Nick Champion (Wakefield, Australian Labor Party) Share this | Hansard source

I would be happy to discuss the provisions of the bill, if only I were not interrupted all the time by constant quorum calls. Mr Deputy Speaker, as I was saying, the hard-earned life insurance policies of Australian workers should not be put at risk by the cavalier accounting of unregulated corporate managers. They should be protected by government regulations.

This bill performs two important functions, and I would like to address each in turn. Firstly, the bill provides for a more effective compliance regime and gives the APRA a broader spectrum of injunction powers to enforce financial entities’ compliance with the prudential regulation requirements. Schedule 2 of the bill harmonises court injunction powers across prudential legislation including the Banking Act 1959, the Insurance Act 1973, the Life Insurance Act 1995 and the Superannuation Industry (Supervision) Act 1993. In doing so, APRA will now be able to seek more reliable injunctions that are tuned more accurately to the circumstances. This ensures that APRA has the flexibility to respond promptly and directly to any risk to the financial health of an entity that provides life insurance to Australians. Changes to the court injunction powers are in the interests of ordinary Australians, ensuring that in the case of any risk of contagion within a corporate group their hard-earned life insurance savings can be protected. If a person or company fails to comply with the requirements of the prudential legislation then the Federal Court may issue a restraining interim injunction. Under these provisions APRA will also be able to seek an interim injunction to protect depositors, policyholders or superannuation beneficiaries’ interests while the court considers whether to grant a final injunction or enforce another prudential rule. These new interim injunctions refocus APRA’s powers to not only respond to financial mismanagement or contagion but also address the effects of this mismanagement. Under these new provisions, if a company is investigated by APRA, working Australians will not be left in the lurch during that process. Their deposits, their policies and their superannuation entitlements will be secured by court order.

The bill also removes a gap in Australia’s prudential regulation framework. Currently APRA does not supervise life insurance non-operating holding companies. As these companies can have a significant effect on the conduct and financial health of life insurance companies, it is an imperative in the current economic climate that they are regulated. In the current climate so many Australians are finding it hard. They are experiencing some difficulties in the employment market. They are worrying about how much certainty they have over their financial arrangements. The collapse of economic institutions in the United States and Europe—30 banks either bailed out, failed or nationalised—has made the case for effective and strict regulation of financial institutions absolutely clear to everyone. Two years ago we could not have imagined a line-up of deposit holders in front of Northern Rock Bank, something that we had not seen since the 1930s runs on banks. So it is pretty clear to everybody that financial institutions of all types need to be properly regulated. This is not policy on the run. It is basically a measure entirely consistent with the regulators and entirely consistent with where we find ourselves with the core principles of the International Association of Insurance Supervisors.

It is also consistent with the current regulation and supervision of general insurers and authorised deposit-taking institutions. In fact the scope of the prudential regulation regime introduced by the first schedule of this bill is closely modelled to match the existing regulation of general insurers and authorised deposit-holding institutions. There is an added benefit in introducing legislation in this way. It closes a loophole, but it makes sure that the frameworks are similar so as to minimise compliance costs for industry, ensuring a smooth transition to the new regulatory regime.

Obviously this regime is needed. It is not a minor issue; it is a real one. International experience has demonstrated the interconnections between companies within corporate groups, including between prudentially regulated entities and unregulated entities, and we have seen the often catastrophic results that can occur when unregulated entities enter into arrangements which affect the regulated entity. So these measures strengthen prudential regulation of life insurance conglomerates in line with the regulation of other companies.

One needs only look at the collapse of the American company AiG and its subsequent bailout by the American government. AiG as a company had written as many as 81 million life insurance policies. But the actions of just one of its subsidiaries, AiG Financial Products, which acted like a hedge fund and which was unregulated and which wrote derivative contracts up to a value of $2.7 trillion—it seems like an extraordinary figure, but that was the extent of the contracts—brought it to a crisis point. When the financial collapse came they had a house of cards arrangement. Many of those derivatives were collateralised debt obligations, and just this one division turned in a $40.4 billion loss as a result of the GFC. That in turn undermined the rest of the company. So you can see that the actions of one unregulated entity can undermine the life insurance business which had been making a profit at the time. It still makes a profit, but it was the actions of a cowboy outfit in this particular firm that undermined the rest of the business.

I think Australians will be relieved to see the government introducing these amendments, enhancing the powers of APRA, giving consumers greater confidence that the financial standards of APRA related entities will be extended to life insurance companies. I have to congratulate the Assistant Treasurer on this development. I think it is prudent and sensible legislation. As I said before, the global economic recession, the financial crisis, has really woken us up to the risks of poorly regulated financial institutions. It has woken us up to the fact that so much of modern financial architecture is unregulated. That lack of regulation, that lack of oversight, could have potentially catastrophic effects on our financial system. The bill before the House today removes some of those risks. It removes some of the regulatory gaps. It makes sure that the prudential regulation framework for the life insurance industry is appropriate and guards the interests of policyholders and the financial interests of all Australians. I commend the bill to the House.

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