Written by Partner Michelle Levy and Law Graduate Michal Magat
The exposure draft of the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017, will, if passed, give new powers to the Australian Prudential Regulation Authority in relation to the authorised non-operating holding company and other related bodies corporate of APRA-regulated entities (including foreign regulated entities).
The Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017 (the Bill) will introduce statutory management for life and general insurance companies and extend to corporate groups Australian Prudential Regulation Authority's (APRA) already broad powers to appoint a statutory manager to take control of, and give directions to, a regulated entity, and to implement the transfer of a part of a regulated entity's business. Like APRA's existing powers, these powers are, for the most part, intended for extraordinary circumstances, but they are not conditional upon any such circumstance occurring.
Treasury's September 2012 Consultation Paper Strengthening APRA's Crisis Management Powers said that a key lesson from the 2008 global financial crisis was that the internal complexity of large financial groups presented a substantial barrier to the effective management of APRA-regulated entities during a period of crisis. The Explanatory Memorandum to the Bill says that APRA-regulated entities are exposed to a high risk of cross-contamination where a group company is in financial distress, especially where the company provides essential services to the APRA-regulated entity. For these reasons, the Bill would give APRA the power to control, set prudential standards for, and prevent failure at, every level of a financial group, from the non-operating holding company at the top to the last subsidiary.
The policy and practical reasons for the proposed expansions of APRA's crisis resolution powers range from protection of depositors and policyholders, meeting the overriding policy objective of maintaining the stability of the Australian financial system, and providing for the more effective 'resolution' of a distressed APRA-regulated entity either towards financial soundness or liquidation.
If APRA appoints a statutory manager to an APRA-regulated entity, or if it intends to do so, the Bill will give APRA the power to appoint a statutory manager to any of the APRA regulated entity's related entities if:
- the entity provides essential services to the regulated entity; or
- the appointment is necessary to facilitate the resolution of the regulated entity.
The (expanded) statutory management regime for ADIs is substantially replicated by the Bill for insurance companies, for which it will operate in parallel with the judicial management regime.
The Bill also expands APRA's directions power by introducing new triggers for the exercise of the power which explicitly relate to giving directions to or on account of subsidiaries of a financial group. More importantly, the Bill enables the use of the power for 'pre-positioning' a regulated body and its group in order to prepare viable contingency plans and to remove obstacles to potential supervisory action prior to a crisis. The Bill will enable APRA to give directions to any group entity to make changes to the entity's systems, business practices or operations, but also to reconstruct, amalgamate or otherwise alter the business, structure or organisation of the entity or of the group.
The above changes are not without limits. For instance, the 'pre-positioning' of an entity or a group still requires a trigger (for instance, the breach of a prudential standard), and the power of a statutory manager to enter into certain transactions is constrained by fair value considerations or shareholder approval.
At the same time, however, the Bill will expand the moratorium on litigation for an entity under statutory or judicial management by preventing enforcement actions and the disposal of property, and restricting the capacity of the suppliers of essential services to deny supply. Similarly, the Bill will stay the exercise of contractual rights against a regulated body triggered by APRA's intervention in a related body corporate.
The Bill will also allow APRA to direct a holding company to recapitalise a regulated entity by issuing shares in the holding company or intermediary bodies, or by purchasing shares in intermediate bodies or the regulated body. The Bill will also clarify that conversion and write-off of capital instruments by an APRA-regulated entity can take place despite listing rules, company constitutions or the great majority of domestic and foreign laws.
The Bill also empowers APRA to appoint a statutory manager to control the Australian assets and liabilities of a foreign regulated body with a local branch office in financial distress. Although APRA cannot direct the foreign board, it will be able to suspend its control over the Australian business, and thus more easily prevent transfer of capital from Australia, revoke the body's authorisation or wind up the branch.
The Bill proposes to harmonise prudential standards and powers across the banking and insurance industry legislation, to enhance and standardise:
- APRA's power to vary and revoke authorisations;
- the immunity of directors, officers and companies acting under APRA's direction; and
- the immunity of statutory and judicial managers for all acts or omissions done otherwise than in bad faith.
It would also prevent section 588FE of the Corporations Act 2001 from voiding transactions undertaken by appointed managers.
Finally, the Bill will expand the Financial Sector (Transfer and Group Restructure) Act 1999 to permit the compulsory transfer of non-regulated business related to insurers and not just to banks.
The key assumption behind the Bill and similar efforts in other jurisdictions is that a regulator's directions and statutory managers are capable of bringing about the resolution of distressed bodies in a way that justifies the proposed expansion of regulatory powers. Although the Explanatory Memorandum to the Bill notes that a newly appointed statutory manager would require time to become familiar with the financial state of the company, it does not address the consequences of this delay or of the expanded moratorium designed to protect the manager. The expansion of APRA's crisis resolution powers by the Bill is not without its costs both for the present operation and organisation of financial groups, and for their conduct during a future time of crisis. Whether these costs are justified by improved outcomes will only perhaps become apparent after a market emergency that is best avoided in the first place.