House of Representatives

Income Tax Rates Amendment (RSAs Provided by Registered Organizations) Bill 1999

Second Reading Speech

Senator HEFFERNAN (Parliamentary Secretary to Cabinet)

I move:

That these bills be now read a second time.

I seek leave to have the second reading speeches incorporated in Hansard.

Leave granted.

The speeches read as follows-


I rise today to introduce three bills that represent the culmination of the Government's financial system reform efforts over the last few years. The reforms spelt out in these bills were initiated in response to the Report of the Financial System Inquiry, chaired by Stan Wallis. They represent a further step along the path of financial system regulatory enhancements.

Such regulation should not stand in the way of economic and technological progress; nor should it promote the interests of one group over another. Instead, financial system regulation should provide a sound, stable environment to encourage the creation of wealth, and to facilitate trade.

As we approach the end of this millennium, it is helpful to consider these changes in the wider perspective of both international financial system developments and changes to the Australian regulatory environment.

And there have been massive changes. Twenty years ago, if you wanted to access your money, you had to go to a branch between 10:00 am to 3:00 pm Monday to Friday. Back then, the Automatic Teller Machine was just a distant idea, credit cards were virtually unknown, and no one could spell `EFTPOS' let alone pronounce it.

As the Treasurer has stated, we now have the lowest interest rates since man last walked on the moon. At least today, you can borrow relatively easily-including over the phone and internet. Back when Jack Schmitt ascended to the Apollo 17 lunar module on 14 December 1972-the last man on the moon-interest rates were of a similar level. But it was virtually impossible for the majority of people to borrow. Going cap in hand to your local branch manager-you were lucky to get a small proportion of a housing loan at the reasonable interest rate. The balance of a housing loan was made up from an assortment of sources at considerably higher rates of interest, often up to five percentage points more.

In 1981, the then Treasurer, now our Prime Minister, received a report on the performance of financial regulation completed by the Australian Financial Inquiry. This formed the basis of many of the regulatory changes of the 1980s, including the floating of the dollar.

In the years following that report, it became clear to many that further reform was not just desirable but it was essential.

Honourable Senators will be aware that the Government introduced into the Senate last year a package of legislation to complete the first stage of the Government's financial sector reform program.

That package of legislation instituted wide-ranging measures aimed at improving the efficiency, competitiveness and stability of Australia's financial system. Included among those measures were the creation of a single prudential regulator-the Australian Prudential Regulation Authority (APRA), the strengthening of Australia's payments system with the creation of a Payments System Board within the Reserve Bank, and a refocusing of disclosure and consumer protection through the Australian Securities and Investments Commission (ASIC).

The purpose of this bill is to provide for the transfer of regulatory responsibility from the States and Territories to the Commonwealth of building societies, credit unions and friendly societies. This bill will allow building societies and credit unions to better compete with banks and to operate outside their existing State / Territory boundaries.

As such, consumers will have a greater selection of financial service providers, and a greater selection of financial products. In other words, Australian consumers will have greater choice. Providing consumers with greater choice is a further example of this Government's commitment to consumer empowerment and its commitment to consumer sovereignty.

The bill will also provide a single regulatory framework for life insurance companies and friendly societies, while recognising the special features of friendly societies. The amendments also strengthen regulation for life insurance and increase the flexibility of its application.

All told, about 20 building societies, 237 credit unions and 85 friendly societies will be involved in the regulatory transfer. These organisations represent 1326 branches nationally, with $38 billion in assets and 12,420 employees.

To complement this package, State and Territory Governments will be signing with the Commonwealth a Financial Sector Regulation Transfer Agreement and enacting legislation within their jurisdictions to effect this regulatory transfer.

Then, for the first time in the history of the Commonwealth, there will be a single consistent regulatory regime for deposit-taking institutions, life and general insurance, and superannuation.

The bill also proposes to make sundry minor amendments to correct errors that have been detected in the relevant acts and to improve consistency.

Madam President, after the last election the Prime Minister created a new ministerial position-the Minister for Financial Services and Regulation. The new responsibilities taken by my colleague Mr Hockey reflect the realisation that the financial services industry comprises more than just the banks; there are also building societies, credit unions, friendly societies, insurance companies, asset managers, custodians, trustees, financial advisers and superannuation funds-to name just a few. This realisation also reflects the Government's desire to see these institutions playing a larger role in the financial services industry by increasing competition and offering a broader range of products to consumers.

This is also one of the country's fastest-growing sectors-a sector employing hundreds of thousands of Australians, a sector that is strongly contributing to our record economic growth, and a sector which is innovative and integral to our continued efforts to secure Australia's place as a centre for global financial services.

I will now turn to the bill in more detail.

Amendment of the Australian Prudential Regulation Authority Act 1998 (APRA Act)

The bill will expand and clarify APRA's ability to take on functions as a result of an agreement with a State or Territory. This will enable APRA to be contracted to provide prudential regulation and advisory services on a fee for service basis subject to the agreement of the Minister. The Commonwealth, States and Territories agreed that State and Territory Governments would remain responsible for the prudential regulation of housing cooperatives and trustee companies but they will be able to enter into an agreement with APRA to provide prudential regulation or advice services for these entities.

Amendment of the Banking Act 1959 (Banking Act) and the Reserve Bank Act 1959 (Reserve Bank Act)

The bill proposes to apply the Criminal Code-which is scheduled to come into force by March 2000-to the Banking Act and the Reserve Bank Act. There will be no change in the penalties associated with any of the offences.

To ensure consistency between banks and other deposit-taking institutions, the bill proposes to extend the banking holiday and unclaimed moneys provisions to all authorised deposit-taking institutions.

The bill also proposes to extend the scope of APRA's standards and directions powers and to facilitate the development of voluntary industry support arrangements.

Amendment of the Corporations Law

Madam President, to enable the transfer of regulatory responsibility of building societies, credit unions and friendly societies to the Commonwealth, a new Schedule will be added to the Corporations Law that will provide for the registration of financial institutions and friendly societies as companies and the regulation of those companies under the Corporations Law by ASIC.

Both Ministerial Council for Corporations (MINCO) and the Ministerial Council for Financial Institutions (MINFIN) have unanimously approved the proposed amendments to the Corporations Law in the bill. Unanimous agreement of MINCO and MINFIN Ministers is required under the Corporations Agreement, because the amendments will have the effect of extending coverage of the Corporations Law to various classes of financial institutions established under State and Territory statutes.

The objective of the new Schedule is to facilitate the registration of the entities as companies with as little disturbance to operations, and as little conversion costs, as possible.

In line with this objective, the bill is structured so that at the transfer date, the entities themselves need do little to give effect to the transfer. Entities will be deemed to be registered as a company type that most closely fits their current structure, unless they elect to be registered as a different category prior to transfer. The bill provides for a transitional period of 18 months following the transfer day. Entities will be given this period to make the necessary changes to their own rules to recognise their new status as a company.

The change to a company form is not expected to present significant difficulties for the institutions concerned, since much of the Corporations Law regulatory framework already applies to them through the respective governing Codes. However, there are some matters that will require exemptions and modifications to be made. Most of these are of a transitional nature, such as the publication of Australian Company Numbers on documents, but there are some matters that are likely to justify ongoing relief from ordinary Corporations Law provisions. There are facilities in the bill to make regulations with respect to such matters. Furthermore, there are powers on the part of ASIC to make exemption and modification orders to facilitate the transition.

The existing conduct and disclosure obligations which apply to friendly society benefit fund products will, as far as possible, be maintained pending the current review of conduct and disclosure obligations applying to financial products under the Government's Corporate Law Economic Reform Program.

Amendment of the Life Insurance Act 1995 (the Life Act)

The transfer of friendly societies to the Commonwealth regime will increase contestability in the market for life insurance products. Until recently, multiple prudential regimes applied to life insurance business offered by financial institutions in different jurisdictions. In late 1997 a unified State scheme was created for state based friendly societies under the guardianship of the Australian Financial Institutions Commission (AFIC). As friendly societies are still in transition under those arrangements, it is appropriate to make their entry into the life insurance regime as seamless as possible in the first instance.

To achieve this, it is proposed that for a transition period, the detailed requirements in respect of friendly societies (particularly in regard to actuarial standards) will be reinstated on the basis existing under the AFIC regime. However, this should not be taken to imply that friendly societies are subject to lower prudential standards during this transition period. The development of the AFIC standards was based significantly on the existing, relevant actuarial standards set by the Life Insurance Actuarial Standards Board under the Life Act. Differences between the two sets of standards are intended to reflect the structural and operational differences in the respective industries.

In the longer term, it is proposed to harmonise the actuarial standards for all companies registered under the Life Insurance Act to the extent appropriate given these structural differences between friendly societies and other life companies.

The arrangements will retain the distinct identity of friendly societies so that the industry differentiation can continue. This enhances choice to consumers. For example, the unique benefit fund structure and rules of friendly societies are to be recognised in legislation.

Other changes open up opportunities for the development of new prudentially regulated products under the life insurance regime. In particular, companies will be able to have certain insurance, annuity or financial benefit business declared to be life insurance business so that it can be offered in a prudentially regulated environment alongside other life insurance business.

Consistent with the thrust of the first stage of the financial sector resform, APRA's powers will be enhanced to facilitate early intervention in the life insurance market. Prudential requirements will be able to be set to better match the profile of the life insurer.

Miscellaneous amendments

The bill proposes a number of minor miscellaneous amendments to several acts, correcting previous drafting errors and improving clarity within those acts. In addition:

States and Territories will be able to confer powers and functions on ASIC which, prior to the regulatory transfer, were performed by State and Territories in relation to transferring financial institutions.
Friendly societies that operate both life insurance business and health insurance business will be able to be jointly regulated under the two regimes.

Consequential amendments

Madam President, the bill proposes a number of consequential amendments to various acts to amend references to `friendly societies', `credit unions' and `building societies' where necessary and appropriate.

The bill also provides transferring institutions 18 months in which to obtain necessary approvals under the Financial Sector (Shareholdings) Act 1998.

Amendments to the taxation laws will ensure appropriate taxation treatment of transferring friendly societies, including for RSA business.

Transitional, Saving and Application Provisions

To ensure the smooth transfer of institutions to the Commonwealth, the bill proposes a number of transitional, saving and application provisions. These provisions include the transfer of staff to APRA, the transfer of assets and liabilities from State and Territory regulatory bodies to APRA and ASIC as appropriate, the granting of authorities and approvals for the use of business names, and transitional provisions relating to unclaimed moneys.

The provisions include a number of transitional regulation-making powers which are intended to be of limited duration and which need to be developed in consultation with the States and Territories and industry.

I commend the bill to the Senate.


In transferring responsibility from the States and Territories to the Commonwealth, the Common wealth was aware that there were some parts of State and Territory laws which were not allowed for under the Commonwealth regime.

The State and Territory regulated entities-such as building societies, credit unions and friendly societies-along with the Commonwealth, were keen to ensure that these groups were not disadvantaged by the transfer. In fact, the Commonwealth's view was that some of these provisions were very useful prudential regulation tools.

Transfers of Business was one such power. Under the State and Territory legislation, building societies, credit unions and friendly societies were able to transfer their business amongst themselves with the approval of the regulator. The Commonwealth is keen to provide a similar mechanism as it will provide an efficient and effective prudential tool for protecting depositors or policy owner monies where their institution is in severe financial hardship. It is also good to facilitate change in the industry.

This bill contains that proposed mechanism.

As a result, the Commonwealth has carried over this useful prudential tool and extended it to all authorised deposit taking institutions and also all life insurance companies.

There are two types of transfer of business. The first is voluntary-where two entities apply to the Australian Prudential Regulation Authority to transfer part or all of one entity's business to the other. If APRA is satisfied that the transfer is in the interests of depositors or policy owners, and other criteria are satisfied, then with the approval of the Minister, APRA may approve the transfer.

The second type of transfer of business is a compulsory transfer. These can only be done in limited circumstances, where the transfer is in the interests of policy owners or depositors. It is expected that in circumstances such as severe financial hardship, where an entity was no longer able to meet it's financial requirements, APRA may seek the agreement of a receiving body to accept the business of the transferring body, and thus protect the interests of depositors or policy owners.

This is a proven effective and useful prudential tool that will complement APRA's other powers under the Banking Act 1959 and the Life Insurance Act 1995.

I commend the bill to the Senate.


The accompanying bill dealing with the transfer of financial institutions from the State to the Commonwealth regulatory regime provides for friendly societies that operate benefit fund business to become regulated as life insurance companies. By becoming life companies under Commonwealth legislation, friendly societies will be able to seek approval to be a retirement savings account (RSA) institution so as to provide RSA business.

Therefore, the transfer of friendly societies into the Commonwealth regime opens up opportunities for the industry to conduct new business. This outcome will be achieved by having friendly societies enter a competitively neutral financial market. New entry into the RSA market increases competition for retirement savings products and expands the choice available to consumers.

This also means that another Wallis Report recommendation will be met-recommendation 43 that sought the extension of the right to offer RSAs to other APRA regulated institutions.

A necessary consequence of this extension of RSA business is to provide appropriate tax treatment for RSA business of friendly societies and other registered organizations. The accompanying bill includes amendments to the taxation legislation to achieve this. This bill amends the Income Tax Rates Act 1986 to specify the rates of tax that apply to the RSA business of friendly societies and other registered organizations. The RSA business of friendly societies and other registered organizations will be taxed at the same rate that applies to the RSA business of competing entities, including life insurance companies and banks.

In particular, income credited by a friendly society to an RSA will be taxed at the 15 per cent rate applying to complying superannuation savings. Any profit generated by the friendly society will be taxed at the company tax rate.

I commend the bill to the Senate.

Ordered that further consideration of the second reading of these bills be adjourned till the first day of the winter sittings 1999, in accordance with standing order 111.