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Focus: APRA's supervisory and enforcement powers to be significantly enhanced

1 April 2009

In brief: APRA will be given significantly stronger supervisory and enforcement powers under draft legislation introduced by the Federal Government last month. Partner John Morgan (view CV) and Senior Associate Claire Machin report on the Financial Sector Legislation Amendment (Enhancing Supervision and Enforcement) Bill 2009.

How does it affect you?

  • The Bill introduces a framework to regulate non-operating holding companies of life companies and broadens the basis on which the Australian Prudential Regulation Authority (APRA) may seek injunctions against banks and insurers in Australia. These latest developments will be of interest to those involved in the management of such entities.
  • Once the Bill is passed in law, APRA will have the power to require as a condition of their registration under the Life Insurance Act 1995 (Cth) (the Life Act) that life companies establish non-operating holding companies. This brings the prudential regulatory regime for life companies into line with the existing regulation of authorised deposit-taking institutions and general insurers.
  • Non-operating holding companies of life insurance companies will be subject to APRA's prudential standards and directions for registration, disqualification, auditing, monitoring and investigation.
  • APRA's approach is expected to be similar to that which it adopted for the general insurance sector, ie, it will seek to develop prudential standards to deal with capital requirements, risk management and governance matters on a consolidated or group basis.
  • APRA's power to seek Federal Court injunctions on prudential matters involving authorised deposit-taking institutions, life companies and general insurers is to be significantly enhanced.
  • Groups with life companies should consider their current corporate structures closely to understand the practical implications of these changes.

Background

The measures are part of the Federal Government package of measures to enhance the stability of Australia's financial system and improve protection for depositors and policyholders. The Council of Financial Regulators (which includes the heads of APRA, the Australian Securities & Investments Commission (ASIC), the Reserve Bank of Australia (RBA) and Treasury) had recommended giving greater power to regulators to manage financial instability and stressed financial institutions.1

The ability of APRA to require registration of a life company's non-operating holding companies (NOHCs) under the Life Insurance Act 1995 (Cth) (the Life Act) and be subject to APRA supervision will bring the prudential regulatory regime for life companies into line with the existing regulation of authorised deposit-taking institutions (ADIs) and general insurers.

The Council of Financial Regulators had also recommended harmonising APRA's powers across the prudential Acts to apply to the Federal Court for injunctions so that APRA, or indeed any person whose interests are affected, can seek injunctions for conduct relating to the financial health of an entity. The draft legislation limits the ability to seek such injunctions under the Banking Act 1959 (Cth), Insurance Act 1973 (Cth), Life Act and the Superannuation Industry (Supervision) Act 1993 (Cth) (the SIS Act) to APRA only, but it significantly expands the basis on which APRA may apply to the Federal Court for an injunction against an ADI or insurer and the types of injunctions available to it.

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Impact of the changes for NOHCs of life companies

The Bill introduces significant changes that will impact company groups which incorporate life companies if APRA requires that the life company have a registered NOHC as a condition of the life company's authorisation under the Life Act.

In anticipation of these amendments, groups with life companies should consider their current corporate structures closely to understand the practical implications of the changes, as these will likely have consequences for their present governance arrangements, risk management programs and capital management plans.

The proposed amendments to the Life Act to deal with the registration and supervision of NOHCs are consistent with the existing provisions under the Insurance Act and Banking Act. It is anticipated that APRA will also introduce new prudential standards to deal with group supervision of life insurance companies and their NOHC subsidiaries. APRA is expected to consult with the life industry before such prudential standards are issued, in the same way that it consulted with the general insurance industry in 2008 over its plans for the prudential supervision of general insurance groups.

Under the proposed legislation, a registered NOHC of a life company will have to comply with the applicable reporting requirements under the Life Act and the Financial Sector (Collection of Data) Act 2001 (Cth), consistent with the requirements and obligations that currently apply to life companies. Likewise, auditors of registered NOHCs and their subsidiaries will have reporting obligations consistent with those that currently apply to appointed auditors of registered life insurers. Those reporting obligations are not insignificant. For example, an appointed auditor has duties to report to APRA on contraventions of the Life Act by a NOHC or its directors that may significantly affect policyholders' interests.

Consistent with its powers under the Insurance Act and Banking Act, the Bill introduces changes to the Life Act to permit APRA to issue a direction to a registered NOHC to remove its auditor where, for example, the person is a disqualified person, is not fit and proper within the meaning of the prudential standards or has failed to adequately and properly perform the duties of an auditor under the legislation. A failure to comply with such a direction attracts a maximum penalty of 60 penalty units and is a strict liability offence, meaning that it does not require proof of any mental element in the commission of the offence.

Persons liable to the penalty under the proposed legislation are regulated NOHCs or life insurers rather than individuals concerned with the management of those entities. However, an officer of a NOHC that has responsibility for ensuring the NOHC's compliance with such a direction, but does not take reasonable steps to ensure its compliance, is also guilty of a strict liability offence carrying a maximum penalty of 50 penalty units.

The Bill also introduces powers to APRA to issue directions to a registered NOHC, including the power to issue a direction that the NOHC remove a director or senior manager of the company from office. In view of these new powers and sanctions, registered NOHCs of life companies will need to have appropriate risk management and internal systems in place to ensure compliance with their new legislative obligations.

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New injunction powers

The proposed amendments to the Banking Act, Insurance Act and Life Act will enhance APRA's powers to seek injunctions against prudentially regulated entities. These changes are consistent across the prudential Acts, bringing about further harmonisation of the APRA prudential regulatory framework for ADIs, life companies and general insurers.

The new powers extend APRA's ability to seek an injunction where:

  • a person has, or proposes to, engage in conduct contravening the relevant prudential Act, or 'attempts, assists, induces or is in any way directly or indirectly knowingly concerned with, or a party to, a contravention of the Act'; or
  • where an entity's conduct or proposed conduct breaches the conditions imposed on its licence or any directions given to it by APRA.

The amendments will enable APRA to seek a variety of different types of injunctions including:

  • restraining injunctions to prevent a party engaging in conduct;
  • performance injunctions requiring the doing of an act or thing where a party has refused or failed to act on APRA's direction or in accordance with the relevant Act or prudential standards;
  • consent injunctions on application of all the parties to the proceedings where proceedings are on foot to seek a restraining or performance injunction; and
  • interim injunctions pending the outcome of an application for a restraining injunction.

The new powers also enable the Federal Court to award damages to any person either in addition to, or instead of, ordering an injunction. These powers could be used to compensate those persons who have been adversely impacted by the alleged wrongdoing on the part of an ADI or insurer.

APRA's enforcement powers will be greatly enhanced by the changes to injunctive relief, enabling it to act immediately against prudentially regulated entities, with the sanction of the courts, to protect relevant interests. The Explanatory Memorandum to the Bill anticipates that this power will be used in very serious cases only and where other enforcement powers available to APRA are insufficient.2

Published 1 April 2009

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Footnotes
  1. These recommendations were outlined in the Treasurer's Press Release No. 061 of 2008, which first announced the Federal Government's intention to introduce changes to enhance the stability of Australia's financial system and improve protection for depositors and policyholders.
  2. Explanatory Memorandum, ch 2, para 2.2.

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