Chris Pearce (Aston, Liberal Party, Shadow Minister for Financial Services, Superannuation and Corporate Law) Share this | Link to this | Hansard source

I rise in the House today to offer some remarks in relation to the Financial Sector Legislation Amendment (Enhancing Supervision and Enforcement) Bill 2009. This bill has two purposes—firstly, to make APRA responsible for the supervision of what are called non-operating holding companies, otherwise known as NOHCs, of life insurers and, secondly, to harmonise and strengthen APRA’s powers to seek court injunctions under a range of acts, including the Banking Act 1959, the Insurance Act 1973, the Life Insurance Act 1995 and the Superannuation Industry (Supervision) Act 1993.

Prudential regulation of non-operating holding companies and related corporate groups was a recommendation that emerged from the HIH Royal Commission. It was also identified in the Wallis report that the former, coalition government commissioned in 1997. APRA currently regulates the non-operating holding companies of general insurers and authorised deposit-taking institutions, otherwise known as ADIs. These powers are granted, respectively, under the Insurance Act 1973—at least, that has been the case since 2002—and under the Banking Act of 1959 since 1998. Under this bill, APRA will have the power to register and supervise the non-operating holding companies of life insurance companies and enforce their compliance with prudential requirements. With the passage of the bill, APRA will be able to seek a consistent and comprehensive range of injunctions from the Federal Court of Australia on prudential matters, and this power will apply to ADIs and to general insurance, life insurance and superannuation.

The bill is aimed at ensuring that, where life insurance companies are part of large corporate groups, they are not exposed to risks that stem from other companies within the group. As these risks may affect policyholders, the parent of the non-operating holding company will become subject to APRA’s prudential supervision. The objectives of the bill are consistent with international agreements on prudential supervision of systematically important financial institutions. Following the Wallis inquiry and the HIH Royal Commission, the coalition granted APRA regulatory oversight of ADIs and of general insurers, and this bill continues the former government’s work by bringing the non-operating holding companies of life insurers within APRA’s bailiwick.

I want to turn to a very important matter that was raised during the consultation phase of the Senate economics committee’s inquiry into this bill. It centres on the decisions that APRA makes. Many APRA directions are not subject to a merits review process. In fact, six out of the 10 directions issued by APRA are not. These powers are granted in the Life Insurance Act 1995, and similar powers exist in the banking and general insurance acts. APRA’s power to issue directions without merits reviews is used to prevent borrowings, prevent the payment of dividends and remove directors and senior managers. All of these are very significant measures, of course, for listed companies—areas in and around borrowings, the payment of dividends and, obviously, the removal of senior people within these organisations. It seems to me—and, as I said, this is something that came to light during the Senate committee inquiry into this bill—that there really is a call for us to consider having a universal merits review process for all of APRA’s directions, not just for four out of 10 but indeed for all 10 of the directions that APRA has the capacity to make.

I think that, if there were processes for merits review available on all of the directions, it would enhance natural justice, improve prudential regulation in our country and instil greater confidence in stakeholders across industries in our country and indeed across the world that Australia has a stronger and more robust prudential regulatory framework than any other country in the world. I think that all of APRA’s decisions and directions ought to at least be open to a merits review process so that all players can have that level of confidence that the decisions that APRA takes are fair, are just and are right.

I understand that this procedure—that is, making all of APRA’s decisions subject to a merits review—could be achieved quite easily. It could be done through a very quick legislative amendment process. I also understand that it would in no way lessen APRA’s ability to act swiftly, which we all support, of course: the ability of our regulators to be able to act swiftly and protect Australians from all walks of life. I think that a universal merits review process should apply to the whole of the general insurance sector, to the life insurance sector and indeed across the whole banking sector as well.

So the coalition support this bill, but we call on the government to work with us and to work with industry stakeholders across the whole of the Australian financial services landscape to enhance transparency and create an even stronger and more robust prudential regulatory framework by considering making all of APRA’s decisions merits-reviewable, which I think can only enhance our standing as a global financial services hub. But, as I said, the coalition support this bill.

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

It is my great pleasure to support the Financial Sector Legislation Amendment (Enhancing Supervision and Enforcement) Bill 2009. Obviously the global economic downturn and financial crisis has woken us up from a 20-year love affair with laissez-faire approaches to regulation. We now know that gaps or holes in the regulation of financial markets and financial entities are really time bombs for the future. The good thing about this bill is that it ensures there is appropriate regulation of financial entities. Chifley once said:

Private banking systems make the community the victim of every wave of optimism or pessimism that surges through the minds of financial speculators.

Obviously this government has one key aim—to ensure that the emotions of Wall Street or the financial markets do not hurt people living in main street in places like Craigmore, Gawler or the Clare Valley in my electorate. To help all Australians through the effects of the global financial crisis we have introduced the Nation Building and Jobs Plan to provide immediate stimulus and to ensure the long-term productive capacity of our economy, with 70 per cent of the stimulus invested in infrastructure throughout the electorate and $291 million for rail on the Gawler to Adelaide line, creating 200 jobs in Victoria making concrete sleepers. We are aware that the infrastructure spend in one part of the country helps people in other parts of the country—a concrete sleeper factory in this case. The Treasurer has been working tirelessly to deliver a budget that makes the tough choices to stimulate the economy and put us on the road to recovery. The Assistant Treasurer has worked diligently to propose the bill before the House today and he should be commended for it.

The bill introduces measures to regulate the non-operating holding companies, NOHCs, of companies that sell life insurance. The bill also harmonises the injunctions that may be ordered as enforcement measures in respect of those entities. The aim of these amendments is to ensure that corporations that sell life insurance and are part of a corporate group affected by the financial crisis remain solvent for their Australian customers. For Australians who have life insurance, particularly the many people in Wakefield, when they purchase their life insurance and make sacrifices to pay the ongoing fees, it is important that they do not inadvertently enter corporate structures that are vulnerable to collapse. You cannot expect ordinary people to look into corporate structures that remain elusive to many learned people—politicians, journalists, lawyers and other experts. We cannot expect the man or woman in the street to know exactly what is going on behind the corporate veil, we cannot expect them to know the accounting or risk management policies—(Quorum formed.)

Yesterday, we saw the member for Paterson kicked out of this House for bad behaviour and today he is on a deliberate campaign to disrupt the people’s business. What a disgrace he is to his electorate and to his shadow portfolio.

Bob Baldwin (Paterson, Liberal Party, Shadow Minister for Defence Science and Personnel) Share this | Link to this | Hansard source

Mr Deputy Speaker, the honourable member is reflecting on the chair. I was just bringing to your attention the standing orders of the House in relation to a quorum. He has reflected on that as a disgraceful event.

Peter Slipper (Fisher, Liberal Party) Share this | Link to this | Hansard source

There is no point of order.

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

No point of order, no reason to call for a quorum: why is the member for Paterson here? Just to disrupt the business of the government and the business of the parliament. He is here to cause trouble. If any of his constituents are listening, I am sure they are disappointed in him.

Government Members:

Government members interjecting—

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

Yes, you would think he would have a black spot to go to.

Peter Slipper (Fisher, Liberal Party) Share this | Link to this | Hansard source

I draw to the attention of the member for Wakefield the standing orders and that he is debating the Financial Sector Legislation Amendment (Enhancing Supervision and Enforcement) Bill 2009, and I would ask him to return to the provisions of the bill.

Nick Champion (Wakefield, Australian Labor Party) Share this | Link to 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.

Bernie Ripoll (Oxley, Australian Labor Party) Share this | Link to this | Hansard source

I thank the House for the opportunity to speak on the Financial Sector Legislation Amendment (Enhancing Supervision and Enforcement) Bill 2009. Given the experiences of today, I am assuming that at some point during my short contribution I will be subjected to a quorum call.

Tony Abbott (Warringah, Liberal Party, Shadow Minister for Families, Housing, Community Services and Indigenous Affairs) Share this | Link to this | Hansard source

For you, no.

Bernie Ripoll (Oxley, Australian Labor Party) Share this | Link to this | Hansard source

I thank the member for Warringah, who says that for me he will dispense with that. It has certainly been the practice for the rest of the morning.

This is a good opportunity to speak about some of the very important and key issues in our financial services sector and some of the changes that need to be made to enhance supervision and enforcement. As we just heard from the member for Wakefield, given the global financial crisis and a range of failures that we have seen in our system, not just here in Australia but across the globe, it is important that we not only acknowledge where some of those failures took place but make real changes in our regulatory regime to minimise them in the future and improve the system that we have before us.

It is sometimes the case that where there are structural flaws or failures in a system you do not see that the system might break until that actually takes place. But that is not always right. There are circumstances where you can foresee structural problems and flaws. In the case before us, I think it is a combination of both. We need an enhanced regulatory regime with supervision and enforcement so that it is continually maintained and scrutinised. Measures need to be taken by government to ensure that our financial system operates efficiently and protects consumers. In the end, what we are referring to is the protection of consumers in a sector in which, for many, involvement is compulsory through the superannuation guarantee or through parts of the financial services sector, including life insurance.

The bill before us will do two things. Firstly, it will remove a gap that exists in the prudential regulation regime by regulating non-operating holding companies of life insurance companies. There currently exists a discrepancy in that those non-operating holding companies are not under the supervision of APRA and they ought to be. APRA currently regulates the non-operating holding companies of general insurers and authorised deposit-taking institutions, but it does not have authority over the non-operating holding companies of life insurers. The scope of the regulatory framework for the non-operating holding companies of life insurance companies is closely modelled on the existing regulation of the non-operating holding companies of general insurance companies and authorised deposit-taking institutions. There were a couple of organisations in the sector—not many—who felt either that this was unnecessary or that the burden of regulation on them was already high enough. They argued the point in a recent Senate inquiry which I will refer to in a moment. I believe that the non-operating holding companies of life insurers should be brought into line. They should be scrutinised by APRA.

The prudential requirements that will apply to non-operating holding companies of life insurers are consistent with the prudential requirements that apply to general insurers. These include governance arrangements, the types of breaches that must be reported to APRA and the types of directions that may be issued. This approach will minimise compliance costs for industry and ensure a smooth transition. Not only that but for the companies involved and for those who use these vehicles the costs will be very, very small indeed. This is an important change because the prudential regulator operates currently under four different acts, including the Life Insurance Act and the Banking Act. Those acts need to work in symphony to provide the best possible mechanisms and tools for APRA to carry out its authority. Removing this gap and regulating the non-operating holding companies of life insurers provides a more efficient mechanism to deal with those issues.

Schedule 2 looks at injunctions. Under this schedule, the bill will strengthen APRA’s powers to enforce the prudential laws through a comprehensive and consistent set of injunctions. This is a very important change. Not only does the bill bring the non-operating holding companies of life insurers under the supervision of APRA but it also gives APRA the power to put in place injunctions in an efficient and timely manner. It is very important for people who may be in breach of regulations that these things take place in a timely manner. The power will apply in relation to authorised deposit-taking institutions, to general insurance, to life insurance and to superannuation.

For any person who breaches or proposes to breach the prudential acts, a condition of authorisation or a direction issued by the Australian Prudential Regulation Authority may be subject to an injunction. I know that members of parliament would have examples in their electorates where action needs to be taken quickly in relation either to an individual or to a scheme. With what we have seen over the past 18 months, you can see the importance of realigning those acts and of making sure that APRA’s powers are the most efficient possible. Certainly, giving APRA a comprehensive and consistent set of powers through injunctions is part of that. This is something which I fully support. I think it is a very appropriate manner in which to deal with these matters.

As an example, APRA can seek an interim injunction to protect the interests of depositors, policyholders or superannuation beneficiaries while the court considers whether to grant a final injunction or to enforce another prudential rule. Again, I think that members of parliament would have examples in their electorates where specific action needed to be taken and where there was a critical period during which an injunction needed to be put in place very quickly, whether temporary or otherwise, in order to stop some form of action taking place.

While it is a fairly straightforward change, it again highlights to the parliament, the community and the financial services sector Labor’s commitment to ensuring an appropriate and efficient set of regulations through APRA, through ASIC and through other bodies. This takes another step in that direction. It ensures that we are taking up our responsibilities. Not only do I commend the bill to the House but also I commend the Assistant Treasurer for the work that he has done in this area.

Chris Bowen (Prospect, Australian Labor Party, Assistant Treasurer) Share this | Link to this | Hansard source

in reply—At the outset, could I thank honourable members who have contributed to this debate on the Financial Sector Legislation Amendment (Enhancing Supervision and Enforcement) Bill 2009. The members for Aston, Blair, Wakefield and Oxley all made well-thought-out contributions. I did not get to hear the entire contribution of the member for Aston, but I did get to hear some of it and have had the rest of it relayed to me. I recognise the opposition’s support for this bill and I thank them for it.

The member for Aston, if I understand correctly, made the suggestion that more of APRA’s decisions should be reviewable and appealable. I recognise that that is a sincere suggestion on his behalf, but it is not one I would be supportive of. My view has long been that the Australian Prudential Regulation Authority is one of the most respected and most efficient regulators of financial prudential requirements in the world, and I would not be supportive of another layer over and above the majority of APRA’s decisions. I think we need to recognise that APRA has a very significant skills base and that it is the body charged with ensuring the ongoing prudential soundness of Australia’s financial institutions. We also need to recognise that, having charged it with that responsibility, we cannot in a broad sense put another hand over its shoulder. We need to rely on it to do the job. I do recognise that the member for Aston’s suggestion is a serious and sincere one but, on the face of it, it is not one to which I would lend my support.

This bill has not been universally welcomed. I know that ING and AXA made submissions to the Senate Standing Committee on Economics, which considered this matter, and the Chief Executive of AXA has taken the opportunity to discuss their concerns with me personally. No modern government should embark lightly on further regulation. The compliance costs of further regulation must always be very carefully considered. I have tested and raised with the Chair of APRA, with the other members of the APRA governing body, Mr Trowbridge and Mr Jones, the compliance burden in this bill and of how necessary it is that they be able to do their job. I am satisfied with APRA’s responses. They have assured me that they will of course be very cognisant of the compliance impacts of any action that they may take under this bill and that they do not intend to create a whole new compliance infrastructure around it. Having said that, they are also very strongly of the view that this bill is extremely important for their ability to do their job. They would characterise the lack of regulation that this bill fixes as a yawning gap in their capacity to do their work, to ensure that a problem in an entity will not spread to other entities in the entire group and to be satisfied that people in the economy are not being adversely exposed to risk.

This bill will enhance Australia’s effective and robust prudential regulation framework in the current climate and ensure that the regulatory framework applying to financial entities remains flexible and responsive going forward. This bill removes the gap in Australia’s prudential regulation framework by ensuring that the Australian Prudential Regulation Authority supervises life insurance non-operating holding companies—known as NOHCs—which can have a significant impact on the conduct and financial health of insurance companies, and of life insurance companies in particular.

This measure is consistent with Insurance Core Principle ICP 17 of the International Association of Insurance Supervisors on group-wide supervision, which is that the supervisory authority supervise its insurers on a solo and group-wide basis. This was an important point in convincing me and the government of the appropriateness of this amendment. These measures bring the prudential supervision of such companies into line with the prudential supervision of NOHCs, general insurance and authorised deposit-taking institutions. The prudential requirements that will apply to life insurance NOHCs are consistent with those that apply to life insurers. The scope of the prudential regulation regime introduced by the schedule is closely modelled on existing regulation of NOHCs, general insurers and authorised deposit-taking institutions. APRA is undertaking industry consultation on consequential changes to prudential standards should the bill be passed by the parliament.

This approach will minimise compliance costs for industry and ensure a smooth transition. This was recognised by the Senate Standing Committee on Economics report on this bill, which notes that:

…the overriding policy of the bill is to line regulation of life insurers with the regulation of general insurers and ADIs.

This bill ensures that the injunctions that may be issued under the prudential legislation are effective tools to enforce financial entities compliance with prudential requirements. The bill also introduces measures to harmonise court injunction powers across prudential legislation—namely, the Banking Act 1959, the Insurance Act 1973, the Life Insurance Act 1995 and the Superannuation Industry (Supervision) Act 1993. The amendments will give APRA flexibility to respond to a range of circumstances relating to the health of an entity in a timely and appropriate way.

International experience has demonstrated the importance of understanding the interconnection between companies and a corporate group, including between prudentially regulated entities and unregulated entities. International experience has also demonstrated the need for regulators to have the ability to take appropriate and timely action. The Senate Standing Committee on Economics has recognised that in the current environment the government may want to act promptly to fill gaps in the prudential architecture. The government is bringing these measures forward to remove a gap in the prudential regulation framework for the life insurance industry and enhance APRA’s ability to use injunctions to respond to the emerging prudential concerns in a timely and appropriate way. I commend the bill to the House.

Question agreed to.

Bill read a second time.