Senate

Explanatory Memorandum

(Circulated by authority of the Minister for Financial Services and Regulation, the Honourable Joe Hockey, MP)

Regulation Impact Statement

Problem identification

3.1 The Australian Prudential Regulation Authority (APRA) was established on 1 July 1998 as the single integrated, prudential regulator of banks, insurance companies, building societies, credit unions, friendly societies and superannuation funds. APRAs primary role is to protect the interests of depositors, insurance policy holders and superannuation fund members. It does this through a variety of methods including through licensing institutions and implementing risk management requirements.

3.2 To understand the condition of financial institutions and to monitor their compliance with prudential requirements, APRA gathers detailed financial data from the entities it supervises through financial reporting requirements. This data is more frequent, and in some respects more detailed, than general purpose reporting (eg. accounting standards) and continuous disclosure (eg. Corporations Law) which are aimed mainly at listed companies to inform the marketplace. The collection of APRAs financial reporting data also enables general research and analysis to be undertaken into the trends and pressures affecting the financial sector and the publication of relevant information.

3.3 On establishment, APRA inherited a variety of data collection tools and analysis systems. These tools and systems were tailored to meet the data needs of APRAs predecessor organisations. Three problems have been identified with this inherited data collection framework.

3.4 First, the existing data collection framework is fragmented, cumbersome and in some areas outdated. APRA collects 153 forms, comprising 17,000 data items. In some cases the data collected is inadequate or no longer relevant to the performance of APRAs functions. For example, the current tools do not permit APRA to collect data about conglomerate groups and industry sub-sectors. In addition, in this information age the current collection framework provides no incentives for institutions to provide data in a timely manner.

3.5 The second problem concerns the inflexibility and inconsistency of the current data collection and publishing powers. APRAs current data collection works in conjunction with its data publishing powers and both are contained in a variety of industry-specific legislation and regulation including: the Banking Act 1959 , Insurance Act 1973 , Life Insurance Act 1995 , Superannuation Industry (Supervision) Act 1993 , Retirement Savings Account Act 1997 and the Australian Prudential Regulation Authority Act 1998 . Changes to APRAs data collection and publishing powers can only be made by changes to such legislation and associated regulations. This is a lengthy process and has meant that APRAs data collection and publishing tools have failed to keep pace with rapid industry development and the demand for current financial sector information. This situation is inconsistent with APRAs aims to streamline and harmonise supervisory and information requirements across APRA supervised institutions.

3.6 Finally, the current situation means that there is a significant overlap in reporting duties imposed on entities to provide similar data to different government agencies such as APRA, the Reserve Bank of Australia (RBA) and the Australian Bureau of Statistics (ABS).

3.7 The ABS also collects an array of data from financial institutions under the Census and Statistics Act 1905 , some of these data items are the same or similar to the data needed to be collected by APRA. There is an opportunity for coordination and rationalisation.

Objectives

3.8 The proposed regulatory measures are designed to streamline and harmonise information requirements across APRA supervised institutions, and to modernise and increase the relevance of financial data, cost effectively.

Identification of options

Option 1 - Amendments to current financial sector data collection powers

3.9 A modernised and harmonised set of financial sector data-collection powers could be inserted into a new Act based on the Financial Corporations Act 1974 . Under this option, the responsibility for collecting information required by the RBA for monetary policy and related purposes under the Financial Corporations Act would be transferred to APRA under the new Act. Similarly, consequential amendments would need to be made to the Banking Act 1959, Insurance Act 1973, Life Insurance Act 1995, Superannuation Industry (Supervision) Act 1993 and Retirement Savings Account Act 1997 and regulations to repeal the current data collection powers. Under the revamped Financial Corporations Act 1974 , APRA would retain the current power to impose financial penalties on institutions that fail to provide data in a timely manner. In addition, it will have power to publish data received from institutions, except for data flagged as commercial-in-confidence or public interest-in-confidence by APRA after consultation with industry. The data collected under this Act will be able to be passed to the RBA and ABS for the purposes of their own monetary policy and statistical requirements, respectively.

Option 2 - No specific action

3.10 Under this option, no measures would be introduced, and APRA regulated financial institutions would continue to provide data according to the financial reporting requirements under the current legislation.

Impact analysis

Impact group identification

3.11 The main groups likely to be affected by the proposed amendments are: financial institutions regulated by APRA, financial institutions regulated under the Financial Corporations Act 1974 (eg. merchant banks and finance companies), APRA, the RBA, the ABS and users of financial services.

Assessment of costs and benefits

Option 1 - Proceed with legislative amendments

3.12 The proposed amendments will benefit all of the parties identified as being affected by the proposed changes.

Financial Institutions

3.13 Financial institutions will benefit from a more streamlined collection process.

3.14 Under the proposed legislation, improved data submission mechanisms (for example, secure website submission in addition to the current disk and email submission - which can be easily corrupted and are time-consuming, particularly for download of many data sets - improved system speed and a data integrity process) and a reduction in the frequency of certain key collections will contribute to a decrease in the amount of data required to be provided in total to APRA, the RBA and ABS, leading to a reduction in the compliance costs and time required to fulfil data providing duties. Financial institutions will not have to spend valuable time providing similar data to RBA, ABS and APRA; instead, APRA will be the central data collection repository.

3.15 Under the proposed legislation, modernised and harmonised collections amongst APRA, RBA and ABS will contribute to easier compliance with APRAs requests for data, as these will be more commercially aligned. Harmonising each of the data collections that APRA is responsible for with the public disclosure requirements of provider institutions and with the financial collections of the ABS and RBA will make it simpler for institutions to comply.

3.16 Implementation of a well understood annual change cycle. As data requirements are generally stable for several years at a time, with only minor additions needed over the short term, it is proposed that a rolling review of all data items be undertaken. This would entail a complete reassessment of data requirements by APRA, RBA and ABS and a rationalisation of data collection using, wherever possible, the same conceptual framework. This process (involving industry consultation and reasonable lead times) will enable institutions to comply with APRAs request for data in a measured and timely manner and add certainty as to what data is required.

3.17 The ability to examine industry data collected by APRA and selectively use this data as a basis for comparison with other institutions or sectors of the financial system (peer groups) will benefit the industry directly and analysts more broadly by facilitating greater market transparency leading to better informed commercial decisions.

3.18 The costs associated with the proposed amendments are not easily measurable. Financial institutions will initially face some transitional costs as a result of having to provide data to APRA in a different form. However, given that one of the aims of the amendments is to closely mirror the way APRA collects data with the way that financial institutions report their business activities, these costs should be modest. Further, the disciplined review cycle means future data changes will follow a predictable process with adequate industry consultation and lead times. In the long term, the benefit in cost savings to financial institutions will be substantially greater than the initial costs incurred.

APRA

3.19 APRA will benefit from the proposal through an increased ability to collect data required to effectively perform its supervisory functions. For example:

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a single reporting and analysis platform across industries;

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new risk rating and improved exception reporting arrangements;

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more efficient and effective offsite analysis tools for APRA front line supervisors;

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better collection and analysis of data across conglomerate groups and industry sub-sectors; and

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where APRA has specific concerns about a financial institution, APRA will be able to more effectively gather information from that institution in a more timely manner.

3.20 In addition, the proposed amendments will provide industry with an incentive to comply with APRAs request for data. It also encourages prudent practice amongst institutions by ensuring that they examine their activities in a similar manner to that of the supervisor. The proposed amendments will also facilitate the continued development of a cooperative relationship between APRA and industry.

3.21 The costs to APRA in the development and deployment of integrated data systems together with the associated staff training necessary to allow efficient analysis of the different industry data sets are substantial. The Statistics Project is utilising a range of internet based secure communications technologies, together with high end Oracle data warehouse and business intelligence tools. Consulting costs associated with the project are substantial. The analysis functionality available to APRA analysts will be substantially in advance of anything previously available to prudential supervisors. However, the technology investment provides a long-term solution to a problem involving substantially out of date, disparate, data collection and analytical systems. It is important to realise that the systems being replaced are reaching the end of their useful life and, although the costs of the Statistics Project are substantial, the difference between these costs and the costs of maintaining and eventually updating the existing systems is marginal. The long term benefits, including better access to data and more efficient regulation, leading to better prudential oversight of the financial industry, will far outweigh the initial investment. Furthermore, unquantifiable but real benefits will accrue to the users of financial services through greater confidence in financial services, greater safety for investors and a stronger financial sector.

ABS and RBA

3.22 The amendments will benefit the RBA and ABS through:

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more efficient and rationalised data collection methods; resulting in

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reduced staff and systems costs that are duplicating processes already undertaken by APRA; and

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allowing resources to be concentrated on improved analysis activities.

3.23 The costs associated with the proposed amendments to the ABS and RBA will be negligible. APRA is currently negotiating a user-pays agreement for the provision of data to the ABS and RBA. While final costs to these agencies is yet to be agreed it should build in the savings realised by rationalising the data collection system.

3.24 Financial institutions will continue to be included in ABS collections where the subject matter, or the detail, is not required by, or of interest to, APRA or RBA for their purposes.

Option 2 - No specific action

3.25 The benefit will be short term savings, through avoiding initial outlays to improve systems and staff training, but there will be no long term benefit and it is estimated there will be the following long term costs:

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for APRA, an ageing set of systems and forms which will become increasingly difficult to maintain and increasingly outmoded in content ;

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a continued burden on financial institutions to provide similar data to different government bodies; and

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a continued duplication of government processes and resources.

3.26 Also, in the absence of reform to streamline APRA's data collection powers, to obtain the relevant information APRA will need to rely on more indirect methods such as licensing, capital, audits and inspections. Tasking frontline supervisors to put a disproportionate store on these other prudential techniques is staff resource intense and could diminish APRAs standing and credibility within the regulatory community and the financial marketplace.

Consultation

3.27 Consultation on the content of the Financial Sector (Collection of Data) Bill 2001 and Financial Sector (Collection of Data - Consequential and Transitional Provisions) Bill 2001 involved representative bodies including the Australian Bankers Association, International Banks and Securities Association of Australia, Credit Union Services Corporation (Australia) Limited, National Credit Union Association Inc., Australian Association of Permanent Building Societies, Australian Friendly Societies Association, Australian Superannuation Funds Association, Australian Institute of Superannuation Trustees, Insurance Council of Australia, Australian Equipment Lessors Association Inc, Investment & Financial Services Association Limited and the Industry Funds Forum.

3.28 Consultations were largely positive, particularly in the banking sector, although a few refinements to the legislation were suggested by the superannuation sector partly reflecting factors specific to this sector. These suggestions have been taken into account through the Government amendments to the legislation.

3.29 Similarly, the Australian Securities and Investments Commission, the Australian Taxation Office, RBA and ABS are supportive of the proposed amendments. The RBA and ABS fully support that APRA should be the central collection point for most financial data from the finance sector.

Conclusion and recommended option

3.30 Option 1 will modernise and increase the relevance of data collections by developing a flexible framework to accommodate financial sector data collection and provide an opportunity to review the current data collections, some of which is historical data collection and serves no real prudential purpose now. Streamlining and harmonising industry Acts into a single data collection Act and the use of reporting standards will ensure the flexibility of data collection and publication to keep pace with financial sector innovation and developments.

3.31 Given substantial benefits will be provided to all parties affected by the proposed amendments, and that the long term costs to all of the parties will be minimal, Option 1 is the preferred option. The proposed amendments are necessary to remedy the current deficiencies in the data collection system.

Implementation and review

3.32 It is proposed that the Financial Corporations Act 1974 be amended so that APRA will act as a single Government collection agency for the financial sector. It is also proposed that this Act be renamed the Financial Sector (Collection of Data) Act 2001 . The Financial Sector (Collection of Data - Consequential and Transitional Provisions) Bill will consequentially amend all of APRAs industry supervision Acts to remove data collection provisions. All current data collection powers in the industry specific legislation will be transferred and harmonised into this new Act.

3.33 It is proposed that a rolling review of all data items be undertaken entailing a complete reassessment of data requirements by APRA, RBA and ABS and a rationalisation of data collection and to use, wherever possible, the same conceptual framework.

3.34 In addition, the detailed regulatory standards will be introduced progressively over the next two to three years, beginning with the authorised deposit-taking institution (ADI) sector on a date to be fixed by Proclamation. APRA will continue to hold in depth consultations with industry groups on the regulatory standards before they are introduced.