Chris Pearce (Aston, Liberal Party, Parliamentary Secretary to the Treasurer) Share this | Hansard source

I move:

That this bill be now read a second time.

This bill allows consumers and businesses who purchase a general insurance product in Australia to be confident that they will be protected by Australia’s world-class prudential regime.

This bill amends the Insurance Act 1973, to strengthen and clarify the requirement that anyone that carries on general insurance business in Australia, either directly or through the actions of another (for example, a financial intermediary) is required to become authorised and will be prudentially regulated by the Australian Prudential Regulation Authority, or APRA.

At the same time, the government is keen to continue welcoming new entrants into the Australian general insurance market as it recognises these new entrants promote strong competition and innovation. The government will continue to welcome well-capitalised and well-managed foreign insurers.

To that end, APRA will adopt a more risk-focused approach to prudential standards to align prudential requirements with the risk posed by different classes of insurers, with the result that categories of insurers posing a lower risk will face a reduced regulatory burden.

This approach will better protect Australian consumers and businesses from poorly regulated direct offshore foreign insurers, or DOFIs.

However, the government does not want the proposed changes to unduly restrict market capacity.

For this reason, the bill provides a framework that enables the government to develop regulations to provide limited exemptions from the new regime. These exemptions will allow Australia’s largest businesses, with risks that cannot appropriately be placed with an authorised insurer in Australia, to obtain insurance offshore.

It is hoped these changes will encourage domestic insurers to continue providing innovative products that meet the needs of Australian consumers and businesses.

To enforce these Insurance Act 1973 changes, APRA’s powers will be expanded so that it can investigate entities that it has a reasonable belief are carrying on insurance business in Australia without being authorised. APRA will also have the power to apply to the Federal Court for an injunction to stop an entity from acting illegally. The government recognises that these new powers are strong but, on balance, considers these to be necessary to maintaining the integrity of the prudential regime.

To complement these prudential changes, the Corporations Act 2001 will be amended so that Australian financial service licence holders and authorised representatives will be required to deal only in authorised general insurance products, including those provided by Lloyd’s underwriters, with limited exceptions.

Licence holders will also be required by regulation to supply data on any dealing in insurance covered by the exemptions.

With regards to discretionary mutual funds (DMFs), which are providers of risk management tools that are an alternative to insurance, the government has formed the view that at this stage DMFs do not pose a significant risk to systemic integrity. Therefore it would not be appropriate to prudentially regulate DMFs at this time. However, the nature and scope of DMF activity will be monitored via information collection over the next three years. At that time, once there is sufficient information on DMFs’ activities, a review will be undertaken to determine whether or not it is appropriate to prudentially regulate these entities as well.

The government is taking steps to ensure individual consumers are adequately informed about DMFs by an amendment to the Corporations Regulations requiring DMFs to disclose to all their clients, both retail and wholesale, the key characteristics of their product, including that the DMF has a discretion whether or not to pay out on a claim.

The government is also amending the Financial Sector (Collection of Data) Act 2001 to subject DMFs to a rigorous and compulsory data collection regime, to better understand the nature and scope of their operations. This data, along with the data collected from Australian financial service licence holders and authorised representatives who deal in DMF products, will provide sound statistical input for future policy.

This bill addresses an outstanding HIH Royal Commission recommendation and a regulatory gap identified by the International Monetary Fund’s Financial Sector Assessment Program. It follows extensive consultation with stakeholders on how best to regulate DOFIs and DMFs.

The government welcomes industry’s ongoing assistance in implementing and adjusting to these new arrangements.

In October 2006, the International Monetary Fund found that Australia had a robust financial sector. The changes proposed in this bill will enhance the protection for Australians buying insurance and will encourage competition and innovation in the Australian general insurance market. They will enhance community confidence in the market and Australia’s overseas reputation as a sound, well-regulated market. I commend the bill to the House.

Debate (on motion by Ms Plibersek) adjourned.

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