provides that it will not be necessary for the prosecution to prove fault as part of the offence. This is appropriate in this instance as a failure to provide notification would undermine the integrity of the regulatory regime.

12.16 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. As such, the imposition of the penalty for contraventions of this notification requirement should not depend on whether the relevant entity intended to appoint the receiver or administrator without notifying APRA.

12.17 Furthermore, requiring fault as a particular element of these offences would undermine deterrence and increase the likelihood of breaches that could impact on policy holders and depositors and financial stability more generally.

12.18 The penalty for the offence complies with the requirements of the Government's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers as:

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the offence is not punishable by imprisonment;

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the maximum penalty of 60 penalty units is at the maximum allowable for strict liability offences (60 penalty units for individuals and 300 penalty units for companies); and

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the harm to depositors, policy holders and financial stability is so significant that fault should not be an element of the offence; and

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an entity should be on notice to guard against the possibility of appointing a receiver or administrator without notifying APRA.

Breaches of a condition of authorisation or registration

12.19 The Bill amends the Banking and Life Insurance Acts to provide a comprehensive model to allow APRA to impose, vary and revoke a relevant entity's conditions of authorisation or registration. The changes to these provisions replicate the existing effective approach provided for in the Insurance Act with appropriate modifications and they extend to both regulated entities (ADIs and insurers) and authorised NOHCs.

12.20 The amendments to the Banking and Life Insurance Acts provide that a contravention of a condition of authorisation or registration is a strict liability offence with a maximum penalty of 300 penalty units for a company and 60 penalty units for an individual. These offence provisions replicate the existing offence provisions that apply as part of the Insurance Act.

12.21 By making a contravention of a condition of authorisation or registration a strict liability offence, the amendments to the Banking and Life Insurance Acts provide that it will not be necessary for the prosecution to prove fault as part of the offence.

12.22 The imposition of strict liability for these offences is appropriate because the circumstances that would justify APRA's imposition of the conditions would be of significant importance to the protection of an entity's policy holders and depositors and to financial stability in Australia. Contraventions of the conditions therefore reflect such a significant prudential concern about the risks arising from that regulated entity's operations that the imposition of the criminal penalty should not depend on whether the entity intended to breach the conditions or not.

12.23 Furthermore, requiring fault as a particular element of these offences would undermine deterrence and increase the likelihood of breaches that could impact on policy holders and depositors and financial stability more generally.

12.24 The penalty for the offence complies with the requirements of the Government's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers as:

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the offence is not punishable by imprisonment;

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the maximum penalty is at the maximum allowable for strict liability offences (60 penalty units for individuals and 300 penalty units for companies);

•

the harm to depositors, policy holders and financial stability is so significant that fault should not be an element of the offence; and

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an entity subject to a condition should be on notice to guard against the possibility of any contraventions of the condition.

Failures to comply with a direction

12.25 The Bill amends the Industry Acts to extend the power to give directions to cover directions to subsidiaries of authorised NOHCs and regulated entities (see 3.19 to 3.26).

12.26 The existing offence provisions in subsections 108(1) and 108(2) of the Insurance Act and 230F(1) and 230F(2) of the Life Insurance Act currently apply where a general insurer or life insurer (as the case may be) or authorised NOHC fails to comply with a direction, and are strict liability offences with a penalty of 50 penalty units for an individual and 250 penalty units for a corporation. The Bill will amend the direction powers in sections 104 of the Insurance Act and 230B of the Life Insurance Act so that they give APRA power to give a direction to a subsidiary of a regulated entity or NOHC. As a result, the offence provisions are amended so that a subsidiary will commit an offence if it fails to comply with the direction.

12.27 Separate strict liability offence provisions in subsection 108(4) of the Insurance Act and subsection 230F(4) of the Life Insurance Act will also be extended to where a direction is given to a subsidiary of an insurer or authorised NOHC under the amended directions provisions. The existing offences in those subsections apply where a direction is given to an insurer or authorised NOHC and an officer of the entity fails to take reasonable steps to ensure compliance. For the offence to be committed the officer's duties must include ensuring that the company or NOHC complies with the direction, or with a class of directions that includes the direction. This will now extend to officers of relevant subsidiaries that receive a direction under the amendments in the Bill. The penalty for an individual for failure to comply is 50 penalty units.

12.28 The imposition of strict liability for contraventions of directions given by APRA to other entities within a regulated entity's corporate group is necessary because and appropriate because when dealing with complex groups, it is often not sufficient to apply powers to the regulated entity alone. Critical services (such as information technology, financial positions or essential staff) may be located in other group entities and contagion effects can occur within groups. APRA needs to be able to move swiftly to safeguard the critical operation of entities where the need arises. Strong compliance with the directions is necessary to ensure that APRA can effectively resolve entities that enter distress in an orderly fashion.

12.29 Contraventions of these APRA directions could have such significant consequences for financial stability in Australia that the imposition of the criminal penalty should not depend on whether an entity intended to breach the conditions or not.

12.30 Furthermore, requiring fault as a particular element of these offences would undermine deterrence and increase the likelihood of breaches.

12.31 The penalties for these offences comply with the requirements of the Government's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers as:

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the offences are not punishable by imprisonment;

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the maximum penalty in each case is below the maximum allowable for strict liability offences (60 penalty units for individuals and 300 penalty units for companies);

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directions are an essential tool for ensuring the prudential safety of insurers and the harm to policy holders and financial stability is so significant that fault should not be an element of the offence.

Right against self-incrimination under article 14(3)(g) of the ICCPR

12.32 The Bill provides for additional information gathering powers that allow APRA and other statutory managers of an insurer to obtain information from the current and past officers of an insurer and a life company that is under statutory management (see paragraphs 2.159 to 2.161).

12.33 These new information gathering powers replicate the existing powers in the Banking Act that apply in relation to authorised deposit taking institutions and extend them to apply to relevant insurance and life insurance entities.

12.34 The information gathering powers allow APRA and other statutory managers to require current and past officers of insurance and life insurance entities to provide information and documents relating to a relevant entity's affairs if the entity is under statutory management. A failure to provide the requested information or documents is an offence that is punishable with:

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imprisonment of up to 12 months in cases where the information or documents are required by a statutory manager; or

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imprisonment of up to 12 months or 50 penalty units or both where the information or documents are required by APRA.

12.35 The new information gathering provisions engage the right against self-incrimination under article 14(3)(g) of the ICCPR because they provide that an officer (past or current) cannot refuse to provide information or documents on the basis that doing so would incriminate the officer or make the officer liable to a penalty.

12.36 Engaging the right against self-incrimination in this way is necessary and justified as only the key personnel of a relevant entity will have access to information and documents relating to that entity's financial condition. It is essential for APRA or a statutory manager to be able to obtain this information quickly to assist with the management and crisis resolution of an insurance or life insurance entity that is financially distressed.

12.37 By compelling relevant officers to provide the required information and documents, APRA and other statutory managers will be able to maximise their ability to rehabilitate a distressed insurance or life insurance entity. This will benefit the entity's customers, creditors and other suppliers. In the event of a significant crisis, APRA would also be able to use the information gathering powers to support decision making and prevent contagion in the financial system.

12.38 The Bill balances APRA's need to access information with a person's right against self-incrimination by ensuring that incriminating information or documents provided (and identified as such) cannot be used against a person in criminal proceedings or in proceedings where the person may be liable to a penalty. The protection does not apply in relation to proceedings relating to the falsity of the information or documents provided.

12.39 The amendments therefore effectively ensure that APRA and other statutory managers can access information and documents from relevant officers of insurance and life insurance entities but preserves the officers' rights against self-incrimination by ensuring that the information and documents cannot be used as evidence in criminal proceedings or proceedings where a penalty may be imposed.

12.40 To the extent that criminal and other proceedings can be brought because the information or documents provided are false, this is justified as it is necessary to ensure the accuracy of the material provided to APRA and other statutory managers. Furthermore, any proceedings that are brought would relate to the provision of false information or documents as opposed to proceedings concerning matters the information or documents relate to.

12.41 The new information gathering powers in the Bill are therefore consistent with the right against self-incrimination under article 14(3)(g) of the ICCPR.

Right to the protection against arbitrary or unlawful interference with privacy under article 17 of the ICCPR

12.42 The Bill engages the right to the protection against arbitrary or unlawful interference with privacy under article 17 of the ICCPR as a result of:

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the new information gathering powers outlined above in paragraphs 12.29 to 12.38 of this Statement of Compatibility with Human Rights; and

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the extension of section 42 of the Transfer Act to allow APRA to provide information to a body that receives the shares of another body as part of a compulsory transfer of business.

Information gathering powers

12.43 The information gathering provisions allow for APRA and other statutory managers to obtain information about a relevant entity. While this information must relate to the business of a relevant entity (for example, a distressed insurance entity), it is possible that the information required may include personal information.

12.44 The provision of this information is justified and necessary as it allows APRA and other statutory managers to maximise their ability to rehabilitate a distressed entity. This will benefit the relevant entity's customers, employees, creditors and other suppliers. In the event of a significant crisis, APRA would also be able to use the information obtained to support decision making and prevent contagion in the financial system.

12.45 Where personal information (for example documents relating to an entity's personnel) is provided it would be as part of efforts to rehabilitate a distressed entity. This would be to the benefit of the specific individuals whose personal information is transferred and the general public. The individuals whose information is shared would benefit as the distressed entity would have better prospects for recovery meaning a higher likelihood that jobs would be maintained. There would also be a broader benefit to the general public as a distressed entity would have better prospects of success, reducing possible losses amongst customers, suppliers and other creditors.

Sharing information to support the compulsory transfers of shares

12.46 The amendment to section 42 of the Transfer Act allows APRA to provide information (including personal or confidential commercial information) to the receiving body in connection with the transfer of shares (in addition to the existing power to share information where there is a transfer of business).

12.47 The provision is necessary because under the compulsory transfer provisions a receiving body's board must consent to the transfer. In order to facilitate this it will be necessary and appropriate for APRA to provide information to the receiving body about the business, including confidential information and information relating to staff and executives of the body being transferred. It will also be necessary for APRA to share such information in the process of settling the detail of the transfer, including the schedule of assets and liabilities, and in documentation relating to transferred staff.

Information sharing is consistent with the ICCPR

12.48 The sharing of information under the provisions in the Bill would be subject to express legislative provisions and would therefore be lawful. The information transferred would also still be subject to appropriate protections. The Privacy Act 1998 would apply to the information as appropriate. Where information is provided to APRA, the existing strong APRA confidentially provisions would apply and where information is provided to other statutory managers, the statutory manager would be responsible for the relevant entity and as such their access to the information would be no different to the previous manager's access to the information.

12.49 The provisions in the Bill relating to the sharing of information are therefore consistent with the right to the protection against arbitrary or unlawful interference with privacy under article 17 of the ICCPR as they explicitly provide for the lawful sharing of relevant information in appropriate circumstances.

Right to freedom of expression and to seek information under article 19(2) of the ICCPR

12.50 The Bill engages the right to freedom of expression and to seek information under article 19(2) of the ICCPR as a result of new secrecy provisions to be included in the Industry Acts (see 3.78 to 3.106).

12.51 These provisions allow for APRA to indicate in writing that directions it has provided to a relevant banking, insurance or life insurance entity cannot be publically disclosed. APRA can make such secrecy determinations if it believes that disclosure of a direction it has made would have an adverse effect on a relevant entity's deposit or policy holders or if APRA believes that it is necessary to promote financial stability in Australia. A breach of these secrecy provisions could result in imprisonment of two years.

12.52 These secrecy provisions engage article 19(2) of the ICCPR because they prevent individuals from disclosing details about directions given by APRA and also restrict the public's access to information relating to the directions.

12.53 The secrecy powers are intended to resolve crisis situations where APRA will require time to obtain information and take urgent action to prevent significant losses to customers of a distressed entity and ensure that there is no contagion within the financial system. The secrecy powers are necessary and appropriate because they enable APRA to take appropriate steps in a time of crisis to prevent significant public detriment.

12.54 While the secrecy provisions in the Bill do restrict the right to freedom of expression and to seek information under article 19(2) of the ICCPR, this is permitted under article 19(3) as the provisions allow APRA to protect an entity's customers and the public more generally by preventing contagion in the financial system during crisis situations.

12.55 The secrecy provisions have been balanced with exemptions which allow for the disclosure of information in appropriate circumstances. Disclosure is allowed where information subject to a direction is already public or authorised by APRA. There is also an exemption that allows a person affected by a secrecy provision to disclose the information to a legal representative for the purpose of obtaining legal advice. A regulation making power also ensures the Government can create additional exemptions quickly to balance the rights of individuals who may be affected by the secrecy provisions.

12.56 The exemptions to allow disclosure ensure that the secrecy provisions are proportionate by not preventing disclosure where it would be unfair to do so (for example, when seeking legal advice).

12.57 As such, the secrecy provisions in the Bill are consistent with the right to freedom of expression and to seek information under article 19(3) of the ICCPR.

Conclusion

12.58 The Bill is compatible with human rights as:

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the strict liability offences are appropriate and consistent with the requirements of the Government's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers;

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the information gathering powers are consistent with the right against self-incrimination under article 14(3)(g) of the ICCPR; and

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the information gathering powers are consistent with the right to privacy under article 17 of the ICCPR.

12.59 To the extent that the secrecy provisions in the Bill restrict the right to freedom of expression and to seek information, this is appropriate, justified and consistent with the article 19 of the ICCPR.