Explanatory Memorandum(Circulated by authority of the Minister for Financial Services and Regulation, the Honourable J.B. Hockey, MP)
1.1 This Bill forms a part of the second stage of legislation to implement the Government's response to the recommendations of the Financial System Inquiry as announced by the Treasurer, the Hon. Peter Costello, M.P., in the House of Representatives on 2 September 1997.
1.2 The Final Report of the Inquiry and the Government's response to it are directed to the fundamental goals of the Government, to increase competition and improve efficiency, while preserving the integrity, security and fairness of the financial system.
1.3 The performance of the financial system, and the cost effectiveness of its regulation, are critical to the efficient functioning of the Australian economy.
1.4 The first stage of the reforms introduced a new organisational framework for the regulation of the financial system from 1 July 1998, and a variety of measures to improve efficiency and contestability in financial markets and the payments system.
1.5 This second stage of reforms aims to:
- transfer regulatory responsibility for building societies, credit unions and friendly societies from the States and Territories to the Commonwealth; and
- bring the regulation of building societies and credit unions into line with the regulation of other authorised deposit-taking institutions (including banks) and establish a single regulatory framework for life insurance companies and friendly societies while recognising the special features of friendly societies.
1.6 The second stage is designed to:
- provide a new regulatory system that is less cumbersome and duplicative than the State and Territory financial institutions system;
- enable the non-bank deposit-taking sector to provide a more effective source of competition for the banks in the retail market by operating under the same regulatory structure as banks; and
- maintain commercial flexibility by retaining different corporate structures, including mutuality, and the terms 'building society', 'credit union' and 'friendly society'.
1.7 To effect the transfer, the Commonwealth is introducing a package of three bills, including this Bill. The other two bills are the Financial Sector (Transfers of Business) Bill 1999 and the Income Tax Rates Amendment (RSAs Provided by Registered Organizations) Bill 1999.
- In addition, the Commonwealth will sign with the States and Territories a Financial Sector Regulation Transfer Agreement. In turn, the States and Territories will introduce legislation to facilitate the transfer.
1.8 The broad objectives of the Financial Sector Reform (Amendments and Transitional Provisions) Bill (No. 1) 1999 are to:
- amend the Corporations Law, and the Corporations Agreement, to provide for the registration of building societies, credit unions and friendly societies as companies and the regulation of those entities under the Corporations Law by the Australian Securities and Investments Commission;
- amend the Life Insurance Act 1995 to provide for a single prudential regime for companies undertaking life insurance business and to permit friendly societies to be regulated under such a regime;
- amend the Banking Act 1959 to provide for coverage across all authorised deposit-taking institutions (including building societies and credit unions) of the unclaimed moneys and bank holiday provisions;
- allow for transitional and consequential provisions to ensure that the new regulatory regime operates effectively from the transfer day and to provide for appropriate continuity of subordinate instruments made under the State / Territory regime; and
- set up a facility for the Australian Prudential Regulation Authority to provide, under State and Territory laws and on a cost recovery basis, prudential regulation and advisory services for cooperative housing societies and trustee companies.
1.9 It is not envisaged that the Bill will have a financial impact on the operations of Government. The Bill extends the coverage of the financial sector levy arrangements to institutions transferring from State supervision. Levy receipts are fully appropriated for expenditure on regulatory purposes.
1.10 Under the financial sector levy arrangements, institutional categories pay a levy broadly in line with the cost of supervising that category. This includes the cost of APRA's prudential supervision and one-off establishment costs, and the cost of consumer regulation undertaken by ASIC.
1.11 The Bill also establishes a mechanism for APRA to contract its prudential services on a fee for services basis.
1.12 The Office of Regulation Review has advised that a Regulation Impact Statement is not required for this Bill as it is of a minor or government machinery nature and does not substantially alter existing arrangements.
The following abbreviations are used in this explanatory memorandum.
|ADI||- Authorised Deposit-taking Institution|
|AFIC||- Australian Financial Institutions Commission|
|APRA||- Australian Prudential Regulation Authority|
|APRA Act||- Australian Prudential Regulation Authority Act 1998|
|ASIC||- Australian Securities and Investments Commission|
|ASIC Act||- Australian Securities and Investments Commission Act 1989|
|Banking Act||- Banking Act 1959|
|CCWPSBL||- Cairns Cooperative Weekly Penny Savings Bank Limited|
|FI Code||- Financial Institutions Code of a State or Territory|
|FS Code||- Friendly Societies Code of a State or Territory|
|Life Insurance Act||- Life Insurance Act 1995|
|LIASB||- Life Insurance Actuarial Standards Board|
|National Health Act||- National Health Act 1953|
|NOHC||- Non-Operating Holding Company|
|RBA||- Reserve Bank of Australia|
|Reserve Bank Act||- Reserve Bank Act 1959|
|RSA||- Retirement Savings Account|
|SSA||- State Supervisory Authority|
|Tax Act||- Income Tax Assessment Act 1936|
3 Formal Clauses
Clause 1 - Short title
3.1 The Short Title of the Bill is defined here.
Clause 2 - Definitions
3.2 This clause specifies the meaning of the terms 'Corporations Law' and 'transfer date'. The transfer date for the purposes of this Act is a date proclaimed by the Governor-General.
Clause 3 - Commencement
3.3 This clause provides for commencement of the various proposed amendments. More details are provided in the notes on items relating to respective Schedules.
Clause 4 - Schedule(s)
|Schedule 1||- Amendment of the Australian Prudential Regulation Authority Act 1998|
|Schedule 2||- Amendment of the Banking Act 1959|
|Schedule 3||- Amendment of the Corporations Law|
|Schedule 4||- Amendment of the Life Insurance Act 1995|
|Schedule 5||- Amendment of the Reserve Bank Act 1959|
|Schedule 6||- Miscellaneous amendments|
|Schedule 7||- Consequential amendment of Acts|
|Schedule 8||- Transitional, saving and application provisions|
4 Explanation of items
The main purpose of Schedule 1 to the Bill is to expand and clarify APRA's functions undertaken as a result of an agreement with a State or Territory - subject to the Minister's or a delegate's approval.
The need to provide for an expansion of APRA's functions arose from discussions between Commonwealth, States and Territories about the supervisory arrangements for trustee companies and housing cooperatives. The Commonwealth, States and Territories have agreed that States and Territories will remain responsible for the regulation of trustee companies and cooperative housing societies (and any associated government guarantees), and they will be able to enter into an agreement for APRA to provide prudential regulation or advice services for these entities. Subject to the agreement of the Minister, APRA will provide these services on a fee for service basis, with the risk borne by the Commonwealth (and APRA) restricted to fulfilling the terms of the contract.
4.1 Schedule 1 will commence on the day the Bill receives Royal Assent, with the exception of Item 4 which will commence on the transfer date.
4.2 This item provides a definition of the phrase "prudential regulation or advice services" that APRA will be able to provide under its expanded functions.
4.3 Proposed subsection 9(b) clarifies the ways in which APRA can have powers or functions conferred on it from a State or Territory. Proposed subsection 9A(1) ensures that any functions acquired in this way are in accordance with either an agreement between the Commonwealth and the State or Territory, that has been approved by the Minister, or the Minister has separately agreed to the conferral.
4.4 Proposed subsection 9(c) expands APRA's functions by allowing it to enter into an agreement (subject to proposed subsection 9A(2)) to provide prudential regulation or advice services.
4.5 Proposed subsection 9A(2) sets out the conditions under which APRA can enter into an agreement with a State, Territory or other person to provide prudential regulation or advice services: namely the approval of the Minister, the charging of a fee and that the service provided is within the Commonwealth's legislative power. Proposed subsection 9A(3) indicates that the agreement may also set out the liability of each party in respect of the agreement.
4.6 Proposed subsection 9A(4) permits the Minister to delegate the approval of agreements under proposed subsection 9A(2) to a Senior Executive Service Office in the Department.
4.7 This item will exclude provision of prudential regulation or advice services under agreements from the possibility of being the subject to additional fixed charges that APRA may impose in respect of its services, facilities, etc under subsection 51(1).
4.8 This item ensures the proposed Financial Sector (Transfers of Business) Act 1999 is included in the list of the Acts in the secrecy provisions.
Items 5 and 6
4.9 These items improve the readability of the APRA Act.
4.10 This item will ensure the consistency between section 57 and proposed section 58 in regard to the list of persons who may not disclose documents or information (except in particular circumstances) and the list of persons who may be provided immunity.
4.11 This item corrects an omission to ensure that it is not an offence to provide another person access to documents, as well as information, provided it is done by the direction or authority of APRA, under compulsion or obligation of law, or another person's direction if the information relates to the other person.
4.12 This item ensures that APRA's protection from liability relates more closely to its functions (proposed section 9). This item will also indemnify APRA, a Board member, an APRA staff member, an agent of APRA, a Board member or an APRA staff member; cover anything done, or omitted to be done, in the exercise or performance, or the purported exercise or performance, of powers, functions or duties conferred or imposed on APRA; and ensure that protection from liability does not apply to an act or omission in bad faith.
5 Schedule 2 - Amendment of the Banking Act 1959
The purpose of Schedule 2 to the Bill is to amend the Banking Act in order to apply the Criminal Code, ensure the independence of the RBA, extend the bank holidays and unclaimed moneys provisions to all ADIs, expand the scope of the standards and directions powers and cover other miscellaneous matters.
5.1 Schedule 2 will commence on the day the Bill receives Royal Assent except for item 53, which will commence on the transfer date.
5.2 This item repeals the definition of a bank as it becomes superfluous with the proposed amendments in this Bill to the bank holiday and unclaimed moneys provisions of the Banking Act which extend them to all ADIs, including building societies and credit unions.
Items 2, 3, 19, 21 - 23
5.3 These items will facilitate the implementation of voluntary industry support arrangements by enabling them to provide for financial support and associated matters rather than just being limited to liquidity support. The reference to 'liquidity' in current legislation is frustrating the development of industry support measures because of definitional uncertainties surrounding this term. Since APRA will only certify those contracts that it considers appropriate to certify, there is no need to restrict the content of these contracts more narrowly than to the provision of financial support and associated matters such as, but not limited to, technical advice.
Items 4, 6 - 9, 24, 26 - 30, 32 - 46, 48 - 52, 56 - 59, 76 and 77
5.4 Item 4 applies the Criminal Code to all offences against the Banking Act. The Criminal Code sets out the general principles of criminal responsibility that will be applied to all offences in Commonwealth legislation. The Criminal Code is due to come into force in March 2000.
5.5 The Criminal Code will not change any of the existing offence or maximum penalty levels associated with conviction for any offence contained in the Banking Act. Instead, it will make the existing offences and associated penalties more transparent by including the descriptions as part of the relevant provisions of the Banking Act rather than being contained in a separate table of offences (currently section 69A). In addition, exemption orders made by APRA under section 11 of the Banking Act will continue to exempt an individual institution or class of institutions from the need to comply with all or specified provisions of the Banking Act.
5.6 This item will repeal sections 7 and 8 of the Banking Act, which prohibit certain actions, and replace them with provisions that comply with the Criminal Code. Further, the amended provisions explain in more detail the requirements on natural persons and bodies corporate under the Banking Act and the availability of possible exemptions.
5.7 Convictions under either proposed sections 7 or 8 contain maximum penalties of 200 penalty units and are indictable offences, meaning that a jury is responsible for determining guilt and the appropriate penalty level. Indictable offences are deemed to apply, unless the contrary intention appears, to bodies corporate as well as to natural persons.
5.8 Nothing in the Act or regulations is intended to limit the operation of section 4K of the Crimes Act 1914. Section 4K states that where an act or thing is required to be done within, or by, a particular period then unless the contrary intention appears, the obligation to do the act or thing continues until the act or thing is done despite the specified time elapsing.
5.9 Under proposed section 8, if a body corporate is convicted of an offence then under subsection 4B(3) of the Crimes Act 1914, the body corporate may be liable for a fine of up to five times that which would be the maximum applicable to a natural person. However, a natural person may also be guilty of an offence under this section if he or she aids or abets, directly or indirectly, or is party to, the body corporate in committing the said offence.
5.10 The RBA will not be guilty of an offence under proposed subsection 8(1) if it carries on banking business in Australia. This amendment will ensure that the RBA is not subject to regulation by APRA, thus ensuring its independence.
5.11 APRA has the power to issue standards on prudential matters for ADIs and authorised NOHCs. The proposed amendments will ensure that these standards powers can be applied to relevant classes or subclasses of ADIs and NOHCs, including allowing APRA to issue a standard that only applies to one (or more) specified ADI(s) or NOHC(s). This change is necessary to give APRA greater flexibility and certainty so as to impose the most appropriate form of prudential regulation for each ADI and NOHC.
5.12 This item will enable APRA to differentiate between various situations and activities with respect to standards.
Items 12 - 18
5.13 These proposed provisions will mean APRA is not required to meet the normal publication requirements where standards contain commercially sensitive information. Where a standard applies to one (or more) specified ADI(s) or NOHC(s), a copy must be provided to all specified ADIs or NOHCs as well as any variations or revocations of these standards.
5.14 This item clarifies that APRA's directions powers can be applied to any aspect of the matters specified in subsection 11CA(2), including part of an item or a group of items.
5.15 This item aligns the definition of an officer to that contained in section 9 of the Corporations Law. The term 'officer' is used in the Banking Act in relation to compliance with a direction imposed on an ADI or an authorised NOHC.
5.16 Under item 31, where a natural person is convicted of an offence for failing to comply with the requirements of proposed subsection 14A(2), the Courts may impose a fine instead of, or in addition to, the imprisonment term. The conversion process is specified in subsection 4B(2) of the Crimes Act 1914.
5.17 Correction of Part VI heading.
5.18 Under section 63 of the Banking Act, an ADI, except a foreign ADI, needs to seek prior approval from the Treasurer before entering into any agreement, arrangement, partnership or reconstruction of its business.
5.19 This amendment will remove the duplication between section 63 and the proposed Financial Sector (Transfers of Business) Act 1999.
5.20 As well as applying the Criminal Code, this item enables the RBA to use the words 'bank', 'banker' and 'banking' in relation to its financial business without committing an offence against section 66 of the Banking Act.
5.21 This item requires APRA to give ASIC a copy of any notifications made under section 66 when it gives a consent for the use of certain business names or imposes conditions on a consent. ASIC is given a copy of the notice because of its role in registering company names.
Items 60 - 62
5.22 These items enable the Treasurer to declare a specified day to be a bank holiday for ADIs. On a bank holiday, ADIs are not compelled to make payments or do other acts that they would not be required to make or do on a Sunday with the obligation deemed to be transferred to the next business day.
5.23 The RBA is treated as an ADI for the purposes of banking holiday provisions.
Items 63 - 65, 67, 69 and 70
5.24 These items extend the unclaimed money provisions from banks to ADIs. As a consequence, ADIs will be required to deliver sums legally payable by them, where the time period for commencing proceedings for their recovery has elapsed (normally seven years) to the Commonwealth. Unclaimed moneys includes amounts in accounts held with an ADI that have not been activated for at least seven years.
Items 66, 68, 71 and 72
5.25 These items apply the Criminal Code to the unclaimed moneys provisions.
5.26 This item repeals the general offences provision in the Banking Act, as it is no longer necessary. In future, all offences will be contained within the relevant section or subsection.
5.27 This item repeals subsections 69(1) and (2) as these issues are covered by the Crimes Act 1914. As a consequence, section 69C is redundant.
5.28 This item removes a reference to a subsection repealed by item 74.
5.29 This item will enable regulations on prudential matters to be made in relation to ADIs or NOHCs.
5.30 This item updates the heading for Schedule 1 of the Banking Act.
6 Schedule 3 - Amendment of the Corporations Law
The purpose of Schedule 3 to the Bill is to add to the Corporations Law set out in section 82 of the Corporations Act 1989 a proposed new Schedule 4.
The new Schedule 4 will provide for the registration of financial institutions and friendly societies as companies and regulation of those entities under the Corporations Law by ASIC. Schedule 3 to the Bill also contains amendments to the Corporations Law consequent upon financial institutions and friendly societies becoming companies.
Schedule 4 also provides that registration of the transferring financial institutions under their previous governing legislation in the States and Territories is cancelled, and no new registrations under such legislation is permitted.
6.1 Item 1 of Schedule 3 to the Bill, which inserts a new Schedule 4 in the Corporations Law, commences on the day the Bill receives Royal Assent.
6.2 The consequential changes to the Corporations Law set out in items 2 - 51 and item 54 will all commence on the transfer date, except for items 30, 31, 42 and 43. The excepted items deal with restrictions on names and include regulation making powers, so they will commence on Royal Assent together with Item 1.
6.3 Items 53 and 54 interact with other changes included in the Corporate Law Economic Reform Program Bill 1998. The manner in which those items commence is explained further in the detailed commentary below.
Part 1-Transfer of financial institutions and friendly societies
6.4 Item 1 of Schedule 3 provides for the transfer of financial institutions and friendly societies to the Corporations Law. Item 1 proposes that a new Schedule 4 is to be added to the end of the Corporations Law set out in section 82 of the Corporations Act 1989.
6.5 Proposed Schedule 4 comprises Parts 1 to 7:
- Part 1-Preliminary
- Part 2-Transfer to Corporations Law registration
- Part 3-Terminating the application of Codes to financial institutions and friendly societies
- Part 4-The transition period
- Part 5-Demutualisations
- Part 6-Continued application of fundraising provisions of the FS Code
- Part 7-Transitional provisions
6.6 A commentary on proposed new Schedule 4 of the Corporations Law follows.
6.7 Part 1 of proposed Schedule 4 sets out some definitions used in the Schedule and a statement of the objective sought by its inclusion.
Clause 1 - Definitions
6.8 Clause 1 defines a number of terms for the purposes of Schedule 4, most of which relate to, or draw on, existing definitions in other laws.
- 'transferring financial institution of this jurisdiction' is defined to include building societies, credit unions, and associations registered under the FI Code; friendly societies and associations registered under the FS Code; Special Service Providers registered under the Australian FI Code; and may also include the CCWPSBL, referred to in the Financial Intermediaries Act 1996 of Queensland.
- 'member of a transferring financial institution' means a person who, immediately before the transfer date, was a member of a transferring financial institution for the purposes of the previous governing Code (as defined elsewhere in clause 1), or for the purposes of the rules of the institution. Most members would satisfy both limbs of this test, since they would be members for the purposes of both the rules of the institution and the relevant previous governing Code.
- The repeal of the definition of 'share' is discussed further in the explanation of clause 12.
- The 'transfer date' will be determined for the purposes of the Act by proclamation (see subclause 3(11) of the Bill). This date will be the date that transferring financial institutions will be taken to be registered as companies under the Corporations Law.
- 'transition period' is used to refer to the period of 18 months after the transfer date, during which transferring financial institutions are required to take certain steps to perfect their conversion to companies. Some provisions of Schedule 4 are operative only during that period.
Clause 2 - Objective
6.4 Clause 2 is a statement of the objective of Schedule 4, which is to facilitate the registration of transferring financial institutions under the Corporations Law with minimal disturbance to operations and cost for the entities concerned. Part 2-Transfer to Corporations Law registration
6.5 Part 2 of Schedule 4 contains provisions regarding the transfer of entities to registration under the Corporations Law. The Part is divided into Division 1, dealing with the transfer process, and Division 2, dealing with the consequences of the transfer.
Division 1-The transfer process
6.6 Division 1 of Part 2 contains clauses dealing with the process of registering transferring financial institutions as companies under the Corporations Law and other related administrative processes.
Clause 3 - Registration of transferring financial institution as company
6.7 Clause 3 is a key provision of Schedule 4. Subclause 3(1) provides that every 'transferring financial institution of this jurisdiction' (as defined in clause 1) is taken to be registered as a company under the Corporations Law in the relevant jurisdiction.
6.8 Subclause 3(2) makes it clear that even institutions which are, immediately before the transfer date, under external administration, will become companies pursuant to subclause 3(1). There are special provisions regarding the continuation of the external administration in clause 11.
6.9 There are three types of company which a transferring financial institution may become on transfer. The three types are:
- limited by shares;
- limited by shares and guarantee; and
- limited by guarantee.
6.10 The category of limited by shares and guarantee is available for transferring financial institutions notwithstanding this category is no longer available for newly incorporating companies.
6.11 Subclause 3(3) sets out in tabular form a 'default setting' for each kind of transferring financial institution and optional company types. The default settings have been selected with the intention that each class of transferring financial institution will have a default setting which 'best fits' its structure, so that the transition will involve minimal change to the current structure. The default settings for the key classes of transferring financial institution are as follows:
|Class of TFI||Default setting||Explanation|
|building society with shares||limited by shares and guarantee||Although some building societies may currently have their primary membership vehicle based on withdrawable shares, prior to transfer those shares will be converted to deposits. After transfer, a new primary membership vehicle will be required which will be the guarantee. Many building societies also issue permanent shares, and the limited by shares and guarantee structure will allow this to continue.|
|building society without shares||limited by guarantee||Building societies with no shares on issue (including withdrawable shares) are closest in character to a company limited solely by guarantee.|
|credit union with shares||limited by shares||Credit unions with shares on issue (including withdrawable shares) are likely to have a membership structure based on shares which can continue under a limited by shares structure, with withdrawable shares being converted to redeemable preference shares.|
|credit union without shares||limited by guarantee||Credit unions with no shares on issue (including withdrawable shares) are closest in character to a company limited solely by guarantee.|
|friendly society with no shares on issue||limited by guarantee||The vast majority of friendly societies have not issued shares and are closest in character to a company limited by guarantee.|
|friendly society with shares on issue||limited by shares and guarantee||A very small number of friendly societies have some shares on issue. Those entities cannot be converted to a company limited by guarantee alone, so the default setting is a company limited by shares and guarantee.|
6.4 Entities which do not wish to become the company type specified in the default setting will be entitled to elect, prior to the transfer date, to become a different type of company. However, not every option is available for every kind of transferring financial institution. The main restrictions are that:
- entities which have shares on issue immediately before the transfer date, including withdrawable shares, may not become companies limited by guarantee alone;
- other than associations and Special Service Providers, transferring financial institutions must become public (rather than proprietary) companies; and
- Special Services Providers must become companies limited by shares.
6.5 A transferring financial institution may elect, by board resolution pursuant to subclause 3(4), to become any of the available company types under subclause 3(3). To be effective the election must be in the prescribed form and be lodged with ASIC at least seven days prior to the transfer date.
6.6 Although a range of company types is available to most transferring financial institutions under subclause 3(3), there are likely to be a number of considerations relevant to an institution contemplating making an election. Company type and membership structure may be a feature which is used to distinguish entities eligible for various entitlements or concessions under other laws and policies.
6.7 Part 2B.7 of the Corporations Law includes facilities for companies to change type at any time by following various procedures. Those procedures could be utilised by transferring financial institutions to change company type after the transfer date. However, those procedures do not allow for a company limited by shares alone to convert to a company limited by guarantee, or shares and guarantee. Accordingly, if a transferring financial institution elects to become a company limited by shares only (through election or otherwise), it is not possible to rely on the existing procedures in the Corporations Law to modify that company type after the transfer date. For that to occur there would need to be special modification of the existing procedures under the regulations or through an ASIC exemption or modification order (both of which are discussed below).
6.8 Subclause 3(5) provides that, if a transferring financial institution does not make an election, it will be taken to be registered as the default company type specified in subclause 3(3), unless there is a regulation providing for the contrary.
Clause 4 - Documents to be lodged with ASIC following transfer
6.9 The SSA must transfer certain records and information about transferring financial institutions so that it can be recorded on the relevant part of ASIC's information system.
6.10 The name and registered office of each transferring financial institution under the previous governing Code immediately prior to the transfer date must be provided, together with a copy of the institution's rules in force at that time. If the institution is in external administration (for example, liquidation or receivership), the SSA must give ASIC a notice setting out the type of administration. The regulations may specify further information regarding the external administration that must be provided, such as the name and address of any liquidator.
6.11 Documents regarding charges registered under the previous governing Codes over institutions' property must also be provided to ASIC. The status of existing charges are preserved, for the purposes of the Corporations Law, under Subdivision D (see further below).
Clause 5 - Documents to be lodged with ASIC by transferring financial institution
6.12 Clause 5 provides that transferring financial institutions must lodge a notice with ASIC in the prescribed form, within one month of the transfer date, setting out the personal details of directors and secretaries of the institution. The personal details required are those that would have to be set out if the notice was required under existing section 242 of the Corporations Law, being:
- given and family names;
- all former given and family names;
- date and place of birth; and
6.13 Failure to comply with the requirements of clause 5 is an offence which carries a maximum penalty of five penalty units. Division 2 of Part 9.4 of the Corporations Law contains provisions relating to offences generally.
Clause 6 - Company to set up registers and minute books
6.14 Clause 6 contains requirements relating to the establishment by transferring financial institutions of registers and minute books for the purposes of the Corporations Law.
6.15 Subclause 6(1) provides that, within 14 days of the transfer date, entities must set up:
- registers of members, debenture holders and option holders required by section 168 of the Corporations Law;
- registers of charges required by section 271 of the Corporations Law; and
- the minute books required by section 251A of the Corporations Law.
6.16 Transferring financial institutions must include in the registers of members, debenture holders, option holders and charges all the information that is required to be included in those registers and that is available to the company on registration.
6.17 The Corporations Law contains provisions which require companies to allow persons to inspect and make copies of various registers and minute books within certain time periods (see, for example, section 173). Subclause 6(2) provides that during the 14 day period provided under subclause 6(1) for setting up the registers and minute books, entities need not comply with any such request, but the time period for compliance with the request begins to run from the end of the 14 day period.
6.18 Regulations may be made in relation to inspection rights in relation to some institutions (see discussion of regulation making powers below).
Clause 7 - ASIC to complete formalities of registration
6.19 Subclause 7(1) provides that ASIC must take certain steps as soon as practicable after the transfer date to formally register transferring financial institutions under the Corporations Law.
6.20 In particular, ASIC must:
- record the registration and allocate an Australian Company Number (ACN) to each transferring financial institution;
- issue the institution with a certificate of registration which sets out its registered name, ACN, company type and jurisdiction of registration.
6.21 The date of registration is the transfer date.
6.22 Subsections 1274(2) and (5) of the Corporations Law deal with the inspection, production and admissibility in evidence of certain records lodged with ASIC. Subclause 7(2) provides that those subsections apply to the record of registration that ASIC makes pursuant to subclause 7(1) as if it were a document lodged with ASIC.
Clause 8 - Registration of registered bodies
6.23 Division 1 of Part 5B.2 of the Corporations Law provides for entities which are 'registrable Australian bodies' to become registered under that Division as a registered Australian body. Such bodies are allocated Australian Registered Body Numbers (ARBNs).
6.24 Some transferring financial institutions may have been registered as registered Australian bodies prior to the transfer date. Following the transfer date, registration as an Australian body under Division 1 of Part 5B.2 will no longer be necessary or appropriate, since the entities will be registered as companies. Subclause 8(1) provides that any transferring financial institutions which are registered Australian bodies will automatically cease to be registered as such, and ASIC must remove the name from the register under Division 1 of Part 5B.2. Subclause 8(2) provides that ASIC may keep any documents which were lodged because the company used to be a registered body.
Division 2-The consequences of the transfer
6.25 Division 2 comprises four subdivisions relating to the consequences of the transfer. Subdivision A contains some general provisions. Subdivision B deals with the consequences for members and membership. Subdivision C deals with how share capital is to be treated. Subdivision D deals with charges over the property of Transferring Financial Institutions.
Clause 9 - Effect of registration under clause 3
6.26 The purpose of clause 9 is to clarify certain matters in connection with the transfer of entities to registration to the Corporations Law.
6.27 Subclause 9(1) is directed at the institution itself. It provides that registration as a company does not create any new legal institution or affect any of the institution's rights or obligations (except as against members in their capacity as members). Legal proceedings by or against the institution or its members are not affected by the transfer.
6.28 Subclause 9(2) is a key provision. It carries forward many of the features that the institution had immediately before transfer. All members (as defined in clause 1) of the transferring financial institution immediately prior to the transfer date become members of the company following transfer. Similarly, directors and secretaries continue to hold office following the transfer, and the registered office of the institution becomes the registered office of the company.
6.29 Subclause 9(2) also provides that the rules of the transferring financial institution, as in force immediately before the transfer date, become the company's constitution. This includes benefit fund rules of a friendly society, except health benefit fund rules which are regulated under the National Health Act-subclause 9(3).
6.30 The standard set of replaceable rules described in section 135 of the Corporations Law does not apply to transferring financial institutions until such time as they choose to repeal their constitution-see subclause 9(4).
Clause 10 - Provisions applying to company limited by shares and by guarantee
6.31 The Company Law Review Act 1998 made changes to the Corporations Law so that no companies limited by shares and guarantee could be newly incorporated. That Act repealed or amended a number of provisions to delete references to those companies. Since companies of that type existing at that time were 'grandfathered', in that they could remain as that type notwithstanding that no new ones could be created, it was necessary to preserve certain references in the previous law for the purposes of those companies. Section 1416 of the Corporations Law was inserted for that purpose, and it provides that certain parts of the previous law apply to companies limited by shares and guarantee.
6.32 Some transferring financial institutions will be taken to be registered as companies limited by shares and guarantee. Subclause 10 applies section 1416 to those companies so that the provisions which that section preserves for the purposes of the grandfathered companies limited by shares and guarantee will also apply to transferring financial institutions which are taken to be registered as that company type.
Clause 11 - Transferring financial institution under external administration
6.33 Some transferring financial institutions may be in the course of external administration proceedings at the transfer date.
6.34 If the rules regarding the external administration which applied to the transferring financial institution immediately before the transfer date were those of the Corporations Law, as applied by previous governing Codes, clause 11 operates to continue those proceedings under the new rules which apply under the Corporations Law. Acts done under the rules as applied by the previous governing Codes prior to the transfer date are taken to have effect as if they were done under the Corporations Law (subclause 11(3)). Previous appointments of liquidators by SSAs will be valid for the purposes of the Corporations Law (subclause 11(5)), notwithstanding there is no equivalent method of appointment by ASIC. However, a certificate issued for the winding up of a transferring financial institution by an SSA under section 341 of the FI Code, or section 402 of the FS Code, is not a basis for winding up of the institution under the Corporations Law.
6.35 It is possible that a transferring financial institution may be under external administration pursuant to laws other than the Corporations Law as applied by the previous governing Codes. This may have occurred if it was placed in administration prior to the commencement of the previous governing Codes in the relevant jurisdiction. To deal with such cases, a specific power has been included to permit regulations to be made to deal with transitional matters (see Part 7, discussed below).
6.4 Subdivision B contains rules about how the various forms of membership of transferring financial institutions are translated when the entities become companies under the Corporations Law. There is a separate clause for each company type a transferring financial institution may become.
Clause 12 - Institution becoming a company limited by shares
6.5 If a transferring financial institution becomes a company limited by shares, clause 12 applies.
6.6 If a transferring financial institution has shares (other than withdrawable shares) on issue immediately before the transfer date, paragraph 12(1)(a) provides that those shares simply become shares of the company.
6.7 If a transferring financial institution has withdrawable shares on issue immediately before the transfer date, paragraph 12(1)(b) provides that those shares are converted to redeemable preference shares for the purposes of the Corporations Law.
6.8 It is intended that this paragraph will apply only to withdrawable shares issued by credit unions. Withdrawable shares issued by building societies are more akin to debt than equity because of their treatment under the FI Code. It is proposed that provision will be made under State and Territory laws for the conversion of all withdrawable shares issued by building societies to deposits prior to the transfer date.
6.9 Some transferring financial institutions which become companies limited by shares may have members who do not hold any kind of share as at the transfer date. Since it is a fundamental principle of company law that members of companies limited by shares alone hold at least one share, it is necessary to make provision for the issue to those persons with a share in the company that the transferring financial institution becomes.
6.10 Paragraph 12(1)(d) provides that persons in that category are taken to have been issued with a 'membership share' in the company on the transfer date. The objective is to substantially replicate, through the holding of a membership share, the relationship that existed between the institution and the member prior to the transfer date.
6.11 In the case of building societies, many persons hold 'permanent' shares for investment purposes but also have various membership rights and obligations under the rules of the society in some other capacity (such as borrower or depositor). Those persons will also receive a membership share, even though they have a permanent share, as a vehicle for the rights and obligations which they have in a capacity other than as a shareholder (paragraph 12(1)(c) and subclause 12(3)).
6.12 The features of a 'membership share' are described in subclause 12(3). Membership shares:
- carry the rights that were conferred on the holder prior to the transfer date by the institution's rules and the previous governing Code (subject to the exception for building society members with permanent shares described above);
- do not have any paid or unpaid amount attached to them;
- are personal to the member concerned and are not capable of transfer, even by transmission or devolution by will or operation of law; and
- can be cancelled in the same circumstances that a member could have had their membership cancelled, and the rules in Part 2J.1 regarding share capital reductions and share buy backs do not apply to such a cancellation.
6.13 As there is no unpaid amount on membership shares, members who are taken to be issued with those shares will not incur any liability to contribute to the company. Further, as there is no paid amount on the shares, there is no impact on the company's share capital accounts by the issue of the membership shares. However, persons issued with membership shares retain any rights to surplus on a winding up that they had prior to the transfer date.
6.14 Notwithstanding the introduction of no par value in the Company Law Review Act 1998, shares of zero paid and zero unpaid amounts would be inconsistent with the existing definition of 'share' in section 9 of the Corporations Law, which refers to a share in the share capital of a body. That definition will be repealed by clause 1 so that the membership share will not be incompatible with the section 9 definition of 'share'.
6.15 Subclause 12(2) deals with the treatment of membership shares issued in relation to memberships which were held jointly prior to the transfer. Persons who receive a membership share in relation to a membership held jointly prior to transfer date will hold the membership share jointly with the other joint members, even if the other persons in the joint membership would not be entitled to receive a membership share in their own right because they hold other shares. Subclause 12(2) also clarifies that the issue of a membership share to joint members does increase the voting rights of those members.
Clause 13 - Institution becoming a company limited by guarantee
6.16 Companies limited by guarantee alone do not issue shares, but all members guarantee to contribute a certain amount in the event the company is wound up. The object of the provisions dealing with companies which become companies limited by guarantee is to replicate, so far as possible, the relationship the members had prior to the transfer date in a limited by guarantee form.
6.17 Clause 13 provides that each person who was a member of a transferring financial institution immediately prior to the transfer date is taken to have given a guarantee. However, this deeming provision is only for the purpose of ensuring members of the transferring financial institution have status as a member of the company. Clause 16 (discussed below) provides a mechanism so that, even though members of transferring financial institutions immediately prior to the transfer date are deemed to have given a guarantee for the purposes of membership, they are not liable to contribute to the company in the event it is wound up.
6.18 A statement of the value of the undertaking provided by members of a company limited by guarantee is included in the company's constitution. Following the passage of the Company Law Review Act 1998 there is no longer a statutory form of words for the guarantee to be included in the constitution, but the usual form is:
"The liability of the members of the company is limited and each member undertakes to contribute to the company's property if the company is wound up while he, she or it is a member or within one year after he, she or it ceases to be a member, for payment of the company's debts and liabilities contracted before he, she or it ceases to be a member and of the costs, charges and expenses of the winding up and for adjustment of the rights of the contributories among themselves, such amount as may be required not exceeding a amount of [ ] dollars in addition to the amount (if any) unpaid on any shares held by him, her or it."
6.19 Part 4 of Schedule 4 contains provisions which require modifications to be made to the constitution of transferring financial institutions and those companies which become companies limited by guarantee would need to include a statement similar to the one above to comply with that Part. It would not be permissible for companies to nominate an amount of zero for the value of the guarantee (see the definition of company limited by guarantee in section 9).
6.20 Paragraph 13(1)(b) provides that, until such time as the amount of the guarantee is determined by including such a statement in the constitution of the transferring financial institution, any members joining after the transfer date will also be taken to give a guarantee of a similar form to those persons who were members as at the transfer date (that is, one which is for the purposes of membership only and is not enforceable).
6.21 However, persons who join after the time that the statement of guarantee is included in the institution's constitution will be treated as a normal member of a company limited by guarantee and, if the institution is wound up, they will be liable to contribute to the company's property up to a specified amount as stated in the company's constitution.
6.22 Some transferring financial institutions may have joint members. Subclause 13(2) deals with such memberships by providing that joint members of transferring financial institutions are taken to have provided a guarantee jointly with the other joint member(s). Other amendments are made in this Bill to the provisions of the Corporations Law which deal with joint members in the context of meetings and other matters (see discussion of items 35, 37 and 38 below).
Clause 14 - Institution becoming a company limited by shares and guarantee
6.4 Clause 14 deals with entities that become limited by shares and guarantee. The primary membership vehicle in such companies is the guarantee, since all members are required to provide a guarantee.
6.5 In this regard, the provision of clause 14 regarding transferring members and those who join prior to the time the guarantee is determined are the same as those applying to companies limited by guarantee alone (see discussion of clause 13).
6.6 As to shares, the provisions of clause 14 are similar to those applying under clause 12 to a company which becomes limited by shares alone, except that there is no need to provide for issue of 'membership shares' because the guarantee provides a vehicle for 'pure' membership rights (such as attending and voting at general meetings). Shares, in these companies, will be issued solely for the purpose of raising capital.
Clause 15 - Redeemable preference shares that were withdrawable shares
6.7 Clause 15 deals with shares which were withdrawable shares but are converted under clause 12 or clause 15 to redeemable preference shares.
6.8 Subclause 15(1) provides that generally the provisions of the Corporations Law dealing with redeemable preference shares (such as Part 2H.2) apply to such shares. However, the subclause expressly provides that the share is redeemable on the same terms that the withdrawable share was withdrawable, and the holder of the redeemable preference share continues to have the same rights and obligations that they had by holding the withdrawable share.
6.9 Some transferring financial institutions may currently have issued only withdrawable shares. Subclause 15(2) clarifies that it is possible for transferring financial institutions to have on issue only redeemable preference shares. This subclause is intended to overcome an implication that might arise by use of the word 'preference' in the description of the share that it must be preferred over some other type of share, therefore it cannot be the only class of share on issue. Since it is possible that a share structure involving only redeemable preference shares may become the preferred or standard model for one or more classes of financial institution, subclause 15(2) will also permit all entities of certain classes of financial institution to adopt such a structure, as well as transferring financial institutions, so that a standard structure may be adopted across an industry class.
Clause 16 - Liability of members on winding up
6.10 The Corporations Law provides that members and past members of companies may be liable to contribute to the property of the company in the event the company is wound up. The object of clause 16 is to clarify the position of certain members and past members of transferring financial institutions.
6.11 Subclause 16(1) deals with past members of transferring financial institutions. It provides that persons who ceased to be members of transferring financial institutions prior to the transfer date are not liable to contribute under the provisions of the Corporations Law if the institution is wound up after the transfer date unless the person held shares. Past members who held shares (including withdrawable shares) may be liable to contribute in the event of a winding up under Division 2 of Part 5.6 of the Corporations Law if the shares they held were not fully paid.
6.12 Subclause 16(2) excludes liability of persons under guarantees which they are taken to have given because they are, or become, members of transferring financial institutions before the amount of the guarantee is determined. It provides that persons who are taken to have given a guarantee under subclause 13(1) (transferring financial institution becoming company limited by guarantee) or subclause 14(1) (transferring financial institution becoming company limited by shares and guarantee) are not liable under the provisions dealing with the liability of contributories generally (section 515), members of companies limited by guarantee (section 517) or members of companies limited by shares and guarantee (section 518, as preserved by section 1416 and clause 10) merely because of the guarantee they were taken to have given. Such persons may, however, be liable to contribute for other reasons. For example, if the institution becomes a company limited by shares and guarantee, a person may hold, or may have held, partly paid shares in the institution.
Subdivision C-Share capital
6.13 The Company Law Review Act 1998, which commenced operation on 1 July 1998, amended the Corporations Law to give effect to significant reforms in relation to the nominal value of shares and share capital reductions. In essence, the notion of a company's 'authorised capital' and 'par value' or 'nominal value' of shares is no longer a concept relevant to newly incorporated companies under the Corporations Law.
6.14 Schedule 5 of the Company Law Review Act 1998 contained various transitional rules governing the conversion of authorised capital, par value and related matters in respect of companies that were registered prior to the commencement of the 'no par value' regime. Subdivision C of the Bill contains similar rules about how the share capital of transferring financial institutions is to be treated, since those entities are transferring from a regulatory framework which will, on the transfer date, still recognise the par value concept.
Clause 17 - Share capital
6.15 Clause 17 provides for certain amounts to become part of a transferring financial institution's share capital when it becomes registered as a company.
Conversion of withdrawable share capital
6.80 Paragraph 17(1)(a) refers to withdrawable share capital "within the meaning of the FI Code of this jurisdiction". The term 'withdrawable share capital' is not expressly defined, but it is intended to cover that term as it is used in, for example, section 159 of the Code.
6.81 Under the FI Code withdrawable shares form part of the share capital of societies. However, for some purposes (such as accounting treatment-see, for example, the requirements in Attachment A to the Prudential Standards issued by the AFIC) the amounts are treated as liabilities. Similarly, withdrawable share capital is not treated as capital for the purposes of capital adequacy standards.
6.82 It is intended that, for the purposes of the Corporations Law, withdrawable shares will, on conversion to redeemable preference shares, be treated like other redeemable preference shares in that they will become part of the share capital of the company. This will only be relevant to credit unions because any withdrawable shares of building societies will no longer exist at the transfer date as they will have already been converted into deposits.
6.83 However, the inclusion of former withdrawable shares in the share capital of the company for the purposes of the Corporations Law does not necessarily preclude the situation that, for some purposes (such as accounting standards or capital adequacy standards issued by APRA) those shares will be treated in a manner more akin to liability than capital, as they were under the FI Code, depending upon the rules of the institution relating to the redemption facility. Institutions may, as part of the modifications to their constitutions which will occur during the transitional period (see below), align the redemption facility applying to converted withdrawable shares and new redeemable preference shares.
Conversion of share premium account and capital redemption reserve
6.84 Some transferring financial institutions (particularly building societies) may have established share premium accounts and capital redemption reserves under their previous governing Codes. Those amounts will become part of the share capital of the company that the society becomes. This conversion occurred for companies registered under the Corporations Law on 1 July 1998 pursuant to section 1446, which was inserted by the Company Law Review Act 1998.
Use of share premium account
6.85 It will no longer be possible for transferring financial institutions to redeem redeemable preference shares out of their share premium account, because those moneys will become part of the share capital of the company. However, subclause 17(2) provides that any amount which was in a transferring financial institution's share premium account immediately prior to the transfer may be used to:
- pay any premium on the redemption of redeemable preference shares or debentures issued prior to the transfer; or
- write off preliminary expenses incurred or discounts allowed before the transfer date, in respect of any issue of shares or debentures.
Clause 18 - Application of no par value rule
6.80 Section 254C of the Corporations Law, which commenced on 1 July 1998, provides that shares of a company have no par value. Section 1444 of the Corporations Law, which commenced at the same time, provides that section 254C applies to shares of companies issued both before and after its commencement. Section 1445 deals with how references in the law after 1 July 1998 to the 'amount paid' and 'amount unpaid' on shares applies in relation to shares issued before that date.
6.81 Clause 18 is intended to clarify the position for transferring financial institutions, since they were not registered as at 1 July 1998. Subclause 18(1) mirrors section 1444 and provides that section 254C applies to all shares of a transferring financial institution, whether or not they are issued after the transfer date. Subclause 18(2) mirrors section 1445, and provides that, in relation to shares issued before the transfer date:
- the amount paid is the sum of all amounts paid to the institution at any time for the share (but not including any premium); and
- the amount unpaid on a share is the difference between the issue price (not including any premium) and the amount paid on the share.
Clause 19 - Calls on partly-paid shares
6.80 Clause 19 provides that the liability of a shareholder for calls on partly paid shares is not affected by the elimination of the par value concept by the application of section 254C. This clause mirrors section 1448 of the Corporations Law.
Clause 20 - Reference in contracts and other documents to par value
6.81 Prior to the transfer date, transferring financial institutions and other persons may have entered into various contractual and other arrangements which refer to par value of shares issued by the institution. There may also be references to the par value of shares in the rules of some transferring financial institutions, which will become part of the company constitution.
6.82 Clause 20 mirrors section 1449 of the Corporations Law. That section provides for how certain references in contracts, trust deeds and other documents to certain terms should be interpreted. Clause 20 provides for how references in documents to par value of a share; aggregate par value of issued share capital; share premium; and right to return of capital in respect of transferring financial institutions should be interpreted if those contracts or documents were entered into prior to the transfer date. The objective is to provide a 'default' translation mechanism for references to par value and other matters no longer recognised by the Corporations Law into terminology which has a similar or equivalent meaning, so that the documents concerned will not fail. However, it would still be possible for parties to negotiate amendments to contracts and documents to reflect the new terminology as they see fit.
6.83 Under clause 4, ASIC receives from SSAs details of charges over the property of transferring financial institutions which have been registered under the previous governing Codes. Subdivision D contains rules to preserve registered status of pre-existing charges following the transfer to Corporations Law.
Clause 21 - Registration of prior charges
6.84 The purpose of clause 21 is to provide for a deeming mechanism which will, in combination with subsection 265(3) of the Corporations Law, ensure that charges registered under the previous governing Codes will be taken to have been registered under the Corporations Law from the time that they were lodged under the previous law.
6.85 The previous governing Codes (the FI Code and the FS Code) applied the provisions of the Corporations Law with respect to registration of charges. Clause 21(1) provides that, where details of a charge were registered under provisions of the Corporations Law as applied by the previous Codes, ASIC is taken to have entered in the Australian Register of Company Charges established by ASIC under section 265 of the Corporations Law the relevant particulars of the charge that were entered pursuant to the previous governing Code. ASIC is taken to have done this at the beginning of the transfer date in accordance with the requirements of subsection 265(2) of the Corporations Law (subclause 21(2)). Subsection 265(3) will operate to deem the charges included in the register pursuant to subclause 21(2) to have been registered from the time that they were lodged under the previous Code-see also subclause 21(3).
6.86 The deemed registration of charges for the purposes of the Corporations Law under clause 21 does not affect the operation of laws, such as the priority for depositors under the Banking Act, which may take effect as a result of transferring financial institutions becoming regulated under those laws.
Part 3-Terminating the application of the Codes to financial institutions and friendly societies
6.87 It is intended that, after the transfer date, the transferring financial institutions will no longer be subject to their previous governing Codes except insofar as transitional and savings provisions apply. There will be no more entities registered under those Codes. From the transfer date, registration, corporate governance and market integrity aspects will be dealt with under the Corporations Law. Prudential supervision will be carried out by APRA pursuant to the Banking Act and the Life Insurance Act.
6.88 Clause 22 and clause 23 deal with these matters. Since they form part of the Corporations Law, they will be applied in each State and the Northern Territory as laws of those jurisdictions pursuant to the respective Corporations ([name of State]) Acts. In the Australian Capital Territory, the provisions will apply directly through the Corporations Act 1989.
Clause 22 - Cancellation of Code registrations
6.89 Clause 22 provides that, on the transfer date, the registration of each transferring financial institution under the relevant previous governing Code is cancelled. The terms 'transferring financial institution' and 'previous governing Code' are defined in clause 1.
Clause 23 - No new registrations under the Codes
6.90 Clause 23 provides that after the transfer date, no more entities may be registered under the FI Code, the FS Code or the AFIC Code. The defined term 'previous governing Code' is not used in this clause because it is not intended to apply to the Financial Intermediaries Act 1996 of Queensland.
Part 4-The transition period
6.91 The mechanism provided for in Schedule 4 is intended to provide for a simultaneous transfer of entities on the transfer date, with the least possible disturbance and cost for the entities concerned. However, the transition to the Corporations Law regulatory framework as companies will involve some steps to be taken by the transferring financial institutions.
6.92 In particular, entities will be required to make some changes to their own constitutions to recognise the relevant form of membership vehicle (shares and/or guarantee). Part 4 provides for a transition period (18 months) during which transferring financial institutions can take the required steps to required to modify their constitutions. There will be a streamlined mechanism for achieving these changes.
6.93 It is likely that there are some requirements in the Corporations Law affecting transferring financial institutions with which it is not practicable to require immediate compliance because of administrative steps which the entities would need to take. It is not considered practical to provide for a transitional regime in relation to each and every such matter, since some may only affect a small number of entities and some issues may not have been identified.
6.94 This situation is addressed in three ways. During the transitional period, there will be a regulation making power which can be used to modify the operation of the Corporations Law as it applies to classes of transferring financial institutions or individual entities. Further, ASIC will have powers to make orders which modify or exempt individual or classes of transferring financial institutions from compliance with parts of the Corporations Law. Finally, the Court is given power to resolve transitional difficulties arising out of the application of the Corporations Law to transferring financial institutions, and the Court's orders have effect notwithstanding the provisions of the Corporations Law (see discussion of clause 38 below).
Clause 24 - Modifications of constitution
6.80 Subclause 24(1) imposes a requirement on transferring financial institutions to modify their constitutions within the 18 month transition period so that they:
- give effect to Schedule 4;
- are consistent with the Corporations Law; and
- set out the rights and obligations attaching to each class of share, including shares that are taken to be issued pursuant to other provisions of the Schedule.
6.81 The bulk of modifications contemplated by this subclause relate to recognition of shares and rights attaching to shares.
6.82 In the case of companies limited by guarantee or shares and guarantee, the inclusion of a statement in the constitution regarding the limitation of liability and the amount of the guarantee would be a modification consistent with the Corporations Law, even though there is no longer an express requirement in the Corporations Law to include such a statement in the constitution.
6.83 Subclause 24(2) expressly clarifies that transferring financial institutions which have been taken to have issued membership shares under clause 12 may, rather than merely expressly recognising those shares in its constitution:
- modify its constitution to alter the statutory rights and obligations attaching to those shares; or
- cancel any such shares (for the terms of cancellation, see clause 12) and not provide for them in the constitution at all.
6.84 Failure to comply with the requirements of clause 24 renders a company guilty of an offence under section 1311 and subject to the maximum penalty provided for in that section and section 1312.
Clause 25 - ASIC may direct directors of a company to modify its constitution
6.85 If a transferring financial institution does not comply with clause 25 by making the required changes to its constitution by the end of the 18 month transition period, clause 25(1) gives ASIC power to direct that the institution to take necessary or specified steps to modify its constitution so that it does comply, or make such modifications as ASIC specifies, within a time limit which must be more than 28 days. Failure to comply with such a direction without reasonable excuse amounts to a contravention of the direction. Intentional or reckless contravention is an offence, punishable by a maximum penalty of 100 penalty units or imprisonment for 2 years, or both. Section 1314, which deals with continuing offences, will apply to this offence.
6.86 Some constitutions may impose various procedural requirements for constitutional changes which it is not possible or practical to comply with in the context of making the changes required under clause 24. Subclause 24(1) permits ASIC to give a direction after the transition period requiring steps to be taken to modify a constitution which are inconsistent with the company's constitution. Subclause 25(3) excludes civil and criminal liability for actions taken by a director in accordance with such a direction. Subclause 25(2) permits the directors of a transferring financial institution to request ASIC to issue a direction prior to the end of the transition period so that they can take steps to make the required changes in accordance with the direction.
Clause 26 - ASIC's power to make exemption and modification orders for the transition period
6.87 As mentioned above, it is not feasible to include in the Corporations Law all the exemptions and variations necessary or desirable to deal with the transition to the Corporations Law framework. Under clause 26, ASIC is given powers to make orders about how the Corporations Law and regulations apply to transferring financial institutions during the transitional period. The types of orders made may include, but are not limited to:
- orders which modify or omit various procedural requirements (such as member approval requirements under Parts 2G and 2F) to permit entities to make changes to their membership structures to comply with the Corporations Law and/or laws relating to prudential supervision with a minimum of cost and disturbance to members; and
- orders which relax or vary various other requirements which it would not be appropriate or necessary to immediately apply to transferring financial institutions.
6.88 The orders may take the form of exempting one or more entities from compliance, or declarations that the Corporations Law applies with modifications (subclause 26(1)). ASIC orders may be drafted as general or specific in relation to the provisions affected, the entities affected or other matters (subclause 26(3)). Orders must be in writing and published in the Commonwealth Gazette (subclause 26(5)).
6.89 The power can be used to make orders about the application to transferring financial institutions during the transitional period of any aspect of the Corporations Law or regulations made under it (see section 8A). Clause 26(2) sets out particular matters which the exemption and modification may be used for (without limiting its general application). However, if the order contemplated relates to a matter directly affecting the rights and obligations of members, being altered procedures for changes of company type, changes to the company constitution or matters affecting shares, clause 27 (discussed below) imposes special procedural requirements for modifications to constitutions made under exemptions or declarations.
6.90 Subclause 26(4) provides that ASIC may impose conditions on orders which can apply to the institution or other persons. Failure to comply with a condition renders a person liable to a penalty under Division 2 of Part 9.4. In addition, ASIC is given power to apply to the Court for an order that the person must comply with a condition in a specified way.
Clause 27 - When certain modifications of a company's constitution under an exemption or declaration take effect
6.91 The orders that ASIC may make under clause 26 may relate to procedural requirements in connection with modifications to company constitutions. Although ASIC is given wide powers under clause 26 to make orders to relax procedural requirements, in the case of modifications to company constitutions clause 27 imposes another set of requirements that apply even if ASIC, by way of an exemption or modification order, disapplies the usual provisions.
6.92 Subclause 27(1) provides that, if a company is exempted from complying with other provisions which require the lodgement with ASIC of a copy of modifications to the constitution (see Part 2B.4), a copy must be lodged within 14 days of it being made.
6.93 Subclauses 27(3) - 27(8) provide that where modifications to constitutions are made in the absence of unanimous agreement by members of an affected class because ASIC disapplied provisions relating to class rights (see Part 2F), members in the class may apply to the Court to have the modification set aside. These provisions result in a procedure which is largely identical to the procedure which would ordinarily apply under section 246D to a variation or cancellation of class rights, or a modification of a company's constitution to allow class rights to be varied or cancelled. The key difference is that 246D allows an application to be made to have the modification set aside by members holding 10 per cent or more of the votes in the class, while subclause 27(3) refers to 10 per cent or more of the members of the class. The difference in this regard is directed at ensuring that the general body of members in a class is not prevented from challenging a modification due to large blocks of voting rights held by a small number of persons.
6.94 The Court may set aside the modification if it is satisfied that the modification would unfairly prejudice the applicants, but if not so satisfied the Court must confirm the modification (subclause 27(7)). The company must lodge a copy of the Court's order with ASIC within seven days of it being made (subclause 26(8)).
6.95 An application must be made within one month of the modification being made (subclause 26(4)). If no application is made, the modification takes effect after one month. If an application to set it aside is made, the modification does not take effect unless and until the application is withdrawn or finally confirmed (subclause 26(5)).
Clause 28 - Modification by regulations for the transition period
6.80 Clause 28 allows regulations to be made which modify the operation of the Corporations Law (including the regulations made under it-see section 8A) with respect to individual transferring financial institutions or a specified class of those entities. The regulations may also modify provisions of the FS Code which are applied to some transferring financial institutions as part of the Corporations Law pursuant to clause 36.
6.81 Subclause 28(3) provides that regulations made under this clause take effect only for the transitional period. There is, however, a separate power to make regulations for ongoing modifications with respect to limited subject matters (see clause 38).
Subclause 28(2) restricts the capacity of regulations made under the clause to modify or create new penalties or modify any obligations, contravention of which would result in commission of an offence.
6.82 Many transferring financial institutions have a membership structure which is commonly described as 'mutual'. Although what constitutes a mutual organisation is not clear cut, some characteristics commonly (though not necessarily) found in such organisations are:
- the organisation provides services only to its own members;
- members each have one vote; and
- members share equally in profits and/or rights to surplus reserves on a winding up.
6.83 All of these characteristics are dealt with in the constitution of the entities concerned. However, only the latter two are of importance in the present context in that they directly affect the rights of members.
6.84 Under the previous governing Codes, entities which sought to demutualise, in addition to the usual requirements for membership approval of changes to the constitution and complying with the usual requirements for sale of securities, were required to comply with various prudential standards issued by AFIC regarding the demutualisation scheme. Those standards were directed at ensuring that an institution seeking to demutualise gave proper regard to members' interests, and disclosed the scheme fully.
6.85 The existing Corporations Law does not contain special provisions concerning demutualisations. In particular, ASIC does not have power to issue binding standards. However, given the nature of the transferring financial institutions it is considered desirable, in the interests of protecting the rights of members of transferring financial institutions, to carry over into the Corporations Law framework some aspects of the regulatory framework regarding demutualisation which applied under the previous governing Codes.
6.86 To this end, Part 5:
- establishes comprehensive disclosure requirements to ensure that members are fully informed so they can make a sound judgement about whether the demutualisation proposal is in their best interests; and
- includes a prohibition on unconscionable and/or misleading and deceptive conduct relating to a demutualisation, and various civil remedies and other enforcement mechanisms relating to the prohibition.
6.87 The requirements of Part 5 only apply to transferring financial institutions which do not have voting shares (as defined in section 9) listed on a stock exchange, because such entities would not be 'mutual' in character. Further, if ASIC is satisfied that a transferring financial institution does not have a mutual structure, it may exempt that company from the operation of the Part.
Clause 29 - Disclosure for proposed demutualisations
6.88 A demutualisation would normally involve a number of processes. Not all demutualisations would proceed in the same way. However, most would involve:
- modification of the constitution; and/or
- the issue of shares to members.
Modification of constitution
6.80 The internal procedures for modifying company constitutions are set out in Part 2B.4 of the Corporations Law, and normally require the modification to be approved by a special resolution of members. Subclause 29(1) identifies a range of types of modifications which may be part of a demutualisation process, being modifications which have the effect of:
- varying or canceling the rights of some or all members to:
- the reserves of the company (as defined in subclause 29(8));
- the assets of the company on a winding up; or
- varying or canceling class rights (for the purposes of section 246C of the Corporations Law; or
- allowing one of the above variations to take place.
6.81 Not all of the abovementioned types of modification would necessarily be part of a demutualisation process. ASIC is given power under clause 30 to exempt proposed modifications from the operation of Part 5. That power is discussed further below.
6.82 If Part 5 applies to a proposed modification, subclause 29(1) provides that notice of the meeting of the company's members must be accompanied by certain documents, as set out in subclause 29(4) (discussed below), some of which must be lodged with ASIC within 7 days of giving notice of the meeting. Subclause 29(1) also provides that the notice period for such a meeting may not be shortened under the procedures set out in subsection 249H(2) of the Corporations Law.
6.83 Depending on the terms of the constitutions of individual entities, some boards have powers to issue and vary rights attaching to shares. In those cases, it is possible that a board could, through those mechanisms, effectively demutualise a company directly, without seeking approval of a constitutional change. However, not all issues of shares would amount to an effective demutualisation-only one which would effectively vary the rights of the existing members. Such a share issue would, under existing section 246C of the Corporations Law, amount to a variation of rights and therefore subject to the procedures for under Part 2F.2.
6.84 Subclause 29(2) provides that if an issue of shares by a transferring financial institution would be subject to Part 2F.2 and a meeting of the company's members is required to consider the class rights variation or cancellation (see existing section 246B), similar requirements apply to that meeting as apply under subclause 29(1) with respect to meetings to consider constitutional change.
6.85 The documents that subclause 29(4) provides must accompany the notice of meeting to each member are:
- a disclosure statement which ASIC has registered;
- in the case of a proposed constitutional change, an estimate of the financial benefits (if any) that would be offered to the member if the proposed modification occurs; and
- an expert's report regarding the proposal.
6.86 The required content of the disclosure statement and ASIC's consideration of it are discussed in detail below (see discussion of clauses 31 and 32). The estimate of financial benefits must be individually tailored to each member. For example, it may include a statement of the number of shares and/or amount of alternative cash compensation that the member would be entitled to receive if the demutualisation proposal were to proceed as a result of the proposed modification(s) being approved. The expert's report must include a statement about whether, in the expert's opinion, the proposed modification is in the best interests of the members of the company as a whole, and the reasons for forming that opinion. There are also further requirements for the content of the expert's report, which are set out in clause 33 (discussed below).
6.87 Failure to comply with the disclosure requirements does not result in the company being guilty of an offence (subclause 29(5)). However, contravention of subclauses 29(1) and 29(2) will be subject to civil penalties under Part 9.4B of the Corporations Law. This has a number of consequences including that:
- ASIC may apply to the Court for a civil penalty order that a person involved in a contravention is prohibited from managing a corporation and/or is required to pay a pecuniary penalty of up to 2,000 penalty units; and
- persons who suffered loss or damage due to the contravention may seek compensation (section 1317 HA), and the person may also be liable to compensate the company itself (section 1317HD).
6.88 Injunctions under section 1324 of the Corporations Law and undertakings to ASIC under section 93AA of the ASIC Act would also be available in relation to the contravention.
6.89 A contravention which meets certain further requirements concerning intention under section 1317FA may amount to a criminal offence under that section. A contravention which is dishonest will amount to an offence under subclause 29(7), punishable by a maximum penalty of 2,000 penalty units or imprisonment for five years, or both.
6.90 The disclosure requirements under clause 29 operate in addition to, not in substitution for, the other disclosure requirements (if any) that would apply in connection with the offer or issue of securities as part of a demutualisation procedure.
6.91 It may be possible, in the case of some transferring financial institutions, to use schemes of arrangement or selective capital reduction to effect what amounts to a demutualisation, without issuing further shares or making constitutional changes. These types of procedures are not dealt with specifically by the demutualisation provisions in the Bill because they are already subject to comprehensive regulatory requirements, including member disclosure and remedial protections, which would operate to protect the interests of members.
Clause 30 - ASIC's exemption power
6.92 As mentioned above, Part 5 does not attempt to identify with precision the characteristics of a mutual structure. A number of characteristics may tend to signal that a company is mutual, but not all of them are necessary.
6.93 The approach taken is to apply Part 5 to all unlisted transferring financial institutions at first instance, and give ASIC exemption powers so that the requirements will only apply to relevant types of entities and modification proposals.
6.94 Subclause 30(1) allows ASIC to exempt a transferring financial institution from Part 5 (and any regulations made under it-see subclause 30(7)) altogether if it does not have a mutual structure. Subclause 30(3) sets out some indicators which ASIC may take into account in assessing whether or not a company has a mutual structure, but ASIC may also take into account other relevant matters.
6.95 Subclause 30(2) allows individual modification proposals to be exempted from the Part if it will not result in, or permit, the mutual structure of a company to be modified. Subclause 30(4) states that ASIC must take into account for that purpose whether the proposed modification would result in, or allow a further modification, which would convert the company into one run on the basis of yielding dividends to shareholders.
6.96 Exemptions in relation to particular modification proposals may be granted subject to conditions (subclause 30(5)), which must be in writing and published in the Commonwealth Gazette (subclause 30(6)). ASIC may apply to the Court for an order that a condition is complied with in a specified way.
Clause 31 - Coverage of disclosure statement
6.97 The disclosure statement must be one which ASIC has registered under clause 32. That clause contains specific requirements in relation to the information to be included. However, obtaining registration of the statement does not necessarily mean that the statement complies with the requirements of clause 30 (see subclause 32(5)).
6.98 In addition to the specific requirements in clause 32, clause 31 sets out a general standard for the disclosure statement to accompany the notice of meeting required under subclause 30(3). The statement must include all information that members would reasonably require and expect to be given in order to make an informed decision about the proposed modification. This general approach is similar to that used under the Corporations Law in relation to prospectus documents.
Clause 32 - Registration of disclosure statement
6.99 Subclause 32(1) provides that ASIC must register a disclosure statement if it adequately sets out or explains various specified aspects of a demutualisation proposal that would clearly be relevant to the decision of members. The information specified in subclause 32(1) includes:
- the proposed variation of members' rights;
- details of a proposed share issue, including its implications for management and structure;
- the financial benefits that will be offered to members generally and the basis on which those entitlements will be determined;
- any benefits the company officers may receive; and
- how voting on the proposed modification or share issue will take place.
6.100 Some of the listed matters will not be applicable to a proposed modification or share issue. Only relevant matters must be included in the statement.
6.101 Subclause 32(2) provides that the readability and ease of comprehension of the statement by members is a factor that ASIC may take into account in deciding whether or not to register the statement.
6.102 Subclause 32(3) provides that a disclosure statement must include a disclaimer to the effect that ASIC's registration of the statement merely indicates the statement contains the required information-it does not in any way imply that ASIC considers the proposal is in the best interests of members.
Clause 33 - Expert's report
6.103 As mentioned above, ASIC's role in relation to the disclosure statement is limited to reviewing whether it contains the information specified in clause 32-ASIC is not required to examine the merits of the demutualisation proposal as it relates to members.
6.104 However, clause 30 requires that the notice of meeting is accompanied by a report by an expert, which does contain an opinion about whether the proposal is in the best interests of members of the company as a whole. If the company obtains two or more such reports, each report must be lodged with ASIC and provided to members (subclause 33(1)). Failure to lodge or provide copies of all reports is an offence.
6.105 An expert must not be an associate of the company (subclause 33(2)). 'Associates' are defined in Division 2 of Part 1.2 of the Corporations Law. Subclause 33(3) provides that expert must include in his or her report the details of the relationships (if any) between the expert and the company, any financial or other interest the expert has which might reasonably cause the expert to give a biased report, and any fee or other benefit which the expert will or may receive in connection with the report.
Clause 34 - Unconscionable conduct in relation to demutualisations
6.106 Members of mutual transferring financial institutions are, by and large, likely to be members in order to obtain financial services from the entities concerned. In that sense, they are akin to consumers of financial services rather than investors in financial service providers.
6.107 Under the ASIC Act, there are various provisions in relation to unconscionable conduct and misleading or deceptive conduct in connection with the provision of financial services to consumers. However, for various reasons, those provisions would not apply to the various steps involved in a demutualisation. It is considered that, given the nature of the entities and their members, such provisions should apply to the extent that they are relevant.
6.108 Subclause 34(1) prohibits persons from engaging in unconscionable conduct, or misleading and deceptive conduct, in relation to a modification of a company constitution, or anything done in conjunction or connection with the modification, or share issue to which Part 5 applies. The scope of the prohibition covers not only procedures and acts in relation to the members' voting on a constitutional change, but also matters consequent on the modification, such as the allocation and issue of securities or other financial benefits associated with a demutualisation.
6.109 Subclause 34(2) provides that in determining whether a person has engaged in unconscionable conduct for the purposes of subclause 34(1), matters which should be taken into account are whether the person exercised undue influence or pressure on members, or unfair tactics against members. These matters are based on matters to be taken into account in determining whether there is unconscionable conduct for the purposes of the ASIC Act.
Clause 35 - Orders the Court may make
6.110 A contravention of subclause 34(1) is not a criminal offence (see subclause 34(4)). There are, however, a number of civil remedies available in relation to a contravention or proposed contravention, including:
- orders to make disclosure of information or publish advertisements under (paragraph 35(1)(a));
- orders to protect the rights or interests of any person affected by the modification or share issue, including orders relating the acquisition or divestiture of shares or exercise of voting rights and other rights in relation to those shares (paragraphs 35(1)(c) and (d));
- injunctions and other orders under Part 9.5 of the Corporations Law; and
- orders under subclause 35(2) to refund money, return property or pay compensation to persons suffering loss or damage due to the conduct in question.
6.111 The orders may be applied for by ASIC or a member of the company (subclause 35(3)).
6.112 In addition to those remedies, ASIC may be able to accept enforceable undertakings under section 93AA of the ASIC Act.
6.113 These provisions will serve to protect members of transferring financial institutions from unfair and discriminatory behaviour by officers or other persons in connection with a demutualisation which might result in an inequitable distribution of the property of the institution and other financial benefits to the disadvantage of the members as a whole.
Part 6-Continued application of fundraising provisions of the Friendly Societies Code
6.114 Currently, a friendly society which offers benefits in a benefit fund is subject to the disclosure obligations contained in Part 4B of the FS Code. The disclosure obligations in Part 4B are modeled on the fundraising provisions in Part 7.12 of the Corporations Law.
6.115 The disclosure obligations applying to an offer of a benefit in a friendly society benefit fund is to be transferred to the Corporations Law. Rather than simply applying the existing fundraising provisions in Part 7.12 of the Corporations Law to friendly society benefit funds, the approach taken under Part 6 is to incorporate the relevant provisions of Part 4B of the FS Code into the Corporations Law.
6.116 This approach is designed to ensure that, as far as possible, the status quo is maintained in this area of regulation of friendly societies, pending the current review of disclosure obligations applying to financial products under the Government's Corporate Law Economic Reform Program.
Clause 36 - Application of the Friendly Society Code
6.117 Subclause 36(1) will incorporate into the Corporations Law Divisions 2 and 3 of Part 4B of the FS Code, as set out in Schedule 1 of the Friendly Societies (Victoria) Act 1996 as in force immediately before the transfer date.
6.118 Subclause 36(1) also incorporates into the Corporations Law the text of other provisions of the FS Code which support the operation of Divisions 2 and 3 of Part 4B of the FS Code. In particular, the text of any necessary interpretation provisions, sections 28, 29 and 128 of the FS Code and any relevant regulations are incorporated.
6.119 To ensure that the provisions of the FS Code which are incorporated into the Corporations Law operate effectively within the general structure of the Law, a number of modifications have been made to the incorporated provisions. These modifications are contained in subclause 36(2). For example, references to an SSA have been changed to references to ASIC. This ensures that the incorporated provisions provide ASIC with appropriate regulatory powers.
6.120 Currently, offers of benefits in a friendly society benefit fund are exempted from complying with the fundraising provisions in Part 7.12 and the managed investment provisions in Chapter 5C of the Corporations Law pursuant to Class Order relief granted by ASIC. It is expected that ASIC will continue this relief.
6.121 As a result, where a friendly society offers interests in a benefit fund the fundraising provisions in Part 7.12 and the managed investment provisions in Chapter 5C of the Corporations Law will not apply. Instead, the provisions of the FS Code incorporated by clause 36 will apply. However, where a friendly society offers securities other than benefits in a benefit fund, such as shares or debentures, the fundraising provisions in Part 7.12 of the Corporations Law will apply.
Part 7-Transitional provisions
6.122 Part 7 contains provisions about:
- how unclaimed money and other property relating to transferring financial institutions under the previous governing Codes is to be dealt with; and
- regulations that may be made to deal with other transitional issues arising out of the application of the Corporations Law to transferring financial institutions.
Clause 37 - Unclaimed money
6.80 The intention is that the unclaimed money provisions in the Corporations Law will apply without modification to unclaimed monies which arises after the transfer date. Those monies will be paid to ASIC in accordance with the usual Corporations Law procedures. However, unclaimed monies which are paid to State or Territory authorities prior to the transfer will remain with those authorities or will be dealt with under the relevant State or Territory laws-those monies will not be transferred to ASIC.
6.81 There are two types of unclaimed monies dealt with under the Corporations Law which may arise in relation to matters which occurred prior to the transfer date but will not yet be in the hands of relevant State or Territory authorities as at the transfer date. These types of unclaimed monies require transitional provisions to ensure that they will be collected by State and Territory authorities rather than ASIC.
6.82 Section 414 of the Corporations Law deals with the compulsory acquisition of shares from persons who dissent from a scheme of arrangement or reconstruction approved by a majority of members under Part 5.1 of the Corporations Law. Section 414 is applied by the previous governing Codes, with modifications. It is intended that any property which becomes unclaimed as a result of a scheme entered into prior to the transfer date should be administered under the unclaimed money laws of the States and Territories. Subclause 37(1) applies section 414 to any sum or other property to which that section had applied under the previous governing Codes. Subclause 37(3) substitutes the Minister responsible for unclaimed money in the relevant Code for ASIC, so that if any transferring financial institutions hold such monies as at the transfer date, they will be required to pay it within the time limits set out section 414, except that rather than paying it to ASIC (as required by section 414) it is paid to the relevant Minister responsible for unclaimed monies.
6.83 A similar framework is established for unclaimed monies which may be payable by liquidators under section 544 (as applied by the previous governing Codes). Monies which remain in the hands of liquidators relating to liquidations which occurred prior to the transfer date will be covered by section 544, but liquidators will be required to pay them to the relevant Minister responsible for unclaimed money, rather than to ASIC.
Clause 38 - Modification by regulations
6.80 In addition to the power in clause 28 which permits modifications to the Corporations Law in relation to transferring financial institutions during the transitional period, clause 38 permits ongoing modifications to be made in relation to specified subject matters not only in respect of those institutions but also other classes of institutions engaged in financial business.
6.81 This power may be used to make modifications to the Corporations Law necessary or desirable due to the nature of the business of the entities concerned, their particular membership structure, or due to interaction with other regulations applying to institutions of a particular class. Most of the envisaged modifications would arise out of the special interaction of the company/member relationship with the financial service provider/customer relationship.
6.82 The types of regulations made under this clause might include:
- modifying the rights of inspection of members' registers (since this right may, in the case of building societies and credit unions, be inconsistent with laws relating to the privacy of the customers of those institutions);
- modifying the requirements to issue share certificates in respect of certain types of shares;
- procedures for issuing, canceling or redeeming membership shares or redeemable preference shares; or
- modifying reporting requirements to members.
6.83 Like the power to make regulations modifying the law during the transitional period, the regulations made pursuant to the ongoing regulation making power cannot modify the law so as to create significant offences or increase penalties or obligations giving rise to existing penalties.
Clause 39 - Regulations may deal with transitional, savings or application matters
6.84 Subclause 39(1) provides for a broad-based regulation making power to deal with matters of a transitional, application and savings nature connected with the transfer of transferring financial institutions to the Corporations Law framework, or the consequential amendments to the Corporations Law made by this Bill. This includes power to save the application of various things which applied prior to the transfer date.
6.85 Subclause 39(2) expressly provides for modifications made under subclause 39(1) to apply or save provisions (with or without modifications) of Commonwealth, State or Territory law, including provisions which have been repealed or amended, or by otherwise specifying rules to deal with the matter or consequence or outcome of the matter for the purposes of the Corporations Law.
6.86 Subclause 39(3) expressly provides that the regulations may deal with the continued effect of instruments made, or things done, under the previous governing Codes, with or without modifications. Subclause 39(4) expressly authorises the making of regulations which allow a specified authority (such as ASIC) to make determinations in this regard. There is a complementary regulation making power which can be used in connection with preserving instruments and things done relevant to other Acts which may apply to transferring financial institutions (such as the Banking Act and the Life Insurance Act).
6.87 Subclause 39(5) specifically refers to regulations made to handle the external administration of transferring financial institutions, which were, prior to the transfer date, subject to external administration other than pursuant to the Corporations Law as applied by previous governing Codes. Most entities under external administration at the transfer date would be covered by the transitional provisions in clause 11.
6.88 It may not be possible, prior to the transfer date, to pass regulations relating to all matters which require transitional, savings or application provisions, as some may not be identified until a specified matter arises. Accordingly, it is considered highly desirable to allow such transitional, savings and application regulations to operate retrospectively where necessary, so that complex legal difficulties do not arise due to an unintended lapse of the legal effectiveness of a particular instrument, act or thing done under the previous governing Code. Any retrospective regulations would be subject to scrutiny to ensure they did not unduly interfere with person's rights. However, in the cases envisaged for retrospective provisions it is more likely that they are designed to preserve rights back to the transfer day and prevent undesirable consequences.
Clause 40 - Court may resolve transitional difficulties
6.89 If, notwithstanding the powers to modify the operation of the Corporations Law under regulations and ASIC administrative powers, transitional difficulties do arise, interested persons (such as the transferring financial institution, members or officers of the institution, and other affected parties) may apply to the Court under clause 40 for an order to remove the difficulty. Subclause 40(2) provides that any such order has effect notwithstanding a provision of the Corporations Law. This power is expressly conferred in subclause 40(3) subject to the Constitution, to ensure that the powers conferred on the Court under the clause do not exceed the powers that could be validly conferred.
6.90 Items 2 - 62 provide for amendments to the rest of the Corporations Law consequential on the addition of the new Schedule 4 at the end (see further the explanatory material for Part 1 of Schedule 3).
Items 2, 4 - 5, 8 - 13, 15, 17 - 27, 49, and 51 - 59
6.91 These items repeal or amend a number of provisions of the Corporations Law by deleting definitions of, and references to, institutions, regulators or laws which are no longer meaningful in the context of the Corporations Law following the transfer of financial institutions and friendly societies to the Corporations Law.
6.92 A definition of 'APRA' is inserted in section 9 of the Corporations Law.
Items 6, 7, 30, 31, 32 and 36
6.93 Existing sections 136 and 137 of the Corporations Law deal with the mechanisms for adoption, modification and repeal of a company constitution. Existing Part 2F.2 deals with special voting procedures for variation of class rights, which may be relevant in the context of changes to a company constitution. Section 9 includes a definition of 'constitution'.
6.94 Amendments to the Life Insurance Act made by Schedule 4 of this Bill propose to introduce a special regime under that Act for the adoption of benefit fund rules by friendly societies as part of their company constitution, modification of benefit fund rules and consequential amendments to other parts of the constitution. These provisions will impact on the mechanisms set out in sections 136, 137 and Part 2F.2 of the Corporations Law.
6.95 These items add notes explaining the effect of the provisions dealing with benefit fund rules in the Life Insurance Act on the mechanisms in the Corporations Law, and changes the definition of 'constitution' in section 9 of the Corporations Law to recognise the impact that those provisions may have on the content of a company's constitution.
Items 14 and 16
6.96 The definitions of 'share' and 'withdrawable share' in section 9 of the Corporations Law are repealed. The term 'withdrawable share' is no longer used in the Corporations Law. The existing definition of the term 'share' no longer is applicable to some types of shares, particularly the 'membership share' introduced by the new Schedule 4 to the Corporations Law.
6.97 A provision is inserted after section 92(2) of the Corporations Law providing that interests in friendly society benefit funds are 'securities' for the purposes of Parts 7.3 to 7.6 of the Corporations Law. Those Parts deal with the licensing and conduct of participants in the securities industry, including dealers and advisers.
6.98 The licensing and conduct of dealers and advisers in relation to friendly society products is currently regulated under Division 4 of Part 4B of the FS Code. The FS Code provisions are almost identical to similar provisions in Parts 7.3 to 7.6 of the Corporations Law.
6.99 The effect of item 28 will be to apply the licensing and conduct provisions of Parts 7.3 to 7.6 of the Corporations Law to dealings in friendly society products rather than the provisions of Part 4B of the Code. Given the similarity of the provisions, there will be little change in the requirements applying to persons authorised to deal in, or advise on, friendly society products.
6.100 This will ensure that persons who conduct a business of dealing in, or advising on, benefits of a benefit fund will be required to be licensed by ASIC and subject to the licensing provisions of the Corporations Law. However, amendments to the Corporations Regulations will ensure that a friendly society will not be required to be licensed merely because of any dealing with a person in relation to its own securities. This is consistent with a similar exemption provided to bodies corporate in Corporations Regulation 7.3.12.
6.101 It is anticipated that the current exemptions in section 128 of the FS Code for health benefit funds and superannuation funds will be maintained in the Corporations Regulations. Section 30 of the Corporations Act 1989 allows the making of regulations amending the application of the licensing and conduct provisions of the Corporations Law.
6.102 Existing Part 1.2B of the Corporations Law explains how various parts of the Corporations Law affect financial institutions under the FI Codes. As those entities will become companies, the Part is no longer required and will be repealed.
Items 33 and 45
6.103 After transfer, all transferring financial institutions will be companies, so there will be no easily identifiable difference, in terms of the type of registration, between, say, a credit union and a building society. This is a significant difference to the position under the previous governing Codes, where building societies and credit unions were registered under separate distinct categories.
6.104 However, under section 66 of the Banking Act, there are restrictions on the use of the expressions 'bank' and like words, 'building society', 'credit union' and 'credit society' without the consent of APRA. APRA may impose conditions on its consent. It is expected that APRA will develop a policy for the use of such terms, which may include conditions about how entities are structured in terms of their membership and voting. This will be one of the critical issues that transferring financial institutions will need to consider when deciding which company type and membership structure they wish to adopt.
6.105 After transfer, this will be the mechanism for distinguishing between credit unions, building societies and other forms of ADIs. Only an ADI which has consent under section 66 of the Banking Act to use the expression building society or credit union will be permitted to do so.
6.106 With respect to friendly societies, the position is somewhat different. There will be restrictions on the use of the expression 'friendly society' relating to financial business in the Life Insurance Act and APRA will be given power to determine that a company may not use that expression. APRA will also have power to consent to entities using the expression.
6.107 However, some friendly societies are not engaged in financial business and therefore do not fall within APRA's sphere of operations. It is expected that State and Territories will establish restrictions on the use of the expression 'friendly society' in connection with other types of business (including pharmacy business).
6.108 The proposed amendment to section 147 the Corporations Law set out in item 33 will allow the regulations to provide that a prescribed word is unacceptable to include in a company name unless a specified authority (including a State and Territory authority) has consented to the company using or assuming the name, or if the company is otherwise permitted to use the name under a specified provision of a law (at the Commonwealth, State or Territory level). This will enable the Corporations Law framework to support the names restrictions imposed under other legislation at the Commonwealth, State and Territory level, because ASIC will be able refuse to register a company name which includes restricted words (such as building society, credit union or friendly society) unless the applicant is entitled to use or assume that name under the other relevant laws.
6.109 The proposed amendment to section 601DC set out in item 45 will provide for a complementary power in relation to names of registrable Australian bodies and foreign companies. The amendment to section 147 made by item 33 only applies to company names.
6.110 Transferring financial institutions will be deemed to be registered under the name they had immediately before the transfer date (subject to the possible addition of 'Limited'), so any that had restricted words in their name will not need to obtain a consent for the purposes of the regulations. Further, each law which restricts the use or assumption of restricted words (such as the Banking Act and the Life Insurance Act) already provides, or will provide, for transitional arrangements so that relevant transferring financial institutions will not be in breach of those provisions.
6.111 The other way the Corporations Law framework supports the names restrictions in other laws is by giving ASIC power to direct a change of name. This is discussed immediately below.
Items 34 and 46
6.112 Existing section 158 of the Corporations Law authorises ASIC to direct a company to changes its name in certain circumstances. The amendment proposed in item 34 will extend this authorisation so that ASIC will be permitted to direct a company to change its name if a consent of an authority under the amended subsection 147(4) is withdrawn, or if the company has breached a condition on consent given by an authority under amended subsection 147(4), or if the company ceases to be otherwise permitted to use or assume the name under amended paragraph 147(4)(b).
6.113 This will allow ASIC to direct that a company remove one or more words from its name if, under other laws dealing with restricted words, it is no longer entitled to use or assume that name.
6.114 The amendment to subsection 601DJ(1) is a complementary amendment which relates to the names of registrable Australian bodies and foreign companies.
Items 35, 37 and 38
6.115 Existing subsections 169(8), 249A(2) and 249J(1) of the Corporations Law provide for how joint holders of shares in a company or interests in a scheme should be treated in the context of the rules regarding registers of members and meetings of members.
6.116 These items amend the relevant subsections so that they extend to joint guarantors, since many transferring financial institutions may have members in this category.
Items 39 - 41
6.117 These items substitute existing references to 'Australian Prudential Regulation Authority' in paragraphs 461(1)(j), 462(2)(h) and subsection 462(3) of the Corporations Law with the acronym 'APRA', which will be defined in section 9.
Items 42 - 44
6.118 Existing subsection 482(1) of the Corporations Law deals with the power of the Court to stay or terminate the winding up of a company on the application of a creditor or contributory. The subsection will be amended so that, in the case of a company registered under the Life Insurance Act, APRA will have power to apply to the Court to have a winding up stayed or terminated.
6.119 Existing section 511 permits applications to be made to the Court by a liquidator, contributory or creditor, to determine questions arising in the context of a voluntary winding up. The section will be amended so that, in the case of friendly societies registered under the Life Insurance Act, APRA will have power to apply to the Court to have those questions determined. The proposed power does not extend beyond friendly societies, since other types of company registered under that Act may not be wound up voluntarily.
6.120 This power will complement the other functions and powers APRA will have regarding external administration of companies registered under the Life Insurance Act proposed in Schedule 4 of the Bill.
Items 48 and 50
6.80 These items remove existing special exemptions for financial institutions from the fundraising disclosure provisions in Part 7.12 and the fundraising liability provisions in Part 7.11 of the Corporations Law. With the transfer of regulation of these financial institutions to the Commonwealth, these exemptions are no longer necessary.
Items 60 and 61
6.81 These items include subclause 29(5) of Schedule 4 as a civil penalty provision. See further the explanation of subclause 29(5) under item 1.
6.82 Item 60 amends existing section 1317DA. When Schedule 1 of the Corporate Law Economic Reform Bill 1998 takes effect section 1317DA will be replaced with a subsection numbered 1317E(1). Item 61 makes a corresponding amendment to the replacement provision.
6.83 The commencement provisions take effect so that if section 1317DA is replaced by a new subsection 1317E(1) before this Bill commences, item 60 will not come into operation.
6.84 This item adds a new Division 11A and section 1465A to Part 11.2, which deals with commencement and application of certain changes to the Corporations Law. Proposed section 1465A explains the purpose of the addition of new Schedule 4.
6.85 Part 3 contains a miscellaneous amendment to the Corporations Law.
6.86 This item corrects and error in paragraph 437D(a) of the Corporations Law arising out of a drafting omission in Act No. 48 of 1998. The reference to 'Australian bank' in paragraph 437D(3)(a) was changed to 'Australian ADI' by that Act, but due to a drafting omission, a second reference to 'bank' in the paragraph was not replaced.
7 Schedule 4 - Amendment of the Life Insurance Act 1995
The purpose of Schedule 4 to the Bill is to establish a competitively neutral prudential regime for financial institutions providing life insurance products. This will be achieved by regulating both life insurance companies and benefit fund friendly societies under the Life Insurance Act. Friendly societies are presently regulated under a State and Territory regime.
All friendly societies will also become registered as companies under the Corporations Law - see Schedule 3 - but those that do not have benefit funds will not require prudential regulation under the Life Insurance Act. Friendly societies that only offer health insurance business will only be regulated under the National Health Act. A small number of friendly societies that presently undertake benefit fund business and registered health insurance business will be jointly regulated under the Life Insurance Act and the National Health Act.
The proposed amendments to the Life Insurance Act will increase the flexibility and overall efficiency of the regulatory arrangements to appropriately cover friendly societies. The Life Insurance Act and its subordinate legislation will recognise the distinct characteristics of friendly societies, in particular, the benefit fund structure and the rights of members. The proposed changes include:
- additional flexibility in the application of actuarial standards to recognise differences in the operations of friendly societies;
- a new actuarial standard to provide for adequate capitalisation outside statutory funds (or benefit funds). This will serve a similar objective to the existing management fund capital standard for friendly societies and will replace the fixed initial and continuing capital requirements for life companies;
- a new provision to allow a life company to seek an APRA declaration to have its insurance business (other than health insurance business or insurance against loss of, or damage to, property) and annuity business regulated as 'life insurance business';
- a new provision to allow a life company to seek an APRA declaration to have business consisting of the provision of eligible financial benefits regulated as 'life insurance business';
- a new provision to allow a life company to restructure or terminate a statutory fund subject to APRA's approval. At present a statutory fund may only be restructured through a process of division or amalgamation;
- additional powers for APRA to make prudential standards in order to protect the interests of policy owners. APRA may also direct a life company to take an action if the company has contravened the Act or the direction is necessary in the interests of policy owners. These powers will enable APRA to impose specific corrective action and facilitate early intervention to prevent a crisis from emerging; and
- provision for APRA to give relief from certain financial reporting requirements.
It is also proposed that friendly societies be able to continue to use the voluntary wind up mechanisms established in the Corporations Law. The amendments also transfer to the Commonwealth the administration of unclaimed moneys that accrue to friendly societies.
The proposed amendments will restrict the assumption or use of the expression 'friendly society' in relation to a financial business carried on by a body corporate. That is, a body corporate that is not a friendly society for the purposes of the Life Insurance Act will need to seek APRA's consent to use the expression in respect to its financial business. This measure will protect the use of the expression 'friendly society' so as to reduce market confusion about whether financial business undertaken by the body corporate is prudentially regulated.
Another consequence of friendly societies becoming life insurance companies under the Life Insurance Act is that they will be able to seek approval to be an RSA institution under the Retirement Savings Account Act 1997. Proposed amendments to taxation legislation are included in this Bill (Schedule 7) to provide competitively neutral taxation treatment for the RSA business of friendly societies. The taxation rates for this business will be set in the accompanying Income Tax Rates Amendment (RSAs Provided by Registered Organizations) Bill 1999.
A number of related or minor amendments have been included to update the Life Insurance Act.
7.1 The amendments in this Schedule will commence on the transfer date.
Amended Section 3 - Object
Items 1 - 4
7.2 An additional object of the Life Insurance Act will be to protect the interests of persons entitled to other kinds of benefits provided in the course of carrying on life insurance business. An example is to protect owners of eligible financial benefits declared by APRA (under section 12B of the amended Life Insurance Act) to be life insurance business.
7.3 The objects section of the Life Insurance Act will also make it clear that there will be a number of special provisions that apply only to friendly societies.
Amended Section 9A - Continuous disability policy
7.4 As the Dictionary in the Schedule will include a definition of health insurance business (see item 73), these words may be omitted from subsection 9A(7).
Amended Section 11 - Life Insurance Business
Items 6 - 8
7.5 The existing section 11 of the Life Insurance Act defines what is and what is not life insurance business for the purposes of the Life Insurance Act. The notes inserted by Items 6 and 8 make it clear that declarations made under sections 12A and 12B will extend the kinds of business that are life insurance business and limit the kinds of business that are not life insurance business for the purposes of the Life Insurance Act.
7.6 The reference to 'friendly society' will be omitted from paragraph 11(3)(a). This will remove the exclusion from the Life Insurance Act for friendly societies.
Amended Section 12 - Classes of Life Insurance Business
7.7 Subsection 12(2) will be rephrased to retain the effect of existing paragraph 12(2)(a). This will provide that APRA may declare that business included in one class of life insurance business (ordinary or superannuation) may be treated for the purposes of the Life Insurance Act as if it were included in the other class of life insurance business.
Items 10 and 12
Proposed Section 12A - Declarations that insurance or annuity business is life insurance business
7.8 Proposed section 12A will enable a life company to seek a declaration from APRA that certain insurance or annuity business is life insurance business for the purposes of the Life Insurance Act. Consideration cannot be given under this provision to the business of health insurance or insurance against loss of, or damage to, property. This provision replaces the existing declaration power in paragraph 12(2)(b).
7.9 This will allow APRA to consider treating as life insurance business certain insurance or annuity business that does not fall clearly within the section 9 definition of 'life policy'. In making such a declaration, APRA may have regard to a number of criteria specified in subsection 12A(4). For instance, APRA may consider whether the business is similar in nature to life insurance business, whether it would be appropriate for the business to be regulated under the Life Insurance Act or whether it would be more appropriate for the business to be regulated under some other law.
7.10 APRA may use the power to declare a certain insurance or annuity product to be life insurance if it does not satisfy the definition of life policy in section 9. Examples of the types of products that may be declared under this power are interim short-term accidental death policies, short-term income protection policies, or short term annuity products. However, it is intended that APRA will not use the section 12A declaration power in respect of an insurance or annuity product that would be more appropriately regulated under other legislation, such as the Insurance Act 1973.
Proposed Section 12B - Declaration that other financial business is life insurance business
7.11 Proposed section 12B will operate on a similar basis to section 12A but enables a company to seek a declaration from APRA that an eligible financial benefit is to be treated as life insurance business for the purposes of the Life Insurance Act. To be considered an eligible financial benefit, the conditions in subsection 12B(1) must be satisfied. For example, the benefit needs to be provided in accordance with a contract, it needs to involve an amount of money rather than the provision of a service or facility and is not excluded by being regulated under other specified legislation or regulations.
7.12 A declaration made under sections 12A or 12B will only apply to the company that has made the application and would not broaden the general concept of a life policy. Therefore, a similar product offered by another provider would not be life insurance business unless that other provider also obtains a declaration under sections 12A or 12B.
7.13 Under both sections 12A and 12B, where the company making the application is not yet a life company a separate application for registration would also need to be lodged and accepted by APRA for the company to be able to operate any declared business as life insurance business. Subsection 17(4) makes this clear by stating that a company must not intentionally carry on business that has been declared to be life insurance under sections 12A or 12B unless the company is registered under the Life Insurance Act (item 12).
7.14 Under sections 12A and 12B existing life insurance companies and new entrants will have opportunities to develop new products that are prudentially regulated as life insurance business. This provides scope for life companies to broaden the range of products offered to consumers.
Proposed Part 2A (Divisions 1 - 5) - Special provisions relating to life companies that are friendly societies
Proposed Division 1 - Preliminary
Proposed Section 16A - Overview
7.15 Proposed section 16A provides an overview of the application of the amended Life Insurance Act to friendly societies. The section refers to the amendments that define the concept of a friendly society. It also clarifies that a friendly society will be a life company if it carries on life insurance business in Australia. In determining whether a company carries on life insurance business, the effect of the modified operation of key concepts and the declaration powers (sections 12 and 12B) must be taken into account.
7.16 The overview also notes that the amended Life Insurance Act will apply to life companies that are friendly societies by taking into account the following: the modified operation of key concepts (Division 3); the modifications relating to statutory funds (Division 4); other modifications including those made by regulations (Division 5); and special provisions in relation to friendly societies (including provisions about auditors and winding up).
7.17 Subsection 16A(6) will ensure that where a provision of the Life Insurance Act has been modified (for example, by the regulation making power under proposed section 16ZC or existing section 261), references to that provision will be taken to mean references to the modified provision.
Proposed Section 16B - Definitions
7.18 Proposed section 16B introduces definitions that are required for the application of the special friendly society provisions.
7.19 Subsection 16B(2) establishes the concept of 'adequately adopted' which is the process by which a friendly society must adopt benefit fund rules or amendments to benefit fund rules before seeking APRA approval. The rules will need to be adopted by the company in a way set out in the Prudential Rules. The level of adoption required will vary depending on the nature of the proposed rules or amendments and could be by resolution of the Board of Directors of a friendly society or by special resolution of the members of a friendly society. APRA will make a judgement about whether the level of adoption adequately takes into account the interests of members of the relevant company. Given ASIC's corporate governance and consumer protection roles, APRA may consult ASIC on this matter.
Proposed Division 2 - Friendly societies and how this Act applies to them
Proposed Section 16C - What is a friendly society?
7.20 For the purposes of the Life Insurance Act, a friendly society will be a company that either:
- becomes registered under the Life Insurance Act from the transfer date under the transitional arrangements (see Item 11 of Schedule 8); or
- that APRA determines to be a friendly society under subsection 16C(2).
7.21 APRA may vary or revoke a determination that a company is a friendly society for the purposes of the Life Insurance Act.
7.22 Prudential Rules may be established about the circumstances in which APRA may exercise its powers to determine a company to be a friendly society or to vary or revoke such a determination. It is expected that the Prudential Rules establishing when a company is a friendly society will focus on companies that gain registration under the Life Insurance Act to conduct life insurance business (including that determined under sections 12A and 12B) and reflect the special characteristics of friendly societies. It is intended that APRA will not make determinations under subsection 16C(2) in the absence of Prudential Rules. As Prudential Rules are disallowable instruments the matters that APRA will consider in making a determination that a company is a friendly society will be subject to Parliamentary scrutiny. However, for administrative convenience, the application of those rules, in the form of a determination under section 16C that a company is a friendly society, will not be a disallowable instrument. The determinations will be subject to judicial review.
7.23 APRA will not need to make a determination in respect of a transferring friendly society that becomes registered under the transitional arrangements (see Item 11 of Division 5 of Schedule 8).
Proposed Section 16D - Act applies to friendly societies in accordance with this Part
7.24 The Life Insurance Act will apply to friendly societies subject to the provisions of Part 2A, including the modifications in Divisions 3 and 4 and any other modifications that may be made under regulations.
Proposed Section 16E - Restriction on use of the expression friendly society
7.25 It is intended to restrict the assumption or use of the expression 'friendly society' by making it an offence for certain bodies corporate to use the expression in relation to a financial business they carry on in Australia. A friendly society registered under the Life Insurance Act can use the expression without seeking APRA's consent. Any other body corporate will require APRA's consent to use the expression 'friendly society' in respect to its financial business. This measure will protect the use of the expression 'friendly society' so as to reduce market confusion about whether financial business undertaken by an entity is prudentially regulated. This measure is consistent with the 1998 amendment to the Banking Act (section 66A) that restricts the use of expressions such as authorised deposit taking institution .
7.26 The maximum penalty for failure to comply with these requirements will be 50 penalty units. If a body corporate is convicted of an offence then, under subsection 4B(3) of the Crimes Act 1914, the body corporate may be liable for a fine of up to five times the maximum that would be applicable to a natural person. However, a natural person may also be guilty of an offence under this section if he or she aids or abets, directly or indirectly, or is party to, the body corporate in committing the said offence. (Other maximum penalties introduced by the amendments will apply on the same basis.)
7.27 A company that was a friendly society under the FS Code prior to the transfer date will not need to seek APRA's approval to use the expression 'friendly society' if it continues to undertake service or fraternal friendly society activities. For example, such an entity will be able to continue to market itself as a friendly society and will only require APRA's consent if it subsequently commences to undertake some form of financial business.
7.28 A related matter dealt with in the amendments to the Corporations Law is the use of the expression 'friendly society' in the registered company name.
Proposed Division 3 - Modified operation of key concepts
Proposed Section 16F - Issue, ownership etc of policies
7.29 To enable the Life Insurance Act to apply appropriately to the benefit fund business of friendly societies, proposed section 16F will provide key concepts. These concepts will also apply to all other laws of the Commonwealth unless a contrary intention appears (subsection 16F(4)). Significant concepts developed in the section are:
- a friendly society will be taken to issue a policy to a person when it accepts an interest in a benefit fund in accordance with the benefit fund rules;
- the benefit fund rules are taken to be the terms of the policy;
- the owner of the policy is taken to be the person that applies for an interest in a benefit fund or the person that has received those rights by assignment or transfer;
- the amount required to be paid under the benefit fund rules as a condition of entitlement to the rights is taken to be a premium; and
- the policy is taken to be referable to the benefit fund.
Proposed Division 4 - Modified operation of provisions relating to statutory funds
Proposed subdivision 1 - Modifications
Proposed Section 16G - References to a statutory fund are references to an approved benefit fund
7.30 This section generally provides for regulatory neutrality, in that the provisions of the Life Insurance Act that apply to the statutory funds of life companies also apply to the approved benefit funds of friendly societies. However, there are some exceptions to this principle stated in other provisions in Subdivision 1 of Division 4 (see discussion of sections 16H - 16K) or if there is a contrary intention in a particular provision or brought about by regulations (see proposed section 16ZC). These exceptions reflect the different nature of benefit fund business, including the provision of a single product and the significance of benefit fund rules.
Proposed Section 16H - Modification of section 34
7.31 Proposed section 16H modifies the operation of section 34 of the Life Insurance Act which describes what money, assets and investments constitute assets of a statutory fund. Section 34 will apply to a friendly society as if existing subsections 34(2), 34(3) and 34(4) were omitted and the provisions in section 16H were substituted.
7.32 The modifications require a friendly society to keep the assets of an approved benefit fund distinct and separate from the assets of other approved benefit funds and from all other money, assets, or investments of the friendly society. There are two exceptions to this:
- a friendly society may invest assets of two or more approved benefit funds in a single investment if the investment is in accordance with the approved benefit fund rules of each of the funds and any applicable Prudential Rules. In such a joint investment, the asset will be regarded as an asset of each of the contributing approved benefit funds in proportion to their respective contribution; and
- a friendly society may maintain a single bank account for money that constitutes assets of two or more approved benefit funds if the account is maintained in accordance with any applicable Prudential Rules.
7.33 These modifications are based on similar provisions in the FS Code (sections 99 and 103) and will thus allow friendly societies to maintain their existing investments after the transfer. As benefit funds are intended to manage the assets of a single product, the ability to jointly invest the assets provides additional investment opportunities. The present Life Insurance Act requires assets to be maintained within the statutory fund, but since one statutory fund can contain a large number of different life insurance products the scope for asset pooling between products already exists under these provisions.
Proposed Section 16I - Modification of section 38
7.34 Section 16I modifies the operation of section 38 of the Life Insurance Act that deals with the expenditure and application of statutory funds. The modification adds an additional requirement to section 38 as it will apply to a friendly society. The additional requirement is that a friendly society may only apply assets of an approved benefit fund or mortgage or charge such assets in accordance with the approved benefit fund rules. This modification is based on a similar provision in the FS Code (section 101).
Proposed Section 16J - Modification of section 43
7.35 Section 16J modifies the operation of section 43 of the Life Insurance Act that deals with the investment of statutory funds. The modification adds an additional requirement to section 43 as it will apply to a friendly society. This requirement is that the investment of the assets of an approved benefit fund must be in accordance with the approved benefit fund rules and comply with any applicable Prudential Rules. This modification is based on a similar provision in the FS Code (section 103).
Proposed Section 16K - Modification of section 45
7.36 Section 16K modifies the operation of section 45 of the Life Insurance Act that deals with the transfer of assets between funds. The modification adds subsection 45(5) that will allow a friendly society to transfer assets between the management fund and approved benefit funds in accordance with the requirements of section 45 (eg on a fair assets value basis).
Proposed subdivision 2 - Approved benefit fund rules
Proposed Section 16L - Approval of benefit fund rules
7.37 Section 16L and subsequent provisions in subdivision 2 of Division 4 of Part 2A provide the process for APRA to approve benefit fund rules, amendments to approved benefit fund rules and amendments to a company's constitution that are consequential upon such changes. Once APRA approval has been attained, these provisions require the lodgement of the rules or amendments with ASIC and establish that the changes form part of the company's constitution. (See Part 2 of Schedule 3 of the Bill, including the amendments to the definition of constitution , sections 136 and 137 and Part 2F.2 of the Corporations Law.)
7.38 The processes established in subdivision 2 replace the requirements in Part 4A of the FS Code for the SSA to approve the establishment of the benefit fund and register the benefit fund rules if they have been established in accordance with the Code and AFIC standards. Under the FS Code, a single regulator served both a corporate governance and prudential role for friendly societies. In comparison, the Commonwealth regime has been developed to take into account a joint APRA and ASIC regulatory regime for life companies. Accordingly, the provisions reflect the following roles for the two regulators: prudential regulation by APRA, and corporate governance and disclosure regulation by ASIC.
7.39 As the benefit fund rules establish the rights of the benefit fund members it is desirable to have an independent regulator scrutinise new benefit fund rules or amendments to approved benefit fund rules. For instance, the approval process (in particular, the adequately adopted process - see section 16C) could require a special resolution of members to adopt the proposed changes of the benefit fund rules. APRA might consider this appropriate if, for example, the amendments being considered by the friendly society involved significant changes to the financial entitlements of the benefit fund members or the riskiness of their investment. In the absence of this process, there is a possibility that the friendly society would be able to make substantial changes to benefit fund entitlements without involving benefit fund members in the decision-making process.
7.40 The approval process is appropriate for friendly societies because the financial products offered by this industry are established by the benefit fund rules (and are exempted from the operation of the Insurance Contracts Act 1984 by Part 9 of that Act). In comparison, other life companies issue a policy when they enter into contracts that constitute the policy. Such contracts are not easily changed after they are issued.
7.41 The proposed process for the approval of benefit fund rules requires a company to apply in writing to APRA for approval of benefit fund rules for a benefit fund operated, or to be operated, by the company. The application will need to comply with Prudential Rules. A company that makes an application will either be a friendly society already registered under the Life Insurance Act or a company seeking to be registered. Transitional provisions will deem the existing benefit funds and benefit fund rules of friendly societies that become registered under the transfer arrangements to be approved in accordance with the requirements of these provisions (items 11(7) and (8) of the transitional provisions - Division 5 in Schedule 8).
7.42 Subsection 16L(3) provides that APRA must approve benefit fund rules if a written application has been made in accordance with any applicable Prudential Rules and if APRA is satisfied that:
- the carrying on of the activities will constitute the carrying on of life insurance business. Life insurance business includes life policies under section 9 and business declared to be life insurance under sections 12A or 12B;
- the benefit rules are consistent with the Life Insurance Act (defined to include regulations, actuarial standards, prudential standards and Prudential Rules made under that Act); and
- the rules have been adequately adopted (in accordance with proposed subsection 16B(2)).
7.43 A company will be guilty of an offence if it is required by Prudential Rules to notify members of the approved benefit fund rules and fails to do so. The maximum penalty for a failure to comply with these requirements will be 50 penalty units.
Proposed Section 16M - Lodging approved benefit fund rules with ASIC
7.44 A company must lodge a copy of its approved benefit fund rules with ASIC in accordance with any ASIC requirements. Approved benefit fund rules will form part of a friendly society's constitution. This will enable individuals to obtain a copy of the constitution from ASIC offices.
7.45 The company will be guilty of an offence if it does not lodge the approved benefit fund rules with ASIC within 14 days after the day on which APRA approved the rules (under section 16L). The maximum penalty for a failure to comply with these requirements will be 5 penalty units.
Proposed Section 16N - When approved benefit fund rules come into force
7.46 This section establishes when approved benefit fund rules come into force. If the rules specify the date of effect, the rules will come into force from that day. Otherwise, for an existing friendly society the rules will come into effect from the day they are lodged with ASIC. If a company is not yet a friendly society under the Life Insurance Act, the rules will come into force on the day it becomes a friendly society for these purposes (ie, it is registered under the Life Insurance Act and is determined to be a friendly society under section 16C).
Proposed Section 16O - Approved benefit fund rules form part of a company's constitution
7.47 Approved benefit fund rules that come into force will become part of the constitution of a company. This preserves the FS Code position that benefit funds are established under the rules of a society.
7.48 Amendments to the Corporations Law will recognise the requirements of the amended Life Insurance Act for the adoption of benefit fund rules by friendly societies as part of their companys' constitutions, modification of benefit fund rules and consequential amendments to other parts of the constitutions.
Proposed Sections 16P - 16T - Amending approved benefit fund rules
7.49 These provisions require a similar approval (proposed section 16Q) and lodgement process (section 16S) for the amendment of approved benefit fund rules as for the initial approval of the rules. If a friendly society does not follow this process, the amendment will not be effective (proposed section 16P). The matters that APRA will consider in approving the amendment, and the relevant offence provisions, are also consistent with those in section 16L.
7.50 Proposed section 16R will establish a process for APRA to seek action if it considers that approved benefit fund rules are deficient because they are inconsistent with the Life Insurance Act. APRA may require a friendly society to propose an amendment of the approved benefit fund rules to rectify the deficiency and to submit the amendment for APRA's approval (under section 16Q).
- If the friendly society submits a proposed amendment within the reasonable period specified by APRA in its notice (under subsection 16R(2)), APRA can approve the amendment under section 16Q and the friendly society will then lodge the amendment with ASIC in accordance with section 16S. An approved amendment will come into force in accordance with proposed section 16T.
- If APRA refuses to approve the amendment under section 16Q or the friendly society fails to submit an amendment within the specified time, APRA may amend the rules to rectify the deficiency (subsection 16Q(4)). APRA must give the friendly society written notice of the amendment (subsection 16Q(5)). The amendment will come into force from the day it is lodged (by APRA) with ASIC (section 16T). If APRA makes such an amendment, the friendly society will be guilty of an offence if it is required (by Prudential Rules) to notify its members of the amendment (subsection 16Q(6)) and does not do so. The maximum penalty for a failure to notify is 50 penalty units.
7.51 An amendment of approved benefit fund rules that is in force under section 16T takes effect as an amendment of the constitution of the friendly society by force of section 16P. This is consistent with the section 16O treatment of approved benefit fund rules.
Proposed Sections 16U - 16Y - Approval of consequential amendments of company's constitution
7.52 Consistent with the processes established to approve the benefit fund rules, the provisions will enable APRA to approve amendments to a company's constitution that are consequential upon the approval or amendment of its benefit fund rules. This will enable a friendly society to undertake a single process to amend its benefit fund rules and related parts of its constitution - rather than having to also pursue the Corporations Law requirements to amend its constitution in relation to minor consequential matters.
7.53 Proposed section 16U will provide for a friendly society to seek APRA's approval of consequential amendments as part of the same application for approval of benefit fund rules (under section 16L) or amendments to the approved benefit fund rules (under section 16Q). The application for consequential amendments must be in accordance with Prudential Rules. APRA may approve the consequential amendments if satisfied that the amendments are consequential on the proposed benefit fund rules or the amendment of benefit fund rules and do not also deal with other matters. APRA may consult ASIC in considering these matters. The same offence provisions as those under sections 16L and 16Q will apply if the friendly society is required to notify members of the amendments and fails to do so.
7.54 Section 16U will only be used by APRA to approve minor changes to a company's constitution that flow from new or amended benefit fund rules. For example, the approval process may be appropriate where the addition of a new benefit fund to the company's constitution requires additional cross-references to other parts of the constitution.
7.55 Proposed section 16V applies if APRA considers that the constitution of a company is deficient because, as a result of the adoption or amendment of approved benefit fund rules, the constitution is inconsistent with those rules. Section 16V applies in a similar manner to section 16R (see above) that enables APRA to seek amendments to approved benefit fund rules. That is, APRA may give a company a written notice requiring the company to submit for approval consequential amendments (in accordance with the requirements in Prudential Rules) to rectify deficiencies in its constitution.
- APRA may approve the consequential amendments if satisfied that the amendments rectify the deficiency. APRA must give the company written notice of its decision.
- If APRA refuses to approve the proposed amendments or the company fails to submit consequential amendments, APRA may, in writing, determine consequential amendments of the constitution to rectify the deficiency. APRA must immediately give the company written notice of the amendments.
- The company will be guilty of an offence if APRA has either approved or made consequential amendments to the company's constitution and Prudential Rules require the company to notify some or all of its members of the consequential amendments and the company fails to do so. Failure to notify members attracts the same maximum penalty as that applying under the notification provisions of sections 16L, 16Q and 16R.
7.56 If APRA approves consequential amendments of a company's constitution (under sections 16U or 16V), the company will need to lodge a copy of the consequential amendment with ASIC (proposed section 16W). This provision is consistent with the requirements that a company lodge with ASIC a copy of approved benefit fund rules (section 16M) and approved amendments to approved benefit fund rules (section 16S) and applies a similar maximum penalty as those sections.
7.57 Proposed section 16X provides that consequential amendments approved by APRA under either section 16U or section 16V come into force on the day lodged with ASIC or a later day if specified in the amendments. This provision is consistent with the application of section 16T (that deals with when an amendment of approved benefit fund rules come into effect).
7.58 Section 16X ensures that a consequential amendment of a company's constitution which has been approved or determined by APRA under the process described above will take effect as an amendment of the constitution of the company. This is consistent with the outcome for benefit fund rules approved by APRA under the process established by the proposed amendments in this Bill and amendments to approved benefit fund rules. Proposed amendments to the Corporations Law (see Part 2 of Schedule 3 of the Bill - the amendments to the definition of constitution , sections 136 and 137 and Part 2F.2) will expressly acknowledge the proposed Life Insurance Act process for amending the benefit fund component of a company's constitution.
Proposed Section 16Z - Contractual effect of approved benefit fund rules and policies
7.59 Proposed section 16Z provides that approved benefit fund rules of a friendly society will have effect as a contract between the friendly society and each person who is the owner of a policy referable to the benefit fund. One of the consequences of the contractual effect is stated in subsection 16Z(2) - that is, the contract will have effect and be able to be enforced as a contract between a friendly society and a person who is the owner of the policy. If the friendly society that issued the policy transfers or assigns the liabilities to another company, subsection 16Z(2) provides that the contract will have effect and may be enforced with that other company.
7.60 The contractual effect established in this provision is in addition to the contractual relationship established in the Corporations Law between each company member (including benefit fund members) and the company, and each company member to every other company member. The provision in the Life Insurance Act will ensure that a full range of contractual remedies will be available to members if there is a breach of benefit fund rules - there may otherwise be limitations to the remedies available under the Corporations Law.
7.61 In combination, the Corporations Law provisions and section 16Z of the Life Insurance Act will have a similar effect as section 71 of the FS Code.
Proposed Division 5 - Other modifications
Proposed Section 16ZA - Assignment of a benefit fund interest
7.62 Section 200 of the present Life Insurance Act establishes the right for a policy owner to assign the policy to another person in accordance with the requirements of that section. For an assignment of an interest in a benefit fund, the requirements in subsection 200(2) will be replaced with the requirements in proposed section 16ZA. In particular, to be effective, the assignment must be made in accordance with the requirements in the relevant benefit fund rules. The remainder of section 200 will apply to the assignment of a benefit fund interest. The assignment of benefits is presently dealt with in section 124 of the FS Code.
Proposed Section 16ZB - Jointly regulated friendly societies
7.63 Proposed section 16ZB will enable a friendly society that becomes regulated under the Life Insurance Act because of the transitional arrangements and that was carrying on health insurance business immediately before the transfer date to continue to carry on that health insurance business. Section 234 of the Life Insurance Act otherwise prohibits a life company from undertaking mixed insurance business (though a similar exception was allowed for existing life companies that undertook general insurance before the Life Insurance Act commenced in 1995). The effect of the provision is that the friendly society's life insurance business would be regulated under the amended Life Insurance Act and its health insurance would continue to be regulated under the National Health Act. This is described as a jointly regulated friendly society . The section makes it clear that the application of the Life Insurance Act to these friendly societies may be modified by regulations made under proposed section 16ZC.
7.64 As section 234 of the Life Insurance Act will not permit other life companies to undertake mixed insurance business, there will be no other life companies, other than a small number of transferring friendly societies, undertaking both life insurance and health insurance business through the same entity. The amended Life Insurance Act will also ensure that the new declaration powers in sections 12A and 12B do not deal with health insurance business. The Dictionary in the Schedule will include a definition of health insurance business and will give it the same meaning as in section 67 of the National Health Act.
Proposed Section 16ZC - Modifications by regulations
7.65 In addition to the modifications set out in Part 2A, it is intended that the application of the Life Insurance Act to friendly societies will be able to be modified by regulations. The regulations making power is needed to deal with further modifications that may become apparent over time, to adapt procedures that cannot be applied to friendly societies immediately but may be able to be applied after a suitable transition period or to deal with detailed technical matters. For example, the concepts of a policy document and participating and non-participating policies are not easily translatable in law for friendly societies, but can be modified in the regulations.
7.66 It is envisaged that regulations under proposed section 16ZC will be used to deal with matters including:
- to provide that a memorandum of transfer for assignment of a life policy taken out with a friendly society is made in accordance with a prescribed form;
- to provide that a register of benefit fund members is to be kept by a friendly society;
- to apply different surplus distribution provisions for friendly societies;
- to clarify references to the term 'policy document' as applicable to friendly society business;
- to focus actuarial reporting requirements for friendly societies on individual benefit fund operations;
- to modify the operation of the Life Insurance Act in relation to a jointly regulated friendly society (see section 16ZB); and
- to modify certain directions provisions so that the directions cease to have effect once the voluntary winding-up of a friendly society commences.
7.67 The introduction of a regulation making power to provide for modifications of the Life Insurance Act for friendly societies is similar to the approach that was used to deal with existing life companies when that Act commenced in 1995 (see section 261).
Proposed amendments to sections 21, 23 and 24
Items 13 - 16
7.68 At present APRA may refuse an application for registration of a company if the applicant does not meet the capital requirements set out in paragraphs 21(3)(a), (b), (c) or (ca). Once registered, section 23 requires a life company to continue to meet the prescribed capital requirements.
7.69 The proposed amendments will repeal the existing initial and continuing capital requirements for life companies (paragraphs 21(3)(a), (b), (c) or (ca) and section 23) and the powers to modify the continuing capital requirements (section 24). These are to be replaced with requirements introduced by other amendments (Division 3 of Part 5 dealing with a new management capital standard) for the life company to have adequate capitalisation outside its statutory funds.
7.70 A minor amendment to paragraph 21(3)(e) will reword the paragraph to make its intention clearer.
Items 17 and 19 - 22
Amended sections 52 and 53 - Restructure and termination of statutory funds
7.71 At present the Life Insurance Act provides for the division and amalgamation of statutory funds. It is proposed that the Life Insurance Act be made more flexible by allowing for the restructure and termination of statutory funds. The broader provisions are consistent with those available under Divisions 3 and 4 of Part 4A of the FS Code.
7.72 The principal provisions will be set out in amended Division 3 of Part 4 (new sections 52 and 53) dealing with the restructure or termination of statutory funds. The existing Division 3 will be repealed (see item 22).
7.73 Proposed new section 52 provides for the restructure of statutory funds. Prudential Rules may provide that a life company can apply to APRA to restructure its statutory funds by making one or more policies that are referable to a statutory fund or funds become referable to another statutory fund or funds of the company (whether existing or proposed). If APRA approves the application, the restructure is to take place. The Prudential Rules will be able to deal with a range of matters including requirements for making the application, criteria for APRA to approve or refuse to approve the application, notification requirements, matters connected with how the restructure takes place, and information requirements by APRA following the restructure.
7.74 Subsection 52(4) will provide that APRA cannot approve the application where:
- the restructure will result in unfairness to the groups of policy owners of a transferring or receiving fund;
- the solvency standard will not be met by a transferring or receiving fund after the restructure; or
- in comparison to existing subsection 52(4), the capital adequacy standard is not required to be satisfied by the transferring and receiving funds immediately after the restructure. This recognises the possible benefits of the restructure to the operations of the life company. However, the standard will subsequently need to be satisfied by each fund;
- the company is being wound up when the application is made.
7.75 Proposed new section 53 provides for the termination of statutory funds. Prudential Rules may provide that a life company may apply to APRA to terminate one or more of its statutory funds. If the application is approved the termination is to take place. Subsection 53(2) provides an indication of the types of matters that may be dealt with in the Prudential Rules.
7.76 Subsection 53(3) will provide that APRA cannot approve the application in any of the following circumstances:
- the restructure will result in unfairness to the groups of policy owners of the fund or funds; or
- the company is being wound up when the application is made.
7.77 As a consequence of these changes, a number of amendments to linking provisions will also be made:
- the references in paragraph 30(e) will be changed to 'restructured or terminated'; and
- the heading for section 46 and the words of this provision will be amended to make it clear that there are only two ways that life company can change the statutory fund or fund to which a policy is referable or terminate a statutory fund. That is, the restructure or termination provisions of Division 3 need to be followed, or in the case of a change in the statutory fund, the subsection 35(4) process can be followed.
7.78 Subsection 46(2) will provide that a liquidator is able to restructure or terminate statutory funds without following the processes in Division 3. It is not necessary for APRA to be involved in approving the restructure or termination of statutory funds once a liquidator has been appointed to the life insurance company. That is, the liquidator will have the power to restructure or terminate the statutory funds without observing the procedures required for an operating life insurance company.
Proposed section 54 - Prudential Rules may deal with transitional matters
7.79 The present section 54 is no longer required because the notification procedures for a restructure or termination of a statutory fund will be established by the Prudential Rules under section 52 and 53. Item 22 repeals the existing section 54 because it is part of Division 3.
7.80 The new section 54 provides that Prudential Rules may be established to deal with transitional, saving or application matters arising from the amendments to Division 3 and the transfer for friendly societies to the Life Insurance Act. The two circumstances that are envisaged requiring coverage in the Prudential Rules are, where at the date the amendments to the Life Insurance Act take effect, an application had been submitted or an approval received:
- for the division of one or more statutory funds of a life company under the existing Division 3 provisions of the Life Insurance Act; or
- for the restructure or termination of a benefit fund under the FS Code.
7.81 This will ensure a smooth transition to the amended Life Insurance Act as it will enable actions taken under the present Division 3 of the existing Life Insurance Act or similar provisions of the FS Code to continue to have effect for the purposes of the amended Division 3.
Amended section 55 - Additional requirement for transfer of policies between statutory funds by endorsement
Items 18, 23 - 25
7.82 As the amendments in new Division 3 (restructure and termination provisions) will have a broader application than the existing Division 3 (division and amalgamation provisions), it is necessary to make clearer the role of the process in subsection 35(4), which allows a policy document to be endorsed so as to change the statutory fund or funds to which the policy is referable. This clarification will occur in the following ways:
- a note will be inserted in subsection 35(4) to make it clearer that if a policy is endorsed as prescribed in the subsection, it will also be necessary to comply with section 55 (see item 18);
- section 46 will clarify that APRA's approval is not required if the restructure is in accordance with subsection 35(4) and section 55; and
- additional words will be inserted in paragraph 55(2)(b) and subsection 55(3) to make it clearer that if a policy is transferred from one statutory fund to one or more statutory funds by the process of endorsement of the policy document established in subsection 35(4), then assets must be transferred in accordance with the section 55 requirements. The life company must notify the policy owner in accordance with the section 55 requirements.
7.83 In combination these amendments and those relating to Division 3 have the following effects:
- A policy will be able to be transferred from one statutory fund to one or more statutory funds if the policy document is endorsed to that effect. This process of transfer of policies by endorsement will not require a Division 3 approval from APRA. It would not be expected that this process would be utilised other than for transfers of one or a few policies at a time. The requirements of section 55 will need to be satisfied for these types of transfers.
- For transfers that extend beyond one or a few policies at a time, the restructure provisions of section 52 will need to be followed by the life company. Section 55 will not apply to restructures that attain approval under the section 52 process.
Proposed amendments to Part 5 - Solvency and capital standards
Items 26 - 28
7.2 Part 5 of the present Life Insurance Act deals with two actuarial standards applied to life companies - solvency and capital adequacy standards. The title of Part 5 will be broadened (item 26) to refer to 'capital standards' so that it can accommodate a new Division 3 providing for a management capital standard (see item 29).
7.3 Division 2 of Part 5 provides for a capital adequacy standard applicable to statutory funds. The application of this actuarial standard will be made more flexible by allowing it to be expressed as to set different standards of capital adequacy:
- for statutory funds of different companies;
- for different classes of statutory funds; or
- to have effect in relation to a statutory fund in circumstances specified in the capital adequacy standard.
7.4 This amendment will provide equal flexibility in the establishment of the capital adequacy standard and the solvency standard (Division 1 of Part 5). Under subsection 70(1B), the actuarial standard may provide that a life company may be taken to comply with the capital adequacy standard in respect of a statutory fund if it complies with the solvency standard in respect of the statutory fund.
7.5 In the first instance, these provisions enable the AFIC prudential standard 6.2.1 to be reimposed for friendly societies in satisfaction of the solvency and capital adequacy requirements. This will enable a smooth transition for friendly societies transferring into the Life Insurance Act. This is particularly appropriate given that the industry is still in a period of transition under the FS Code (most States joined the Code in October 1997).
7.6 Overall, the actuarial approach in the Life Insurance Act and under the FS Code are intended to produce a similar prudential outcome with the AFIC standards developed by reference to the solvency and capital adequacy standards set by the Life Insurance Actuarial Standards Board (LIASB). Any differences in the actuarial approaches under the two regimes predominantly reflect structural and operational differences in the respective industries. For example, the different industry approaches to meeting expenses- that is, friendly societies meet expenses for their life insurance business out of the management fund whereas most life insurance companies meet such expenses out of the statutory funds.
- AFIC prudential standard 6.2.1 applies broadly the same calculation method for solvency as the existing Life Insurance Act actuarial standards for solvency and capital adequacy. As a general comment, the solvency requirement under the AFIC standard is set at a level between the Life Insurance Act solvency and capital adequacy standards.
- AFIC prudential standard 6.2.6 is a management fund capital requirement. The expense component of this standard is based on the expense requirements of the business (the friendly society's management fund meets the expenses of the benefit funds) and thus serves a similar role to the expense reserve component in the LIASB standards. Under the Life Insurance Act, such a requirement will be reimposed on friendly societies by the new management capital standard (see below).
7.7 In the longer term, it is proposed to harmonise the requirements in the solvency, capital adequacy and management capital standards to the extent appropriate given structural differences in the way the two industries operate.
7.8 The minor amendment to subsection 73(1) ensures that APRA will be able to take into account the interests of prospective policy owners as well as existing policy owners in giving a capital direction to a life company.
Proposed Division 3 - Management capital standard
7.9 Division 3 of Part 5 will introduce a proposed new actuarial standard to provide for the setting of a management capital standard. The purpose of the new management capital standard is to ensure that:
- the financial position of the life company reflects an appropriate capital commitment to its life insurance business outside the statutory fund; and
- a life company will be able to meet its obligations in respect of any business it conducts that is not life insurance business as those obligations fall due.
7.10 This new actuarial standard will:
- serve a similar objective to the existing management fund capital standard for friendly societies that provides an expense component (see above) and an asset component that addresses risks in respect of asset quality (AFIC's prudential standard 6.2.6);
- in time??replace the fixed initial and continuing capital standards for life companies presently imposed through sections 21 and 23 respectively; and
- allow different standards of management capital to be set for different classes of companies or in different circumstances (as set out in the standard).
7.11 It is intended that the commencing management capital standard will reimpose the AFIC standard on friendly societies and reimpose the section 21 and 23 shareholder capital requirements on other life companies.
7.12 Proposed section 73D reintroduces the powers available in the present section 24 (that will be repealed under item 16). This is consistent with the removal of the continuing capital requirements (present section 23) and its replacement with the management capital standard for life companies. This provision will enable the Treasurer to make a written declaration that the management capital standard is to have effect in relation to a particular company with the modifications specified in the declaration. A declaration can only be made if the conditions in paragraphs 73D(2)(a) and (b) are met.
7.13 It will be a requirement of proposed new section 73E for every life company to comply with the management capital standard at all times.
7.14 APRA will be able to give management capital directions to particular life companies in the circumstances set out in proposed section 73F and a life company must comply with such a direction (subsection 73F(4)). This directions power serves a similar purpose to APRA's directions powers under section 68 (the power to give solvency directions) and section 73 (the power to give capital directions). APRA will be able to give management capital directions in either the circumstances described in subsection 73F(1) or in subsection 73F(2). APRA will only be able to make such a direction to a life company with the Treasurer's agreement. The decisions will become 'reviewable decisions' for the purposes of section 236 (see items 62 and 64) from 1 July 2002 at which time Treasurer's agreement will no longer be required. These arrangements are designed to be consistent with the application of the directions powers contained in sections 68 and 73. (The Financial Laws Amendment Act 1997 amended sections 68 and 73 to require the Treasurer to agree to directions given and amended the merit review provisions with respect to such decisions.)
Items 30 - 33
7.15 At present, the Life Insurance Act requires a life company to appoint an approved auditor (section 84) and APRA may approve a person to audit life companies (section 85). It is proposed that section 85 be broadened to allow two classes of approved auditors to be established: a person may be approved to audit friendly societies and/or other life companies. This will allow APRA to apply different requirements (such as the nature of audit experience) to a person seeking to be approved to audit life companies (other than friendly societies) vis-a-vis friendly societies.
7.16 Having two groups of approved auditors that are appropriate to the requirements of these two classes of life companies enables the services provided by the auditors to be tailored to the circumstances of their client life companies. For example, the audit requirements of a small regional friendly society, and thus the level of experience and expertise required of the auditor, will differ from that of a large, nationally or internationally focussed life company. Further, these provisions accommodate a continuity in friendly societies' present audit arrangements (refer to the transitional provisions of auditors - item 15, Division 5 of Schedule 8)
Proposed Division 8 of Part 6 - APRA's power to make exemption orders
7.17 It is proposed that Part 6 of the Life Insurance Act be expanded to include a new Division 8 that allows APRA to exempt life companies from certain financial reporting requirements of the Life Insurance Act. These provisions are based on the exemptions and modifications powers of Part 2M.6 of the Corporations Law. Amongst other things, these provisions will ensure that exemptions provided by an SSA (under section 361 of the FS Code) with respect to the financial reporting for one or more benefit funds of a friendly society can be re-imposed by APRA if appropriate.
7.18 APRA will be able to make specific exemption orders on an application by a life company as authorised by the company's directors (proposed section 125A) or make class exemption orders (proposed section 125B). The order will relieve the directors of the life company, the life company, the approved auditor or the appointed actuary from compliance with a financial reporting requirement specified in one of the sections listed in subsection 125A(1) or any other provision prescribed by the regulations for the purposes of the sections. APRA must not make an order unless it considers it appropriate to do so having regard to any criteria specified in Prudential Rules.
7.19 The order may be made subject to conditions and be indefinite or limited to a specified period. Non-compliance with a condition, imposed under subsection 125A(4)(a) will not be an offence. However it may lead to a direction being given to the life company by APRA under proposed section 230B.
7.20 APRA must give ASIC notice of the making, revocation or suspension of an order made under section 125A or section 125B.
7.21 The exemption powers for certain financial reporting requirements will allow APRA to tailor its reporting requirements to the particular circumstances of certain life companies or classes of life companies. For example, several provisions require separate reports for 'participating' and 'non participating' business. As these concepts are not used by friendly societies, APRA may consider using the class exemption orders in respect to such requirements. Further, APRA may accept that it is more efficient, but sufficiently robust, for certain types of business to be audited less frequently (eg small benefit funds that are closed to new business). Decisions made by APRA under sections 125A and B will not be disallowable by the Parliament but will be 'reviewable decisions' for the purposes of section 236 (see item 63). This is consistent with the status of decisions made by ASIC under Part 2M.6 of the Corporations Law.
Items 35 - 40
7.22 At present the Life Insurance Act allows life companies to be wound up only by order of the Court on an application of a judicial manager (under subsection 175(6)) or on application by APRA (under section 181). It is proposed that an additional method for winding up be allowed for a life company that is a friendly society. Voluntary winding up is available to friendly societies under the FS Code. Proposed subsection 180(2) will provide that a friendly society may be wound up voluntarily if each person with an interest in a benefit fund of the society is a member of the society and each member has only one vote on a special resolution to wind up the society. If a special resolution of the friendly society is passed, the wind up will take place in accordance with the voluntary winding up procedures of the Corporations Law subject to any additional or conflicting requirements established in the Life Insurance Act. Such an additional requirement will be that the friendly society lodges a copy of the special resolution with APRA within 7 days. The maximum penalty for contravention of this requirement will be 30 penalty units.
7.23 Proposed section 183A will allow a liquidator to apply to the Court for directions regarding any matter arising under the voluntary winding up of a friendly society. The liquidator must give APRA written notice of an intention to apply to the Court for directions.
7.24 Section 186 sets out some requirements for a liquidator to determine whether a life company has a policy liability to the policy owner and the amount of such a liability. Subsection 186(2) provides that a liquidator must make such determinations in accordance with "the directions of the Court". Since it is proposed to introduce a process of voluntary winding up for friendly societies, and the Court may not be involved in such a process, subsection 186(2) will be amended slightly to provide for "any directions of the Court".
7.25 Subsection 186(2A) will be inserted to require a liquidator to take into account the approved benefit fund rules of a friendly society in determining whether there is a policy liability and the amount of the liability. The liquidator need only take into account the benefit fund rules to the extent those rules are consistent with any directions of the Court. This provision will apply in any winding up of a friendly society, that is, whether it is by order of a Court or a voluntary winding up. One of the effects of subsection 186(2A) will be that a liquidator, in establishing the amount of the policy liability, will take into account whether the policy owner is entitled to a distribution of surplus by virtue of the benefit fund rules.
7.26 Having determined the policy liability under section 186, the liquidator will then apply the assets of the statutory funds in accordance with the requirements of section 187. Section 187 provides for the assets of the statutory fund to be applied in the following order of priority (to the extent that there are sufficient assets remaining after each step): the discharge of debts and claims referable to the business of the statutory fund - in accordance with subsection 556(1) of the Corporation Law; the policy liabilities of the statutory fund; other liabilities referable to that fund; and in such manner as the Court directs and considers equitable having regard to matters in paragraph 187(3)(d). These provisions will place a higher priority on assets being used to discharge policy liabilities than under the FS Code that allows the liabilities of the benefit fund to be met ahead of the policy liabilities. (Most friendly society liabilities fall against the management fund, rather than the benefit fund, so this legal difference will not have much practical effect.) The proposed treatment will ensure that the policy owners of all life companies including friendly societies receive the same priority in a winding up. The change is consistent with depositor priority under the Banking Act (section 13A).
7.27 The outcome of these provisions is that the policy liability of each member will be determined in accordance with the benefit fund rules. For example, a member that is entitled to a distribution of surplus would have that right reflected as a policy liability and the assets would be applied to meet that liability ahead of meeting other liabilities (except those required under section 556 of Corporations Law).
Transfer of Life Insurance Business
7.28 Part 9 of the Life Insurance Act provides for the transfer and amalgamation of life insurance business under a scheme confirmed by the Court. Subsection 190(5) will provide that Court approval for such a scheme will not be required if the transfer of the life insurance business is made under separate legislation. The proposed legislation - the Financial Sector (Transfers of Business) Bill 1999 - was introduced into Parliament concurrently with this Bill.
Provisions relating to policies
Items 42 - 49 and 51 - 56
7.29 Part 10 of the Life Insurance Act contains provisions relating to such matters as the general issue of policies, their assignment and mortgage and protection of policy owners' interests. Amendments to certain provisions of Part 10 (sections 199, 200, 206, 210, 211, 212, 216, 218, 226, 227 and 230) are required because the concept of life insurance business will be broadened to include business declared by APRA to be life insurance (under sections 12A and 12B).
7.30 The amendments will ensure that the Part 10 provisions apply to all policies, where appropriate, not only 'life policies'. This will provide a more neutral treatment of policy owners and life companies, irrespective of the nature of the product acquired from a life company. It is also consistent with the application of similar provisions of the FS Code to all benefit funds of friendly societies.
7.31 Transitional provisions relate to the assignment of interests in benefit funds and the registration of policies under section 227 (items 12 and 13 of Division 5 of Schedule 8).
7.32 Given that responsibility for prudential regulation of life insurance business will be amalgamated and vested in the Commonwealth, this item removes any claims or requirements that friendly societies could otherwise face under residual State and Territory legislation with respect to unclaimed monies.
Proposed Part 10A - Prudential standards and directions
7.33 Consistent with amendments introduced to the Banking Act as part of the Financial Sector Reform (Amendments and Transitional Provisions) Act 1998, it is proposed that the Life Insurance Act be amended to provide APRA with general standards and directions powers. These amendments draw upon similar provisions in the FI Code.
7.34 APRA needs to be an independent and operationally autonomous regulator to ensure the financial safety of depositors and to maintain stability and confidence in the financial system. Certain and flexible standards powers will allow APRA to respond very quickly and continuously to developments in financial products or the system, as a whole, or in a crisis to prevent contagion effects in the financial system. For this reason, it is proposed that a prudential standard will be a non-disallowable instrument.
7.35 Any direction would ultimately be subject to judicial review processes, but in order to preserve the integrity of directions as a prudential tool, they will not be subject to merit review processes nor disallowance by the Parliament. This is consistent with the standards and direction making powers of APRA under the Banking Act.
Proposed Division 1 - Prudential standards
Proposed Section 230A - Prudential standards
7.36 Proposed section 230A will give APRA the power to make standards on prudential matters for life companies (and to vary or revoke a standard). These prudential standards will specify the requirements to be met by life companies in order to protect the interests of policy owners and prospective policy owners of life companies. A prudential standard may require compliance by all companies, a specified class of companies or one or more life companies and may impose different requirements in different situations or in respect of different activities. Non-compliance with a prudential standard is not, by itself, an offence under the Life Insurance Act, but may result in a direction being given. The prudential standards will formalise aspects of APRA's existing practices, such as the issuance of circulars to provide guidance on emerging industry practice.
Proposed Division 2 - Directions
Proposed Section 230B - Directions by APRA
7.37 Proposed section 230B will enable APRA to give directions to life companies if it considers the company has contravened the Life Insurance Act or conditions imposed under the Life Insurance Act or if it is in the interests of policy owners or prospective policy owners. Section 230B will be a general directions power and will not replace the role of specific directions powers in the Life Insurance Act (ie solvency and capital directions) or the proposed management capital directions (section 73F).
7.38 The primary function of the directions power is intended to prevent institutional failure and thereby maintain financial system stability. Clearly, if a life company does not comply with the Life Insurance Act (including subordinate legislation, such as a prudential standard or regulation) an APRA direction will be an important trigger to correct its behaviour and ensure that the institution remains sound. Early corrective action may be appropriate in the interests of policy owners and prospective policy owners even if the Life Insurance Act has not been breached.
7.39 The types of directions that may be given by APRA are set out in subsection 230B(2). These include a number of specific directions that may be given (eg a direction not to issue any policy or collect any premium) and a broad power to make a direction regarding the way in which the affairs of a life company are to be conducted or not conducted. The direction may deal with the time by which compliance is required and the directions will have effect until it is revoked in writing by APRA. APRA will also be given the power to revoke a direction, thereby providing flexibility, eg, if there are changed circumstances or there is a valid objection by the institution concerned.
7.40 Subsection 230B(5) authorises the life company to comply with the direction despite anything in its constitution or any contract or arrangement to which it is a party. However, to ensure the independence of a judicial manager or a liquidator, APRA must not give a direction in relation to any part of a life insurance business that is under external control.
Proposed Section 230C - Direction not a ground for denial of contractual obligations
7.41 Because there is a risk that a direction from APRA may trigger conditions in contracts that could destabilise an already fragile institution, proposed section 230C provides that a direction by APRA under section 230B should not provide a ground for any other party to deny its contractual obligations, accelerate any debt or close out any transaction with the institution. However, a party to a contract is relieved from obligations to a life company if the life company is prevented from fulfilling its obligations under the contract (except if APRA has directed the life company not to discharge any policy or other liability). A party to a contract affected by a direction under section 230B may apply to the Federal Court for an order to deal with the matter (but not in a way that would contravene the direction). Section 230C is consistent with section 11CD of the Banking Act.
Proposed Sections 230D and 230E - Information about Directions and Secrecy requirements
7.42 Proposed subsection 230D will allow APRA to publish information relating to any direction it has issued in the Commonwealth Gazette. However, APRA will be under no obligation to do so since this may, in particular circumstances, cause needless concern in the community about the soundness of the institution involved. If it has previously published a direction and then revokes that direction, APRA must also publish the revocation. Accountability is addressed by requiring APRA to report to the Treasurer on directions when requested. However, this does not prevent APRA reporting to the Treasurer at any other time.
7.43 Information relating to directions will be subject to the secrecy requirements of the APRA Act unless the information has been published in the Commonwealth Gazette.
Proposed Section 230F - Non-compliance with a direction
7.44 A life company will be guilty of an offence if it does not comply with a direction given to it by APRA under section 230B. The maximum penalty for a body corporate will be up to 250 penalty units per day that the offence is committed. An officer of a life company is guilty of an offence if the officer fails to take reasonable steps to ensure that the company complies with a direction and the officer's duties include ensuring such compliance. The maximum penalty for an officer will be up to 50 penalty units per day that the offence is committed.
Amendments to subsections 236(1) and 236(1A) - Reviewable decisions
Items 58 - 64
7.45 Subsection 236(1) outlines the decisions made under the Life Insurance Act that are reviewable by APRA and that may subsequently be reconsidered by the Administrative Appeals Tribunal. The section sets out the process and the period within which a request for review must be made and also the period to make a decision.
7.46 To ensure consistency with the existing merit review provisions of the Life Insurance Act, the proposed amendments will expand the list of provisions that are reviewable decisions for the purposes of section 236. The amendments will add the following decisions to subsection 236(1):
- a declaration under subsection 12A(1) or 12B(2) that certain insurance or annuity business is, or other eligible financial benefits are, life insurance business;
- a decision under section 16E that a body corporate may assume or use the expression friendly society ;
- a refusal to give approval under subsection 16L(3) for benefit fund rules, under subsection 16Q(3) for a proposed amendment of approved benefit fund rules, or under subsection 16U(3) for the consequential amendments of a company's constitution;
- a management capital direction under subsection 73F(1) or (2), or a decision to vary, or a refusal to revoke or vary, such a direction under subsection 73F(6) or (7); and
- a decision to make a specific or class exemption order under subsection 125A(2) or 125B(2).
7.47 Subsection 236(1A) provides that certain decisions will not be reviewable decisions for a five year period (from 1 July 1997 when this provision took effect). To ensure consistency with existing provisions relating to solvency and capital adequacy directions, the Treasurer's agreement will be sought for decisions made under section 73F prior to 1 July 2002. After that date, it will no longer be necessary to obtain the agreement of the Treasurer and the decision will become a reviewable decision under section 236.
Proposed Section 251 - Compensation for acquisition of property
7.48 Section 251 provides certainty that the Constitutional requirement in section 51(xxxi) - that any acquisition of property or removal of property rights be on just terms - is satisfied by the Life Insurance Act. If an acquisition is not on just terms, the affected person may apply for compensation from the Commonwealth. There is, however, no expectation that the operation of the Life Insurance Act will lead to an acquisition of property other than on just terms. A similar provision was included in the 1998 amendments to the Banking Act.
Items 66 - 68
7.49 This Bill provides an opportunity for the Life Insurance Act to be tidied up by removing certain provisions that were transitional on the replacement of the Life Insurance Act 1945. The provisions that will be repealed relate to the capital arrangements for companies registered overseas or life companies incorporated overseas. These provisions are not required because the capital requirements referred to are to be replaced by the new management capital standard. The following provisions will be repealed on this basis: paragraph 254(7)(a), subsection 254(9) and section 255.
Amendments to the Dictionary in the Schedule
Items 69 - 78
7.50 New definitions will be added, and existing definitions removed or amended as a result of the amendments to the Life Insurance Act.
7.51 The following definitions will be inserted:
- actuarial standards - the definition has been inserted to ensure that the distinction between actuarial standards (those made under Division 4 of Part 6) and the new prudential standards are recognised;
- prudential standards - APRA will be able to make prudential standards for life companies under the Division 1 of Part 10A of the Life Insurance Act; and
- section 12A or 12B policy - a policy that is issued in the course of carrying on business declared to be life insurance under new sections 12A or 12B.
- The following definitions will be amended:
- approved auditor - to distinguish an approved auditor in relation to a life company that is a friendly society from an approved auditor of a life company other than a friendly society.
- friendly society - to reflect that friendly societies will be regulated under the Life Insurance Act rather than under State and Territory legislation;
- policy - the definition has been expanded to take into account section 12A or 12B policies (see above);
- policy document - as above; and
- this Act - the definition has been changed to reflect other amendments to the Life Insurance Act including new types of subordinate legislation and the modifications to the Life Insurance Act (and the subordinate instruments) that apply to friendly societies.
7.52 The definition of eligible assets will be repealed as the concept will no longer be relevant once sections 21 and 23 of the Life Insurance Act are repealed and replaced with the new management capital standard.
8 Schedule 5 - Amendment of the Reserve Bank Act 1959
The purpose of Schedule 5 is to apply the Criminal Code to offences against provisions of the Reserve Bank Act.
8.1 Schedule 5 commences on the day on which this Bill receives Royal Assent.
Items 1 to 5
8.2 These items will apply the Criminal Code to all three offences against provisions of the Reserve Bank Act and insert notes with each offence provision. The Criminal Code sets out the general principles of criminal responsibility that will be applied to all offences in Commonwealth legislation. The Criminal Code is due to come into force in March 2000.
8.3 Applying the Criminal Code will not change the existing offence or maximum penalty levels associated with conviction for any offence contained in the Reserve Bank Act.
9 Schedule 6 - Miscellaneous amendments
The purpose of Schedule 6 is to make miscellaneous amendments to Commonwealth legislation.
9.1 Except as specified below the provisions in Schedule 6 commence upon Royal Assent.
9.2 Item 3 commences on a day to be fixed by Proclamation. A date cannot be fixed for the amendment until it is known when AFIC will be dissolved by appropriate State laws.
9.3 Item 6 is taken to have commenced on the commencement of Schedule 12 of the Financial Laws Amendment Act 1997, which amended the Life Insurance Act.
9.4 Item 10 commences immediately prior to the commencement of Part 1 of Schedule 13 of the Financial Sector Reform (Amendments and Transitional Provisions) Act 1998. Part 1 of Schedule 13 amended the administration of the Life Insurance Act.
9.5 Items 18 and 19 commence immediately prior to the commencement of the APRA Act to ensure that no company is adversely affected by the incorrect reference.
9.6 Item 26 will commence on the transfer date.
Australian Securities and Investments Commission Act 1989
9.1 This item will insert a new subsection in section 11 of the ASIC Act which will permit powers and functions to be conferred on ASIC directly by State and Territory laws. This facility can be used by States and Territories to confer powers and functions on ASIC which, prior to the transfer of functions, were performed by State and Territories or their agencies (such as AFIC and SSAs) in relation to transferring financial institutions.
9.2 This facility will permit State and Territory transitional and savings provisions in respect of laws that governed financial institutions prior to the transfer date (such as the FI Code and the FS Code) to expressly provide that a function or power which is now vested in a body such as AFIC or an SSA is, following the transfer, vested in ASIC.
9.3 The new facility for direct conferral by State or Territory laws will be in addition to the facility in subsection 11(8) which permits ASIC to perform functions and powers as agent of a State or Territory pursuant to an arrangement or agreement consented to by the Minister.
9.4 The new subsection provides that a direct conferral under State or Territory law must be:
- in accordance with the provisions of an agreement entered into between the Commonwealth and the State or Territory concerned which has been approved by the Minister for the purposes of the subsection; or
- approved by the Minister for the purposes of the subsection.
9.1 This item corrects a numbering and formatting error in material inserted into the Financial Sector Reform (Consequential Amendments) Act 1998 by Parliamentary amendments.
9.2 This item repeals existing subparagraph 127(4)(aa)(ii). That subparagraph deals with ASIC disclosing information to AFIC to assist with its functions and powers. AFIC will no longer be operational following the transfer of financial institutions and friendly societies, so the subparagraph will become redundant.
Authorised Deposit-taking Institutions Supervisory Levy Imposition Act 1998
9.12 This item makes a minor wording change.
Authorised Non-operating Holding Companies Supervisory Levy Imposition Act 1998
9.13 This item makes a minor wording change.
Financial Laws Amendment Act 1997
9.14 This item corrects a drafting error to an amendment made to the Life Insurance Act.
Financial Sector Reform (Amendments and Transitional Provisions) Act 1998
9.15 This item repeals the commencement provision for Part 3 of Schedule 4 as there is no Part 3 of that Schedule.
Items 8, 9, 11 and 12
9.16 These items update the references to legislation that were not passed in 1998.
9.17 This item amends a drafting error in the original legislation.
9.18 These proposed amendments correct a drafting error in item 236 of Schedule 16.
9.19 Item 5 of Schedule 19 is being repealed. The mechanism for transferring the prudential regulation of building societies, credit unions and special service providers from the Financial Institutions Code 1992 to the Banking Act is being inserted by item 7 in Schedule 8.
Financial Sector Reform (Consequential Amendments) Act 1998
9.20 This item repeals subsections 2(3), 2(6), 2(8), 2(9), 2(10), 2(11) and 2(12) as the APRA Act has already commenced while the Superannuation Legislation (Commonwealth Employment) Repeal and Amendment Bill 1998 was not passed in 1998.
9.21 This item corrects a reference contained in the amendments to the Financial Corporations (Transfer of Assets and Liabilities) Act 1993. Given that the amendment commenced on the commencement of the APRA Act, the correction will commence (retrospectively) immediately before the commencement of that legislation.
9.22 This item corrects a misdescribed amendment.
General Insurance Supervisory Levy Imposition Act 1998
9.23 This item makes a minor wording change.
High Court of Australia Act 1979
Items 21 - 24
9.24 Amendments to the Banking Act, that took effect from 1 July 1998, extended the coverage of the legislation from banks to a wider range of financial institutions known as ADIs.
9.25 The proposed consequential amendments replace references of 'bank' to 'ADI' and hence have the effect of extending the High Court of Australia Act 1979.
Life Insurance Supervisory Levy Imposition Act 1998
9.26 This item makes a minor wording change.
National Health Act 1953
9.27 This provision deals with friendly societies that carry on health insurance business and life insurance business. These friendly societies will be jointly regulated under the amended Life Insurance Act and the National Health Act - see proposed amendments to the Life Insurance Act (item 11 of Schedule 4). The Life Insurance Act amendment will provide a regulation making power to enable modifications in the application of the Life Insurance Act in relation to these jointly regulated friendly societies.
9.28 On a consistent basis, section 82QAA of the National Health Act will be amended (by Item 26 of this Schedule) to provide a regulation making power to modify the application of that Act to jointly regulated friendly societies.
Retirement Savings Account Providers Supervisory Levy Imposition Act 1998
9.29 This item makes a minor wording change.
Superannuation Supervisory Levy Imposition Act 1998
9.30 This item makes a minor wording change.
10 Schedule 7 - Consequential Amendments of Acts
The amendments in Schedule 7 amend references to 'friendly societies', 'credit unions' and 'building societies' in Commonwealth legislation where necessary and appropriate. The amendments in Schedule 7 are consequential to the amendments contained in this Bill and the Financial Sector Reform (Amendments and Transitional Provisions) Act 1998 which provide for the transfer of regulatory responsibility for friendly societies, credit unions and building societies from the States and Territories to the Commonwealth. These amendments contain no new policy and simply ensure that the Government's policy in relation to these financial institutions is implemented in other Commonwealth legislation.
This Schedule also provides 18 months for building societies, credit unions and friendly societies to obtain any necessary approvals under the Financial Sector (Shareholdings) Act 1998.
Another matter addressed in this Schedule is the taxation treatment of friendly societies. Apart from changing the definition of 'friendly societies' in a manner consistent with the consequential amendments made in other Acts, amendments are being made to the Income Tax Assessment Acts 1936 and 1997 to achieve the following:
- continue to apply Division 8A to the life insurance business of friendly societies; and
- to provide appropriate tax treatment for RSA business of friendly societies (by becoming life insurance companies under the Life Insurance Act, friendly societies will be able to seek approval to be an RSA institution under the Retirement Savings Account Act 1997). The taxation rates for this business will be set in the accompanying Income Tax Rates Amendment (RSAs Provided by Registered Organizations) Bill 1999.
10.1 Schedule 7 commences on the transfer date, as defined in clause 2 of this Bill, except as specified.
10.2 Items 43 and 44 of Schedule 7 commence either on the proclamation of Part IV of the Financial Corporations Act 1974 or the transfer date, whichever occurs later.
1 Item 118 of Schedule 7 commences either immediately prior to the commencement of section 17 of the proposed Life Insurance (Conduct and Disclosure) Act 1999 or the transfer date, whichever occurs later.
2 Item 206 of Schedule 7 will not commence if the proposed Assistance for Carers Legislation Amendment Act 1999 commences on or before the transfer date.
3 Items 205 and 207 of Schedule 7 commence either immediately after the commencement of the proposed Assistance for Carers Legislation Amendment Act 1999 or the transfer date, whichever occurs later.
References to 'building societies' and 'credit unions'
Items 1 -18, 22 - 41, 43, 44, 46 - 52, 54 - 58, 106, 107, 109, 110, 113, 116, 119 -121, 123 -146, 149 - 152, 154 - 233 and 236 - 247
4 The proposed consequential amendments contained in the above items delete or amend references to 'credit union' and 'building society' (or equivalent). In these circumstances, the references will be redundant once the transfer of regulatory responsibility for these financial institutions is complete, as credit unions and building societies (or equivalent) will be regulated under the Banking Act as ADIs rather than the State and Territory based FI Code. ADIs cover those institutions currently licensed as banks, any other body corporate that APRA licenses to take deposits; and upon agreement to their transfer, credit unions and building societies. It should be noted that these amendments have been made, where appropriate, to reflect that cooperative societies will continue to be subject to State and Territory legislation and will not be classified as ADIs.
References to 'friendly societies'
Items 19 -21, 42, 53, 108, 111, 112, 114, 115, 117, 118, 122, 147, 148, 153, 234 and 235
10.1 The proposed amendments contained in the above items delete or amend references to 'friendly society' where occurring. This is as a consequence of the new arrangements whereby friendly societies that conduct life insurance business will be regulated under the Life Insurance Act, rather than the State and Territory based FS Code.
Financial Sector (Shareholdings) Act 1998
10.2 The proposed amendments to the Financial Sector (Shareholdings) Act 1998 contained in item 45 will provide state regulated entities transferring to the Commonwealth regime that are in breach of that Act a period of 18 months to apply to the Treasurer for approval under that Act.
10.3 Proposed item 45 provides that where a transfer or engagements or a merger takes effect on a date after the transfer date in accordance with the FI Code or the FS Code of a State or Territory, and the transfer or merger would result in a person holding a stake exceeding 15 per cent in a particular financial sector company, then the Treasurer is taken to have given an approval under section 14 for the person to hold the same percentage stake in the company. The approval is taken to specify a period of 18 months from the date of effect during which it remains in force.
Items 59 - 105
10.4 Appendix A to this schedule provides detailed notes on amendments to the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997.
10.5 This Bill will amend the following Acts to give effect to the second stage of the Government's Financial Sector Reform package as outlined above:
- Bankruptcy Act 1966
- Cheques Act 1986
- Child Care Payments Act 1997
- Child Support (Registration and Collection) Act 1988
- Commonwealth Inscribed Stock Act 1911
- Debits Tax Administration Act 1982
- Defence Force Retirement and Death Benefits Act 1973
- Employment Services Act 1994
- Farm Household Support Act 1992
- Financial Corporations Act 1974
- Financial Sector (Shareholdings) Act 1998
- Financial Transaction Reports Act 1988
- Fringe Benefits Tax Assessment Act 1986
- Health Insurance Act 1973
- Income Tax Assessment Act 1936
- Income Tax Assessment Act 1997
- Insurance Act 1973
- Insurance (Agents and Brokers) Act 1984
- Insurance Contracts Act 1984
- Life Insurance (Conduct and Disclosure) Act 1999
- Military Superannuation and Benefits Act 1991
- National Health Act 1953
- Petroleum Resource Rent Tax Assessment Act 1987
- Privacy Act 1988
- Proceeds of Crime Act 1987
- Retirement Savings Accounts Act 1997
- Sales Tax Assessment Act 1992
- Social Security Act 1991
- State Grants (Housing) Act 1971
- Superannuation Act 1976
- Superannuation Act 1990
- Superannuation Contributions Tax (Assessment and Collection) Act 1997
- Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Act 1997
- Superannuation Guarantee (Administration) Act 1992
- Taxation Administration Act 1953
- Termination Payments Tax (Assessment and Collection) Act 1997
- Veterans' Entitlements Act 1986
- Wool Tax (Administration) Act 1964
Appendix A to Schedule 7 - detailed notes on amendments to the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997
A.1 The amendments to the Tax Act primarily relate to establishing a regime for taxing the retirement savings account (RSA) business of friendly societies. Other amendments ensure that existing provisions in the Tax Act and the Income Tax Assessment Act 1997 relating to the taxation of friendly societies, credit unions and cooperative housing societies apply appropriately after the introduction of the Financial Sector Reform amendments.
Friendly societies and other registered organizations
Items 59 and 105
A.2 Items 59 and 105 amend the definition of 'friendly society' in subsection 6(1) of the Tax Act and subsection 995-1(1) of the Income Tax Assessment Act 1997 to ensure that a body that is recognised as a friendly society following the introduction of the financial sector reform amendments is treated as a friendly society for taxation purposes.
Items 61, 62 and 64
A.3 Items 61 and 62 amend the definitions of 'life assurance company' and 'registered organization' to ensure that a friendly society or other registered organisation is not treated as a life insurance company for purposes of the eligible termination payment provisions of the Tax Act.
A.4 Similarly, item 64 amends the definition of 'life assurance company' in section 110 to ensure that a friendly society or other registered organization is not treated as a life insurance company for purposes of Division 8 of the Tax Act.
Items 65 and 100 - 103
A.5 Items 65 and 100 - 103 make consequential amendments to ensure that RSAs operated by friendly societies or other registered organizations are taxed under Division 8A of Part III of the Tax Act rather than under Subdivision AB of Division 8 of Part III (RSAs operated by life insurance companies) or Division 7A of Part IX (RSAs operated by other financial institutions).
RSAs operated by friendly societies and other registered organizations
A.6 Division 8A of Part III of the Tax Act outlines the taxation treatment of friendly societies or other registered organizations that carry on life assurance business. Under Division 8A the taxable income of a registered organization is divided into three classes, each of which is taxed at a different rate.
A.7 The three classes of assessable income and appropriate rates are:
- the eligible insurance business class - which is taxed at a rate of 33%;
- the complying superannuation/roll-over annuity class - which is taxed at a rate of 15%; and
- the non-complying superannuation class - which is taxed at a rate of 47%.
A.8 A new class of assessable income will be established for the RSA business of friendly societies or other registered organizations. The RSA class will be split into two components:
- the RSA category A component taxed at a rate of 15%; and
- the RSA category B component taxed at a rate of 36%.
A.9 This will ensure that the RSA business of friendly societies or other registered organizations will be taxed consistently with the RSA business of competing entities.
Items 66 - 76
A.10 A number of definitions in subsection 116E(1) will be amended and new definitions inserted in relation to the amendments to Division 8A. Item 66 inserts a heading.
- 'annuity' - this definition is being amended to ensure that a pension, within the meaning of the Retirement Savings Accounts Act 1997, paid from an RSA is an annuity for the purposes of Division 8A (item 67).
- 'eligible insurance policy' - this definition is amended to ensure that an RSA policy is not an eligible insurance policy and is not included in the eligible insurance business class of a registered organization (item 68).
- 'life assurance policy' - this definition is amended to ensure that, for the purposes of Division 8A, an RSA provided by a registered organization is a life assurance policy (item 69).
- 'RSA assessable income' - that part of the total income of a registered organization for an income year that is from its RSA business (item 70).
- 'RSA asset' -an asset of registered organization that relates to the organization's RSA business (item 71).
- 'RSA business' - the business relating to the issuing of, or the undertaking of liability under, RSAs (item 72).
- 'RSA category A component' - the component of the RSA combined component worked out under new subsection 116N(2) (item 73).
- 'RSA category B component' - the component of the RSA combined component worked out under new subsection 116N(3) (item 74).
- 'RSA combined component' - the component of the taxable income worked out under section 116HE for the RSA class of business (item 75).
- 'Taxable contribution' - the definition of 'taxable contribution' is relevant for working out the taxable income of an RSA provider under new section 116L and the RSA category A amount of taxable income under new section 116M . The amount of taxable contributions is worked out under Part IX (item 76).
Items 77 - 80
A.1 Section 116G, which exempts a registered organization from tax on all its income other than income from its eligible insurance business, complying superannuation/roll-over annuity business and non-complying superannuation business, will be amended to ensure that income from its RSA business is assessable (item 77).
A.2 Section 116GA provides for the apportionment of gains and losses arising from the disposal of assets of a registered organization between the classes of assessable income based on the class to which the asset relates. Subsection 116GA(3) will be amended to ensure that, consistent with the RSA business of other RSA providers, the ordinary capital gains tax rules will apply to the disposal of assets relating to RSA business (item 78).
A.3 Section 116GB provides for the determination of the net capital gains of a registered organization that is to be included in each class of assessable income. Subsection 116GB(5) will be amended to ensure that prior year capital losses are applied to reduce the overall capital gains for the RSA class of income before reducing the capital gains of the other classes of assessable income (item 79).
A.4 Section 116GD allocates the assessable income of a registered organization between the classes of assessable income. New subsection 116GD(1A) will ensure that the RSA class of assessable income will include (item 80):
- any assessable income allocated to the RSA class under section 116GA or section 116GB;
- any amounts included in assessable income under new section 116M(2); and
- any other RSA assessable income.
A.1 Section 116H, which relates to the allowable deductions of a registered organization, will be amended to ensure that RSA contributions are treated as assessable income for the purposes of the section (item 81).
Items 82 - 85
A.2 Section 116HAB, which allows a deduction for expenditure incurred in obtaining superannuation premiums, will be amended so that it applies consistently to expenditure incurred in obtaining RSA contributions (items 82 - 85).
A.3 Section 116HAC, which allows a deduction for expenditure incurred in obtaining the investment component of relevant life insurance premiums, will be amended so that it does not apply to RSA contributions (item 86).
A.4 Section 116HD, which sets out the order for applying prior year losses against current year assessable income, will be amended so that losses are offset against the RSA class of assessable income before being applied to the other classes of assessable income (item 87). However, new subsection 116O will ensure that losses are not applied to reduce the RSA category A amount of the RSA component of assessable income.
A.5 Item 88 inserts new Subdivision B - RSA providers into Division 8A of Part III to outline the taxation treatment of an RSA provider that is a friendly society or other registered organization. New Subdivision B of Division 8A contains new sections 116K to 116Q .
- Broadly the amendments identify the taxable income of the RSA provider recognising:
- specific amounts which are exempt from tax;
- specific amounts which are included in the RSA combined component of the assessable income of the RSA provider; and
- specific deductions which are available to an RSA provider.
A.6 The amendments also work out the RSA combined component of taxable income. Once the RSA combined component of the taxable income of a registered organization is established, it is divided into an RSA category A component (which is taxed at a rate of 15%) and a RSA category B component (which is taxed at a rate of 36%)
Assessable income of an RSA provider
A.7 New section 116L provides that the assessable income of an RSA provider includes all taxable contributions made during the year of income to RSAs provided by the RSA provider. Investment income derived by RSA providers is included in the RSA provider's assessable income under the ordinary provisions of the income tax law.
Exempt Income of an RSA provider
A.8 New section 116Q exempts an RSA provider from tax on any amounts that, but for the operation of new subsection 116M(4), would have been taken into account under new paragraph 116M(2)(b) in calculating the RSA category A amount of the RSA combined component of taxable income.
A.9 New subsection 116M(4) excludes interest or any other amounts credited by an RSA provider to an RSA that is paying out a pension from the RSA category A amount of taxable income. The amount that is excluded from the RSA category A amount of taxable income, and which is exempt from tax under new section 116Q , is worked out under new subsections 116M(5) and (6).
A.10 If an RSA is paying out a pension in respect of the whole of the year of income that the RSA was in existence, then the whole amount credited to the RSA category A amount of taxable income will not be taken into account when calculating the assessable income. [ New subsection 116M(5)]
A.11 If an RSA is paying out an annuity for only part of the year of income that the RSA was in existence, then the amount that is not be taken into account when calculating the RSA category A amount of taxable income is calculated using the following formula:
Amount credited to RSA * (Number of days in part of year in respect of which the annuity was paid / Number of days in the year on which the RSA existed)
A.12 In this regard the number of days in the part of the year in respect of which the annuity was paid is the number of days in the period from the first day of the period to which the pension relates until either the end of the year of income or the day on which the RSA ceased to exist, whichever is earlier.
Allowable deductions of an RSA provider
A.13 New section 116P ensures that an RSA provider is not entitled to a deduction for amounts credited to RSAs.
Calculation of the RSA category A amount of taxable income
A.14 New section 116M sets out how to calculate the RSA category A amount of taxable income for a registered organization. The RSA category A amount is the sum of:
- all taxable contributions made during the year of income to RSAs [ new paragraph 116M(2)(a)] ; and
- other amounts (other than contributions) credited during the year of income to RSAs reduced by any amounts credited to RSAs that are paying out current pensions [ new paragraph 116M(2)(b) and subsections 116M(4) - (6)] ;
- less any amounts paid or withdrawn from RSAs other than benefits paid to, or in respect of, the holder of the RSA [ new subsection 116M(2)] .
A.15 In addition, in calculating the RSA category A amount, any tax paid in respect of RSAs is not taken to have been an amount paid from the RSA [ new subsection 116M(30)] .
Components of the RSA combined component
A.16 New subsection 116N provides that the RSA combined component of an RSA provider that is a friendly society or other registered organization is divided into an RSA category A component and an RSA category B component.
A.17 The RSA category A component is the RSA category A amount worked out under new section 116M . That is, the amount actually credited to RSAs.
A.18 The RSA category B component is the RSA combined component reduced by the RSA category A component. That is, the profit made by the friendly society or other registered organization on RSA business.
Restricting losses to the RSA amount of taxable income
- New section 116O operates to ensure that RSA providers cannot offset losses against RSA income. The new section applies if:
- the RSA provider has no taxable income;
- the RSA provider has no RSA combined component; or
- the RSA combined component is less than the RSA category A amount.
A.1 In these circumstances new subsection 116O(2) applies if the RSA provider has no taxable income or the taxable income of the RSA provider is less than the RSA amount. If new subsection 116O(2) applies:
- the RSA provider is taken to have both a taxable income and a tax loss for the year of income;
- the taxable income is equal to the RSA category A component;
- the tax loss is taken to be the amount that would have been the RSA provider's tax loss if the RSA category A component were not income derived;
- the RSA combined component and the RSA category A component are equal to the RSA category A amount; and
- all other components of taxable income are taken to be nil.
A.2 If the circumstances in new subsection 116O(1) apply and the taxable income of the RSA provider is equal to or greater than the RSA category A amount, then new subsection 116O(3) provides that:
- the RSA combined component and the RSA category A component are taken to be equal to the RSA category A component;
- the difference between the RSA category A component and that amount would, but for
new subsection 116O(3)
, have been the RSA combined component is to be applied to reduce the other components of taxable income in the order of:
- the EIB component;
- the CS/RA component;
- the NCS component.
Collection of tax from friendly societies that carry on RSA business
Items 98 and 99
A.1 These items amend sections 221AL(c)(ii) and 221AZE(2)(c)(ii) to ensure that net capital gains in relation to RSA business are appropriately taken into account in relation to the collection and recovery of tax from friendly societies or other registered organizations that carry on RSA business.
Credit unions, building societies and cooperative housing societies
A.2 The Bill makes some other consequential amendments to the Tax Act as a result of the Financial Sector Reform amendments.
Items 60 and 93
- These items make consequential amendments to:
- amend the definition of credit union in subsection 23G(1); and
- remove the definition of credit union in section 202A.
Items 63, 89 - 92, 94 -97 and 104
A.1 These items make consequential amendments to:
- remove references in the Tax Act to a building society in section 102M, paragraph 121AO(4)(b), subsection 159GP(1) and subsection 303(1); and
- replace references to a building society with a reference to cooperative housing society in section 202A and section 218.
11 Schedule 8 - Transitional, Saving and Application Provisions
The purpose of Schedule 8 is to provide the necessary transitional, saving and application provisions required to smoothen passage to the new regulatory/legislative framework outlined in this Bill and the Financial Sector (Transfers of Business) Bill 1999. This Schedule includes transitional provisions relating to the transfer of staff to APRA, the transfer of assets and liabilities from the SSAs and AFIC to APRA and ASIC (as appropriate), the granting of authorities and approval for using business names, and transitional provisions relating to unclaimed moneys. This Schedule also includes transitional provisions relating to the operation of the Life Insurance Act, including: the transfer of certain friendly societies into that Act; transitional provisions relating to auditors and actuaries; the continued effect of declarations made under the Life Insurance Act before its amendment; and the effect of amendments on taxation legislation. It also includes a regulation making power to cover off any transitional, saving or other matters necessary to effect a smooth transfer of State and Territory financial institutions that cannot be detailed in primary law.
11.1 Schedule 8 commences on the day on which this Bill receives Royal Assent.
Part 1 - Transitional provisions relating to transfer from State and Territory regulatory regimes
Division 1 - Interpretation
11.2 Item 1 contains the definitions used throughout Schedule 8.
11.3 FIC body covers building societies, credit unions and special service providers that were previously regulated under the FI Codes. It does not capture associations as these institutions will not be subject to prudential regulation.
Division 2 - Transitional Provisions relating to staff
11.4 The following items are transitional provisions for the transfer of staff from the SSAs and AFIC to APRA.
11.5 This item requires APRA to employ staff previously employed by an SSA or AFIC as specified in a transfer agreement between, or on behalf of, the Treasurer and the relevant State or Territory minister(s). The transfer agreement has effect only to the extent that it is within the Commonwealth's legislative power.
Items 3 and 4
11.6 These items are similar to those relating to the transfer of Insurance and Superannuation Commission and RBA staff to APRA, and require staff transferred from an SSA or AFIC to APRA to be:
- employed on terms and conditions relating to remuneration that are no less favourable than those which they were employed under immediately before the agreed date;
- for the purposes of this provision, remuneration should be interpreted broadly, looking at the total value of a remuneration package, having regard to benefits such as superannuation and motor vehicles.
- entitled to retain all the benefits they had accrued as an employee of an SSA or AFIC in respect of length of service up to the agreed date as if those benefits had been accrued as an APRA employee;
- a statement of accrued benefits must be recognised by APRA if given, but the lack of a statement will not have any affect on an employee's entitlements as a transferred employee;
- taken to have continuous service as an APRA employee, for all purposes - that is, a person's service immediately prior to the agreed date as recognised by the State or Territory SSA or AFIC is recognised as service with APRA; and
- subject to having their terms and conditions of employment varied by APRA after the agreed date in accordance with those terms and conditions or by or under a law, award, determination or agreement.
11.7 As SSA and AFIC staff transferring to ASIC will become Commonwealth employees, a separate transfer provision for these staff is not required. These staff will be transferred under section 81B of the Public Service Act 1922, which already contains mechanisms to protect accrued rights and entitlements.
11.8 The agreement may specify that staff are to be transferred on or after the transfer date. It may be necessary for some staff to transfer after the transfer date to enable time for AFIC and the SSAs to be wound up and to finalise other matters.
Division 3 - Transfer of assets and liabilities
Items 5 and 6
11.9 Relevant assets (including records) and liabilities are to be transferred to APRA or ASIC (as appropriate) from the SSAs and AFIC as specified in a transfer agreement between, or on behalf of, the Treasurer and the relevant State or Territory minister(s). The two items provide for the unrestricted transfer of assets and liabilities to the Commonwealth provided it is within the Commonwealth's legislative power.
Division 4 - Transitional provisions relating to the operation of the Banking Act 1959
11.10 All building societies, credit unions and special service providers currently supervised under the FI Code of a State or Territory will be automatically granted authorities to carry on banking business, under subsection 9(3) of the Banking Act, by APRA on the transfer date. From that date, these institutions will be classified as ADIs.
11.11 Subject to Ministerial agreement, APRA will also automatically grant the CCWPSBL an authority to carry on banking under subsection 9(3) of the Banking Act.
11.12 APRA will have the power to subject the authorities to conditions, which may be revoked or varied over time as the circumstances of an institution changes.
11.13 APRA must given written notice to each institution of the granting of its authority to carry on banking business and any conditions attached.
11.14 Currently, under the Financial Institutions Code 1992, building societies, credit unions, service providers and associations may trade or carry on business under a name containing the words 'building society', 'credit union', 'credit society', 'credit cooperative' or words of similar meaning.
11.15 This item will automatically grant consent to these institutions on the transfer date under section 66 of the Banking Act to continue to trade or operate under the name and title that the had been trading or operating. Any conditions that were attached to the approval of business names will continue to apply. APRA will be able to insert or vary the conditions attached to the use of any of these business names in the future at any stage.
11.16 Exemptions granted by the SSAs under subsection 144(4) of the Financial Institutions Code 1992 will be continued as if granted by APRA under section 66 of the Banking Act. Any existing conditions associated with any of these exemptions will also be preserved.
11.1 Under section 69 of the Banking Act, ADIs will be required to pay certain unclaimed money amounts at 31 December into Commonwealth consolidated revenue that have not been operated on by either deposit or withdrawal for seven years or more.
11.2 Inconsistencies exist in the definitions and timing between State and Territory unclaimed money laws and section 69. These differences would require transferring deposit-taking institutions to submit two unclaimed money statements within a very short period of time in the transfer year and others to pay a substantial catch-up payment when transferring from a jurisdiction with an unclaimed money period greater than seven years.
11.3 These transitional issues arise from inconsistencies in definitions and timing between State and Territory unclaimed money laws and the unclaimed money provisions in the Banking Act. These provisions also make accommodations for transferring entities with the view to easing the burden resulting from the transfer.
11.4 Under subitem 9(2), if, previous to the transfer of State and Territory regulated deposit-taking institutions, monies have been paid to the States and Territories in line with their unclaimed money laws, then those monies are to remain with the States and Territories and will not be transferred to the Commonwealth.
11.5 Subitem 9(2) defines unclaimed monies as excluding amounts where notification action has occurred prior to the transfer date under State and Territory unclaimed money laws even if these amounts have not actually been paid.
11.6 Due to the difference in cut-off dates for compiling unclaimed money statements under the State and Territory laws and Commonwealth laws, in the transfer year there may be a gap between the cut-off date for the last statement to the States and Territories and the cut-off date for the first statement to go to the Commonwealth. Subitem 9(3) clarifies that any unclaimed monies that accrue over this gap will be payable to the Commonwealth.
11.7 Moreover, monies that would not have qualified as unclaimed under the State and Territory laws prior to the transfer but qualify under section 69 of the Banking Act immediately after the transfer are liable to be paid to the Commonwealth.
11.8 The requirement to catch-up may subject the transferring institution to an unreasonable adjustment burden. In order to assist institutions, all transferring institutions will be given the option of additional time in which to comply with the Commonwealth provisions.
11.9 Subitem 9(4) provides an optional hiatus of one year for all transferring entities. A transferring institution is only required to submit its first statement to the Treasurer on or before the second 31 March following the transfer date, although, if so desired, the institution is permitted to submit a statement in the first year.
11.10 If a transferring entity chooses to exercise the option of the hiatus, it is not required to notify the Treasurer but the amounts that would have been included in this first statement must (if they are still unclaimed monies) be included in the next unclaimed money statement delivered.
11.11 Subsection 69(5) of the Banking Act requires that the total amount shown in the statement shall be paid by the ADI to the Commonwealth at the time of delivering the statement. Subitem 9(5) allows the Treasurer, or an authorised officer, to make a determination that a transferring entity has, subject to subitem 9(6), satisfied the requirements of that subsection. This determination can apply to an individual ADI or class of ADIs.
11.12 Any accommodations made under subitem 9(5) do not exempt the transferring entity from lodging a complete unclaimed money statement.
11.13 The arrangements made in subitem 9(5) can only have a maximum duration of five years after the date upon which the first unclaimed monies would otherwise have been required to be paid - that is when the statement is lodged as under subsection 69(3) of the Banking Act after allowing for the hiatus of one year. Subitem 9(6) is intended to cap the duration of the operation of these transitional provisions so that all institutions will be fully compliant with section 69 of the Banking Act by, at the latest, 31 March of the seventh year after the transfer date (sixth year if the transfer date is before 31 March in a particular calendar year).
11.14 Subitem 9(9) provides definitions of the expressions 'Commonwealth unclaimed money statement' and 'notification action'. This subitem also lists the names of the State and Territory unclaimed money acts that are meant by the expression 'unclaimed money law'.
Division 5 - Transitional provisions relating to the operation of the Life Insurance Act 1995
11.15 Division 5 of Schedule 8 provides transitional provisions relating to the operation of the Life Insurance Act, particularly provisions relating to the transfer of friendly societies into this regime.
11.16 Item 10 defines the following terms for use in Division 5 of Schedule 8: amended Act, eligible benefit fund, existing benefit fund rules, health insurance business, old Act, and transferring friendly society.
Companies taken to be registered
11.17 This item will provide a mechanism for registering friendly societies under the Life Insurance Act. The transferring friendly societies will be specified in regulations (either by name, by inclusion in a specified class or in some other way) and must meet the following criteria:
- immediately before the transfer date the company was a friendly society;
- the company carried on business through one or more eligible benefit funds (an eligible benefit fund had approval under the FS Code or was deemed to have been established under the transitional provisions of the Code and does not relate to health insurance business);
- therefore, a friendly society that only operated health insurance business through benefit funds will not be subject to the transfer mechanism; and
- the company was not winding up immediately before the transfer date (ie, a liquidator was not in force in accordance with the FS Code).
11.18 Where a company is taken to be in winding up immediately before the transfer date, that process will continue to be governed by the relevant provisions of the Corporations Law rather than the amended Act. Clause 11 of Item 1 of Schedule 3 provides transitional provisions for transferring financial institutions that are under external administration.
11.19 The regulations may provide for the company to cease to be registered (subitem 11(4)). The existing deregistration mechanisms are limited because cancellation of registration may only occur after a 12 month lead time (section 26) or at the request of a company (section 27). Subitem 11(4) will provide a more appropriate and timely way of reversing registrations that should not have occurred under the transitional provisions (eg, if a friendly society that only conducts health insurance business is inadvertently registered).
11.20 The company will receive a certificate of registration from APRA (under section 21(5) of the amended Act) as soon as it is practicable. Subitem 11(3) provides that the friendly society's registration may be dealt with as if it had actually been granted under section 21 of the amended Act. For example, APRA will be able to impose conditions on registrations under section 22 of the Act.
11.21 Subitem 11(5) will deem APRA to have made a declaration under section 12A if, immediately before the transfer date, the transferring friendly society carried on certain insurance or annuity business that was not otherwise life insurance business. The effect of this transitional provision is that the deemed business will be treated as if it were life insurance business.
11.22 Subitem 11(6) will deem APRA to have made a declaration under section 12B if, immediately before the transfer date, the transferring friendly society carried on business to which section 12B would have applied (ie eligible financial benefit business) and that was not otherwise life insurance business. The effect of this transitional provision is that the deemed business will be treated as if it were life insurance business.
11.23 Under subitem 11(7) the eligible benefit funds of the company are taken to be established in accordance with the requirements of the amended Life Insurance Act. Under subitem 11(8) the existing benefit fund rules for those funds are taken to be approved (under proposed section 16L) and to have come into force (under proposed section 16N). There are two possible qualifications to the deemed approval:
- subitem 11(9) - if a provision of the existing benefit fund rules is inconsistent with the amended Act or any instrument made under the amended Act, the provision is not effective to the extent that it is inconsistent;
- The rules of a friendly society that transferred into the FS Code were required to comply with that Code, the regulations and standards made under the Code within a two year period. As this transitional period will not have expired at the time friendly societies transfer into the Life Insurance Act regime, transitional arrangements for benefit fund rules will be continued through the Prudential Rules developed by APRA. Provided the friendly society meets the transitional requirements of the Prudential Rules subitem 11(9) will not be triggered during that transitional period.
- subitem 11(10) - the deemed approval of the existing benefit fund rules may be revoked by a written determination made by APRA if APRA considers that the inconsistency (dealt with in subitem 9) is detrimental to the interests of owners or prospective owners of policies. Such a determination may only be made during the 12 month period that commences 18 months after the transfer date. The rules cease to have effect from the day of APRA's determination. The determination will be a reviewable decision under the amended Life Insurance Act (subitem 11(12)).
11.1 Subitem 11(13) preserves the financial year of the company that applied under the FS Code. A friendly society will be able to seek APRA's agreement to change the financial year under subsection 77(6) of the amended Act.
11.2 Subitem 11(14) enables APRA to give notice of a range of transitional matters to the friendly society, eg notice that the friendly society is taken to have been granted registration.
Assignment of interests in benefit funds
11.3 Item 12 will provide that an interest in an eligible benefit fund of a transferring friendly society that was assigned under the FS Code will be taken to be an assignment for the purposes of the amended Life Insurance Act (ie, in accordance with subsection 200(2)).
Registration of policies
11.4 Item 13 will provide that the registration requirements of section 227 will not need to apply to a policy issued before the transfer date that was not a life policy under the old Act. That is, the amendments to subsections 227(1), (2) and (3) that change references from 'life policy' to 'policy' (see item 55 of Schedule 4) will not require life companies to retrospectively register policies that were not previously required to be registered. However, all policies issued after the transfer date will need to be registered. (It is intended that a regulation will be made, under proposed section 16ZC, to modify the application of section 227 so that friendly societies continue to maintain registers of benefit fund members rather than policies.)
11.5 The difference between these two terms is that 'life policy' has the meaning given in section 9 whereas policy will be defined in the Dictionary in the Schedule to mean 'a life policy, a sinking fund policy, or a section 12A or 12B policy'.
Continued effect of existing section 12 declarations
11.6 As noted earlier, the existing declaration powers in paragraph 12(2)(a) allowing APRA to declare certain insurance or annuity business to be life insurance will be repealed and replaced with the declaration power in section 12A. Item 14 will ensure that a declaration made for the purposes of paragraph 12(2)(a) of the old Act will continue to have effect as if it were a declaration under subsection 12A(1) of the amended Act.
11.7 Subitem 15(1) provides that the approval of a person as a life company auditor (under subsection 85(1) of the old Act) will be taken to be an approval (under the amended Act) for the person to audit both life companies other than friendly societies (see subsection 85(1)(a)) and friendly societies (see subsections 85(1)(b)).
11.8 Subitem 15(2) provides that if an appointment of a person as an auditor of a transferring friendly society is in force under any of the FS Codes immediately before the transfer date, the person will be taken on the transfer date to be:
- approved by APRA to audit friendly societies (under paragraph 85(1)(b)); and
- the appointed auditor of the transferring friendly society in accordance with section 84 of the amended Act.
11.9 An approval or appointment taken to be granted under subitem 15(2) will be dealt with under the amended Act as an actual approval under paragraph 85(1)(b) and an actual appointment under section 84. The written notification normally required under section 87(1) when a life company appoints an auditor will not be required for such appointments (subitem 15(5)).
11.10 The FS Code allows the appointment of a firm of auditors and recognises each member of the firm to be an appointed auditor (subsection 340(6) of that Code). Therefore, the effect of the transitional provision for a transferring friendly society that had appointed a firm of auditors is that:
- each member of the firm at the transfer date will be taken to be approved by APRA to audit friendly societies under paragraph 85(1)(b); and
- each member of the firm will be taken to be the appointed auditor of the transferring friendly society under section 84 of the amended Act (ie there will be several persons that are the appointed auditor of that friendly society - see proposed subitem 15(3)).
11.1 Subitem 16(1) provides that if an appointment of a person as an actuary to a transferring friendly society is in force under any of the FS Codes immediately before the transfer date the person is taken, on the transfer date, to have been:
- granted approval under subsection 93(6) of the amended Act; and
- appointed as actuary of the transferring friendly society in accordance with section 93 of the amended Act.
11.2 An approval and appointment made in this manner will be able to be dealt with as if an approval had actually been granted under subsection 93(6) of the amended Act and an appointment had been made in accordance with section 93 of the amended Act. The written notification normally required under subsection 95(1) when a life company appoints an actuary will not be required for such appointments (subitem 16(3)).
11.3 Under section 216 of the Life Insurance Act, a life company must each year give an annual statement of unclaimed money (other than unclaimed money in RSA accounts). The life company must, at the same time, pay unclaimed monies to the Commonwealth. Unclaimed money means all sums of money that have become legally payable by the life company in respect of policies and which have not been claimed within seven years after the maturity date of the policy.
11.4 Inconsistencies arise in the operation of this provision and State and Territory unclaimed money laws. In the absence of transitional arrangements, these differences would require transferring friendly societies to submit two unclaimed money statements within a very short period of time in the transfer year. Item 17 will provide time for friendly societies to adjust to the new arrangements.
11.5 The transitional arrangements being provided for friendly societies are consistent with those being provided for building societies and credit unions described above.
11.6 Subitem 17(1) excludes as unclaimed money for the purpose of section 216 an amount of money where notification action has occurred prior to the transfer date under State and Territory unclaimed money laws even if these amounts have not actually been paid as at the transfer date. Therefore, monies that have been paid to the States and Territories by friendly societies in line with their unclaimed money laws will remain with the States and Territories and will not be claimed by the Commonwealth.
11.7 In the transfer year it would be possible for a gap to arise between the cut-off date for the last statement to the States and Territories and the cut-off date for the first statement to the Commonwealth. Subitem 17(2) clarifies that any unclaimed monies that accrue over this gap will be payable to the Commonwealth. Amounts that would not have qualified as unclaimed money under the State and Territory laws but qualify under section 216 immediately after the transfer are liable to be paid to the Commonwealth.
11.8 Despite these transitional arrangements, the requirement to catch-up may be onerous on transferring friendly societies. In order to assist institutions, all transferring institutions are to be given the option of additional time in which to comply with the Commonwealth provisions. Subitem 17(3) provides an optional hiatus of one year for all transferring friendly societies. This means that the first statement is only required to be submitted with ASIC on or before the second 31 March following the transfer date (though the institution is permitted to submit a statement in the first year). Under this option, the amounts that would have been included in this first statement must (if still unclaimed money) be included in the next unclaimed money statement provided to ASIC.
11.9 Subsection 216(3) of the Life Insurance Act requires the total amount shown in the unclaimed money statement to be paid by a life company to the Commonwealth at the time the statement is made. Subitem 17(4) allows ASIC to make a determination that a transferring entity has, subject to subitem 17(5), satisfied payment requirements. Such a determination will not exempt the transferring entity from lodging a complete unclaimed money statement.
11.10 The determination made by ASIC can only have a maximum duration of five years after the date upon which the first unclaimed monies would otherwise have been required to be paid. (That is, when the statement is lodged as under subsection 216(1) after allowing for the hiatus of one year.) Subitem 17(5) will cap the operation of these transitional provisions so that all institutions will be fully compliant with section 216 before 31 March of the seventh year after the transfer date (sixth year if the transfer date is before 31 March in a particular calendar year).
Effect of amendments on taxation legislation
11.11 The purpose of this provision is to clarify the tax treatment of the business of friendly societies that become registered under the Life Insurance Act at the transfer date. The effect of the provision is that business undertaken by friendly societies that, immediately before the transfer date, was not 'eligible insurance business' will not be taken to be 'eligible insurance business' for tax purposes merely because of the transfer arrangements. 'Eligible insurance business' is presently taxed at 33 per cent to the entity whereas other friendly society activities might be exempt from tax.
Transfer of engagements and mergers
11.12 Subitems 19(1) and 19(2) will provide that where a transfer of engagements or a merger is underway prior to the transfer date, it may be completed in accordance with the relevant State or Territory law, despite anything in the Banking Act, the Life Insurance Act or any other Commonwealth law prescribed by the regulations.
11.13 Subitem 19(3) specifies that regulations may deal with how specified laws of the Commonwealth apply in relation to the situation resulting from a transfer of engagements or a merger completed in accordance with a State or territory law.
11.14 Subitem 19(4) specifies the circumstances in which a transfer of engagements will be taken to have commenced prior to the transfer date for the purposes of this item by referring to the relevant approval, determination and direction provisions of the State or Territory's FI or FS Codes.
11.15 Subitem 19(5) specifies the circumstances in which a merger will be taken to have commenced prior to the transfer date for the purposes of this item by referring to the relevant approval and determination provisions of the State or Territory's FI or FS Codes.
Treatment of determinations under section 29 of the Social Security Act 1991
11.16 Approvals made under section 29 of the Social Security Act 1991 prior to the transfer date with respect to friendly societies will be continued as if made under the amended legislation.
Part 2 - Transitional provision related to amendments of the High Court of Australia Act 1979
11.17 This item ensures that approvals of banks and authorisations of persons given before the commencement of Schedule 6, which amends the High Court of Australia Act 1979 so it is consistent with the extension of the Banking Act to ADIs that occurred during the first stage of the financial system reforms, are taken to be in force after that commencement.
Part 3 - Regulations
11.18 This item defines the scope of regulations that may be made for matters of a transitional, saving or application nature associated with the transition of building societies, credit unions, friendly societies, associations, special service providers or the CCWPSBL. It covers regulations associated with the APRA Act, Banking Act, Financial Sector (Shareholdings) Act 1998, Life Insurance Act and the proposed Financial Sector (Transfers of Business) Act 1999.
11.19 Regulations will enable the continuation, in part or full, of many instruments and things done under the replaced State and Territory legislation, including the FI and FS Codes as appropriate. The regulation may also include applying, with or without modification, the provisions of the repealed State or Territory law before it was repealed.
11.20 The regulations may permit all or some of the matters specified in subitem 22(4) to be determined by a specified person or specified class of persons. This will enable a person to determine identify, continue or modify a thing done or instrument made or class of things or instruments.
11.21 It is envisaged that most regulations will not be retrospective and will take effect from the transfer date. However, there will be scope to apply regulations retrospectively to the transfer date if necessary to cover any matters that may have accidentally been overlooked. This retrospectivity is necessary to ensure a smooth transition for transferring institutions and their members, depositors and policyholders in the event that a matter was not identified and dealt with prior to the transfer date or the regulation made had unintended and undesirable other consequences.
11.22 A general regulation making power has been included at item 23 to allow the Governor-General to make regulations, not inconsistent with the legislation.