The Federal Government has proposed a major strengthening of APRA’s crisis management powers and has released a consultation paper containing wide-ranging proposals for financial services reform that are now open to industry comment.
If implemented, the proposed reforms will affect all financial sector enterprises regulated by the Australian Prudential Regulation Authority (APRA), comprising authorised deposit-taking institutions, superannuation entities, life insurers and general insurers.
Some proposals would have implications from Day 1 – these include possible regulation of holding companies, increased notification requirements, systems changes and new obligations. Other proposals would impact at the time of a crisis – with enhanced powers for APRA to facilitate a more immediate and direct response. The interaction of insolvency law under the Corporations Act and the Insurance Act is proposed to be recalibrated, time lines compressed and APRA provided with more powers.
There are several drivers of these changes: continuing reform – APRA has indicated for some time that group regulation is being developed; refinements and streamlining processes including in respect of judicial management and other aspects; implementing further non contagion strategies; international developments and the lessons learnt from the GFC.
The paper proposes many significant changes, some of which we outline in this article. Submissions in response to the consultation paper are due by 14 December 2012.
Proposed reforms include:
Enhancing APRA’s crisis resolution powers
- Insurers in crisis – Grant APRA the power to facilitate the appointment of either a Judicial Manager or Statutory Manager to manage an authorised Non-Operating Holding Company (NOHC) or a subsidiary of a NOHC. Broad ranging powers would also be granted to managers to maximise their ability to make decisions with APRA with respect to the transfer of business (among other things).
- Claw back of capital transfers – Grant APRA power to suspend the clawback provisions in the Corporations Act in certain circumstances.
- Direction powers and continuous disclosure – Enhance APRA’s direction powers to include the power to temporarily suspend continuous disclosure obligations and to give civil and criminal immunity to directors and officers who have made reasonable steps to comply with APRA directions.
- New APRA powers in relation to foreign regulated insurers – Enable APRA to revoke the authorisation of a foreign regulated general insurer where foreign authorisation is revoked and allow APRA to use its direction powers to direct a foreign branch of a general insurer not to transfer assets out of Australia and compulsorily order the transfer of the Australian business of a foreign insurer or its subsidiaries and related parties.
- Moratorium provisions – Widen, clarify and harmonise the moratorium provisions to include, for example, restrictions on commencing proceedings in a Court, enforcing security and refusing the supply of essential services.
- Expanding the scope of the winding up and external administration provisions – Including so that authorised NOHCs and subsidiaries of general insurers and NOHCs are subject to the new provisions.
- Changes to the operation of the Financial Claims Scheme (FCS) – Ensure APRA has broad ranging powers in relation to the administration of the FCS. Ensure the FCS can be automatically activated at the time APRA applies to the Court for the winding up of an insolvent general insurer. Allow appropriated funds under a FCS declaration to be used to transfer policy liabilities from a failed general insurer to another general insurer and enable APRA to obtain information from third parties where such information would facilitate FCS administration. Clarify the role of liquidators appointed to general insurers for which the FCS has been declared to remove any inconsistencies between their obligations under the Corporations Act and the Insurance Act. Allow APRA to make discretionary judgments as to whether interim payments should be made under the FCS.
Simplification and streamlining of Acts administered by APRA
- Requiring a NOHC of a regulated entity to be authorised – Two options are proposed: empower APRA to issue a notice to a holding company that it must become an authorised NOHC; or require all holding companies of regulated entities to become authorised NOHCs. The first option is preferred. It is suggested that APRA would hold the power to authorise a NOHC under any of the Industry Acts1 so that a NOHC may hold multiple authorisations. It is also proposed that the Insurance Act be amended so that the application provisions for authorisation are similar to those currently contained in the Life Insurance Act 1995.
- Prohibition on changing constitutional documents – Amend the Insurance Act so that the constitutional documents of a general insurer that were provided to APRA in an application for authorisation may not be amended (without APRA’s written approval) to authorise directors of the general insurer to act in the interests of the insurer’s holding company.
- Repeal of ‘show cause’ provisions and expansion of investigatory powers – Remove ‘show cause’ provisions from the Insurance Act and empower APRA to conduct investigations or appoint investigators on certain grounds. Simplify entry and search powers and broaden APRA’s power to investigate where breaches of other Acts or deterioration of financial conditions are suspected. It is proposed that such amendments would remedy gaps in the Insurance Act with respect to APRA’s investigatory powers and subsidiaries of general insurers and NOHCs would also be subject to investigation.
- Non-disclosure directions and assistance from certain persons – Give APRA the power to direct persons or entities under investigation (and their legal representatives) not to disclose the content of the investigation. Expand the class of persons from whom APRA may seek assistance from during an investigation.
- Power to obtain information with respect to group matters – Extend APRA’s investigation and information obtaining powers to group matters and so that APRA may request information about non-subsidiary entities (including funds, partnerships and trusts) controlled by a group containing an authorised insurer.
- New requirements regarding investigation reports and actuarial investigation powers – APRA may give a copy of an investigation report to the body being investigated and to the public. APRA may specify the actuary who is to conduct an investigation, set the terms of reference for the appointment of an actuary, set the timeframe for any such appointment, and set the timeframe for the provision of the actuary’s report to be provided to APRA.
- Enhance whistleblower protection – Including providing protection to former employees, directors and officers.
- Auditors and actuaries - Various provisions with respect to auditors are proposed to: make it an offence to mislead an actuary; require that auditors and actuaries abide by confidentiality agreements (breach of such provisions would be a criminal offence); introduce a high level provision relating to the roles, duties and functions of actuaries which would be regulated by APRA via specific provisions in the prudential standards; and extend certain provisions so that they apply to the subsidiary or authorised NOHC of an insurer.
- Insurance Act to prevail over the Corporations Act – In the event of a conflict of laws, the provisions of the Insurance Act would prevail over any applicable provisions of the Corporations Act. This would allow APRA – whose duty is to protect the interests of policyholders – to suspend owners’, shareholders’ and other rights in relation to a financially distressed insurer. It is also proposed APRA have the power to seek leave of the Court to intervene in certain court proceedings.
- Express APRA power to confer with foreign regulators – APRA would also be granted the express power to cooperate with and give assistance to foreign regulators with respect to regulated entities within Australia that are members of groups that the foreign regulator supervises.
Miscellaneous and technical amendments to the Insurance Act
- Duties of an agent of a foreign general insurer to be clarified – It is proposed the Insurance Act be amended so that the roles and responsibilities (and consequences of any breaches) of agents of foreign general insurers are set out. Amendments may include: requiring the prudential standards to apply to agents; imposing an obligation upon agents to comply with the prudential standards that are applicable to them; requiring agents to provide certain information to APRA; and extending a protection from liability for agents who act in good faith and according to the provisions of the Insurance Act.
- Definition of ‘assets’ in Australia to change in relation to foreign reinsurance recoverables – Amend ss 116A(1) of the Insurance Act so that, save for reinsurance contracts with Lloyd’s underwriters, only contracts that expressly provide for payments to be made in Australia will satisfy the test in ss 116A(1)(c) to ensure that such assets are accessible should an insurer be wound up.
Call to action
General insurers should consider the impact that the proposals would have on their business if implemented and prepare a submission in response to the discussion questions in the consultation paper before 14 December 2012.
The Government has suggested that stakeholders making submissions also include cost-benefit analysis information so as to assist in assessing the likely business compliance costs associated with the reform proposals.
The Government will review submissions and prepare a regulatory impact statement before it commits to developing its preferred reform options in 2013.