Client Update: Proposed amendments to enhance APRA's powers over insurers
25 January 2010
In brief: Draft legislation has been released for public consultation that, if passed, will substantially enhance the Australian Prudential Regulation Authority's power in respect of regulated entities, with the intention of strengthening the authority's ability to manage a financial sector crisis. Partner Dean Carrigan and Senior Associate Amanda Taylor report.
- Enhanced APRA powers
- General powers to regulate life and general insurers
- APRA's failure management powers
- Business transfers and recapitalisation
- APRA's investigation powers
- Corporations Amendment Regulations 2010
On 19 January 2010, Chris Bowen, Federal Minister for Financial Services, Superannuation and Corporate Law, released the Financial Sector Legislation Amendment (Prudential Refinements and Other Measures) Bill 2010 (the Bill) for public consultation. If passed into law, proposed amendments to legislation governing banks and life and general insurers will substantially enhance the Australian Prudential Regulation Authority's (APRA) powers in respect of regulated entities and, in some cases, their corporate groups. The proposed amendments follow the introduction of the Financial Claims Scheme in October 2008, and are intended to strengthen APRA's powers to manage a financial sector crisis. We have previously reported on the Federal Government's financial stability package for the insurance industry. Careful consideration will need to be given to the proposed amendments' implications, and life and general insurers may wish to make submissions to Treasury in respect of the proposals.
The Corporations Amendment Regulations 2010 were released for public consultation on the same day. If passed, these regulations will require banks and general insurers to provide information relating to the Financial Claims Scheme in their product disclosure statements.
The measures contained in the Bill are intended further to enhance APRA's powers in respect of life and general insurers and authorised deposit-taking institutions (ADIs). The Explanatory Material released with the Bill notes that the review of APRA's powers to manage a financial crisis is consistent with developments overseas, where countries such as the UK and the US have sought to review and strengthen their financial frameworks.
In summary, the proposed amendments are intended to enhance APRA's powers to:
- investigate and detect risks to prudentially regulated institutions and the financial system, and to promote financial system stability;
- compel compliance with, and rectify breaches of, prudential requirements;
- act when regulated financial institutions are at risk of experiencing financial distress and to ensure that distress is resolved without undermining financial stability;
- administer the Financial Claims Scheme (the FCS), which protects deposits in Australian banks, credit unions and building societies (currently up to a limit of $1 million per depositor) and eligible policyholders of general insurers; and
- collect data that APRA or the Government requires to identify and respond to developments in the financial sector.
The Bill proposes amendments to a number of current Acts, including the Life Insurance Act 1995 (Cth) and the Insurance Act 1973 (Cth) (the Insurance Act), which will be of particular interest to life and general insurers. In some cases, the proposed amendments are intended to ensure consistency between the powers that APRA has in respect of life and general insurers, and the powers that APRA has in respect of ADIs under the Banking Act 1959 (Cth).
The Bill proposes amendments to APRA's general powers to regulate life and general insurers, including the following:
- APRA will be permitted to make prudential standards for consolidated general insurance groups as a whole, or with respect to parts of a consolidated general insurance group.
- APRA will be permitted to exclude assets or amounts from being included by a general insurer as 'assets in Australia' by prudential standard. Amendments are also proposed to the Insurance Act, to clarify that in a liquidation, a general insurer's assets in Australia must first be applied to meet its liabilities in Australia.
- APRA will be permitted to set criteria by legislative instrument for granting an authorisation to carry on a regulated business in Australia, or to become a non operating holding company (NOHC) in respect of a regulated business.
- Where APRA revokes a life or general insurer's authorisation, it may provide that the authorisation continues in effect in relation to a specified matter or specified period, as though the revocation had not happened, for the purposes of a prudential law.
- Amendments are also proposed to enhance APRA's direction-making powers:
- in respect of a material deterioration in a life or general insurer's financial condition (presently a direction may only be issued where the deterioration is both material and 'sudden'); and
- in respect of a subsidiary of a general insurer, life insurer or authorised NOHC.
A number of amendments are proposed to APRA's failure management powers in respect of life and general insurers. In particular:
- A person seeking to appoint an external administrator to a general insurer or life insurer must provide APRA with a copy of the application for the appointment, and a copy of all the documents that will be filed in a support of that application.
- The proposed amendments will clarify that APRA has the right to be heard in proceedings related to the replacement of a judicial manager.
- Further amendments are proposed to the judicial management provisions, so that a judicial manager of a general insurer or life insurer is vested with the powers of the board of directors of the insurer. This would align the powers of a judicial manager of an insurer with the powers of a statutory manager under the Banking Act.
The Bill proposes new powers for APRA to order an insurer to recapitalise or to transfer its business to a third party. In particular:
- APRA will be permitted to direct a general or life insurer to recapitalise in circumstances equivalent to those that would presently allow APRA to appoint a judicial manager to those entities. It would be a criminal offence for an insurer to fail to comply with such a direction issued by APRA in certain circumstances.
- Amendments are proposed to the Financial Sector (Business Transfer and Group Restructure) Act 1999 (Cth) to permit APRA to require the compulsory transfer of a general insurance business to another general insurer (that legislation currently only applies to life insurers and ADIs).
- It is also proposed that, in certain circumstances, APRA could require a compulsory transfer of aspects of a life or general insurer's business to another entity that is not an authorised insurer.
- Amendments are proposed to clarify that APRA may commence or continue an investigation after a regulated entity enters external administration.
- It is also proposed to make amendments to insurance and banking legislation to clarify that a person cannot fail to comply with a requirement to provide information or produce books or documents to APRA on the ground that the person might be disqualified as a result.
- Additional requirements will be imposed on life and general insurers to keep records relating to their insurance business in Australia at a location notified to APRA and that the records are kept in, or are readily convertible into, English.
Finally, the Bill will also make amendments to harmonise the requirements of auditors and actuaries under insurance and banking legislation, and will effect changes to the financial sector levies frameworks that have been recommended by the 2009 Report of the Review of Financial Sector Levies.
The closing date for submissions on the Bill is 16 March 2010.
These regulations arise from amendments in the Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Act 2008 (Cth).
Specifically, the regulations will require ADIs and general insurers to provide information relating to the FCS in product disclosure statements.
The Regulations would implement the objective of informing investors and clients about the relationship between protected accounts, protected insurance policies and the FCS.
The FCS disclosure requirements for general insurers will become operational from 17 April 2010 and for ADIs from 12 October 2011.
The closing date for submissions on these Regulations is 16 February 2010.
- Louise JenkinsPartner,
Ph: +61 3 9613 8785