Andrew Murray (WA, Australian Democrats) Share this | Hansard source

The Financial Sector Legislation Amendment (Restructures) Bill 2007 seeks to facilitate the adoption of a non-operating holding company as the ultimate holding company of a financial group in Australia. This provides financial groups with greater flexibility in choosing a corporate structure to manage risk exposure and to comply with prudential requirements without unnecessarily constraining their business efficiency and competitiveness. According to the explanatory memorandum, the NOHC structure offers a financial group greater operational flexibility while providing for more efficient and effective means of meeting prudential requirements by allowing the appropriate allocation of risk between prudentially and non-prudentially regulated businesses of a group. This type of structure can assist in quarantining risk in the various parts of a financial group by, for example, separating the risks of a group’s entrepreneurial private investment activities from its insurance and banking operations.

Under the amendments in this legislation, the minister will approve an application if he is satisfied that the restructure would improve the operating body’s ability to meet its prudential obligations. Schedule 1 to this bill extends the coverage of the Financial Sector (Transfers of Business) Act 1999 to the restructure of financial groups involving the creation of an NOHC as the ultimate holding company of the group in Australia. It will be applicable to the restructure of a financial group that has an ADI general insurer or life insurance company as the ultimate holding company of a group in Australia and where that ultimate holding company will be replaced by an NOHC.

This bill will facilitate the adoption of an NOHC structure by providing the minister with the power to grant financial entities relief from specific statutory requirements under the Corporations Act that currently impede such restructures. Any relief granted will be specified in a restructure instrument. The minister will also have the power to approve the issue of associated internal transfer certificates, which provide for the transfer of specified assets and liabilities between two related bodies of a financial group by the Australian Prudential Regulation Authority. The arrangement will allow APRA to work through the details of the rearrangement with the financial group so as to assist APRA to efficiently satisfy prudential requirements. This will provide financial groups with an efficient mechanism to separate their activities into separate business lines. The appropriate allocation of risk between prudentially and non-prudentially regulated businesses can assist the financial group to more efficiently and effectively meet its prudential requirements.

The bill provides the minister with the power to grant relief from specific requirements of the Corporations Act. To grant relief, the minister will issue a restructure instrument that specifies the statutory provisions and the entities of a company group—and any persons involved in complying with a requirement—for which the relief applies. The relief provided by the minister will only relate to the specific provisions of the Corporations Act, as set out in the restructure instrument. It will not relieve an entity from having to meet other obligations under the Corporations Act, associated regulations and other relevant legislation.

Schedule 2 of this bill amends the consolidation membership rules and the capital gains tax provisions in the Income Tax Assessment Act 1997 to remove tax impediments that prevent financial groups that contain ADIs from restructuring. The measure applies from 1 July 2007. According to the explanatory memorandum, these changes were recommended by the Wallis review, which took place in 1997 and concluded that, to protect against creditors of one entity seeking to pursue the other entities of a group, legal separation structured around an NOHC was the best method of quarantining the assets and liabilities of the various entities in the group. Such a structure, according to the Wallis review, relieves other entities of a group of any formal obligation to support a distressed affiliate and, because of this, it will provide financial groups with greater flexibility in choosing a corporate structure to manage their risk exposures and to comply with prudential requirements, without unnecessarily constraining their business efficiency and competitiveness.

The Wallis review took place at least a decade ago and in a substantially different regulatory environment. It also took place well before the Westpoint, ACR and Fincorp collapses, where elderly creditors were often left without their life savings and without recourse against the entities in which they had invested. Financial restructuring can be fraught with danger, especially for unsophisticated investors. It became apparent, when investors in ACR were interviewed, that a number of the investors were under the impression that ACR—its full name being ‘Australian Capital Reserve’—was in some way connected with the Reserve Bank. While groups like Westpoint, ACR and Fincorp are not ADI holders, general insurers or life insurers, the general point stands, particularly when you remember that the disgraced HIH would have fallen into the categories relevant to this bill.

My concern is that, with this separation of liability between an insurance company or bank and a more ‘entrepreneurial’ arm of it, a crooked, incompetent or immoral outfit could restructure so that it was quarantined from a loss of investor funds. I can see the television advertisements now where the name of the ‘entrepreneurial’ arm is in big letters, the voiceover says that it is part of XYZ insurance group and there is the disclaimer in tiny letters at the bottom of the screen saying that the XYZ insurance group is not liable for any of the losses incurred by the ‘entrepreneurial’ arm. Using an NOHC structure, investors would not, in fact, be able to call on the insurance group to cover any loss that the entrepreneurial arm incurs. Such an entity will not be caught for false and misleading advertising because it will legitimately be part of a particular banking or insurance group. I know of no other effective consumer protection legislation that would stop this from occurring.

We all know that ASIC worked hard to ensure that ACR was properly complying with its obligations in its advertising to consumers, and look at what still happened there. Imagine what would have happened if HIH had been given an NOHC structure. I do not understand why, in the current financial climate, that regulation in this area is being loosened up—unless the government knows that there are dangers on the horizon. We should have learnt our lesson from the corporate collapses of insurance companies like HIH and others not to go down this road without further protection.

I want to remind the Senate that, in respect of related companies, corporate restructuring is already used by unscrupulous companies to deprive creditors, including employees, of access to assets when a subsidiary collapses. There have been examples in the past where employees—and creditors, generally—have lost out where the company responsible for the failure has been a holding company that has washed its hands of the debts of the subsidiary company. When companies were originally conceived, it was intended that they would provide a benefit of limited liability to their owners—namely, the shareholders. It was not intended that they would be manipulated to allow for the separation of assets in one company and liabilities in another, resulting in those to whom money is owed having access to no significant assets to satisfy their entitlements or not being able to recover from the parent or holding company.

On behalf of the Democrats, I have several times brought an amendment to the Senate in an attempt to implement the recommendations of the Harmer Law Reform Commission report in 1988. Harmer proposed making related companies liable for the debts of insolvent companies in limited circumstances. With those limited circumstances, it would be up to a court to consider matters like the extent to which the related company took part in the management of the insolvent company, the conduct of the related company to the creditors of the insolvent company and the extent to which the circumstances that gave rise to the winding-up are attributable to the actions of the related company.

Labor has supported these Democrat initiatives a number of times in the Senate, but for the same number of times the coalition has refused this obvious reform. Its refusal continues to benefit those who wish to abuse the system. The substance of the Law Reform Commission report proposal was that a liquidator or creditor of an insolvent company would be able to apply to a court for an order that a related company must pay an amount of a debt—and, obviously, that affects all creditors, including employees. Whether the court ordered the payment and how much was ordered to be paid would be determined by a number of factors, such as: the extent to which the related body corporate took part in the management of the company; the conduct of the related body corporate towards the creditors of the company generally and to the particular creditor to which the debt or liability related; the extent to which the circumstances that gave rise to the winding up of the company were attributable to the actions of the related body corporate; and the extent to which the insolvent company had, at any time, engaged in one or more transactions that resulted in the value of the insolvent company’s assets being reduced. One weakness with all of that is that it does require people to take court action and, whether you are an employee or a creditor, that has a cost and time relationship—which means that you are trying to recover money after the event.

On behalf of the Democrats, I moved amendments that arose from that Harmer Law Reform Commission report of 1988 to the Company Law Review Bill 1997, the Financial Sector (Shareholdings) Bill 1998, the Financial Sector Reform (Consequential Amendments) Bill 1998 and the Bankruptcy Legislation Amendment Bill 2002. Previously, when I moved this Harmer amendment, the government said that it understood the intent and motivation behind it and that it would look to do something about it—hollow words, obviously.

It is evident that the behaviour of related corporations impacts upon individuals if related corporations incur debts or liabilities that they cannot meet. The Australian Democrats have long held that the Harmer Law Reform Commission recommendation of 1988 should be in law. Every instance that we have of corporations and unjustly enriched directors being able to walk away from a situation of debts or liabilities of a related company is just unacceptable. In the past it has happened in the airline industry, it has happened in the mining industry and it has happened in the insurance and investment industry. According to the EM:

… to date, no major Australian financial group containing an ADI has chosen to adopt a NOHC structure. This has been because regulatory and tax provisions have impeded Australian financial groups from moving to such a structure.

That being the case, I would suggest that the regulatory framework is just fine as it is. I am all for business efficiency and competitiveness in a global market, and my record in voting in this place shows that. However, it should only be achieved while maintaining market integrity and consumer, creditor and investor protection, which is appropriate. I do not believe that this bill achieves any of these objectives. This is another bill that raises the issue of the role of the minister and the role of the regulator in a given marketplace. Just like the Trade Practices Act, the relevant minister is the Treasurer, and here he intrudes on the role of APRA. Just as the Australian Democrats have difficulty with the role of the Treasurer in relation to the National Competition Commission, we are just as concerned that it is considered appropriate that he have a role in relation to financial institutions.

In June 2006 in an adjournment speech on the National Competition Commission, I questioned the role of the Treasurer in the whole approvals system. I said:

… if the Treasurer is to have a place in regulating matters of competition he must be required to make decisions and to detail them in writing.

I note the report from the Scrutiny of Bills Committee that drew attention to the new subsection 36C(1) of the Financial Sector (Transfers of Business) Act 1999, which would grant the Treasurer the discretion to decide whether the conditions specified in paragraphs (a), (b) and (c) of that subsection have been satisfied, thus permitting an ADI, a life insurance company or a general insurer to obtain approval to change its corporate structure and thereby facilitate an NOHC being the ultimate holding company of a financial group. The Alert Digest from the Scrutiny of Bills Committee notes that there is no provision in the bill for the exercise of the Treasurer of this discretion to be subject to any form of merits review under the AAT Act 1975. As the Alert Digest says, the Scrutiny of Bills Committee consistently draws attention to provisions that exclude review by relevant appeal bodies or otherwise fail to provide for administrative review.

I also consistently say that regulation of industry should be outside political influence. However, the government keeps inserting ministers into so much of the decision-making process and in situations which exclude review. That is just plain wrong. According to the EM, it must be demonstrated to the minister that, as a result of the restructure, the operating body would be in a better position to meet relevant prudential requirements. So let us test that. Imagine HIH coming to the Treasurer 10 years ago for a decision to restructure in the way intended in this bill. Does anyone honestly believe they would have been knocked back then?

In examining the application, the minister will also consider the interests of depositors and policy owners of the operating body. The question for the Australian Democrats is whether those two very different classes of people have interests which are in any way similar, or are in fact mutually exclusive. The minister must also take into account the interests of the financial sector and ‘any other matters appropriate in making a decision’. This addition of the minister into the restructuring process is unnecessary and unwise. The legislation sets out the criteria which the minister must take into account, but my question is: why can’t APRA apply those criteria, and as an independent body? My question is: given that the criteria set out under section 36 of the act are the same as those which APRA would be taking into account, why can’t its role be extended to impose conditions on the restructure et cetera—subject to merits review of course?

A number of politicians of all political persuasions have jumped from various parliaments into the arms of investment banks and companies and insurance companies. On the precautionary principle, without imputing any misconduct or bad motive to the present incumbent, I am wary of any minister having a role in this type of matter. Either you have faith in your regulator and the regulatory framework or you do not. And if you do not, then you should beef up the law and the regulator, but do not give commercial corporate decisions to ministers. Although the provisions in this bill require the Treasurer to give reasons for his decision in writing, and to apply certain criteria to that decision making, I reiterate that it can put the minister in an invidious or conflict-of-interest situation and these processes should be left entirely in the hands of the regulator, the law and the courts.

In summary, I take issue with the basic principle of quarantining one part of a group from another for liability purposes. The effect can be that investors can be suckered into undue and irrecoverable exposure in one arm of the group. If the government had introduced law to take account of the Harmer recommendation, I would be much less concerned. My other major concern is the inappropriate powers given to the Treasurer to make these corporate commercial decisions, coupled with its non-reviewable nature. Consequently, the Australian Democrats oppose this bill.