House of Representatives

Financial Sector Legislation Amendment (Prudential Refinements and Other Measures) Bill 2010

Explanatory Memorandum

Circulated By the Authority of the Minister for Financial Services, Superannuation and Corporate Law, the Hon Chris Bowen MP

Chapter 2 - Amendments to APRA's correction powers

Outline of chapter

2.1 Schedules 1 to 3 of the Bill amend the Banking, Insurance and Life Insurance Acts to enhance APRA's power to correct breaches of the prudential framework by issuing directions.

Context of amendments

2.2 Effective enforcement powers ensure that APRA is able to compel compliance with, and rectify breaches of, minimum standards. APRA is equipped with various enforcement powers and sanctions including the power to enter into court-enforceable undertakings, issue directions, and seek court injunctions to enable it to respond proportionately to compliance issues.

2.3 In most situations, APRA is able to address prudential concerns by working cooperatively with the Board and management of a supervised entity, thereby allowing the Board and senior management to maintain full responsibility for decisions made by the entity.

2.4 However, there may be times where APRA judges that it is necessary to use more direct tools to rectify or manage prudential concerns. In particular, directions powers enable APRA to specify how an entity should resolve compliance issues and therefore enable APRA to compel an entity to take specific action to address prudential risks that have been identified.

2.5 The Banking, Insurance, and Life Insurance Acts each enable APRA to issue directions to regulated entities under specified circumstances. Refining and, where appropriate, enhancing the triggers that allow the issue of directions would ensure APRA can respond in a timely and decisive way to emerging prudential concerns which affect an entity, the entity's group or affect the financial system more broadly.

Summary of new law

2.6 Schedules 1 to 3 of the Bill amend the Banking, Insurance and Life Insurance Acts to:

·
enhance the triggers for issuing directions;
·
make it an offence for a NOHC of a general insurer to fail to comply with a direction to remove a director or senior manager; and
·
clarify that APRA may issue directions to foreign ADIs relating to their control of assets and their responsibility for liabilities.

Comparison of key features of new law and current law

New law Current law
APRA may give directions to regulated entities under the Banking, Insurance and Life Insurance Acts if APRA has reason to believe that there has been, or there might be, a material deterioration in the entity's financial condition. APRA may give directions to regulated entities under the Banking, Insurance and Life Insurance Acts if APRA has reason to believe that there has been, or there might be, a sudden material deterioration in the entity's financial condition.
In deciding whether to give a direction to an ADI under section 11CA of the Banking Act, APRA may disregard any external support for an ADI. It is not clear whether ARPA may disregard any external support for an ADI in deciding whether to give a direction under section 11CA of the Banking Act.
APRA may issue directions to an ADI, insurer or an authorised NOHC of an ADI or insurer under relevant provisions as a result of the conduct or condition of a subsidiary of such an entity, in certain circumstances. APRA has the power to direct regulated entities to control the actions of their subsidiaries, where a directions trigger is met. However, the triggers do not presently make any reference to subsidiaries of such entities.
Subsection 27(7) of the Insurance Act is amended to make it also an offence for an authorised NOHC to fail to comply with a direction from APRA to remove a director or senior manager. Subsection 27(7) of the Insurance Act makes it an offence for general insurers and corporate agents to fail to comply with a direction to remove a director or senior manager.
Clarify that APRA may issue a direction to a foreign ADI relating to its control of assets or its responsibility for liabilities. It is not clear that APRA may issue a direction to a foreign ADI relating to its control of assets or its responsibility for liabilities.

Detailed explanation of new law

Triggers for issuing direction

2.7 Under the Banking, Insurance and Life Insurance Acts, triggers must be satisfied prior to APRA issuing a direction. The Bill amends the triggers for giving a direction to an ADI, general insurer, life insurer or an authorised NOHC of these entities.

Deterioration in financial condition

2.8 Currently, paragraphs 11CA(1)(h) of the Banking Act, 104(1)(g) of the Insurance Act and 230B(1)(g) of the Life Insurance Act provide that APRA may issue a direction if there is 'a sudden material deterioration in the body corporate's financial condition' [Emphasis added].

2.9 The Bill amends the relevant provisions to remove the word 'sudden'. This reflects that it is not the speed but the extent of the deterioration that should be relevant in determining whether the trigger is met . [Schedule 1, item 13, Schedule 2, item 86, Schedule 3, item 54, paragraph 11CA(1)(h) of the Banking Act 1959, paragraph 104(1)(g) of the Insurance Act 1973, and paragraph 230B(1)(g) of the Life Insurance Act 1995]

ADI receiving external support

2.10 The Bill amends section 11CA of the Banking Act to clarify that APRA may disregard any external support for an ADI in deciding whether to give a direction under the section . [Schedule 1, item 16, subsection 11CA(1B) of the Banking Act 1959]

2.11 Currently, it is unclear whether APRA may disregard external support, for example, the provision of Australian Government (Government) support to an ADI, in determining whether to give a direction to an ADI under section 11CA of the Banking Act. The amendment clarifies that APRA may disregard such support.

2.12 The Bill also enables regulations made under the Banking Act to specify that a particular form of support is not external support for the purposes of the above mentioned amendment. This enables the regulations to clarify any types of external support that are not to be disregarded by APRA in deciding whether to give a direction under section 11CA of the Banking Act . [Schedule 1, item 16, subsection 11CA(1C) of the Banking Act 1959]

Reference to subsidiaries

2.13 The Bill amends the grounds for giving directions under section 11CA of the Banking Act, section 104 of the Insurance Act and section 230B of the Life Insurance Act so that a direction can be given in certain circumstances as a result of the conduct or circumstances of subsidiaries of regulated entities . [Schedule 1, item 14, Schedule 2, item 87, Schedule 3, item 55, subsection 11CA(1AA) of the Banking Act 1959, subsection 104(1A) of the Insurance Act 1973, and subsection 230B(1AA) of the Life Insurance Act 1995]

2.14 Currently, APRA has the power to direct a regulated entity to do, or cause a subsidiary to do, certain things if a directions trigger is met. However, the triggers themselves do not presently refer to subsidiaries.

2.15 The Bill amends the sections identified above to enable APRA to use its existing powers to direct a body corporate that is an ADI, insurer or authorised NOHC of an ADI or insurer, if:

·
APRA has reason to believe that:

-
a subsidiary of the body corporate is, or is about to become, unable to meet the subsidiary's liabilities; or
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there is, or there might be, a material risk to the security of the assets of a subsidiary of the body corporate; or
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there has been, or there might be, a material deterioration in the financial condition of a subsidiary of the body corporate; or
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a subsidiary of the body corporate is conducting the subsidiary's affairs in an improper or financially unsound way; or
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a subsidiary of the body corporate is conducting the subsidiary's affairs in a way that may cause or promote instability in the Australian financial system; and

·
APRA considers that the direction is reasonably necessary for one or more prudential matters relating to the body corporate . [Schedule 1, item 14, Schedule 2, item 87, Schedule 3, item 55, subsection 11CA(1AA) of the Banking Act 1959, subsection 104(1A) of the Insurance Act 1973, and subsection 230B(1AA) of the Life Insurance Act 1995]

2.16 The amendment reflects that the conduct or circumstances of a subsidiary of a regulated body may in some instances affect prudential matters relating to the regulated body.

2.17 The Bill also makes amendments to sections 11CA of the Banking Act, 104 of the Insurance Act and 230B of the Life Insurance Act to clarify that:

·
the new direction power triggers do not limit the existing triggers in those sections in any way; and
·
the existing direction power triggers in those sections do not limit the new triggers in any way . [Schedule 1, items 12 and 14, Schedule 2, items 85 and 87, Schedule 3, items 53 and 55, subsections 11CA(1) and 11CA(1AA) of the Banking Act 1959, subsections 104(1) and 104(1A) of the Insurance Act 1973, and subsections 230B(1) and 230B(1AA) of the Life Insurance Act 1995]

2.18 As a result of the amendments inserting the new triggers, consequential amendments are made to paragraph 11CA(1A)(b) of the Banking Act, paragraph 104(2)(b) of the Insurance Act and paragraph 203B(1A)(b) of the Life Insurance Act. The amendments insert a reference to the new triggers into those paragraphs . [Schedule 1, items 15, schedule 2, item 88, and schedule 3, item 56, paragraph 11CA(1A)(b) of the Banking Act 1959, paragraph 104(2)(b) of the Insurance Act 1973, and paragraph 203B(1A)(b) of the Life Insurance Act 1995]

Failure by an authorised NOHC to comply with a direction to remove a director under the Insurance Act

2.19 Section 27 of the Insurance Act presently allows APRA to direct general insurers, corporate agents and authorised NOHCs of general insurers to remove a person from the position of director or senior manager, in certain circumstances.

2.20 Subsection 27(7) of the Insurance Act presently makes it an offence (penalty: 300 penalty units) for a general insurer or corporate agent to fail to comply with such a direction. However, it does not presently make it an offence for an authorised NOHC of a general insurer to fail to so comply.

2.21 The Bill rectifies this inconsistency by amending subsection 27(7) of the Insurance Act so as to apply it to a NOHC of a general insurer on the same terms as it presently applies to general insurers and corporate agents. As a result, a NOHC of a general insurer commits an office if: the NOHC does, or fails to do, an act; and by doing or failing to do the act, the NOHC fails to comply with a direction under section 27 of the Insurance Act . [Schedule 2, items 15 and 16, subsection 27(7), paragraphs 27(7)(a) and (b) of the Insurance Act 1973]

Directions to foreign ADIs regarding assets and liabilities

2.22 The Bill amends the Banking Act to clarify that APRA may direct a foreign ADI:

·
to act in a way that a particular asset, or a particular class of assets, of the ADI is returned to the control (however described) of the part of the ADI's banking business that is carried on in Australia; or a particular liability, or a particular class of liabilities, of the ADI ceases to be the responsibility (however described) of the part of the ADI's banking business that is carried on in Australia; or
·
to not act in a way that a particular asset, or a particular class of assets, of the ADI ceases to be under the control (however described) of the part of the ADI's banking business that is carried on in Australia; or a particular liability, or a particular class of liabilities, of the ADI becomes the responsibility (however described) of the part of the ADI's banking business that is carried on in Australia . [Schedule 1, item 17, subsection 11CA(2B) of the Banking Act 1959]

2.23 The amendment clarifies that APRA may issue a direction to prevent inappropriate intra-entity transactions that may undermine the financial position of the ADI's Australian operations. This may be particularly important in a situation where the foreign ADI is in financial distress and to ensure that liability holders in Australia are not disadvantaged in the winding up or other resolution of the ADI.

2.24 The amendment does not limit the generality of paragraph 11CA(2)(p) of the Banking Act. That paragraph presently provides that APRA may give an ADI (including a foreign ADI) or an authorised NOHC of an ADI a direction to do, or cause a subsidiary to do, anything related to the way in which the affairs of the body corporate are to be conducted or not conducted . [Schedule 1, item 17, subsection 11CA(2B) of the Banking Act 1959]


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