House of Representatives

Financial Sector Reform (Amendments and Transitional Provisions) Bill 1998

Second Reading Speech

Mr COSTELLO (Higgins-Treasurer)

I move:

That the bill be now read a second time.

This omnibus bill deals with amendments to a number of acts to give effect to the new regulatory framework for the financial system being introduced, consistent with the recommendations of the financial system inquiry. These include:

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the establishment of the Australian Securities and Investments Commission (ASIC), which is based on the Australian Securities Commission;
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amendments to the Banking Act to establish the new regulatory regime in the banking and deposit-taking sector to be administered by the Australian Prudential Regulation Authority (APRA);
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the establishment of the Payments System Board within the Reserve Bank;
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the splitting of the responsibility for relevant insurance and superannuation legislation between APRA and ASIC; and
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transitional provisions relating to the establishment of the new regulatory bodies and the associated regulatory reforms.

The Australian Securities and Investments Commission

The bill renames the Australian Securities Commission as the Australian Securities and Investments Commission and will result in ASIC being the pre-eminent consumer protection and market integrity regulator across the financial system. In addition to the current corporate regulatory functions of the Australian Securities Commission, ASIC will, in the first instance, be taking on consumer protection and market integrity in the areas of insurance, superannuation and aspects of banking and the payments system, and ultimately across the full financial system.

Under the current system, responsibility for consumer protection functions in the financial system is split along institutional lines between a number of Commonwealth and state entities. If this situation is not addressed, globalisation, technological advances and innovations in financial products and distribution mechanisms will result in an increasing incidence of regulatory gaps and inconsistencies which are not conducive to efficient competition in financial markets.

Responsibility for consumer protection and market integrity vested in a single entity will enable ASIC to adopt a functional and objective-based regulatory approach, thereby promoting competitive neutrality and permitting better comparability by consumers of different financial products and services. The amalgamation of consumer protection functions in a single regulator is supported by industry and consumer groups. There will, of course, be close co-operation between ASIC and the Australian Competition and Consumer Commission.

The functions relating to insurance and superannuation were previously exercised by the Insurance and Superannuation Commissioner, a position which will be abolished with the commencement of this bill. The consumer protection functions relating to aspects of banking and the payments system were previously exercised by the Australian Payments System Council, which is also to be disbanded.

Included in the functions transferred from the Insurance and Superannuation Commissioner to ASIC by this bill are functions under the Superannuation (Resolution of Complaints) Act 1993, the Insurance Contracts Act 1984 and the Insurance (Agents and Brokers) Act 1984.

In addition, there are some acts currently administered by the Insurance and Superannuation Commission (ISC) which contain both prudential and market integrity and disclosure requirements and, as such, will need to be split between the two regulators, APRA and ASIC. ASIC will take on regulatory responsibility for parts of the Life Insurance Act 1995, the Insurance Act 1973, the Superannuation Industry (Supervision) Act 1993 and the Retirement Savings Accounts Act 1997.

While the bill effectively transfers responsibility for administration of existing laws from the ISC to ASIC and APRA, it does not, except to a very limited extent, seek to alter the substantive rules applying in this area. In this regard, the task of rationalising and harmonising the financial system regulatory framework with that applying under the Corporations Law will be undertaken as part of the second stage of implementation of the financial system reforms in conjunction with the implementation of the corporate law economic reform program reforms relating to financial markets and investment products.

In particular, the reforms will introduce a single licensing regime for financial market intermediaries as well as a consistent and comparable disclosure regime for financial instruments. In accordance with the corporations agreement, the ministerial Council for Corporations has been consulted and has approved the relevant amendments to the Australian Securities Commission Act 1989 and the Corporations Law.

Banking Act Amendments

The package of amendments to the Banking Act 1959 will:

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establish a single licensing and prudential regulatory regime for deposit-taking institutions by providing for authorities under the act to be issued both to banks and non-bank deposit-taking institutions;
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strengthen and clarify depositor protection powers;
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facilitate the regulation and, hence, use of non-operating holding company structures by financial conglomerates containing a bank or deposit-taking institution; and
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strengthen the regulatory powers of APRA as the prudential regulator, giving it powers to make standards and enforce directions broadly similar to those now provided under the Financial Institutions Code (applying to credit unions and building societies).

The proposed single licensing regime will facilitate increased effective competition, reduce regulatory inconsistencies between institutions conducting essentially the same deposit-taking business and improve efficiency. Over time, consumers should benefit from increased choice, improved quality and lower cost products and services.

Facilitating the use of non-operating holding company structures will allow conglomerates greater commercial freedom in selecting their appropriate business structure, thereby potentially lowering business costs, increasing transparency and reducing barriers to entry, with ongoing benefits both to investors and consumers of financial services. The stability and safety of the financial system will not be compromised by these reforms due to the enhanced powers provided to the prudential regulator. The three key ingredients to ensuring financial stability and depositor protection are:

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strong prudential regulation to lessen risks;
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effective intervention to prevent or manage a crisis; and
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depositor preference to ensure confidence.

APRA will be able to make standards on prudential matters in relation to banks, deposit-taking institutions and non-operating holding companies of banks or deposit-taking institutions. The standards-making power provides APRA with regulatory independence and is flexible, certain and able to be used very quickly in the event of a crisis to prevent contagion effects in the financial system. The standards themselves will not be directly enforceable.

APRA will, however, have a power to give a direction to any licensed non-operating holding company, deposit-taker, or foreign bank branch, if they fail to comply with a prudential standard, regulation, or where this is otherwise necessary in the interests of depositors. Failure to comply with such a direction will be an offence. The directions power is intended to facilitate early intervention by APRA to prevent a crisis from emerging and is similar to that now provided to state and territory regulators of credit unions and building societies under the financial institutions code.

Intervention powers to manage a crisis will also be improved. The amendments proposed in this bill both clarify the mechanisms by which the prudential regulator may take control of a troubled deposit-taking institution, and allow the prudential regulator to appoint an administrator for that purpose. While these statutory management powers provide the means for control in a crisis, they will also enhance APRA's capacity to act in a preventative capacity by using less direct strategies, such as facilitating the takeover of a troubled institution or its business by other sound institutions. In Australia and elsewhere, such action has provided the most common response in practice to financial distress in deposit-taking entities.

These intervention powers are further supplemented by a new power clarifying that APRA may initiate the wind-up of an institution that is insolvent and cannot be restored to solvency within a reasonable period. Such action may prevent further losses from accruing and would therefore be in the best interests of depositors. Again, state supervisory authorities already have the clear power to wind-up building societies and credit unions.

Depositor preference is manifest both in depositor priority on winding-up and in APRA's duty to exercise its powers within division 2 of the Banking Act in the interests of depositors. These are existing, longstanding provisions in the act. While depositor preference can mean disadvantage for other creditors, APRA's intervention powers, particularly the proposed new early intervention powers, also lessen the risks faced by such other creditors, both by reducing the likelihood of insolvency and by increasing the options for resolution in the event of insolvency.

The bill also provides for the abolition of the requirement for banks to hold non-callable deposits with the Reserve Bank. These requirements no longer serve a prudential purpose but have been used to impose a form of regulatory charge. In light of the proposed imposition of levies on all industries that will supervised by APRA and consistent with the intention to remove non-neutral treatment of deposit-taking entities, the non-callable deposit requirements will be abolished consequent on the transfer to the Commonwealth of regulatory responsibility for credit unions and building societies.

Payments System Board

This bill introduces legislation amending the Reserve Bank Act 1959 to establish the Payments System Board within the Reserve Bank. The Payments System Board will be independent of the bank's main board, which will no longer have powers to make payment system policies for the bank. Rather, the Payments System Board will operate as the policy making board of the bank in relation to payments system matters. In particular, it will be responsible for ensuring that the bank's powers are utilised so as to improve the efficiency of the payments system, to promote competition in the market for payment services and to control risk in the financial system.

The PSB will operate on a basis that is very similar to that applying to the main board of the Reserve Bank. For example, similar procedures will apply for the resolution of any disagreement between the policies of the government and the Payments System Board. The Governor of the Reserve Bank will chair the Payments System Board. It will also include another Reserve Bank member, one from APRA and up to five others.

The Payments System Board and the Reserve Bank will be given explicit regulatory powers in the payments system. These powers will be conferred under the Payment Systems and Netting Bill and the Payment Systems (Regulation) Bill, the latter of which I will introduce shortly.

Other Amendments

To prevent excessive compliance costs on building societies and credit unions, the bill also amends the Financial Corporations Act 1974 to exempt these institutions from the data reporting requirements under that act when they are regulated under the Banking Act 1959. The bill also transfers to the Governor of the Reserve Bank the Treasurer's present powers with respect to categorising registered corporations and exempting corporations.

The transitional provisions in the bill preserve the effect of decisions made before the commencement of APRA, including by preserving existing approvals, transferring work in progress to APRA and facilitating the effective transfer of the prudential regulation of building societies and credit unions to the Commonwealth, subject to agreement.

There are also transitional provisions protecting the accrued entitlements of ISC and Reserve Bank staff transferring across to APRA. The accrued entitlements of the ISC staff will be largely protected through the transfer provisions of section 81C of the Public Service Act 1922. The bill also gives the Treasurer the power to transfer the assets and liabilities of the ISC to APRA or ASIC.

Finally, the bill provides for the repeal of certain acts, including the Banks (Shareholdings) Act 1972 which is replaced by the consolidated Financial Sector (Shareholdings) Bill, which I will shortly introduce, and the Insurance and Superannuation Commissioner Act 1987 consequent on the establishment of APRA. I commend the bill to the House and present the explanatory memorandum.

Debate (on motion by Mr Laurie Ferguson) adjourned.