Tim Ayres (NSW, Australian Labor Party, Assistant Minister for Trade) Share this | Hansard source

I move:

That these bills be now read a second time.

I seek leave to have the second reading speeches incorporated in Hansard.

Leave granted.

The speeches read as follows—

FINANCIAL ACCOUNTABILITY REGIME BILL 2023

I would like to note at the outset that this is the first of five bills I will introduce this morning. Taken together, they will establish the Financial Accountability Regime, extending the provisions of the existing Banking Executive Accountability Regime to the Superannuation and Insurance sectors, and also establish a Compensation Scheme of Last Resort, for consumers who have suffered financial losses and have received a relevant determination in their favour from the Australian Financial Complaints Authority.

Members will note that Bills with these same objectives were introduced into the House last year, and progressed as far as a second reading in the Senate. Two things have changed since then.

First, it became clear that the Compensation Scheme of Last Resort component, which replicated an even earlier Bill introduced by the previous Government in October 2021, was no longer fit for purpose.

As I will set out in introducing the Financial Services Compensation Scheme of Last Resort Levy Bill 2023, a back log of complaints that have been lodged with the Australian Financial Complaints Authority (AFCA) and that are expected to be eligible to claim on the CSLR will be funded through a one-off levy on Australia's 10 largest banking and insurance groups.

Since the original Bill was introduced by the previous Government, a material event occurred in the market that significantly increased the amount that would need to be paid out of that one-off levy. That, combined with the passage of time and the need to collect the levy based on the best available data, led us to pause the Bill, and now require minor amendments to it. Such amendments could not be moved in the Senate, on account of Section 53 of the Constitution.

Second, after productive discussions with Senator David Pocock, the Government decided to adopt an amendment he proposed for the Financial Accountability Regime Bill 2023, to articulate more clearly the scope of the Minister's exemption power and to provide for Parliamentary oversight.

The combination of these two things mean that reintroducing the Bills in the way we are doing today is the neatest, lawful path to the agreed objective.

I will move now to the substance of the first Bill, the Financial Accountability Regime Bill 2023.

The Financial Accountability Regime Bill 2023 establishes the Financial Accountability Regime, or FAR, which replaces and extends the Banking Executive Accountability Regime, following a number of recommendations from the Banking Royal Commission.

The Bill underscores the Government's commitment to finalise the action necessary to fully address the Banking Royal Commission and implement measures that compel the financial services industry to act in the public's interest.

Financial services executives make decisions that impact upon the lives of ordinary Australians who have no choice other than to engage with the system that they operate. As a result, the community reasonably expects high standards of accountability and integrity of financial services directors and executives.

The Banking Royal Commission revealed too many instances of misconduct across the sector and highlighted that industry practices often did not meet community expectations. These issues were frequently found to be systemic and part of corporate cultures that can only be improved and remedied from the top-down.

The Bill would establish the FAR with substantially the same design specifications originally introduced in October 2021 which lapsed with prorogation. The requests made by the former Senate Standing Committee for the Scrutiny of Bills and the Senate Economics Legislation Committee were considered and have been addressed in the Explanatory Memorandum accompanying the Bill.

The FAR would extend the existing responsibility and accountability framework to the insurance and superannuation sectors, to ensure that heightened accountability obligations are in place across the wider financial industry.

The FAR ensures that where these community expectations are not met, appropriate consequences will follow.

I would now like to turn to the provisions of the Bill.

The FAR imposes heightened accountability obligations for prudentially regulated financial institutions; meaning banks, insurers, and superannuation entities. These institutions are referred to as accountable entities in the regime. The FAR regulates directors and the most senior and influential executives of accountable entities. These individuals are referred to as accountable persons in the regime.

The FAR imposes four core sets of obligations. Firstly, accountable entities and accountable persons must conduct their business in a proper manner, which includes acting with honesty and integrity, and with due skill, care and diligence; dealing with Australian Prudential Regulation Authority (APRA) and Australian Securities and Investments Commission (ASIC) in an open, constructive and cooperative way, preventing adverse impact on the accountable entities' prudential standing and preventing breaches of certain specified financial services laws by their accountable entity.

Further, accountable entities must ensure clear identification of accountabilities for accountable persons in the organisation across key areas of operations, and defer at least 40 per cent of the variable remuneration of accountable persons for a minimum period of 4 years. Variable remuneration will be reduced where accountability obligations are breached. Ensuring there are financial consequences for accountable persons who do not meet their obligations will increase their focus on the long-term outcomes of their decisions.

The FAR will be supported by the imposition of notification obligations which require accountable entities to provide APRA and ASIC with certain information such as information relating to the responsibilities of their accountable persons or breaches of certain obligations by the accountable entities or their accountable persons.

Both APRA and ASIC will jointly administer the regime.

They will have the power to disqualify accountable persons, investigate suspected breaches of the regime, and direct entities to take remedial action and to apply to the Federal Court to impose a civil penalty on accountable entities.

The Government notes the recommendations made by the Senate Economics Legislation Committee on the Financial Accountability Regime Bill 2022 and Financial Sector Reform Bill 2022 and Financial Services Compensation Scheme of Last Resort Levy Bill 2022 and Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2022. The Committee's report was tabled on 24 October 2022 and we thank the Committee for its recommendation that the Bills be passed. The Bills that I introduce today are substantially the same as those considered by the Committee, though, as previously mentioned, it now incorporates a small amendment previously circulated by Senator David Pocock to articulate more clearly the scope of the Minister's exemption power and to provide for Parliamentary oversight.

The Government has not adopted the Australian Greens' recommendation to introduce individual civil penalties for breaches of accountability obligations. The Government's Bill already contains effective measures to address executive failures to comply, including disqualification, loss of deferred bonuses, and individual civil penalties for assisting in an entity's contravention of its obligations. These sanctions are on top of penalties for misconduct already in place in other financial services laws.

These measures are finely balanced to improve executive conduct in the financial services sector without adversely impacting the sector's efficiency. Adding individual civil penalties is not likely to substantially increase the level of deterrence that already exists, while it may impact on firms seeking to attract and retain the best executive talent.

The FAR will apply to the banking industry six months after the Royal Assent and to the insurance and superannuation industries eighteen months after the Royal Assent.

Through this Bill, the Government is finalising the necessary action to ensure that financial institutions are meeting the community's expectations, and that they are focused on outcomes for all Australians.

Full details of the measure are contained in the Explanatory Memorandum.

FINANCIAL ACCOUNTABILITY REGIME (CONSEQUENTIAL AMENDMENTS) BILL 2023

The Financial Accountability Regime (Consequential Amendments) Bill 2023 is part of a package of Bills that finalises a number of remaining recommendations from the Banking Royal Commission.

The Bill will make minor and consequential amendments to various Commonwealth laws to support the Financial Accountability Regime and provide transitional arrangements relating to the repeal of the Banking Executive Accountability Regime (BEAR).

The Government acknowledges that most of these reforms will require some time for industry to implement, so the bulk of the proposed changes will commence 6 months following Royal Assent.

The Legislative and Governance Forum on Corporations was notified of this Bill as required under the Corporations Agreement 2002 and the National Credit Law Agreement 2009.

Full details of the measure are contained in the Explanatory Memorandum.

TREASURY LAWS AMENDMENT (FINANCIAL SERVICES COMPENSATION SCHEME OF LAST RESORT) BILL 2023

The Treasury Laws Amendment (Financial Services Compensation Scheme of Last Resort) Bill 2023 is part of a package of Bills to establish and fund a financial services compensation scheme of last resort (CSLR).

The Government remains committed to establishing a CSLR.

The background to the CSLR is well known. In 2019, the Financial Services Royal Commission recommended that a CSLR be established. In doing so, the Royal Commission endorsed the 3 principal recommendations of the 2017 Supplementary Final Report of the Review of the financial system external dispute resolution and complaints framework (Ramsay Review). The Ramsay Review noted the inadequacy of existing redress measures in ensuring all consumers are compensated for losses, and recommended the establishment of an industry-funded and forward looking CSLR that targets the areas of the financial sector with the greatest evidence of need.

The CSLR is designed to provide compensation to consumers who have received a relevant determination in their favour by the Australian Financial Complaints Authority (AFCA), where that determination remains unpaid.

Claimants may receive compensation of up to $150,000 where they have an unpaid AFCA determination in their favour for the following financial services or products: personal advice on relevant financial products to retail clients, credit intermediation, securities dealing and credit provision. The cap on claims helps maintain the ongoing financial sustainability of the scheme, whilst balancing the interests of consumers.

The operator of the CSLR will be a subsidiary of AFCA, limited by guarantee and operating on a not-for-profit basis. The operator must act in line with the primary legislation and regulations, with compliance ensured by ASIC. The operator will be managed by a Board consisting of an independent Chair appointed by the Minister, a person who is a member of the board of AFCA, and an actuary who has at least 5 years of actuarial experience.

Passage of this legislation in March 2023 will facilitate the CSLR being operational from December 2023.

The CSLR is designed to act as a last resort mechanism. After the claimant has notified AFCA that their determination remains unpaid, AFCA will be required, where appropriate, to take steps to ensure the relevant entity pays the compensation owed. The CSLR operator will also need to confirm that no other statutory scheme is available to pay all or part of the compensation owed, including any state or territory arrangements.

Measures have been added to reduce the incentive for financial firms to rely on the CSLR, and to facilitate better compliance with AFCA determinations. For example, ASIC must cancel an AFCA member's Australian financial service licence and/or Australian credit licence if the CSLR provides compensation as a result of that member's misconduct.

As set out earlier, legislation to establish a CSLR was previously introduced by this Government on 8 September 2022. That legislation proceeded to the Senate. In December 2022, the Government identified the issue mentioned earlier in relation to the one-off levy, and so the CSLR legislation was not passed last year while further consultation was undertaken.

The CSLR Bills package being introduced today reflect the same intent and are substantively the same as the legislation considered by the Parliament last year. Minor and targeted amendments to reflect the passage of time and further stakeholder feedback have been made.

The Legislative and Governance Forum on Corporations was notified of this Bill as required under the Corporations Agreement 2002.

Full details of the measure are contained in the Explanatory Memorandum.

Finally, I take this opportunity to respond, on behalf of the Government, to the report of the Senate Economics Legislation Committee in relation to the CSLR Bills. The Committee recommended the passage of the Bills that were before them, which contained substantively the same CSLR provisions as are being introduced today. Additional comments were also provided by Coalition Senators who recommended additional Parliamentary scrutiny of AFCA and the CSLR operator, consideration of ASIC's enforcement capacity and capability and consideration of three other technical matters. In response, the Government notes the work being undertaken in the Other Place to conduct an inquiry into ASIC's capacity and capability to respond to reports of alleged misconduct. The Government also notes the appearance of AFCA at Senate Estimates last year. The Government acknowledges the Coalition Senator's recommendations and restates its commitment to ASIC as a key financial system regulator, AFCA as the external dispute resolution provider, and the establishment of the CSLR to support relevant consumers when compensation has not been paid.

FINANCIAL SERVICES COMPENSATION SCHEME OF LAST RESORT LEVY BILL 2023

This Bill is the first of two Bills which form the levy framework to fund the financial services compensation scheme of last resort (CSLR).

The Commonwealth will fund the establishment of the CSLR, which is intended to be operational from December 2023. The Commonwealth will also fund the scheme's initial operation until 30 June 2024.

A back log of complaints that have been lodged with the Australian Financial Complaints Authority (AFCA) and that are expected to be eligible to claim on the CSLR will be funded through a one-off levy on Australia's 10 largest banking and insurance groups.

The costs of the CSLR from 1 July 2024 are to be fully industry funded. The levy framework provides for an ongoing annual levy on entities that fall within a subsector within the scope of the scheme. The framework will issue levies in advance of a financial year, based on expected claims, AFCA fees and administration costs in that upcoming financial year. The ongoing annual levy will follow an approach already applied under the Australian Securities and Investments Commission (ASIC) industry funding model. The first ongoing annual levy notices are expected to be issued by ASIC in May 2024 to fund the scheme for the 2024-25 financial year.

The CSLR is designed to be financially sustainable and provide assurance to relevant financial market subsectors about the maximum amount expected to be levied. The scheme applies subsector caps of $20 million and an overall scheme cap of $250 million. This limits the amount leviable within a single levy period, whilst maintaining the ability to accommodate any unexpected large-scale events or failures. The levy framework provides the Minister with the ability to issue special levies to in-scope and out-of-scope entities, in response to higher-than-expected outlays such as may be experienced with the failure of a large financial firm.

The financial market subsectors that will pay the ongoing annual levy will be detailed in regulations. The regulations will also detail the methodology to be applied by ASIC in its calculation of levy notices.

Full details of the measure are contained in the Explanatory Memorandum.

FINANCIAL SERVICES COMPENSATION SCHEME OF LAST RESORT LEVY (COLLECTION) BILL 2023

This Bill is the second of two Bills which form the levy framework for the financial services compensation scheme of last resort (CSLR).

As noted previously, the Commonwealth will fund the establishment of the CSLR, which is intended to be operational from December 2023. The Commonwealth will also fund the scheme's initial operation until 30 June 2024.

A one-off levy to fund the back log of Australian Financial Complaints Authority (AFCA) complaints that are expected to be eligible to claim on the CSLR will be issued by December 2023. This levy will be payable in two instalments.

The ongoing annual levy to fund the 2024-25 financial year will be issued by May 2024. The ongoing annual levy will then be issued in advance of each following financial year.

In advance of the issuing of a levy, the CSLR operator will determine the amount to be raised through the levy. The CSLR operator's determination will include, as relevant, estimated compensation claims and AFCA fee costs and associated administrative costs. The CSLR operator's determinations will be disallowable.

Levy notices will be issued by the Australian Securities and Investments Commission (ASIC) in accordance with primary law, regulations and the CSLR operator's determination. ASIC will collect the levies and have the power to facilitate and enforce the payment of levies. These powers include the ability to seek information from relevant entities for the purpose of correctly calculating an entity's levy, to impose penalties for late payment and to impose a shortfall penalty where incorrect information has been provided.

Full details of the measure are contained in the Explanatory Memorandum.

Ordered that further consideration of the second reading of these bills be adjourned to the first sitting day of the next period of sittings, in accordance with standing order 111.