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

The Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Bill 2007 and its related bill, the Corporations (National Guarantee Fund Levies) Amendment Bill 2007, bring to some conclusion another contentious, costly and extremely important public issue, namely that arising from the collapse of the HIH Insurance Group. Broadly, the bill aims to bring direct offshore foreign insurers, known as DOFIs, under prudential regulation. It enables information to be collected and collated to determine the nature and scope of discretionary mutual funds operations. The question is whether the added regulation is going to have adverse or positive effects.

DOFIs are foreign insurers that can conduct business either directly, by establishing a subsidiary and applying to APRA for a licence, or indirectly, through the use of Australian insurance brokers with an Australian financial services licence. Discretionary mutual funds are insurance-like funds which retain discretionary power over the payment of insurance in the event of a claim. These DMFs are generally used in circumstances where mainstream contractually secured insurance is either not available or unaffordable.

Several key issues were identified through the consultation process for this bill. These are the need to protect consumers of insurance and insurance-like products to ensure that Australian businesses remain internationally competitive, to minimise administration costs of compliance, to ensure that the industries and professions in Australia faced with more complex risks have access to adequate types and levels of cover, and to ensure that the implementation of proposed provisions of the bill is not overly burdensome. The bill does address recommendations by Justice Owen at the royal commission into the failure of the HIH Insurance Group. He recommended prudential regulation be extended to all discretionary insurance-like products to the extent possible within constitutional limits. He also commented on insurance cover written offshore, but made no specific recommendations. Whilst this proposes prudentially regulating DOFIs with the Insurance Act, DMFs, who offer insurance-like products, will remain unregulated, contrary to commission recommendations. The government has instead opted to empower APRA to collect data on the nature and scope of DMF businesses in Australia over the next 12 months, and this indicates a concern as to possible effects of introducing regulation without further understanding the detail and the nature of DMFs.

In response to Justice Owen’s comments, the government did commission a review of discretionary mutual funds and direct offshore foreign insurers, headed by Mr Gary Potts. Potts made a number of key recommendations, and the proposals for DMFs in the bill do not match the recommendations of the Potts review or the HIH royal commission recommendations, as I said earlier. It should be noted that the data collection recommendation of the Potts review pertains to DMF business that is deemed of no contingent risk. Clearly a contingent risk arises in a predominant amount of business underwritten by DMFs.

The bill was referred to the Senate Standing Committee on Economics, on which I sit, for inquiry and report. While most of the submissions indicated support for the bill, concerns were expressed regarding the ability of professions to obtain adequate levels of professional indemnity insurance, the access of Australian companies to DOFIs and the lack of clarity regarding exemption provisions in the bill. The committee also noticed evidence that Treasury is planning further consultation with stakeholders regarding exemptions, and it aims to achieve a balance between maintaining prudential standards with exemptions that are practical and of minimal cost to government and consumers as well as being flexible in adapting to insurance market cycles. In its report, the Senate committee stated it is:

... satisfied that the consultative mechanism to be implemented by Treasury with regard to DOFI exemptions will produce a set of regulatory provisions that will satisfy the requirements of Australian businesses for access to suitable insurance products, while still maintaining the required prudential standards for the insurance industry. The Committee supports the closure of regulatory gaps identified by the HIH Royal Commission, and the International Monetary Fund. The Committee does not share the fears expressed by some witnesses as to possible significant negative market effects from changes to regulation. Nonetheless, Treasury and APRA should actively monitor market effects to be certain of this.

The point of me emphasising that quote and making the remarks I have is that this is a contentious and difficulty policy area with market effects which are very difficult to ascertain and it requires ongoing analysis and observation by Treasury. The Australian Democrats and I support the committee’s conclusions but we would urge government, in the light of the fact that these policy decisions are contrary in some respects to the HIH royal commission and the Potts review, to continue to monitor this area and to report on this area periodically, as required, to the Senate and to the markets as a whole. The Democrats do, of course, support a financial framework that protects Australian consumers from unregulated and therefore high-risk insurers. A strong, efficient regulatory framework would ensure underwriters are accountable and consumers are protected. We support the bill in full.

Brett Mason (Queensland, Liberal Party, Parliamentary Secretary to the Minister for Health and Ageing) Share this | Link to this | Hansard source

I thank Senator Murray again for his eloquent and erudite contribution, and I commend the bills to the Senate.

Question agreed to.

Bills read a second time.