Submission to the Streamlining Prudential Regulation...

Australian Bankers’ Association Inc. ARBN 117 262 978 (Incorporated in New South Wales). Liability of members is limited.

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2 March 2007

Table of Contents

Introduction ---------------------------------------------------------------------------------------------1

1. Streamlining breach reporting -------------------------------------------------------1

1.1 Requirement to report only material breaches ...................................................2

1.2 Streamlining the timeframe for the reporting of breaches ................................2

1.3 Relationship between reporting requirements of licensees, auditors and actuaries ................................................................................................................3

1.4 Relationship between reporting requirements to APRA and ASIC ...................4

1.5 Responsible persons and officers.......................................................................5

1.6 Protection for ‘whistleblowers’ ............................................................................7

2. Enhancing APRA’s accountability for administrative decisions---------8

2.1 Removing ministerial consent from appropriate administrative decisions .....8

2.2 Removing the gap in APRA’s investigation triggers which results from the removal of ministerial consent ............................................................................9

2.3 Implications of removal of ministerial consent for decisions which affect Lloyd’s Insurers ....................................................................................................9

2.4 Merits review of APRA administrative decisions ...............................................9

2.5 Balancing APRA’s capacity to act decisively with expanding the availability of merits review................................................................................10

2.6 Ensuring flexibility through exemption powers and clarifying review and scrutiny of these powers....................................................................................10

2.7 Streamlining APRA’s directions powers...........................................................10

2.8 Confidentiality of Administrative Appeals Tribunal hearings..........................11

3. Ensuring appropriate flexibility and accountability in making and administering prudential standards---------------------------------------------- 11

3.1 Discretionary decisions under prudential standards making powers............11

3.2 Scrutiny of variations to prudential standards .................................................12

3.3 Simplifying legislative requirements relating to consultation on prudential standards...........................................................................................12

AUSTRALIAN BANKERS’ ASSOCIATION II

4. Ensuring flexibility in enforcement----------------------------------------------- 12

4.1 Flexibility through court-enforceable undertakings.........................................12

4.2 Flexibility in the disqualification regime ...........................................................13

4.3 Clarify processes concerning the appointment of actuaries and auditors ....13

4.4 Supporting cooperation between APRA and relevant professional bodies of actuaries and auditors .......................................................................13

5. Simplifying the Life Act and SIS Act --------------------------------------------- 14

5.1 Phase out prudential rules from the Life Act ....................................................14

5.2 Abolish the Life Insurance Actuarial Standards Board....................................14

5.3 Auditor, audit committee and actuarial requirements under the Life Act ......14

5.4 Overlaps in reporting requirements between APRA and ASIC .......................14

5.5 Reinsurance arrangements under the Life Act.................................................14

5.6 Registration of life insurers................................................................................15

5.7 Clarifying reporting obligations under the SIS Act ..........................................15

5.8 Replacing RSE numbers with Australian Business Numbers (ABNs) ............15

5.9 Simplification of Acts through removal of obsolete legislation ......................16

Attachment 1: Differences in reporting requirements, checks and documentation --------------------------------------------------------------------------------------- 17

Streamlining Prudential Regulation Proposals Paper

Introduction

The Australian Bankers’ Association (ABA) welcomes the opportunity to provide comments on the Streamlining Prudential Regulation: Response to ‘Rethinking Regulation’ Proposals Paper released by The Hon. Peter Dutton, Minister for Revenue and Assistant Treasurer.

Australia’s banking and finance sector is widely recognised as strong and Australia’s financial regulatory and supervisory structure as sound. It is important for Australia to maintain an effective prudential framework to ensure the stability, efficiency and competitiveness of our financial system.

However, it is also important that prudential regulation does not place unnecessary regulatory burdens on business and thereby reduce the competitiveness of Australia’s banking and finance sector. It is the ABA’s view that the main ways to reduce regulatory burdens and compliance costs is to eliminate unnecessary regulation, remove legislative complexity and reduce regulatory inconsistency and/or duplication through assessment of regulation.

The ABA commends the Government for releasing the proposals paper, which contains a number of proposals that seek to streamline prudential regulation without reducing confidence in the regulatory system. It is pleasing that the Government has given considered thought to the concerns raised by industry with the Regulation Taskforce. However, many of these proposals represent a significant shift more broadly in prudential policy and regulation.

Given the significance and breadth of these proposals, we recommend:

• Further consultation: A number of the proposals contain limited explanation and it is difficult to assess the likely ramifications of the proposals. Therefore we consider that further detail about the proposals and further consultation with industry is required before proceeding.

• Rigorous regulatory and business impact assessment: A number of the proposals seek to respond to recent failures without determining whether these failures represent systemic regulatory problems warranting widespread changes to prudential regulation. Therefore we consider that rigorous assessment of the costs and benefits of the proposals is required to assist in providing considered feedback.

Furthermore, the ABA notes that depositor protection and policy holder protection policy is still being resolved – both are likely to have a significant impact on the prudential framework in Australia. It is our view that any changes to the prudential framework should therefore not be made until these outstanding matters are resolved. Having said that, there is benefit in simplifying and clarifying some operational matters, such as streamlining breach reporting.

The ABA believes that the Treasury should convene industry roundtable discussions to work through the technical and practical implications of these proposals. In the meantime, we provide some initial reactions to the proposals.

1. Streamlining breach reporting

The ABA has provided comments on breach reporting in its submission to the Corporate and Financial Services Regulation Review Proposals Paper. We support the concept of consistency in breach reporting arrangements, i.e. what must be reported, when it must be reported and the format for reporting. However, there should also be recognition of the different regulatory objectives and supervisory methods of APRA and ASIC. We suggest that these proposals be clarified through further consultation with industry.

AUSTRALIAN BANKERS’ ASSOCIATION INC. 2

1.1 Requirement to report only material breaches

ABA response: The ABA supports this proposal as aligning the threshold for reporting breaches in the Corporations Act and prudential Acts, thereby addressing concerns with inconsistent regulatory requirements, different materiality thresholds and excessive reporting of breaches under the prudential and financial services regulatory regimes.

Breach reporting requirements are different for holders of Australian Financial Service (AFS) licences, Registerable Superannuation Entity (RSE) licences, and those entities that comply with APRA prudential standards for ADI, life insurance and general insurance. This proposal should reduce the compliance costs associated with maintaining multiple breach reporting arrangements to comply with different legislative requirements.

However, it will also be important for this proposal to address not just statutory obligations, but how the regulators administer the breach reporting obligations contained in the law. A number of banks are concerned with ‘over reporting’ and apparent regulator views on reporting of breaches that banks would otherwise deem as minor.

Therefore, it is essential there is a clear, and as much as possible, consistent means for determining when regulated entities need to report a breach to the regulators. There should be an objective and uniform ‘materiality’ test for entities that are regulated by APRA and ASIC. Currently AFS licence holders are subject to a ‘significant’ test, operators of managed investment schemes subject to a ‘materiality’ test, and prudential regulation, there is currently no test.

It is the ABA’s view that the ‘materiality’ test for breaches that should be notified to APRA should be broadly consistent with the ASIC definition of ‘significant’, but with a prudential emphasis. However, all references should be aligned so that only ‘significant’ breaches should need to be reported to the regulator(s) (i.e. definitions should be aligned so that ‘material’ breaches should be referred to only as ‘significant’ breaches in the law and there is uniform terminology used across the Corporations Act and various prudential Acts).

Therefore, we suggest that the section 912D criteria should be amended as follows and inserted into the SIS Act:

(1) the number or frequency of similar previous breaches;

(2) the impact of the breach or likely breach on the regulated entity’s ability to meet its obligations to depositors, policyholders or superannuation beneficiaries;

(3) the extent to which the breach or likely breach indicates that the regulated entity’s arrangements, and/or, in the case of superannuation the RSE licensee’s arrangements, for ensuring compliance with its regulatory obligations are inadequate;

(4) the actual or potential financial loss to depositors, policyholders or superannuation beneficiaries of the regulated entity itself, arising from the breach or likely breach;

(5) any other matters prescribed by Regulations made for the purposes of this paragraph.

In addition to legislative amendment, we would envisage that ASIC and APRA would amend their guidance on breach reporting to reflect a consistent ‘materiality’ test.

1.2 Streamlining the timeframe for the reporting of breaches

ABA response: The ABA supports this proposal as streamlining the reporting of breaches across the Corporations Act and prudential Acts. It is important that the timeframe for reporting breaches and the breach reporting arrangements are clear and consistent under the prudential and financial services laws. This proposal should improve the efficiency of breach reporting processes and encourage timely and accurate reporting of breaches.


The ABA suggests that the various prudential and financial services laws clarify that a regulated entity is required to report a breach as soon as practicable, and in any event, within 10 business days after a ‘person responsible for compliance’ becomes aware of the breach.

The timeframe for reporting breaches to the regulators should be consistent across statutes. We suggest that the timeframe for when a breach must be reported should commence not at the point of the initial discovery, but when a ‘person responsible for compliance’ becomes aware of a breach and determines the breach to be significant (i.e. material). For example, a person responsible for compliance may have been notified (i.e. an email has been sent), but they may not have become aware of the potential breach (i.e. the email has not been opened and read). Furthermore, in some instances it can take some time for a potential breach to be assessed as material and reportable, so the timeframe should apply from the date that the breach is determined to be significant. These points should be clarified in the law.

The ABA considers that it is appropriate for some breaches required to be reported ‘immediately’ (i.e. as soon as practicable), such as breaches relating to minimum solvency or capital adequacy, to continue to be required to be reported immediately, so that notification to APRA assists in maintaining financial system stability.

It is the ABA’s view that this proposal should assist regulated entities in collecting information to assist in determining whether a breach has occurred and is significant, preparing a breach report and identifying and implementing steps to prevent reoccurrence of the breach.

In addition, it is also our view that documents produced for the purposes of complying with these requirements should be made confidential and subject to privilege to assist the free flow of information between industry and the regulators.

1.3 Relationship between reporting requirements of licensees, auditors and actuaries

ABA response: The ABA supports this proposal as removing overlapping reporting requirements between responsible persons and officers, actuaries and auditors and ensuring that all prudentially regulated entities, including life insurers, are required to report breaches. However, it is essential that the regulated entity be notified at the same time as APRA.

It is important that the legislation:

• Ensures that all material breaches by prudentially regulated entities are reported to APRA; and

• Clarifies that the duty to inform the regulator of a breach is discharged by needing only report once to the regulator.

Breach reporting by auditors and actuaries pursuant to the various laws has generated problems for both regulated entities and regulators. It would be useful to clarify that auditors and actuaries are also required to report ‘significant’ breaches, similar to the ‘materiality’ test for regulated entities, but only in circumstances where the regulated entity is not also required to report the breach to APRA and ASIC. This would align breach reporting by auditors and actuaries with the breach reporting obligations of regulated entities.


The ABA suggests that the various prudential and financial services laws be amended to remove the requirement for a licensee or regulated entity to report a breach where the auditor or actuary is required to notify the licensee or regulated entity and report the breach to ASIC or APRA. It will be important that the process of notification by the auditor or actuary to the licensee or regulated entity is systemic to ensure that the breach is notified.

This proposal will ensure that the breach reporting obligations are aligned in the Corporations Act and various prudential Acts. However, we note that this proposal will not affect the multiple reporting of breaches pursuant to section 990K of the Corporations Act. We have provided comments on this matter in our submission to the Corporate and Financial Services Regulation Review Proposals Paper.

1.4 Relationship between reporting requirements to APRA and ASIC

ABA response: The ABA supports this proposal in principle, as it appears to have the potential to address concerns with regulatory overlap, which generates unnecessary compliance costs for entities regulated by both APRA and ASIC. In instances where a regulated entity is required to report a breach to both APRA and ASIC, it is reasonable that the entity be required to only report the breach once to APRA.

However, it is likely that there will be some practical difficulties with this proposal as the regulators will have varying views on materiality due to the differing regulatory objectives of each regulator. For example, ASIC and APRA may have differing views on an incident of fraud, where it may be deemed as insignificant by one regulator, but potentially material and thereby reportable by the other. To avoid confusion, this point needs to be clarified.

In addition, as it is assumed that APRA will make available any Corporations Act-related breach notifications to ASIC, it will be important to ensure:

• Accountability of information sharing arrangements: Protocols for information exchange and appropriate arrangements should be entered into between APRA and ASIC and adopted as part of their Memorandum of Understanding (MOU).

• Requirement for APRA to notify the regulated entity: APRA should be required to acknowledge that a breach notification has been received and indicate how that notification will be managed.

• Limited dialogue between APRA and ASIC: Information exchange should be contained simply to the provision of the breach notification.

This proposal has the potential to create more complexity than the current system for both regulators and regulated entities. Therefore, we suggest that ASIC and APRA convene an industry roundtable discussion to work through some of the technical and practical issues with this proposal. It would be useful to consider hypothetical case studies of how the new breach reporting requirements would operate in practice for the regulators and regulated entities.

The ABA also envisages that ASIC and APRA would amend their guidance on breach reporting to reflect the new reporting requirements, including handling of breach notifications and related issues. This guidance would assist regulated entities more effectively and efficiently manage their breach reporting processes.


1.5 Responsible persons and officers

ABA response: The ABA believes that streamlining the manner in which the law is administered with respect to responsible officers and responsible persons should reduce unnecessary complexity and regulatory burden. The different legislative definitions, tests, checks and reporting requirements that apply to the ‘responsible person’ and ‘responsible officer’ regimes as contained in the Corporations Act and prudential Acts and as administered by the regulators should be harmonised as much as possible.

However, in practice, while standardisation may be desirable, there are likely to be some practical difficulties with simply merging the two concepts. Furthermore, regulated entities have borne significant compliance costs implementing the Fit and Proper regime, therefore amending the regimes is not ideal. Any changes should seek to minimise compliance costs for regulated entities.

The ABA notes that Recommendation 5.9 of the Regulation Taskforce report suggests that the Government, in consultation with APRA and ASIC, should review the ‘responsible officer’ and ‘responsible person’ regimes with a view to achieving greater consistency, to the extent that this is consistent with the underlying policy objectives. This recommendation not only focuses on the specific definitions as contained in the law, but also the inconsistency in the tests and checks for determining fitness and reporting requirements.

We also note that ASIC is currently consulting on Policy Statement 164: Licensing: Organisational capacities [PS164] and have proposed the use of an alternative term “responsible manager”. While we commend ASIC for seeking to reduce confusion by amending terminology in their policy statement, the differences between the regulatory requirements as applied to responsible persons and responsible officers is more fundamental.

Background

Section 9 of the Corporations Act defines a “responsible officer” as an officer of the licensee who would perform duties in connection with the holding of the licence. Responsible officers are responsible for making significant day-to-day business decisions, such as determining how financial services are provided and the supervision of those financial services. Responsible officers are therefore required to maintain a level of competency commensurate with ensuring that those services are delivered appropriately. Whereas, a “responsible person” under the prudential Acts and responsible officers as contained in the SIS Act are responsible for how regulated entities are prudentially managed.

Large complex financial institutions that hold AFS licences, RSE licences and comply with APRA prudential standards for ADI, life insurance and general insurance entities are subject to extensive regimes for ASIC responsible officers (“ASIC ROs”), APRA superannuation responsible persons (“APRA Super ROs”) and APRA responsible persons in accordance with the Fit and Proper prudential standards (“APRA RPs”).

In some instances, ambiguity and inconsistency between the terms creates unnecessary confusion for these large financial institutions where individuals are to meet different ‘responsibilities’ associated with the different regimes. In these instances, merging the two concepts would likely remove uncertainty and reduce unnecessary burden for those officers required to meet multiple requests and make declarations.

However, in other instances, individuals deemed to be responsible persons may not also be deemed responsible officers; for example, directors and auditors may be responsible persons, but not responsible officers involved in the operations of the business. Extensive training requirements for responsible officers may not be suitable for directors or auditors. In these instances, it would be difficult and costly to combine the two concepts.


Large financial institutions have attempted to introduce processes for ensuring consistency (i.e. approval procedures) and reducing duplication of checks as much as possible (i.e. centralising assessments through a Fit and Proper Committee). However, the legislative terms are broad and this means that the categories may apply to different roles, or there may be some overlap for some individuals. Attempts to streamline review and reporting obligations are difficult due to the different tests and checks required.

Attachment 1 provides an outline of the differences in reporting requirements, checks and documentation.

ABA position on streamlining responsible person and responsible officer regimes

The ABA acknowledges that there are differences between the legislative intent of prudential and conduct of business regulation, but, in practice the responsibility for significant business decisions within regulated entities often (but not always) rests with the same individuals.

It is important that the responsible officer and responsible person regimes are harmonised as much as possible so to capture the appropriate persons without creating unnecessary confusion for industry or compromising the differences in the intent of each regulatory regime. However, it is also important to ensure that the law enables regulated entities flexibility to determine the management structure that best suits their business operations.

In practice, the difference between the Corporations Act and prudential Acts is not necessarily in the manner in which responsible officers and responsible persons respectively are referred to within the law, but the manner in which the law is administered and the obligations that apply to regulated entities in meeting the regimes.

ASIC’s Responsible Officers: Demonstrating compliance with organisational competency obligations guide sets out that a responsible officer may be a senior manager or a person that is otherwise responsible for significant day-to-day business decisions about the monitoring and provision of a financial service.

Therefore, the responsible officer definition would necessarily include senior managers responsible for technical and operational decisions on policy and procedures, legal and compliance and other organisational capacities. Directors may or may not be deemed responsible officers depending on the management structure of the regulated entity.

Whereas, APRA’s Fit and Proper prudential standard gives consideration to whether a particular individual is a responsible person, taking into account the person’s functions and duties and not simply the title of their position. In doing so, it defines a ‘senior manager’ as a person who exercises senior management responsibilities, having primary responsibility for one or more of the following:

(a) high-level decision making;

(b) implementing strategies and policies approved by the Board;

(c) developing and implementing processes or systems that identify, assess, manage and monitor risks in relation to business activities and operations; or

(d) monitoring the appropriateness, adequacy and effectiveness of risk management systems.

Therefore, the responsible person would necessarily include those that maintain strategic business leadership positions such as directors, auditors, actuaries and senior managers responsible for policy and procedures, risk management, fraud control and legal and compliance.

APRA and ASIC requirements differ due to who the requirements apply, checks for determining fitness, training requirements, documentation and reporting obligations.


While there is some appeal in simply requiring all officers to comply with all requirements – that is, applying a consistent legislative definition and holding each officer to the highest standard required by all the three regimes so that tests, checks and reporting obligations are simplified – a number of these processes are very invasive (e.g. requesting a copy of a drivers licence or copies of external business references) and would be extremely difficult and costly to apply in practice where not actually necessary to meet the regulatory objectives for the specific regime.

It is the ABA’s view that:

• A single term should be used in the prudential and financial services laws to refer to a “responsible officer”. The law should be amended to remove the requirement for responsible officers to be ‘officers’.

• A responsible officer in the context of prudential regulation may include additional persons (or ‘senior managers’) involved in risk management and fraud control beyond those persons considered to be a responsible officer in the context of financial services regulation. However, tests, checks and reporting requirements should be standardised as much as possible.

• All responsible officers should have adequate skills, knowledge, experience and competency commensurate with the nature, scale and complexity of the business operations as well as reflective of the objectives of the regulatory regime. Competencies for responsible officers may differ across the prudential and financial services laws.

• Fitness of all responsible officers should be considered against harmonised criteria across prudential and financial services laws, with the appropriate prudential emphasis.

• Reporting and notifications on responsible officers should be harmonised across prudential and financial services laws.

The ABA suggests that to ensure consistency it will be necessary to:

• Amend the various laws to contain a consistent definition of a ‘responsible officer’;

• Amend the applicable regulatory guidance (prudential standards, practice guides, policy statements, guides, etc) to ensure consistent administration of the law.

It is the ABA’s view that the differences between the responsible person and responsible officer regimes results in unnecessary administrative costs. We suggest that the Government look at the responsible person and responsible officer regimes as a whole to reduce unnecessary duplication and differences so that the three regimes are harmonised as much as possible.

1.6 Protection for ‘whistleblowers’

ABA response: The ABA supports this proposal as providing protections for ‘whistleblowers’ and thereby encouraging information flows within financial institutions to responsible officers/persons and to the regulator. This proposal should assist in the prudential management of regulated entities by enabling voluntary information flows and reporting of information in good faith to responsible officers/persons and APRA.

The ABA believes that the section 29JE of the SIS Act criteria on self incrimination should be inserted into the prudential Acts so that information given by an individual in compliance with the duty to notify APRA is not admissible in evidence against the individual in a criminal proceeding or a proceeding for the imposition of a penalty, other than a proceeding in respect of the falsity of the information, if:


(a) before giving the information, the individual claims that giving the information might tend to incriminate the individual or make the individual liable to a penalty; and

(b) giving the information might in fact tend to incriminate the individual or make the individual liable to a penalty.

It is the ABA’s view that it should be made an offence for a person to cause detriment or threaten to cause detriment to another person because that person has made a disclosure. We believe that the section 1317AC of the Corporations Act offence be inserted into the prudential Acts. However, it will be necessary to clarify what constitutes ‘detriment’.

It is also our view that to ensure that whistleblowers act in “good faith”, that it should be an offence if a whistleblower, when they provide information, does not act in “good faith”.

2. Enhancing APRA’s accountability for administrative decisions

It is important for APRA to have the appropriate powers to administer the law, collect information, investigate regulated entities and enforce the prudential framework independently. Furthermore, APRA should be able to tailor prudential requirements to accommodate differing circumstances where this does not compromise the intent of prudential policy and regulation.

However, while we acknowledge that APRA should be accountable for its decisions and that appropriate mechanisms for ensuring scrutiny of regulatory decisions is contained in the law, these mechanisms should not impede efficient decision making, reduce scrutiny of regulatory decisions or compromise the competitiveness and stability of Australia’s financial system. Many of the proposals in section 2 represent a significant shift in prudential policy and regulation and therefore require further detailed consideration.

2.1 Removing ministerial consent from appropriate administrative decisions

ABA response: The ABA has concerns with this proposal. This proposal would enhance APRA’s independence and ensure that the regulator can act in a timely manner. Under the proposal APRA would be protected from ministers becoming involved in prudential decisions. However, this proposal would reduce accountability of prudential decisions by removing the need for APRA to gain written consent from the Minister.

The ABA notes that this proposal is designed to address concerns raised by the International Monetary Fund (IMF) in their Financial System Stability Assessment (FSSA) of Australia where it was noted that the Treasurer could exert influence in prudential decisions beyond policy development and that this was a potential vulnerability.

We also note that this proposal is intended to be consistent with recommendation 22 of the HIH Royal Commission Report, which suggested that the Government consider “removing the requirement for the Treasurer’s agreement to make operational decisions involving APRA’s prudential oversight of general insurers.” The intent of this recommendation is to remove ministerial consent from APRA decisions where these do not have wider policy implications. We observe that this recommendation referred to prudential decisions relating to general insurance only.

Ministerial consent is an important safeguard in promoting confidence in APRA and accountability for APRA decisions. The types of decisions are characterised in the paper as “day-to-day”, “operational” and “administrative”. It is our view that these types of prudential decisions can be quite significant, such as cancelling an RSE licence, suspending or removing a trustee of a superannuation fund and freezing superannuation assets. Therefore, we suggest that further consultation with industry is required. (Also see our comments on proposal 2.4.)


Furthermore, the proposal also does not give consideration to matters of the ATO exercising its powers relating to self-managed superannuation funds (SMSFs).

2.2 Removing the gap in APRA’s investigation triggers which results from the removal of ministerial consent

ABA response: See our comments on proposal 2.1.

The ABA notes comments made by the Insurance Council and Investment and Financial Services Association.

2.3 Implications of removal of ministerial consent for decisions which affect Lloyd’s Insurers

ABA response: No comment.

2.4 Merits review of APRA administrative decisions

ABA response: The ABA has concerns with this proposal. It is important for APRA decisions to be fair, accountable and transparent so that there is confidence in the prudential framework. It is also important that those affected by APRA decisions have mechanisms where those decisions can be scrutinised. However, the ABA does not support merits review for prudential regulation. We do support merits review for competition regulation and efficiency regulation.

The ABA notes that this proposal is intended to address concerns raised in recommendation 23 of the HIH Royal Commission Report, which noted inconsistencies between the Insurance Act and the Banking Act and merits review as a possible way of ensuring consistency.

We also note that recommendation 5.7 of the Regulation Taskforce report agreed that the Government should review the application of merits review to administrative decisions made by APRA, ASIC and the RBA.

The ABA believes that merits review would undermine the prudential regulatory framework. On the one hand, merits review would restrict APRA’s ability to respond quickly to prudential concerns in the public interest. On the other hand, APRA could decide that failure to act immediately would “materially prejudice the interest of beneficiaries or the stability of Australia’s financial system” and therefore make decisions that are not subject to merits review undermining certainty with the application of review mechanisms.

The types of prudential decisions for which merits review would apply are largely those that would no longer require ministerial consent, as well as modifications to risk management strategies and plans. We believe that merits review should not be introduced as a replacement for ministerial consent relating to prudential decisions. (Also see our comments on proposal 2.1.) Furthermore, the types of prudential decisions that the Administrative Appeals Tribunal (AAT) would likely receive for review could be quite technical and it is unclear whether the AAT has the expertise to review such decisions.

APRA decisions should be accountable and transparent. Therefore, it is our view that instead of introducing merits review for prudential regulation, that initially APRA should issue guidance on how it will administer the law with respect to prudential decision making. Such guidance should outline the approach that APRA takes in formally assessing regulated entities in meeting the legislative requirements. Furthermore, APRA should publicly disclose on a quarterly basis the interpretations of its prudential decisions for that period, including an explanation of the grounds for its prudential decisions, especially where APRA has exercised its discretion. (Also see our comments on proposal 3.1.)


Extending merits review to certain prudential decisions would provide regulated entities with greater scope to appeal decisions to the AAT. However, it is unclear in the paper how this mechanism would operate in practice, whether the AAT has the expertise to make decisions regarding prudential matters and whether merits review would extend to self-managed superannuation funds (SMSFs) and ATO decisions.

The ABA is concerned with the breadth of this proposal, and therefore, we believe that further consultation with industry is required to clarify the operational and technical aspects of this proposal.

2.5 Balancing APRA’s capacity to act decisively with expanding the availability of merits review

ABA response: See our comments on proposal 2.4.

2.6 Ensuring flexibility through exemption powers and clarifying review and scrutiny of these powers

ABA response: The ABA has concerns with this proposal. It is important for APRA decisions to be fair, accountable and transparent and that the law enable flexibility to be able to maintain the legislative intent without imposing unnecessary compliance costs on persons or classes of persons.

However, we do not support a broad exemption power that would enable APRA to override the law, for example, the Banking Act, and enable an entity to carry on a banking business, for example, without having to meet the prudential obligations applicable to other ADIs. We also do not support the introduction of merits review for prudential decisions. (Also see our comments on proposal 2.4.)

There are existing mechanisms available to APRA to deal with matters in a flexible manner. Therefore, the ABA believes that further consultation with industry is required to clarify the practical aspects of this proposal.

2.7 Streamlining APRA’s directions powers

ABA response: The ABA supports this proposal in principle to streamline APRA’s powers as contained in the Banking Act with those of the Insurance, Life and SIS Acts. This proposal should remove unnecessary complexity in the legislation and ensure that all prudentially regulated entities are subject to comparable APRA powers.

However, there may be some practical difficulties with this proposal. For example, the Banking Act refers to prudential standards, which do not exist in the SIS Act. In addition, APRA should not have the power to be able to give a direction to the trustee of a superannuation fund, where the trustee is acting as trustee, unless the conduct of the trustee fails to comply with their legal obligations.

The ABA notes that the Government intends to review the structure and size of penalties under the prudential framework.

The ABA believes that further consultation with industry is required to clarify the practical aspects of this proposal.


2.8 Confidentiality of Administrative Appeals Tribunal hearings

ABA response: The ABA supports this proposal in principle to introduce public hearings into the prudential Acts. Confidentiality is an important part of business operations, decisions and customer relations and may be provided for by contract or law. Importantly, we note that in cases of commercial sensitivity that an application can be made to the AAT to have a private hearing. However, we note that the AAT is not subject to rules of evidence which apply to hearings before the courts. Therefore, the ABA believes that further consultation with industry is required to clarify the practical aspects of this proposal.

3. Ensuring appropriate flexibility and accountability in making and administering prudential standards

The ABA acknowledges that it is important for APRA to have flexibility in administering and enforcing the law, particularly in relation to regulatory obligations of regulated entities in the event of a crisis. However, we are concerned with the proposals that seek to introduce broad discretionary powers. Many of the proposals in section 3 represent a significant shift in prudential policy and regulation and therefore require further detailed consideration.

3.1 Discretionary decisions under prudential standards making powers

ABA response: While we acknowledge that it is important for APRA to have the ability to tailor prudential requirements to particular circumstances, it is essential that there is stability in the prudential framework and confidence in APRA’s decision making. Therefore, the ABA does not support this proposal in its current form on the basis that it would remove certainty from the prudential framework.

The ABA considers that making of discretionary decisions can undermine the prudential framework, as prudential standards become the exception, rather than the norm. However, we acknowledge that in certain circumstances APRA should have the ability to reduce, refine or remove regulatory obligations from all regulated entities to ensure compliance with the regulatory objectives.

For example, given the flexibility of the minimal capital framework under Basel II, it would be reasonable for APRA to be able to determine that an internal model meets adequate depositor protection.

Furthermore, it is important for APRA to be able to reduce or remove prudential obligations in certain circumstances, such as in the event of a crisis (e.g. pandemic influenza).

However, APRA should not be granted a broad discretionary power. Any such APRA power to make discretionary decisions under its prudential standards should be limited and clearly defined.

Scrutiny of variations should be available and therefore any discretionary decisions made by APRA should be accountable and transparent. For example, APRA should publicly disclose on a quarterly basis the interpretations of its discretionary decisions for that period, including an explanation of the grounds for its prudential decisions, especially where APRA has exercised its discretion.



3.2 Scrutiny of variations to prudential standards

ABA response: It is important that any APRA power to make discretionary decisions from its prudential standards is subject to scrutiny. (Also see our comments on proposal 3.1.)

It is unclear in this proposal what would happen to existing class order relief. For example, will relief apply across all regulated entities, not just those that apply for relief? This point needs to be clarified.


3.3 Simplifying legislative requirements relating to consultation on prudential standards


4. Ensuring flexibility in enforcement

The ABA acknowledges that the regulatory response in enforcement should be proportionate to the regulatory problem that it is addressing and that APRA’s ability to disqualify unfit persons should be consistent across the various prudential Acts. However, the ABA is concerned about introducing additional legal remedies for prudential regulation. Many of the proposals in section 4 represent a significant shift in prudential policy and regulation and therefore require further detailed consideration.

4.1 Flexibility through court-enforceable undertakings

ABA response: While we acknowledge that APRA now has responsibilities in relation to obligations, such as Fit and Proper Persons, the ABA does not support this proposal to introduce enforceable undertakings for prudential regulation without further information on the proposed regime. It is our view that enforceable undertakings for financial services regulation as it relates to particular licensing, conduct or disclosure obligations are appropriate. It is unclear whether such a regime is appropriate for prudential regulation.

Administrative penalties should be used for matters where other penalties, such as criminal or civil, are inappropriate. APRA should have the ability to administer and enforce the law to ensure that regulated entities meet their obligations. However, serious breaches of prudential obligations should be addressed through existing penalty provisions.

It is the ABA’s view that the existing directions power to direct a regulated entity as to how to address a prudential concern is the appropriate mechanism in relation to prudential regulation. Therefore, we consider that the Insurance Act and SIS Act respectively should be amended to be comparable with the directions power currently contained in the Banking and Life Acts. (Also see our comments on proposal 2.7.)

Alternatively, where it is decided to introduce enforceable undertakings, it should only be in relation to obligations, such as Fit and Proper Persons, where it is reasonable that an undertaking is used to remove or disqualify an unfit person, rather than using a formal direction. In this case it will be necessary to provide guidance as to how enforceable undertakings and directions would be used by APRA.


4.2 Flexibility in the disqualification regime

ABA response: The ABA supports this proposal in principle, as it seeks to align the disqualification powers of the regulators with those that already apply to some regulated entities. However, it is our view that the disqualification of officers should be aligned with ASIC’s power of disqualification under sections 206C, D and E of the Corporations Act, where it is necessary for an application to the court.

It is important that trustees of superannuation funds, including self-managed superannuation funds (SMSFs), auditors and actuaries are subject to the same fit and proper requirements of responsible officers/persons in other prudentially regulated entities. However, in relation to auditors and actuaries, the disqualification power should be restricted to those duties for which the auditor or actuary performs for the regulated entity in meeting its obligations under the various prudential laws.

Having said that, the fit and proper regime has only been in place for a short period and not enough time has passed to assess the effectiveness of the new regime. Financial institutions that implemented the fit and proper requirements into their internal policies and procedures have borne significant compliance costs. In order to minimise compliance costs, we are of the view that legislative amendment should wait until more time has passed to assess the regime and determine whether any changes need to be made to the regulatory requirements.

The ABA believes that this proposal should not restrict the ability of regulated entities to develop their own standard and dismiss people in accordance with it. We also believe that disqualification powers should be used only in circumstances where all appeals have been exhausted.

4.3 Clarify processes concerning the appointment of actuaries and auditors

ABA response: Given the critical role and function that auditors and actuaries perform in prudential regulation, particularly in relation to ensuring the accuracy of information provided by regulated entities to APRA and monitoring compliance with regulatory obligations by regulated entities, it is important for APRA to have an effective mechanism to ensure that auditors and actuaries are subject to the same fit and proper requirements as responsible officers/persons in regulated entities.

However, while the ABA supports this proposal in principle as streamlining the provisions under the Banking and Insurance Acts with those of other prudential Acts and other prudentially regulated entities, we are of the view that legislative amendment should wait until more time has passed to assess the fit and proper regime. Also see our comments on proposal 4.2.

4.4 Supporting cooperation between APRA and relevant professional bodies of actuaries and auditors

ABA response: The ABA supports this proposal in principle, but we have some concerns as to how confidential information would be collected and disclosed between the prudential regulator (APRA) and a professional body.

It is important for APRA and professional bodies to maintain an open flow of information, particularly as it pertains to a persons’ fitness. It is reasonable for APRA to have available a mechanism to refer matters relating to auditors and actuaries to their professional bodies under the prudential Acts.


The ABA notes that there is no precedent in the Corporations Act for this type of referral power for the corporate regulator (ASIC) to refer matters to the professional bodies. Instead matters are referred to the Companies Auditors and Liquidators Disciplinary Board (CALDB) established to hear such matters. We believe that it may be worthwhile for a similar mechanism to be considered for referral of matters between APRA and the professional bodies. This would ensure that confidential information is managed appropriately.

5. Simplifying the Life Act and SIS Act

The ABA generally supports streamlining the Life Act and SIS Act so that principles-based legislation applies to the life insurance industry. However, it will be important to ensure that all prudentially regulated entities are subject to the same prudential rules so that policy holders remain protected.

5.1 Phase out prudential rules from the Life Act

ABA response: The ABA supports this proposal in principle, as it provides greater simplicity and consistency for industry. It is important that prudential rules do not add unnecessary complexity to the prudential framework. However, it is important that all prudentially regulated entities are subject to comparable standards to ensure the integrity, efficiency and stability of the financial system. Therefore, while we support the removal of prudential rules as they apply to life insurers, it is important that streamlining does not result in unintended consequences and gaps in the prudential framework that compromises the protections afforded by the law to policy holders.

5.2 Abolish the Life Insurance Actuarial Standards Board


5.3 Auditor, audit committee and actuarial requirements under the Life Act


5.4 Overlaps in reporting requirements between APRA and ASIC

ABA response: The ABA supports this proposal in principle, as it reduces overlaps in the reporting requirements between APRA and ASIC. We have previously expressed our concerns to the Government about overlap and duplication of reporting, which generates unnecessary compliance costs, in our submission to the Regulation Taskforce. It is our view that it is sensible for duplication in reporting requirements under the Life Act to be removed. However, it will be important to ensure protocols for information sharing between APRA and ASIC are adopted as part of their MOU. (Also see our comments on proposal 1.4.)

5.5 Reinsurance arrangements under the Life Act

ABA response: The ABA supports this proposal. It is the ABA’s view that decisions to enter into reinsurance arrangements should be the responsibility of the Board, rather than of APRA. The reinsurance reporting requirements under the Life Act are unnecessarily prescriptive and should be removed. We note that similar requirements for APRA to approve certain reinsurance contracts for general insurers were removed from the Insurance Act through the General Insurance Reform Act 2001. However, the ABA believes that, as with general insurers, reinsurance reporting requirements should be appropriately dealt with through prudential standards.


5.6 Registration of life insurers


5.7 Clarifying reporting obligations under the SIS Act

ABA response: The ABA supports this proposal in principle as clarifying and simplifying the structure of the SIS Act. However, we note that considerable costs have been incurred by industry in meeting original requirements. To avoid additional unnecessary cost, we suggest that this proposal should be permissive so that financial institutions can take advantage of new requirements in the usual course of business.

The SIS Act and SIS Regulations contain unnecessary complexity which creates confusion in industry, particularly with respect to reporting obligations. It is important that the legislation clearly and consistently articulates the reporting obligations that apply to ‘superannuation entities’ but distinguishes between APRA-regulated superannuation entities and self-managed superannuation funds (SMSFs) as regulated by the ATO.

Having said that, the ABA is concerned with the regulatory framework for SMSFs. Currently, there are differences between how managed investments, superannuation and SMSFs are licensed and regulated. Unlike managed investments where licensed financial advisers provide advice to consumers, unlicensed practitioners, such as accountants, often promote SMSFs. Advice given by a registered tax agent is not financial product advice if the advice is given in the ordinary course of activities and is reasonably regarded as a necessary part of those activities. Accountants have a number of exemptions where they may not be required to hold an Australian financial services licence.

While SMSFs provide an alternative superannuation vehicle for some people (such as individuals that have the time and skill to manage their own superannuation savings and meet the “trustee” obligations contained in the SIS Act), those people that seek ‘advice’ on SMSFs may not have the same consumer protections awarded to those people that seek ‘advice’ on other managed investments or superannuation vehicles (e.g. training and competence standards set out in PS146 may not be met).

Essentially, SMSFs are a product designed to hold financial assets for retirement, therefore regulation should be product neutral. This approach will ensure that the prudential and conduct of business framework (including sound investment strategy and quality of financial advice) is maintained and SMSFs, as an alternative superannuation vehicle, can continue to grow as a viable savings vehicle for retirement. Given the rapid growth of these superannuation vehicles over recent years, ABA suggests that the Government conduct an assessment of the regulatory treatment for SMSFs to ensure funds are prudentially and safely invested.

It is the ABA’s view that ensuring that trustees of SMSFs are meeting their legal obligations through regulatory surveillance and enforcement is of utmost importance for ensuring the safety of individuals’ retirement incomes and the Government’s retirement income policy.

5.8 Replacing RSE numbers with Australian Business Numbers (ABNs)

ABA response: The ABA supports this proposal in principle as it seeks to impose a single business identifier in the form of the Australian Business Number (ABN). The requirement for superannuation funds to cite various identification numbers, such as ABN, AFS licence number and RSE licence and registration numbers is frustrating for industry and confusing for consumers.


It is the ABA’s view that the use of the ABN should be consistent for all regulated entities and other financial service providers pursuant to the various Acts. It is important for banks and other financial services providers to be able to consistently use their ABN as a sole business identifier when they lodge documents with APRA or ASIC and conduct their business with Government. This proposal should make it easier for superannuation trustees and entities to conduct their business with Government.

Currently, under the Corporations Act where an ACN of a company, ARBN of a registered body or ARSN of a registered scheme is required or permitted to be used under a law of the Commonwealth administered by ASIC, the ABN of the company, body or scheme may be used instead, if the last 9 digits of the ABN are the same as the last 9 digits of the ACN, ARBN or ARSN.

However, while we acknowledge that a single business identifier has benefits for some businesses, this may be problematic where the ABN might not be the ABN of the regulated entity but instead the ABN of the trust. In this instance, the ABN is used for tax purposes of the trust and not the regulated entity, and is only the ABN of the regulated entity in its capacity as trustee of the trust. A trustee may have a number of superannuation funds and ABNs for each product, therefore it would be sensible for this proposal to apply to the ABN of the trustee.

The ABA believes this proposal should:

• Clarify how the ABN will apply in circumstances of businesses (companies and trusts);

• Clarify which disclosure documents are required to contain the relevant reference.

Furthermore, there could be substantial costs involved in destroying and replacing affected documents. Therefore, we suggest that this proposal be phased in to allow existing references until reprint is required.

5.9 Simplification of Acts through removal of obsolete legislation

ABA response: The ABA supports the removal of obsolete legislation to clarify and simplify the prudential Acts. There would also be a number of consequential amendments required due to the adoption of these proposals.

Furthermore, consistent with the ABA’s submission to the Options for Improving the Safety of Superannuation Issues Paper and more recently the ABA’s submission to the Parliamentary Joint Committee (PJC) on Corporations and Financial Services inquiry into the structure and operation of the superannuation industry, we consider that the separation of prudential and retirement income provisions of the SIS Act should be a longer-term objective.

However, the ABA acknowledges that this would be a very large undertaking and should only be pursued where a new framework reduces complexity, increases clarity and reduces compliance costs. Some commentators say that the combination of prudential and retirement income provisions would not have occurred if introduced after the implementation of Wallis.


Attachment 1: Differences in reporting requirements, checks and documentation

Differences in reporting requirements

The three regimes have different reporting requirements:

• Any candidate for an ASIC RO position must be assessed and a report made to ASIC via the ASIC online portal within 10 business days of appointment.

• Any candidate for an APRA Super RO position must be assessed and a report made to APRA on the specific APRA form within 14 days of appointment;

• Any candidate for a APRA RP position must be assessed prior to appointment and a report made to APRA on APRA’s specific form within 28 days of appointment, unless:

o the person holds the position as a result of a shareholders’ resolution; or

o APRA has determined that they hold an APRA RP position subsequent to their appointment,

in which case, the assessment must be done as soon as practicable (but no more than 28 days) after the appointment; or

o the need to appoint the person could not have been anticipated within sufficient time to undertake the Fit and Proper assessment, in which case an interim assessment may be undertaken.

In this instance, a limited assessment (which is reasonable in the circumstances) is undertaken at the time of appointment. A full assessment must be undertaken within 90 days of appointment.

The ABA has previously made comments to the Regulation Taskforce about the importance of minimising unnecessary regulatory burden due to inconsistent reporting obligations.

Differences in checks

A summary of differences between each category are noted in the table set out below:

Requirement APRA

SUPER RO APRA RP ASIC RO

Australian Police Check √ √ √

Relevant Overseas Police Check √

Bankruptcy Check √ √ √

ASIC Banned Representatives Check (done by ASIC) √ √ √

APRA civil penalty search √ √

APRA Disqualification Register Check √ recommended

Repeat Australian Police Checks every 2 years √

Repeat Relevant Overseas Police Check every 2 years √

Repeat Bankruptcy Check every 2 years √

Superannuation knowledge √


Knowledge of duties of directors/company secretaries √

Knowledge of investment concepts √

Ability to make informed decisions based on technical experts √

Specific professional qualifications depending on executive position appointed to (as set out in policy) √

Checks of continuing education √ √

Recent CV √ √

Job Description to be submitted √

Proper Person Declaration - initial √ √ (different format to

Super RO)

Proper Person Declaration - annual re-certification √ √ (different format to

Super RO)

Internal References √

External References √

Copy of Drivers Licence √

RO Declaration- Section 2 RO Application Form √

Let’s take one for example – a request for an Australian Federal Police check. A federal police check must be made on the specific form, which means that a federal police check obtained for one regime is unusable for another regime (the AFP has a different request form for each of the purposes of ASIC RO, APRA Super RO and APRA RP). Given that a federal police check can take up to 6 weeks to receive, this can make compliance with the assessment and reporting requirement for each regime very difficult. Verifying ‘responsible officers’ should not require different forms and processes.

The ABA acknowledges that some of the differences identified above are reasonable, given the different regulatory objectives of each regime – that is, the APRA RP focus is on general fitness and propriety while the ASIC RO focus is on skills and experience. However, in many instances there appears to be an unnecessary disconnect between the regulatory requirements.

Differences in documentation

The three regimes have different documentation requirements:

• The APRA RP regime requires each regulated entity to have a written policy based on the requirements of the prudential standards and approved by the board of each regulated entity.

• The APRA Super RO regime requires each regulated entity to have a written Fit and Proper Person Policy based on the requirements of the SIS Act (being different to those in the Fit and Proper Person policy for other responsible persons) that has been approved by APRA.

• The ASIC RO regime does not require a written policy but the regime covers distinct requirements again.


These differences mean that attempts to streamline all three regimes into one policy and set of procedures result in a very large and unworkable policy document. For example, for those financial institutions that maintain a single policy document, when any changes are required, both the Board and APRA must approve these changes, even if they do not strictly relate to an area requiring Board or APRA approval. Whereas, for those financial institutions that maintain separate policy documents, maintaining compliance can be more difficult to manage.

Australian Bankers’ Association 2 March 2007

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