FINANCIAL SECTOR LEGISLATION AMENDMENT BILL (NO. 2) 2002: Second Reading
Mr CADMAN (Mitchell) (11.55 a.m.) —There is no doubt that this House will have a very extensive debate when the royal commission makes its findings, and I do not think anybody would seek to prevent that from occurring.
And it should occur. As the previous speaker, the member for Werriwa, has said, a lot of damage was done by the failure of HIH. If there is one lesson that can be learned by this process, it is this: it is very easy for the regulators to chase the small and the insignificant and pulverise the small schemes—the do-it-yourself insurance and the company funds that seek to take in superannuation—but it is much harder for the regulators to deal with large corporations if those corporations want to cover up things.
I just press on APRA, with the changes that are being made here, the need for it to focus on what should be its top priority—that is, to make sure that it gives confidence to the community. I notice in the Australian Financial Review today comments about the royal commission and APRA's more active role in enforcement. In an article in the Australian Financial Review yesterday there were some comments about APRA from Alan Cameron, who chaired the Australian Securities and Investment Commission from 1993 to 2000. I do not know whether his comments are right—I am not in a position to judge—but I do know that back in 1991, in the period of the Labor government, the head of the Insurance and Superannuation Commission, Richard Beetham, was talking to HIH about their financial situation. So discussions began back then. It is all very well to allege these arrangements, these friendships and all that sort of thing—conspiracy theories by the member for Werriwa—but where was APRA or its predecessor during that period? When giving evidence at the royal commission, Alan Cameron said that he supported the `dual regulator' model and that it was `very sensible'. He said that he liked the previous process and described the role of APRA as more of `the bedside manner of the doctor' in looking after institutions rather than one seeking to carry the responsibility for proper conduct.
There are all sorts of reasons, and gradually they will be displayed—whether there is adequate staff in APRA, whether it had enough staff to focus on superannuation insurance when it moved from Canberra to Sydney, the role of contract workers coming into the organisation and whether it could adequately think through the regulatory process of government which had been established over many years in both insurance and superannuation. I would have to say that there is a great deal of regret all round that HIH went to the point that it did and that it was able to take on FAI without people being aware of the implications. We will come to that in due course. In the meantime, the government is certainly taking action. With this legislation before the House today, the government is strengthening the role of APRA to be able to take decisions and do things that have long needed to be done. [start page 9051]
The Financial Sector Legislation Amendment Bill (No. 2) 2002 that we are debating today does look into what APRA should be doing and does look into the role of the processes. I turn now to the explanatory memorandum to gather up some of the detail which is in this legislation. Apparently this is considered minor legislation, but some of this is pretty significant stuff. According to the EM, the most significant amendments are changes to the Banking Act, which reflects that it has not been updated for some time. These amendments include provision for the application of a fit and proper test for directors and senior managers of Australian deposit-taking institutions. They also examine the proper role and qualifications of those taking a position in non-operating holding companies. All of this—covering the area of who is a fit and proper person to be a director—goes right across the whole financial sector, from banking institutions through to credit unions and building societies. I have to say in passing that I am a little concerned by some of this legislation as it applies to credit unions. I think the application of unnecessary bureaucratic control to mutual companies which are not for profit is quite concerning. I will be watching this very carefully because I am concerned that credit unions are in a different category and, while they certainly should be able to comply with these requirements, the compliance factors for them need not be applied to the same onerous extent as they are for a bank, insurance company or superannuation firm.
Amendments to the Banking Act also deal with auditors and are consistent with the auditor provisions in the Insurance Act. The amendments will provide APRA with the means to remove auditors who fail to perform adequately and properly. Those powers would have been a terrific thing to have had in the case of HIH where we had auditors who were members of the board. I do not believe that that was appropriate or that two auditors should have had a say at that level. Amendments to the Banking Act also include the requirement for a deposit-taking institution and their subsidiaries to notify APRA immediately of any breaches of prudential requirements and any material adverse developments. If they do not notify then I would imagine that that would allow APRA to go in and investigate. If APRA heard that proper processes had not been observed and the prudential requirements were not there then APRA could go in and say, `You have not notified us; we are here to find out what the story is.' That is a valuable improvement.
Another amendment to the Banking Act will allow APRA to apply prudential standards on a consolidated group basis. That means that it will not just be one entity that they are able to look at; it will be the whole lot. If that was a limitation in the previous legislation—that there was no way that APRA could look at a consolidated group—I find that quite surprising. It seems quite strange to me, given the common practice of many different subsidiaries existing within a corporation generally known as a bank, that APRA could not look at the totality in terms of the movement of funds, the prudential requirements and the standards across the whole group. That was certainly a shortcoming in the previous legislation. Consultation has been had by APRA about these matters, and that is fine, but industry needs to be aware that the nation cannot afford the collapse of another insurance agency or even a superannuation fund. I think APRA need to be very active in looking at some members of the superannuation industry to make sure that everything is managed appropriately there. There is stuff out there in the marketplace that APRA should be aware of and if they are not taking action, I think they should be. [start page 9052]
The Banking Act will also be amended to provide additional grounds for APRA to revoke the authority granted to a deposit-taking institution or non-operating holding company. The final amendment in this legislation will correct a discrepancy between the indemnity provisions of the Banking Act and the APRA Act which relates to the extent of protection available to APRA officers under these acts. This amendment will also ensure that Australia complies with the Basel core principles in legally protecting staff of the supervisory agency, which is also very significant. Amendments to the Insurance Act will require APRA to discuss with a third party submissions from a director or senior manager who is being removed. If there is a problem with somebody's conduct or behaviour, this will allow APRA, under the Insurance Act, to talk to others about it—whether it be law enforcement agencies, fellow directors or employees of a company. I believe this is a vital part of APRA's ability to apply a fit and proper test to management. That is what Australians want: a fit and proper test applied to management.
Another amendment to the Insurance Act is the requirement that an insurance company notify APRA of any breach of prudential standards. That brings it into line with the requirements under the Banking Act. Again, it would seem to me that APRA now have the powers to go and have a look if the requirements are not complied with or if the prudential standards are not complied with. If APRA think they may not have been complied with, they can take action. The Superannuation Insurance Commission had many of these powers to go and have a look, and they did not hesitate to do so. I think it was Chris Hurford, when he was Assistant Treasurer, who strengthened the powers, following the collapse of an insurance company, to allow the commission to do that. Again, it is strange that we are having this legislative change that should have originally been within the scope and ambit of APRA.
Another amendment within this bill is to the Insurance Act, and it deals with the incorrect specification of penalties. The penalty provisions need to be increased so that the penalty units applied to a body corporate are appropriate and consistent with the Crimes Act. The final changes are to the Superannuation (Resolution of Complaints) Act and introduce flexibility in the time limits relating to complaints about disability benefits. This also follows the problems that we have had in the insurance industry, allowing a collapsing of the time and acknowledging the difficulty in assessing medical conditions over a time. It gives the Superannuation Complaints Tribunal discretion in dealing with time limits. I think we all know some of the problems with extraordinary lengths of time being available to complainants for payouts under the superannuation act or under other insurance provisions.
Finally, the changes to the Superannuation (Resolution of Complaints) Act will strengthen, modernise and improve the conciliation powers of the Superannuation Complaints Tribunal and will enable it to require attendance at conciliation instead of the current voluntary system. I think these are all good provisions, and we need to get them implemented. They are not minor. Taken collectively, they are substantial and will build, I hope, a new culture within modern governance in Australia. I am pleased that the opposition supports these provisions, and I think that we do have the chance now to build something that is more reliable and trustworthy.
Author: Alan Cadman MP
Source: House Hansard - 14th November 2002
Release Date: 9 Dec 2002