Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2004-2005-2006-2007
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
SENATE
FINANCIAL SECTOR LEGISLATION AMENDMENT
(DISCRETIONARY MUTUAL FUNDS AND DIRECT OFFSHORE FOREIGN
INSURERS) BILL 2007 AND CORPORATIONS (NATIONAL GUARANTEE
FUND LEVIES) AMENDMENT BILL 2007
REVISED EXPLANATORY MEMORANDUM
(Circulated by authority of the Minister for Revenue and Assistant Treasurer,
the Hon Peter Dutton MP)
THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY
THE HOUSE OF REPRESENTATIVES
TO THE BILL AS INTRODUCED
Table of contents
Glossary ...................................................................................... 1
General outline and financial impact....................................................... 3
Chapter 1 Discretionary Mutual Funds ................................................... 9
Chapter 2 Direct Offshore Foreign Insurers -- Insurance Act ...............15
Chapter 3 Direct Offshore Foreign Insurers -- Corporations Act ..........31
Chapter 4 Capping of Levies -- National Guarantee Fund ...................35
Chapter 5 Regulation impact statement: Discretionary Mutual
Funds ...........................................................................39
Chapter 6 Regulation impact statement: Direct Offshore Foreign
Insurers ........................................................................71
1 Glossary
The following abbreviations and acronyms are used in this explanatory
memorandum.
Abbreviation Definition
AFSL Australian Financial Services Licence
APRA Australian Prudential Regulation Authority
APRA Act Australian Prudential Regulation Authority
Act 1998
ASIC Australian Securities and Investments
Commission
ASX Australian Securities Exchange
Authorised insurer Insurer authorised under section 12 of the
Insurance Act 1973 to carry on insurance
business in Australia.
Corporations Act Corporations Act 2001
Corporations Regulations Corporations Regulations 2001
DMFs Discretionary Mutual Funds
DOFIs Direct Offshore Foreign Insurers
FSCODA Financial Sector (Collection of Data) Act
2001
Insurance Act Insurance Act 1973
Insurance Regulations Insurance Regulations 2002
Lloyd's underwriters Lloyd's underwriters as defined in the
Insurance Act 1973 and authorised under
section 93 of that Act
NGF National Guarantee Fund
NGF Bill Corporations (National Guarantee Fund
Levies) Amendment Bill 2007
Potts review 2004 Review of Discretionary Mutual Funds
and Direct Offshore Foreign Insurers
SEGC Securities Exchanges Guarantee Corporation
1
General outline and financial impact
Overview
The Financial Sector Legislation Amendment (Discretionary Mutual Funds
and Direct Offshore Foreign Insurers) Bill 2007 (the Bill) implements the
approach to the regulation of DMFs and DOFIs announced by the Minister
for Revenue and Assistant Treasurer on 3 May 2007.
Under the approach, DOFIs will be prudentially regulated under the
Insurance Act. DMFs will not be prudentially regulated but information
will be collected to determine the nature and scope of their operations.
The Bill addresses an outstanding HIH Royal Commissioner's
recommendation and a regulatory gap identified in the International
Monetary Fund's 2006 Financial Sector Assessment Programme for
Australia.
The Bill also makes a minor amendment to support changes made by the
Corporations (National Guarantee Fund Levies) Amendment Bill 2007
(the NGF Bill). The NGF Bill will impose a cap on levies payable for the
benefit of the NGF.
1. Discretionary Mutual Funds
The Bill introduces a regime for the collection of information on DMFs.
This will be complemented by enhanced disclosure requirements under the
Corporations Regulations.
Information will be collected on both the nature and scope of DMF
business.
APRA will collect information on the nature and scope of DMFs' business
and the role of DMFs in the Australian risk management market. This
collection will occur through an amendment to FSCODA.
ASIC will collect information from AFSL holders and authorised
representatives, who deal in DMF products, on the business they are
placing with DMFs. This information will be collected under an existing
provision in the Corporations Act through an amendment to the
Corporations Regulations.
3
Information collected by the regulators will be used to review within three
years the need to prudentially regulate DMFs.
Disclosure requirements will be strengthened through the Corporations
Regulations to require DMFs to disclose the key characteristics of their
product to both prospective retail and wholesale clients.
Date of effect: These amendments will commence on the day after Royal
Assent.
Proposal announced: The proposals were announced by the Minister for
Revenue and Assistant Treasurer on 3 May 2007.
Financial impact: It is expected that there will be minor implementation
and on-going costs for APRA and ASIC, from the measures in the Bill.
Compliance cost impact: The disclosure and information collection
requirements will impose a compliance cost on DMFs. However, these
costs are likely to be minimal as DMFs consulted have indicated that they
already disclose the unique features of their product to most of their
clients and they already collect much of the information that will be
sought from them.
Summary of regulation impact statement: Discretionary
Mutual Funds
Impact: The measures contained in this Bill will impact on DMFs, AFSL
holders and authorised representatives (financial intermediaries) who deal
in DMF products, and the regulators, APRA and ASIC.
Main points:
· DMFs will have slightly higher administration costs as they
will be required to provide information to APRA. They will
also be required to disclose to prospective retail and
wholesale clients written information on the key
characteristics of the DMF product. These costs may be
passed on to DMF members. However, DMFs have
indicated that they already provide the information on the
key characteristics of the product to the majority of their
clients and they collect information on the business they are
writing.
General outline and financial impact
· It will allow some DMFs clients to make their risk
management decisions based on disclosed information of the
costs and benefits of using a DMF product.
2. Direct Offshore Foreign Insurers
The Bill strengthens and clarifies the definition `insurance business' in the
Insurance Act to capture DOFIs that carry on insurance business in
Australia either directly or through the actions of another (for example, an
insurance agent or broker).
As a result, DOFIs that fit within this expanded definition will be required
to be authorised under the Insurance Act. As authorised general insurers,
they will be required to comply with Australia's general insurance
standards including having a presence and assets in Australia.
Foreign reinsurers are not captured by the expanded definition and, hence,
not subject to regulation under the Insurance Act unless they choose to
establish a branch or subsidiary in Australia. Lloyd's underwriters are not
captured under this expanded definition, but they will remain subject to
regulation under Part VII of the Insurance Act.
The Bill includes a regulation making power that will enable limited
exemptions to be made under the Insurance Regulations to allow risks that
cannot be placed through an authorised insurer to be placed with insurers
not authorised in Australia.
The general insurance prudential standards made under the Insurance Act
will be modified by APRA to take account of the risk profiles of the
different categories of authorised insurers. The modifications of the
general insurance prudential standards will be risk-focused.
To ensure the regulation of DOFIs is effective, APRA has been given
additional enforcement powers in this Bill. APRA will now be able to
investigate persons it believes are carrying on insurance business without
being authorised and those persons aiding, abetting, counselling or
procuring this activity. These investigation powers include a power to
access the premises of persons and a power to gather information from
persons under investigation.
APRA will have the power to seek an injunction from the Federal Court of
Australia restricting unauthorised activity.
To complement these changes, the Bill includes a prohibition in the
Corporations Act on AFSL holders and authorised representatives from
5
dealing in a general insurance product, unless it is from an authorised
insurer, a Lloyd's underwriter or subject to an exemption.
Under the Corporations Act, information will be collected from AFSL
holders and authorised representatives on business placed with insurers
that are not authorised in Australia.
Date of effect: These amendments will commence on 1 July 2008.
Proposal announced: The proposals were announced by the Minister for
Revenue and Assistant Treasurer on 3 May 2007.
Financial impact: It is expected that APRA and ASIC will incur minor
implementation costs.
Compliance cost impact: DOFIs will be required to become authorised
under the Insurance Act and comply with Australia's prudential regime if
they wish to carry on insurance business in Australia.
Australian financial service licence holders and authorised representatives
who deal in general insurance products will be required to place their
client's insurance risks with an Australian-authorised insurer unless the
risk is one for which an exemption is granted. Where an exemption is in
place, AFSL holders and authorised representatives will be able to place
that business with an overseas insurer.
Existing authorised insurers will be subject to the modified prudential
standards. However, the proposed prudential standards will not impose a
greater cost on existing authorised insurers and for some, depending on
their risk profile, may result in a lowering of some prudential
requirements.
Summary of regulation impact statement: Direct Offshore
Foreign Insurers
Impact: The measures contained in this Bill will affect DOFIs, Australian
insureds that use DOFIs, AFSL holders and authorised representatives
who deal in general insurance products (financial intermediaries),
Australian authorised insurers, and APRA and ASIC.
Main points:
· Under the proposed approach, unless an exemption applies,
DOFIs will be required to become authorised under the
Insurance Act or cease operating in the Australian market.
General outline and financial impact
However, APRA, in applying Australia's prudential
standards, will take into consideration the risk profile of the
DOFI.
· At a minimum all DOFIs that operate in Australia will be
required to have a presence in Australia and keep assets in
Australia that meet the necessary capital requirements. This
will enable Australian policyholders to access the Australian
assets in the event that the DOFI fails.
· This may have an impact on Australian insureds, as some
DOFIs may choose to cease writing Australian business
rather than becoming authorised.
· At the same time, there will be an exemption for those
entities that cannot obtain appropriate insurance through an
authorised insurer, allowing those Australian insureds to
continue to access overseas insurers.
· Existing authorised insurers will also be subject to the
modified prudential standards. However, the proposed
prudential standards will not impose a greater cost on
existing authorised insurers and for some, depending on
their risk profile, may result in lower prudential regulatory
requirements.
· Australian financial service licence holders and authorised
representatives who deal in general insurance products will
be unable to place risks with unauthorised DOFIs unless an
exemption applies.
3. Capping of levies -- National Guarantee Fund
The NGF Bill imposes a cap on levies payable for the benefit of the NGF.
The cap on levies per financial year cannot exceed 1.5 times the `minimum
amount' that is in force as at 1 July in the financial year the levy is to be
imposed.
The NGF provides investor protection for certain transactions on the
Australian Securities Exchange (ASX). Levies are able to be collected
when the fund falls below the amount required to be retained in the fund.
This amount is the `minimum amount' of the fund set through the
Corporations Act.
7
The change provides greater certainty about the global liability of the
ASX and market participants to refill the NGF and removes the potential
for unlimited liability to refill the NGF.
This will also address the prudential concerns around unlimited liability
and allow for direct participation by banks on the ASX market. Banks are
prevented, for prudential reasons, from participating directly on the ASX
market and currently must incorporate a subsidiary to participate on the
ASX market.
The Bill also makes a minor change to the Corporations Act to support the
NGF Bill. The NGF Bill is therefore included with the Bill as a package
of reforms, noting that the capping of levies is unrelated to the reforms
dealing with DOFIs and DMFs.
Date of effect: The amendments will commence on the 28th day after the
day the Act receives Royal Assent.
Financial impact: There is no financial impact.
Compliance cost impact: The changes reduce complexity and compliance
costs for banks seeking to participate on the ASX market. Banks are
prevented, for prudential reasons, from participating directly on the ASX
market and currently must incorporate a subsidiary to participate on the
ASX market.
1 Chapter 1
Discretionary Mutual Funds
Outline of chapter
8.1 Items in Schedule 1 of this Bill amend FSCODA to allow APRA to
collect information from DMFs on the role they play in the Australian risk
management market and to determine to what extent these entities pose a
prudential risk.
8.2 The information will be used to review within three years whether it
is appropriate to prudentially regulate these entities.
8.3 To complement the information collection under the amendments in
Schedule 1 of this Bill, information will also be collected under proposed
amendments to the Corporations Regulations from AFSL holders and
authorised representatives that use DMF products.
8.4 Consumer protection measures currently applying to retail clients of
DMFs will be extended via the Corporations Regulations to DMFs'
wholesale clients.
Context of amendments
8.5 DMFs offer `discretionary cover', that is, an insurance-like product
that often involves a contractual obligation on the DMF to consider a
claim when a risk eventuates, but provides the DMF with a discretion
whether it will pay the claim.
8.6 DMFs provide a means of risk management that is an alternative to
insurance. DMFs sometimes meet risks for which insurance may not be
available or affordable.
8.7 DMFs may be established as a corporation limited by guarantee or
trust fund. They are subject to the broader regulatory requirements
contained in legislation and under the common law. For example,
corporations limited by guarantee are regulated by the Corporations Act as
a corporation and trusts are subject to trust laws. Some may also be
associations incorporated and regulated under relevant state or territory
legislation.
9
8.8 Following a recommendation by the HIH Royal Commissioner that
the Insurance Act be amended to extend prudential regulation to all
discretionary insurance-like products, to the extent possible within
constitutional limits, the Government commissioned the Potts review in
2004.
8.9 The Potts review found that there was no comprehensive industry or
government information available on DMFs. However, from the limited
information that was available, it estimated that DMFs only account for
approximately 0.5 per cent of the general insurance market.
8.10 Since the Potts review there have been structural and cyclical
changes to the Australian general insurance market that have altered the
impetus for regulation. These include: tort law reforms, a softening of the
insurance market and a fuller understanding of the impact of the Financial
Services Reform Act 2001.
8.11 As a result of these changes, and after further consultation with
industry, the Government announced on 3 May 2007 that DMFs will not
be subject to prudential regulation at this time. Instead, they will be
monitored and information on their role in the Australian general risk
market will be collected from DMFs and AFSL holders and authorised
representatives who deal in DMF products.
8.12 Once sufficient information has been collected and within three
years of the commencement of Schedule 1 of this Bill, a review will be
conducted to determine whether it is appropriate to prudentially regulate
DMFs.
8.13 In the meantime, the consumer protection provisions that apply to
DMFs in dealing with their wholesale and retail clients will be
strengthened through an amendment to the Corporations Regulations. This
will provide consumers with sufficient information about the risks and
benefits of DMFs to make informed decisions about the products they are
purchasing.
Summary of new law; comparison of key features of new law
and current law
New law Current law
APRA will monitor and collect No information is collected from
information from DMFs on their DMFs, or AFSL holders or
role in the Australian risk market authorised representatives that
and whether they pose a deal in DMF products.
prudential risk
Discretionary Mutual Funds
New law Current law
There will be no change to the FSCODA currently collects
existing regulation of these infromation from corporations
entities under FSCODA. registered under the Act,
APRA-regulated entities and
medical defence organisations.
Detailed explanation of new law
.1 Schedule 1 amends the object of FSCODA to enable APRA to collect
information on DMFs. [Schedule 1, items 1 and 2]
.2 The object provides that APRA can collect information both to assist
in the prudential regulation of bodies in the financial sector and to assist in
the prudential monitoring of bodies in the financial sector. [Schedule 1,
items 1 and 2]
.3 To achieve this expanded object, FSCODA authorises APRA to
determine the reporting standards for registered corporations under the
Act and other bodies that it regulates or monitors. This will now include
DMFs. [Schedule 1, items 3 and 4]
.4 This will allow APRA to develop reporting standards to collect
quantitative and qualitative information from DMFs. The information that
can be collected under the Act from DMFs can include any information
that APRA believes may assist it in determining whether it would be
appropriate to prudentially regulate DMFs.
.5 APRA will also have the power to collect information on the role
DMFs play in Australia's risk management market and the class of
business individual DMFs write (for example, public liability).
.6 To meet the definition of DMF in the Act, DMFs must satisfy all of
the following conditions:
· It must be a fund for making payments to contributors on the
happening of an event, where there is uncertainty as to
whether, or when, the event will happen.
· Two or more persons must contribute to the fund out of
which payments may be made in respect of liabilities,
losses, damages or expenses of the contributors.
11
· The fund must be governed by rules under which any such
payment for the benefit of a contributor is subject to a
discretion of a person or body.
· A contributor cannot have a right in law or equity to a
payment from the fund. However, a contributor will have a
right in law to have their claim considered by the
fund.[Schedule 1, items 3 and 4]
.7 In this definition, it is intended that the phrase `on happening of a
specified event, where there is uncertainty as to whether, or when, the
event will happen' will be interpreted to have the same meaning as this
phrase has for the purposes of insurance contracts. [Schedule 1, item 4,
subsection 5(5)]
.8 The entities to be captured by the definition provide risk cover on a
discretionary basis to a group of individuals, companies or government
entities.[Schedule 1, items 3 and 4]
.9 DMFs structure in a range of ways but common features include:
· Each member of the group makes contributions to a
common fund, which is used to finance the payment of
liabilities of members with respect to specified risks (at least
up to a certain loss level).
· In return for the payment of contributions, members have a
legal right to submit a claim for indemnity and have that
claim considered by the relevant entity. However, in each
case, the relevant entity may approve the claim at its
discretion and use the pool of funds from the membership
subscription to pay part or all of the claim.
· The entity may take out insurance to cover:
- any part of a contributor's claims in excess of the fund
retained by the entity; or
- to cover the situation where multiple claims exhaust
the fund; or
- to cover a contributor's claim, with the fund having a
discretion to cover any excess part of the claim not
met by insurance.
Discretionary Mutual Funds
· In some funds, the entity may also place a call on its
members to contribute additional funds to the pool, if the
pool is exhausted.
.10 These entities may operate by means of a public company limited by
guarantee or may be established under a discretionary trust. However, the
definition of a DMF is not to be taken as being limited to these legal
structures. [Schedule 1, items 3 and 4]
.11 It is not intended to capture funds that are not financial services
business. For example, it is not intended that a family agreeing to pool
money to pay for the replacement of a roof after a cyclone be captured
under the definition of DMF.
.12 The definition of DMFs is not intended to capture state insurance
arrangements; for example, a DMF set up under statute by the state law
society to provide its members with professional indemnity cover. State
insurance is to be given the meaning it has under the Constitution.
[Schedule 1, item 5]
.13 APRA may determine the reporting standards for and collect
reporting documents from the DMFs caught under the definition under
section 13 of FSCODA.
.14 These reporting standards are legislative instruments for the purposes
of the Legislative Instruments Act 2003.
.15 DMFs that do not meet the reporting requirements outlined in section
13 of the Act may be subject to the penalties contained in sections 13, 14
and Part 3, Division 3 of the Act. For example, under section 13 a
financial entity that fails to comply with a requirement to provide APRA
with a reporting document within a particular timeframe may be liable to a
maximum fine of 50 penalty units. Similarly, under section 14 of the Act,
a principal executive officer of a financial sector entity that fails to notify
the governing body of the entity in writing that is has not complied with
the reporting requirement outlined above may be liable to a maximum fine
of 50 penalty units.
.16 Part 3 Division 3 outlines administrative penalties that may apply in
lieu of prosecution for certain offences, including a failure to comply with
the reporting requirements outlined above.
.17 Schedule 1 provides for regulations to be made deeming entities that
do not satisfy the DMF definition to be DMFs for the purposes of the Act
and to exempt entities that meet the DMF definition from being DMFs for
the purposes of the Act. [Schedule 1, item 4]
13
.18 This regulation-making power is necessary because at this time there
is only a limited understanding of the various ways in which DMFs may
be structured. In order to determine whether prudential regulation of
DMFs is warranted a comprehensive collection of information on the
range of existing DMFs is necessary.
Application and transitional provisions
.19 The amendments will commence on Royal Assent. [Clause 2]
.20 However, the first collection of information will not occur until
APRA has developed, in consultation with DMFs, its reporting standards.
Subject to consultation with DMFs, it is anticipated that DMFs will
commence providing information from a period beginning 1 January
2008.
.21 A 1 January 2008 commencement date for the reporting standards
will allow DMFs to put the systems in place to provide the information to
APRA.
Consequential amendments
.22 There will be an amendment to the definition section, section 31 of
the Act, to include DMF as a defined term in the Act. [Schedule 1, item 6]
2 Chapter 2
Direct Offshore Foreign Insurers --
Insurance Act
Outline of chapter
.1 Items 3 to 52 in Schedule 2 of this Bill amend the Insurance Act to
expand and clarify the existing definition of `insurance business' to
capture DOFIs that carry on insurance business in Australia, either
directly or through the actions of another.
.2 Foreign reinsurers are not captured by the expanded definition and
hence not subject to regulation under the Insurance Act unless they choose
to establish a branch or subsidiary in Australia. Lloyd's underwriters are
not captured under this expanded definition, but they will remain subject
to regulation under Part VII of the Insurance Act.
.3 The Bill includes a mechanism to exempt risks that cannot be
adequately insured by authorised insurers.
.4 To enable APRA to effectively enforce the expanded definition of
`insurance business', this Bill includes powers to allow APRA to
investigate the activities of persons it believes are carrying on insurance
business in Australia without being authorised or persons aiding, abetting,
counselling or procuring these activities.
Context of amendments
.5 The HIH Royal Commissioner in his comments on DOFIs, noted a
possible gap in APRA's regulatory reach. He found that it might be
possible for an insurer, for example an insurer who has been refused
authorisation by the APRA, to move offshore and issue insurance policies
through an agent or broker in Australia in an attempt to avoid the
operation of the Insurance Act. In response, the Government
commissioned the Potts review in 2004.
.6 The Potts review found that the current regulatory treatment of
foreign insurers operating in Australia lacked consistency. Foreign
insurers were treated in different ways depending on whether they were
foreign insurers authorised by APRA operating in Australia, Lloyd's
15
underwriters authorised under section 93 of the Insurance Act, or DOFIs.
This meant that the degree of protection afforded to Australian
policyholders with similar insurance risks would vary depending on the
country of origin of the insurer they selected.
.7 DOFIs are foreign insurers that carry on insurance business in
Australia, either directly or via an insurance agent or broker, without
establishing a subsidiary or branch. These DOFIs are not subject to the
provisions of the Insurance Act because they are not considered to be
`carrying on insurance business in Australia' under sections 9 and 10 of
the Insurance Act. However, these DOFIs may be subject to prudential
and consumer regulation in their home jurisdiction.
.8 To the extent that they are carrying on a financial services business in
Australia as defined under the Corporations Act, DOFIs are subject to
consumer protection regulations in Australia. They are required to hold an
AFSL and comply with the conditions of that licence, set out in Chapter 7
of the Corporations Act.
.9 Under the Corporations Regulations, DOFIs must inform purchasers
of particular insurance products (generally those aimed at retail clients)
through their Product Disclosure Statement (PDS) that they are a foreign
insurer and not prudentially regulated in Australia.
.10 Currently only insurers carrying on insurance business in Australia
are subject to FSCODA. However, DOFIs that do not operate through
such a structure are not subject to any information collection requirements
on their activities in Australia.
Summary of new law
.11 Schedule 2 expands the definition of `insurance business' in the
Insurance Act to capture anyone that carries on insurance business in
Australia, either directly or through the actions of another (for example,
an insurance agent or broker).
.12 As a result, all DOFIs that fit within this expanded definition will
have to become authorised under the Insurance Act if they wish to carry
on insurance business in Australia. As authorised general insurers, they
will be required to comply with Australia's general insurance prudential
standards.
.13 Foreign reinsurers, who do not choose to establish a branch or
subsidiary in Australia, will not be caught by this expanded definition.
Direct Offshore Foreign Insurers -- Insurance Act
They will be able to continue to operate in Australia without being
authorised.
.14 Lloyd's underwriters will not be caught under the expanded
definition but will continue to be regulated under Part VII of the Insurance
Act.
.15 In addition, the Bill provides a framework that enables the creation of
limited exemptions in the regulations to allow risks that cannot be placed
through an authorised insurer in Australia to be placed with insurers not
authorised in Australia.
.16 Under existing powers in the Insurance Act, APRA will modify its
existing general insurance prudential standards to take into account the
different risk categories of authorised insurers. APRA will develop a
risk-focused prudential framework to apply to all authorised general
insurers.
.17 To ensure that the regime can be effectively enforced, the Bill
includes additional enforcement powers to enable APRA to investigate
persons it believes are carrying on insurance business without being
authorised and those persons aiding, abetting, counselling or procuring
this activity. These investigative powers include a power to access the
premises of persons and a power to gather information from persons it is
investigating.
.18 APRA will be able to seek an injunction from the Federal Court
restricting this unauthorised activity.
.19 To complement these changes, the Bill includes a Corporations Act
prohibition on AFSL holders and authorised representatives from dealing
in a general insurance product unless it is from an authorised insurer,
Lloyd's underwriter or an exemption applies (as mentioned above).
.20 Information will be collected from AFSL holders and authorised
representatives under proposed amendments to the Corporations
Regulations, on business they place with insurers that are not authorised
in Australia, where an exemption applies.
.21 Once DOFIs become authorised, they will be required, as authorised
insurers, to provide information to APRA under FSCODA.
17
Comparison of key features of new law and current law
New law Current law
Carrying on insurance business in Australia
The current definition is `Insurance business' is currently
expanded so that a person is taken defined in section 3 of the
to carry on insurance business in Insurance Act as `undertaking
Australia if the person carries on liability, by way of insurance
business outside Australia that (including reinsurance), in respect
would be considered to be of any loss or damage, including
carrying on insurance business if liability to pay damages or
it was carried on in Australia and compensation, contingent upon
they act in Australia through the happening of a specified
another person. event, and includes any business
incidental to insurance business as
so defined.'
`Incidental business' referred to
in the current definition of
`insurance business' is deemed to Business incidental to insurance is
include: Inducing others to enter not currently defined under the
into contracts; or publishing or Act.
distributing; or procuring the
publication or distribution of a
statement relating to the person's
willingness to enter into a
contract of insurance as an
insurer.
Exemption
Expands the current exclusions to The definition of insurance
include: contracts of insurance business currently excludes
specified in regulations made insurance regulated under other
under this Act, or in a Australian law (for example,
determination made under health insurance and life
regulations, will not be `insurance insurance) or specific
business' for the purposes of the circumstances (for example,
Insurance Act. insuring a religious organisation).
Direct Offshore Foreign Insurers -- Insurance Act
New law Current law
Enforcement powers
A new Part VA will give APRA APRA existing powers are limited
the power to investigate, enter the to investigating, gathering
premises of, or gather information information from and accessing
from, entities it believes are or premises of those entities that are
may be carrying on insurance authorised under the Insurance
business in Australia without Act or who are seeking to become
being authorised or who are or authorised under the Insurance
may be aiding, abetting, Act.
counselling or procuring that APRA does not currently have the
activity. power under the Insurance Act to
seek an injunction against an
APRA will be able to apply to the entity carrying on insurance
Federal Court for an injunction to business without being authorised.
stop the activities referred to
above.
Detailed explanation of new law
Amending the definition of `insurance business'
.1 This measure expands and clarifies the definition of `insurance
business' so as to ensure that any person carrying on insurance business in
Australia, either directly or through brokers or others acting on their
behalf (such as agents), are required to be authorised under the Insurance
Act and as a result are subject to prudential regulation in this jurisdiction,
including the requirement to have a presence in Australia and to hold
sufficient assets in Australia to meet their liabilities here. This is designed
to protect policyholders from DOFIs that are not subject to robust
prudential regulation, and therefore pose a greater risk of not paying out a
claim.
.2 The entities to be covered by this expanded and clarified definition of
`insurance business' are domestic insurers, foreign insurers and foreign
reinsurers currently operating under the Insurance Act via a branch or
subsidiary, domestic reinsurers and any other insurer that engages in
conduct caught by this measure, including insurers currently referred to as
DOFIs and offshore `captives.'
.3 The activities to be targeted are those leading up to and
including undertaking liability under an insurance contract. These include:
undertaking liability; business incidental to undertaking liability; and the
actions of intermediaries.
19
.4 This measure will expand and clarify the definition of `insurance
business' in two ways:
· by expressly including a set of activities that are to be
considered incidental to `insurance business'; and [Schedule 2,
item 6, subsections 3(5) and 3(7)]
· by deeming `insurance business' carried on outside
Australia to be insurance business in Australia if another
person in Australia acts on behalf of that first-mentioned
person, or acts as a broker of insurance provided by the
first-mentioned person, in relation to that business
[Schedule 2, item 6, subsection 3(6)]
.5 Incidental activities include: inducing others to enter into contracts of
insurance with the person as an insurer, publishing or distributing a
statement relating to the person's willingness to enter into a contract of
insurance as an insurer and procuring the publication or distribution of
such a statement. This is not intended to be an exhaustive list. [Schedule 2,
item 6, subsection (5)]
.6 Incidental activities that take place after the insurer has undertaken the
liability (that is, entered into the contract of insurance with the insured)
will not be captured under the expanded and clarified definition of
`insurance business' in the Insurance Act. It is not intended that the
expanded and clarified definition of `insurance business' capture the
activities of merely handling claims, operating accounts, making
payments or holding records on behalf of an overseas foreign insurer.
[Schedule 2, item 6]
.7 For example, if an incorporated DOFI uses an Australian based agent
or broker, or an agent or broker operating from outside the jurisdiction, to
advertise or encourage Australians to enter into an insurance contract with
the DOFI, the DOFI is taken for the purposes of the Insurance Act to be
carrying on insurance business in Australia and is in breach of subsection
10(1) of the Insurance Act unless it is: authorised; a determination is in
force under subsection 7(1) of the Insurance Act; or an exemption under
section 3A applies.
.8 The agent or broker in this example is not himself or herself carrying
on insurance business in Australia as he or she is not the entity
`undertaking liability.' That is, he or she is not the entity providing the
insurance to the Australia consumer or business under the insurance
contract.
.9 An example of activity that is expressly included as being incidental
to insurance business is an overseas insurer that buys an Australian
Direct Offshore Foreign Insurers -- Insurance Act
distribution list and targets these people via telephone, e-mail or the
Internet suggesting that they take out their insurance with the insurer. In
this example, the insurer would be deemed to be carrying on insurance
business in Australia, even if the activity of sending the letter took place
in the overseas country, because of the effect of the letters or emails in
Australia.
.10 Where an Australian initiates contact with a DOFI (for example,
through the Internet or by calling or visiting the DOFI directly), the DOFI
will not be carrying on insurance business in Australia and will not be
required to become APRA authorised. This is because, even under the
strengthened and clarified definition of `insurance business' the DOFI has
not been deemed to carry on insurance business in Australia.
.11 To allow the greatest flexibility to foreign insurers who wish to
continue carrying on insurance business in Australia once the definition of
`insurance business' is expanded and clarified, section 118 of the
Insurance Act will be expanded to allow a foreign insurer to appoint either
an individual resident or body corporate incorporated in Australia as their
agent in Australia. Currently, foreign insurers, who must appoint an agent
to comply with Australia's prudential regime, can only appoint an
`individual resident' as their agent. [Schedule 2, items 39 to 52]
.12 To ensure consistent treatment of the Australian agent of a foreign
insurer, the disqualification powers outlined in Part V, Division 5 of the
Insurance Act will be extended to include the directors and senior
managers of corporate agents. Corporate agents themselves, will also be
subject to the disqualification powers that apply to individual resident
agents through the expanded description of who is an agent for the
purposes of section 118. [Schedule 2, items 9A to 9V]
Foreign reinsurers
.13 Currently, foreign reinsurers who choose to establish a branch or
subsidiary in Australia are required to seek an authorisation to `carry on
insurance business in Australia' under the Insurance Act. It is not
proposed that this Bill alter this current state.
.14 This Bill exempts offshore foreign reinsurers from the requirement to
be authorised if they carry on insurance business in Australia. This will
allow Australian insurers to continue to access the global reinsurance
market.
.15 Foreign reinsurers writing direct business in Australia would be
classified as direct insurers and are required to be authorised under the
Insurance Act.
21
.16 This exemption applies to reinsurance business carried on by a body
corporate incorporated in a foreign country and to an unincorporated body
established under the law of a foreign country that may sue or be sued, or
may hold property in the name of its secretary or of an office holder of the
body duly appointed for that purpose. [Schedule 2, items 4 and 5]
.17 Incorporated bodies are included because, for example, there are
some trust or trust-like structures (which may be unincorporated bodies)
issuing fully collateralised reinsurance contracts. Collateralisation comes
from the sale of securities. These arrangements are developing as capital
markets become more interested in being involved in reinsurance and the
securitisation of insurance liabilities. The exemption covers these
contracts. [Schedule 2, items 4 and 5]
.18 If a foreign reinsurer elects to set up a branch or subsidiary in
Australia so as to, for example, improve its access to the Australian
market, then it will be required to be authorised under the Insurance Act.
It will be required to become authorised and comply with Australia's
prudential regime.
.19 Similarly, and consistent with the international treatment of
reinsurers, an Australian reinsurer would be required to be authorised by
APRA if it sought to commence operations in Australia.
.20 Foreign reinsurers who currently have a branch or subsidiary in
Australia will continue to be regulated by APRA under the Insurance Act
and have to comply with Australia's prudential regime. However, these
foreign reinsurers can choose to cease writing business through the
Australian branch or subsidiary, place that business in run-off in
accordance with prudential requirements, and become offshore foreign
reinsurers. If they do this, they would no longer be required to be
authorised in Australia for the new reinsurance business they write.
.21 Although offshore foreign reinsurers are exempt, they may be
indirectly subject to the Australian regulatory regime through the
prudential standards applied to direct insurers in respect of reinsurance
obtained from those offshore foreign reinsurers.
Lloyd's underwriters
.22 Lloyd's underwriters are currently regulated under Part VII of the
Insurance Act.
.23 This Bill does not change how Lloyd's underwriters are regulated
under the Insurance Act.
Direct Offshore Foreign Insurers -- Insurance Act
Exemptions made through regulations
.24 This Bill inserts a provision into the Insurance Act that provides for a
mechanism to exempt particular kinds of contracts of insurance or
particular` contracts of insurance from being insurance business under the
Act. [Schedule 2, item 8, section 3A]
.25 As a result, a DOFI providing a contract of insurance or kind of
contract of insurance specified in the regulations or in a determination
made under the regulations will not be taken to be carrying on insurance
business in Australia because the contract or contracts do not meet the
definition of `insurance business' under the Insurance Act.
.26 A DOFI that supplies contracts of insurance subject to an exemption
will not be required to be authorised under the Insurance Act.
.27 The new section provides for contracts of insurance to be specified in
regulations or in a determination made under regulations. The regulations
or determination may specify the contract or contracts of insurance in
terms of product (that is, the line of insurance business) or the person who
is seeking the insurance. [Schedule 2, item 8, subsection 3A(2)]
.28 Determinations made under the regulations that specify a particular
contract of insurance are reviewable in accordance with Part VI of the
Insurance Act. Part VI will be expanded to allow a person who has
applied for a determination to have that determination reviewed by
decision-maker. [Schedule 2, item 8, subsection 3A(3) and items 13 to 33]
.29 Other determinations made under regulations are legislative
instruments for the purposes of the Legislative Instruments Act 2003.
[Schedule 2, item 8, subsection 3A(4)]
.30 The details of the exemption to be included in the regulations will be
finalised after consultation with stakeholders.
.31 The purpose of the exemption is to ensure that, while all insurers who
meet the expanded and clarified definition of carrying on insurance
business in Australia will be required to be authorised, this approach does
not unduly restrict Australian insureds access to the global insurance
market, where it can be clearly demonstrated that they require continued
access to this market.
.32 Both the HIH Royal Commissioner's report and the Potts review
noted that there were many international commercial insurance
arrangements that had worked satisfactorily to date. These reports
indicated that Australian insureds in these arrangements did not need
additional protection from unauthorised DOFIs as they were generally
23
sophisticated entities, like large corporationsk, who adequately assess
their own risks and the risks of the insurance products they purchased.
.33 In addition, the Australian insurance market, although robust and
competitive, is widely acknowledged to be small compared to the major
insurance markets in Europe and the United States of America. Some
large Australian corporations may not be able to access sufficient
insurance to cover their risks in the Australian market.
.34 Alternatively, there may be Australian businesses and individuals
who cannot obtain appropriate insurance from authorised insurers or
Lloyd's underwriters in Australia. This may include circumstances where
an insurance product is not available at all or where the product is not
available with the specific terms and conditions that the Australian insured
requires.
.35 In these cases, without access to offshore foreign insurers, the
Australian insured may be faced with bearing the insurance risk
themselves.
.36 To prevent this, regulations will be enacted to exempt specific lines
of insurance or insurance for a particular client where these lines of
insurance are not available from authorised insurers or Lloyd's
underwriters.
.37 However in developing these exemptions, the balance will need to be
maintained between ensuring capacity and access to insurance and
allowing the DOFI regime outlined in this Bill to be effective in protecting
Australian insureds from less robust offshore foreign insurers.
Enforcement powers
.38 The enforcement powers in this Bill expand the existing enforcement
powers under the Insurance Act to enable APRA to investigate and take
action against suspected breaches of sections 9 and 10 of the Insurance
Act, that is the carrying on of insurance business in Australia without
being authorised. [Schedule 2, items 9, 12 and 36]
.39 Most of the enforcement powers in this Bill will be contained within
a new Part, Part VA in the Insurance Act, and allow APRA to investigate
any person or body corporate it believes on reasonable grounds has
engaged in, is engaging in or will be engaging in conduct in contravention
of sections 9 or 10 of the Insurance Act. [Schedule 2, item 12]
.40 APRA will also have the power, under Part VA, to investigate any
person or body corporate that it believes on reasonable grounds has
engaged in, is engaging in or will be engaging in conduct that constitutes
Direct Offshore Foreign Insurers -- Insurance Act
aiding, abetting, counselling or procuring a contravention of sections 9 or
10 of the Insurance Act. [Schedule 2, item 12, section 62A]
.41 Once APRA has launched an investigation, an authorised person
(defined under new section 2A) or an inspector appointed by APRA will
have the power under this new Part to access the premises of the entity
with either the consent of the occupier of the premises or to apply to a
magistrate for a search warrant to search for, inspect, take extracts from
and make copies of any books (as defined under the Insurance Act)
containing relevant information to the investigation. [Schedule 2, item 12,
section 62B]
.42 APRA or an inspector appointed by APRA may, by written notice,
require a person they believe on reasonable grounds has or may have
information in their control or custody relevant to the investigation, to
produce all or any of the books containing information relevant to the
investigation or provide APRA or the inspector with all reasonable
assistance in connection with the investigation. [Schedule 2, item 12,
subsection 62C]
.43 The information gathering power listed above also includes a power
enabling APRA to require a person to appear before APRA or an
inspector and answer questions put to them. [Schedule 2, item 12, section 62C]
.44 A person is not excused from complying with the notice issued under
section 62C on the grounds that complying with that notice might tend to
incriminate them. However, if the person is an individual and before
answering the questions the person informs APRA or the inspector that
the evidence might incriminate them, the questions or answers cannot be
used in evidence against them in any criminal proceeding other than an
offence of failing to comply with the notice or an offence under section
137.1 or 137.2 of the Criminal Code. [Schedule 2, item 12, section 62D]
.45 Where a person is being examined they may be represented by a legal
practitioner and notes may be made of the examination. The person being
questioned will have a right, free of charge, to a copy of those notes if
they request a copy in writing from APRA. [Schedule 2, item 12, sections 62E
and 62F]
.46 APRA has the power to delegate the powers contained in Part VA in
accordance with section 15 of the APRA Act. An inspector may delegate
their powers to an APRA member, an APRA staff member or a person
included in a class of persons approved by APRA. [Schedule 2, item 12,
section 62G]
.47 APRA is also required under Part VA to complete the investigation
within a reasonable time and to provide written notice to the person who
25
was the subject of the investigation that the investigation is complete and
whether or not APRA proposes to take further action. [Schedule 2, item 12,
section 62H]
.48 What is a reasonable time will be interpreted within the circumstances
of the investigation. For example, in a straightforward case, it will be
possible to quickly assess whether or not there has been a contravention of
sections 9 or 10 of the Insurance Act. APRA will obtain clear evidence
from the agent of the DOFI that the DOFI has written insurance policies
for Australian insureds, in contravention of the section 10 of the Insurance
Act.
.49 In a more complex case where, for example, the DOFI does not have
an agent in Australia and does not operate through brokers, but rather
directly advertises their products over the Internet, it may be more
difficult to obtain sufficient evidence for APRA to satisfy itself as to
whether or not there has been a contravention of section 10 of the
Insurance Act. In those situations, APRA may need to seek information
from a wider range of sources and this will take more time.
.50 This may be necessary to enable APRA to form a reasonable belief
that an entity was, is, or will be carrying on insurance business without
being authorised or aiding, abetting, counselling or procuring that
conduct.
.51 An inspector, if appointed to conduct an investigation under Part VA,
must on completion of the investigation provide APRA with a written
report as to the result of that investigation. [Schedule 2, item 12, section 62I]
.52 In some situations, APRA may need to gather preliminary
information from persons who may or may not be engaged in the unlawful
conduct but who may have information on whether another entity was, is,
or will be engaging in that conduct before it can commence an
investigation under the new Part VA. [Schedule 2, item 36]
.53 For example, an accountant dealing with the financial records of an
entity suspected of carrying on insurance business in Australia without
being authorised is likely to have information on the activities of that
entity which may assist APRA in forming a reasonable belief that the
entity is engaged in unlawful conduct.
.54 An insurance agent representing a DOFI who is carrying on insurance
business in Australia without being authorised and where no exemption
applies may have information on the policies, if any, that the DOFI has
entered into. That information is likely to assist APRA to form the
reasonable belief necessary to launch an investigation.
Direct Offshore Foreign Insurers -- Insurance Act
.55 To enable effective enforcement action to be taken in these situations,
the Bill contains a power that allows APRA, where it believes on
reasonable grounds that a person has or may have in their custody or
control information or documents relating to conduct that constitutes or
may constitutes a contravention of section 9 or 10 of the Insurance Act or
aiding, abetting, procuring or counselling a contravention of those
sections, to send a written notice to that person requiring that person to
give the information in writing signed by the person or produce the
documents within a time and in a manner specified in the notice.
[Schedule 2, item 36, section 115AA]
.56 This measure is not to be taken to include a right to examine the
person, rather it is limited to the person being required to provide either
written answers to written questions set out in the notice (similar to an
interrogatory) or documents that are relevant to whether or not there has
been a contravention of sections 9 or 10 of the Act or aiding, abetting,
procuring or counselling a contravention of those sections. [Schedule 2,
item 36, section 115AA]
.57 A person will commit an offence where they fail to comply with a
notice under section 115AA. The offence has a maximum penalty of 50
penalty units. [Schedule 2, item 36, subsection 115AB(1)]
.58 It will not be an excuse to fail to comply with the notice issued under
section 115AA because complying with that notice might tend to
incriminate the person. [Schedule 2, item 36, subsection 115AB(2)]
.59 However, the power contains a protection against self-incrimination.
Where a person is an individual and informs APRA prior to giving the
information in the form of written answers to written questions that the
information might tend to incriminate them, that information will not be
admissible in evidence against the person in a criminal proceeding, other
than a prosecution under this section or under sections 137.1 or 137.2 of
the Criminal Code. [Schedule 2, item 36, subsection 115AB(3)]
.60 This is designed to protect the agent in the example above who may
be required to provide information to APRA under this measure even
though that information could be used against the agent to prosecute them
for aiding and abetting the DOFI in contravention of the law.
.61 APRA is provided with the power to seek restraining, consent and
interim injunctions from the Federal Court of Australia with respect to
unauthorised insurers and persons involved in the activities of
unauthorised insurers. [Schedule 2, item 9, section 11A]
.62 This power will enable APRA to act quickly in situations where
unauthorised insurers are carrying on insurance business in Australia. The
27
provision permits APRA or any person whose interests are affected by the
conduct of the entity to seek an injunction. [Schedule 2, item 9, section 11A]
Minor technical amendment
.63 A grammatical correction is made to the power to investigate a
general insurer, authorised non-operating holding company (NOHC) or
subsidiary. [Schedule 2, item 11]
.64 The power to enable APRA to access premises under section 115A is
amended to require a warrant to be sought from a magistrate rather than a
justice of the peace. [Schedule 2, items 37 and 38]
Application and transitional provisions
.65 These measures will commence on 1 July 2008. [Clause 2]
.66 The Bill includes a transitional measure to allow regulations to be
made to specify particular entities or classes of entities to which the
expanded and clarified definition of `insurance business' in item 6 does
not apply for a period to be specified in the regulations, not exceeding two
years. [Schedule 2, subitems 7(1) and 7(3)]
.67 To address the Corporations Act prohibition outlined in Chapter 3,
entities that are set out in the transitional regulations to this Bill will be
deemed for the purposes of the Corporations Act prohibition to be
authorised insurers under the Insurance Act. [Schedule 2, subitem 7(2)]
.68 As a result, AFSL holders and authorised representatives (who would
otherwise be in breach of the Corporations Act prohibition if they deal in
a general insurance product that is not from an authorised insurer or a
Lloyd's underwriter or to which an exemption applies), will not be in
breach of the prohibition when they deal in general insurance products
from entities specified in regulations that are not yet required to be
authorised under the Insurance Act. [Schedule 2, subitem 7(2)]
.69 This transition measure will provide the flexibility to exempt
particular entities or classes of entities that may require more time to seek
authorisation under the Act.
Direct Offshore Foreign Insurers -- Insurance Act
Consequential amendments
.70 To enable APRA to use a technical expert to access information when
APRA access the premises under section 62B, section 2A will be inserted
into the Insurance Act to define `authorised person' for the purposes of
Part VA to be APRA or a person authorised by APRA, in writing, for the
purposes of Part VA. [Schedule 2, item 3]
.71 To complement the expansion of section 118, corporate agent will be
defined in the interpretation section of the Insurance Act as `a body
corporate that is appointed under section 118 as an agent in Australia for
the purpose of that section.'[Schedule 2, item 3A]
.72 The definition of senior manager in the interpretation section of the
Insurance Act will also be expanded to include senior managers of a
corporate agent. [Schedule 2, item 5A]
.73 Part V will be renamed `Investigations of general insurers etc' so as
to clearly distinguish between investigations into the activity of authorised
general insurers (Part V) and investigations into the activities of entities
suspected of carrying on insurance business in Australia without being
authorised under the Insurance Act or aiding, abetting, counselling or
procuring that unauthorised activity. [Schedule 2, item 10]
.74 Section 103 of the Insurance Act is also amended to ensure that Part
VA does not apply to the exclusion of certain other laws of the
Commonwealth, State or Territory that make provision for an
investigation into the affairs of the body corporate or other person.
[Schedule 2, items 34 and 35]
29
2 Chapter 3
Direct Offshore Foreign Insurers --
Corporations Act
Outline of chapter
.1 Items 1 and 2 in Schedule 2 of this Bill amend the Corporations Act to
prohibit AFSL holders and authorised representatives from dealing in a
general insurance product that is not from an authorised insurer, Lloyd's
underwriter or where an exemption applies.
.2 The Corporations Act amendments are intended to complement the
changes made to the Insurance Act outlined in Chapter 2 of this
explanatory memorandum.
Context of amendments
.3 AFSL holders and authorised representatives, especially insurance
agents and brokers, provide a conduit for Australian consumers and
businesses to access the insurance market, including DOFIs.
.4 These financial intermediaries provide a valuable financial service to
Australian consumers and business in assist them to obtain competitive
insurance to meet their needs or place a hard to place insurance risk.
.5 The HIH Royal Commissioner noted a possible gap in APRA's
regulatory reach of offshore insurers and that it may be possible for an
offshore insurer, for example, an insurer who has been refused
authorisation by the APRA to move offshore and issue insurance policies
through an agent or broker in Australia in an attempt to avoid the
operation of the Insurance Act.
.6 The changes outlined in Chapter 2 of this explanatory memorandum
enhance the integrity of general insurance prudential regulation in
Australia. The Corporations Act prohibition introduced by this Bill
complements and reinforces the integrity of this general insurance
regulation by limiting the extent to which AFSL holders and authorised
representatives can deal in a product that is not regulated under the
Insurance Act. This maximises the likelihood that Australian individuals
31
and businesses will benefit from the protection provided by Australia's
general insurance regulatory regime.
Summary of new law
.7 Schedule 2 of this Bill amends the Corporations Act to prohibit
Australian financial service licence holders or authorised representatives
from dealing in a general insurance product unless the product is from a
general insurer authorised under the Insurance Act, a Lloyd's underwriter
or relates to an exemption under the proposed section 3A, specified in
Chapter 2 of this explanatory memorandum.
Comparison of key features of new law and current law
New law Current law
AFSL holders and authorised Currently, the only limit on the
representatives will be prohibited financial service products a AFSL
from dealing in a general holders may deal in is outlined in
insurance product that is not from the licence.
an authorised insurer, Lloyd's AFSL holders and their authorised
underwriter or where the new representatives are also required
exemption provisions apply. to comply with the general
obligations under section 912A of
the Act.
Detailed explanation of new law
.1 This measure prohibits AFSL holders and authorised representatives
from dealing in a general insurance product unless the general insurance
product is issued by an authorised insurer under the Insurance Act, a
Lloyd's underwriter or an exemption in the Insurance Act applies (that is,
a section 7 or a section 3A exemption). [Schedule 2, item 1]
.2 For example, an insurance broker, who is an AFSL holder or
authorised representative, will not be able to arrange, acquire, vary or
dispose of a general insurance product for their client unless that product
is from an authorised insurer, Lloyd's underwriter or they are satisfied that
the general insurance product required by the client is exempt.
.3 Where an exemption applies, the AFSL holder or authorised
representative can seek to obtain insurance for the client from any insurer,
but must continue to comply with existing conduct and disclosure
Direct Offshore Foreign Insurers -- Corporations Act
obligations in the Corporations Act (for example the requirement that any
retail personal advice is appropriate).
.4 It is intended that the prohibition will rely on definitions already in the
Corporations and Insurance Acts. The definition of Australian financial
service licensee, contained in section 761A of the Corporations Act, and
the definitions of APRA-authorised general insurer and Lloyd's
underwriter, defined in section 12 and Part 7 of the Insurance Act,
respectively, apply to the prohibition.
.5 This provision would apply to all AFSL holders and authorised
representatives on its face, but in practice would impact most on AFSL
holders and authorised representatives that regularly deal in general
insurance products.
.6 No amendments to the exemptions in 911A(2) are proposed. This
requirement is not to apply to a person exempted under section 911A(2)
from the requirement to hold an AFSL for a financial service they
provide.
.7 Dealing is defined in section 766C of the Corporations Act. The
prohibition does not apply to providing financial product advice, as
defined in section 766B of the Corporations Act.
.8 The prohibition only applies to general insurance products as defined
in section 764A(1)(d) of the Corporations Act.
.9 Consistent with other offences in Chapter 7 of the Corporations Act,
the new prohibition, section 985D(1) is an offence of strict liability. The
maximum penalty is a fine of 50 penalty units. [Schedule 2, Item 1]
.10 The penalty units that will attach to this offence are of a similar order
to others in Chapter 7 of the Corporations Act, for example, the strict
liability offence where a person (fails to give a disclosure document or
statement to a retail client, that is 50 penalty units (this means 50 x 110 for
a natural person and 50 x 110 x 5 for a body corporate that is $27,500).
.11 A strict liability offence is considered necessary to maximise the
deterrent value of the new offence, thus maximising its role in
complementing and reinforcing the regulation of general insurance.
.12 It would be difficult under the circumstances for the prosecution to
prove that a person breached the prohibition and as such the inability to
prosecute these offences would undermine the effectiveness of the
prudential regulation framework put in place to address the problem of
DOFIs carrying on insurance business in Australia without being
authorised.
33
.13 The effective prudential regulation of DOFIs and the financial
intermediaries that deal in general insurance products issued by DOFIs is
necessary to ensure the integrity of the prudential regulation regime so
that there is stability in the financial system, and the interests of
policyholders and beneficiaries are protected.
.14 Consistent with the Government policy and other strict liability
offences in Chapter 7 of the Corporations Act, there is a cap on monetary
penalties of 50 penalty units.
.15 This offence will enforced by ASIC under its existing powers in the
Corporations Act. The three main consequences that will flow from a
breach of this measure are:
· People affected will be able to apply to the court to seek an
injunction under section 1324 of the Corporations Act to
stop the prohibited conduct.
· The general penalty provisions in section 1311 and 1312
will apply to this provision. In addition, the defence of
mistake of fact in section 9.2 of the Criminal code applies to
this prohibition. This measure will not attract a term of
imprisonment.
· A breach of this prohibition will be a breach of obligations
of financial services licensees (that is, specifically section
912A(1)(c)), and may be grounds for ASIC to vary, suspend
or cancel a person's AFSL or apply for a banning order
against that person.
Application and transitional provisions
.16 This offence will commence at the same time as the Insurance Act
measures, on 1 July 2008.
Consequential amendments
.17 A new penalty provision will be inserted into Schedule 3 of the
Corporations Act for a breach of this prohibition. It will carry a maximum
penalty of 50 penalty units. [Schedule 2, item 2]
2 Chapter 4
Capping of Levies -- National Guarantee
Fund
Outline of chapter
.1 Item 1 in Schedule 1 of the NGF Bill and Item 1 in Schedule 3 of the
Bill impose a cap on levies payable, per financial year, for the benefit of
the NGF.
.2 Schedule 1 of the NGF Bill amends the Corporations (National
Guarantee Fund Levies) Act 2001 to impose the cap on levies. Schedule 3
of the Bill amends the Corporations Act to inform readers of the cap on
levies.
Context of amendments
.3 The Corporations Act requires operators of financial markets to have
adequate compensation arrangements, generally for the protection of retail
clients. For the ASX, the NGF provides this compensation arrangement.
Claims may be made under the terms of the Corporations Regulations
2001.
.4 The NGF is administered by the Securities Exchanges Guarantee
Corporation (SEGC), a subsidiary of the ASX. The NGF was formed
when the state stock exchanges merged 20 years ago and was funded by
pooling part of the assets of those exchanges. As at 30 June 2006, the
NGF holds $96.8 million with the major source of funding being
investment income. The NGF is not government funded.
.5 Section 889J of the Corporations Act allows the SEGC to levy
participants and the market operator, the ASX, in the event that the
amount of the NGF falls below the minimum amount set under
section 889I of the Corporations Act (the minimum amount is currently
set at $76 million). These levying abilities are uncapped.
.6 Section 889K of the Corporations Act allows the ASX, as market
operator, to pass on a contributory levy to participants where the operator
has been levied under section 889J but only to the extent of the levy
imposed on the ASX.
35
.7 The NGF Act deals with the imposition and amount of levies imposed
by sections 889J and 889K of the Corporations Act. It is a separate
enactment for constitutional reasons.
.8 While levies have not been imposed since the inception of the NGF,
currently the ASX and market participants have uncapped liabilities to
refill the NGF. This is a particular issue for the banks as the Australian
Prudential Regulation Authority (APRA) requires banks to incorporate a
subsidiary for the purposes of market participation on the ASX. This
involves ensuring that the subsidiary has sufficient capital to meet
participant requirements.
.9 The consequence of potential uncapped liabilities is that banks cannot
participate in their own names. The banks consider that direct
participation has resulting commercial benefits including greater capital
efficiency, a reduced compliance burden and more efficient business
outcomes. The cap on levies allows banks the choice to participate
directly on the ASX market.
Summary of new law
.10 Schedule 1 of the NGF Bill amends section 5 of the Corporations
(National Guarantee Fund Levies) Act 2001 to cap the amount of levies
that could become payable in each financial year. The Schedule 3
amendments to the Corporations Act, in the Bill, direct readers to the cap
on levies.
Capping of Levies -- National Guarantee Fund
Comparison of key features of new law and current law
New law Current law
There will be a cap on the SEGC has the discretion to decide
amount of levies that could who is levied (the ASX and/or
become payable in a financial market participants) and how the
year. amount of a levy is calculated.
However if the imposed levy There is no cap on the amount of
was insufficient to meet claims levies payable for the benefit of
or refill the NGF, the SEGC the NGF.
could impose further levies in
succeeding years provided the
levy does not exceed 1.5 times
the `minimum amount' in force
on 1 July in the financial year the
levy is imposed.
Except for the cap on levies, the
existing SEGC discretion to
decide who and how levies are
calculated will not change.
Detailed explanation of new law
.1 The measure imposes a cap on levies payable in a financial year. The
cap on levies per financial year will be such that the total levy that could
be collected in a financial year cannot exceed 1.5 times the `minimum
amount', as set under section 889I of the Corporations Act, that is in force
as at 1 July in the financial year that the levy is to be imposed. This is a
limit on the ability of SEGC to determine a levy under section 5 of the
Corporations (National Guarantee Fund Levies) Act 2001.
.2 It is possible that more than one levy determination can be made in a
financial year but the total of the levies in a financial year cannot exceed
1.5 times the `minimum amount' that is in force at the beginning of the
financial year.
.3 The cap applies to levies imposed under subsection 889J(1) of the
Corporations Act. It does not apply to levies imposed under subsection
889K(1) of the Corporations Act as any levy the market operator imposes
on participants is already limited to the amount imposed on the market
operator under subsection 889J(1). This means any levy by the market
operator, the ASX, on market participants cannot exceed the primary levy
imposed on the ASX under section 889J.
37
.4 The cap on levies is set at 1.5 times the `minimum amount' of the
NGF. The minimum amount is set under section 889I of the Corporations
Act at $80 million or another amount set by SEGC. However any amount
set by SEGC must be approved by the Minister and notified in the
Gazette.
.5 SEGC determined the current minimum amount ($76 million) in
March 2005. The link to the minimum amount is appropriate as this
amount reflects the needs of the NGF in light of prevailing circumstances.
.6 As is currently the case, levies may only be imposed if the NGF falls
below the minimum amount. The existing SEGC discretion to decide who
is levied (that is, the market operator, the ASX and/or market participants)
and how the amount of a levy is calculated has not changed, except for the
cap on levies.
.7 However if the imposed levy was insufficient to meet claims or refill
the NGF, the SEGC could impose further levies in succeeding years
provided the levy did not exceed the maximum levy of 1.5 times the
minimum amount in each financial year.
.8 The changes do not reduce investors' ability to claim from the NGF.
.9 As at 30 June 2006, the NGF has assets of $96.8 million. On current
figures, claims of up to $210.8 million could be met from the NGF in one
year, if a levy was imposed subject to the maximum cap. However if there
was a serious failure, levies were imposed up to the maximum per year,
and claims could still not be met from the NGF, then investors might need
to wait longer for their claims to be paid in full (that is, until the levies
imposed in succeeding years replenished the NGF). This is also the case
under the existing law, which allows for instalment payments if the claims
would lead to the NGF being exhausted or substantially depleted.
2 Chapter 5
Regulation impact statement:
Discretionary Mutual Funds
Background
.1 The issue of the regulation of DMFs and DOFIs arose within the
context of the collapse of HIH Insurance Limited. The HIH Royal
Commissioner recommended that the Australian Government amend the
Insurance Act to extend prudential regulation to all discretionary
insurance-like products -- to the extent possible within constitutional
limits.
.2 In response to the HIH Royal Commission report, the Government
commissioned the Potts review to examine the extent and nature of DMFs
and DOFIs operating in Australia and their contribution to overall risk
capacity.
.3 As their name suggests, DMFs offer `discretionary cover', that is, an
insurance-like product that does not involve a contractual obligation to
meet the costs if a risk eventuates. At its discretion, the provider will
consider meeting the costs. DMFs provide a means of risk management
that is an alternative to insurance. DMFs sometimes meet risks for which
commercial insurance may not be available or affordable. DMFs benefit
from cost advantages, compared to authorised insurers, due to their
exemption from state taxes and, to a lesser degree, prudential regulation. It
is not clear whether their recent growth (although still a small proportion
of the market) is due to their lower costs or demand for tailored products
that commercial insurers do not provide.
.4 The Potts review recommended that the APRA regulate all DMFs
with contingent risk and all DOFIs that did not come from a regime with
prudential regulation that APRA considered comparable to the Australian
prudential regime. In May 2004, the Government accepted the Potts
review recommendations.
.5 Since then there have been a number of structural and cyclical
changes to the Australian general insurance market, including a fuller
understanding of the impact of the Financial Services Reform Act 2001,
tort law reforms and a softening of the insurance market, altering the
impetus for regulation.
39
.6 In December 2005, Treasury released a discussion paper seeking
public input on proposals to implement the Potts review
recommendations. Treasury received submissions from Australian general
insurers, DOFIs, DMFs, captives, reinsurers, brokers and agents, State
governments and regulators.
.7 As a result of these submissions and the release of the Banks
Taskforce report Rethinking Regulation: Report of the Taskforce on
Reducing Regulatory Burdens on Business on 7 April 2006, the
Government is seeking to depart from the Potts review recommendations.
This regulation impact statement (RIS) seeks policy approval for that
departure.
.8 The Potts review noted there was no comprehensive industry or
Government information available on DMFs. However, based on the
limited information that was available, the Potts review estimated that
DMFs were unlikely to represent more than half of one percent of the
insurance market. The Potts review found that during the 1980s, DMFs
were generally restricted to legal mutuals established under state
legislation for solicitors, medical indemnity organisations, some local
government pools operating as unincorporated mutuals and a university
mutual. In the 1990s the number of DMFs steadily increased in response
to market opportunities. This trend was accelerated by the hardening of
the insurance market in 2001, especially in long-tail public liability lines.
Problem identification
.9 DMFs provide discretionary cover. This means that there is no legal
obligation by the provider to meet the costs of an `insured' event. The
DMF merely accepts that it will, at its discretion, consider meeting such
costs. An insurer, on the other hand, assumes an obligation to pay the
insured on the happening of an event covered by the terms and conditions
of the insurance contract.
.10 Membership subscriptions form a pool of funds to meet claims by
DMF members. Some DMFs buy insurance top up and drop down cover
to supplement the pool funds, to meet large or numerous claims. Some
DMFs may make a call on their members if there is insufficient funds to
cover the liabilities incurred by the members.
.11 DMFs do not pay state insurance taxes on the DMF fund because
they are not offering insurance products. However, they do pay state
insurance taxes on any insurance cover they take out to cover the risk
products they offer. Insurance taxes can add up to more than a third of the
cost of the insurance product.
Regulation impact statement: Discretionary Mutual Funds
.12 Both the HIH Royal Commissioner's report and anecdotal evidence
suggest that purchasers of DMFs' products may not be aware that they are
not purchasing insurance. Anecdotal evidence suggests that in some cases
the purchaser of a DMF product, the DMF member, is driven more by
consideration of price. The DMF member may not fully understand the
discretion that the DMF may exercise, nor the mutual rights and
obligations that flow from pooling funds to cover a member's particular
risk (including the possibility of a call on members if there are insufficient
funds in the pool). They may expect that the DMF will cover any claims
and may not understand that the DMF has discretion to accept or refuse to
pay a claim.
.13 In addition, as DMF products are not insurance, DMFs are not subject
to the prudential requirements in the Insurance Act. As a result, some
argue that DMFs have a greater risk of collapsing or of being forced to
exercise their discretion against paying claims because they have
insufficient funds. This would leave the DMF member to meet the cost of
any claim, potentially creating hardship in funding the claim and leaving a
third party beneficiary without compensation (albeit only where the
member has insufficient funds and the risk insured has a third party
beneficiary).
.14 Because DMFs are not subject to the prudential standards in the
Insurance Act (particularly the capital requirements) and state insurance
taxes (to the extent of the DMF fund), there is a concern that they may
have a competitive advantage over insurers. Insurers have argued that in
some lines this competitive advantage has led to the withdrawal of
domestic insurers and that in other lines it is very difficult for insurers to
compete with a DMF. However, DMFs have argued that they cover risks
that Australian insurers choose not to insure, or not to insure at an
affordable price.
.15 To address these problems, Government action is required to ensure
that Australians have information regarding the characteristics of the
product they are contemplating purchasing, so that they are making an
informed risk management choice. Those characteristics include the
discretion the DMF may exercise and the mutual rights and obligations of
belonging to a DMF, in some cases this may include the ability of the
DMF to place a call on its members.
.16 In addition, Government action is required to ascertain whether or not
DMFs pose a greater prudential risk because they are not subject to
prudential standards.
41
Objectives
.17 The objective of Government action is to ensure that Australians have
a range of risk management tools available to them and information about
the characteristics of the options they are considering, so that they are in a
position to make an informed decision on how to best manage their own
risks.
.18 At the same time, the Government is seeking to maintain not only
contestability, competitiveness and innovation in the insurance sector and
community confidence in the Australian general insurance market, but
also Australia's reputation as a sound, well-regulated insurance market.
.19 Currently, DMFs are generally subject to the financial services
provisions within the Corporations Act and are regulated by the
Australian Securities and Investment Commission (ASIC). As they carry
on a financial services business (that is, they deal in a financial product,
they manage financial risk), they are required to hold an Australian
Financial Services Licence (AFSL) and comply with the disclosure
requirements for retail clients. For example, they are required to disclose
key characteristics of their product in the Product Disclosure Statement
(PDS) they are required to provide to retail clients.
.20 Neither the Corporations Act, nor the Corporations Regulations,
specifically identify what the key characteristics of a DMF product are
and, therefore, what DMFs must disclose to a potential client. As a result,
it is possible that DMFs may not inform potential retail clients about the
DMF's discretion to pay claims and the mutual rights and obligations that
flow from being a DMF member, including, in some cases, the DMF's
ability to place a call on its members.
.21 The requirement to disclose the key characteristics of a DMF product
to clients is limited to retail clients. A business that does not manufacture
products and that employs more than 20 people is not a retail client. This
means that, under the Corporations Act, the DMF does not need to
disclose the characteristics of its product to potential wholesale members.
Small businesses which may be just above the retail test (for example,
they employ 22 people instead of 20) may not understand the
characteristics of the DMF product. Anecdotal evidence suggests that a
large number of many DMFs' wholesale clients may fit this example. In
practice many DMFs, particularly those with retail and wholesale clients,
will provide both classes of client with the same information. However,
this is unlikely to occur where the DMF has no retail clients.
Regulation impact statement: Discretionary Mutual Funds
.22 In addition, most DMFs are considered managed investment schemes
(MIS) and as such are required to be registered as one under Chapter 5C
of the Corporations Act with ASIC.
.23 The conduct in relation to DMF products is also subject to the
consumer protection provisions of the Australian Securities and
Investments Commission Act 2001 (for example, DMFs are prohibited
from engaging in misleading or deceptive conduct, misleading
representation or unconscionable conduct in dealing with their clients).
.24 DMFs are also subject to the broader regulatory environment. That is,
DMFs are generally established as either a corporation limited by
guarantee or trust fund. In both cases, they are subject to the broader
regulatory requirements contained in legislation and under the common
law. For example, corporations limited by guarantee are regulated by the
Corporations Act as a corporation.
Identification of options
.25 There are four options to address the issues raised in relation to the
regulation of DMFs.
Option 1: Full prudential regulation
.26 Under this option, DMFs would be required to become Australian
authorised general insurers under the Insurance Act in order to continue
operating. As an Australian authorised general insurer, they would be
subject to the consumer protection provisions that apply to general
insurers under the Corporations Act and Insurance Contracts Act 1984
and APRA would collect information from them under FSCODA.
.27 DMFs would be required to apply to APRA to become authorised
Australian general insurers. They would be required to provide
information on their ownership, board and management, a three-year
business plan, the structure of their business, their financial projections
and a risk management and reinsurance management strategy. They would
have an ongoing obligation to comply with Australian prudential
standards, that is, they would be required to hold capital equal to the
minimum capital requirement and have assets in Australia equal to their
liabilities. The DMF would also need to satisfy APRA that the directors
and senior managers were eligible to hold key positions within their
organisation. They would also need to appoint an auditor, and possibly an
actuary, approved by APRA. They would also need to satisfy APRA that
their proposed risk management and control systems were adequate and
appropriate for monitoring and limiting the risk exposures in relation to
43
their operations (including balance sheet and market risks, reinsurance
risks, liability risks and capital management risks). APRA has indicated
that it believes that imposing solvency requirements on a discretionary
vehicle could be difficult so DMFs would have to restructure so as to offer
contractual insurance coverage.
.28 Under the Corporations Act DMFs, as insurers, would be required to
provide PDSs to their retail clients. For general insurers, retail clients are
individuals or small business seeking a motor vehicle, home building,
home content, consumer credit, sickness and accident, travel or personal
or domestic insurance product.
.29 Under the FSCODA, DMFs, as insurers, would be APRA-regulated
entities and as such they would be required to provide information on a
quarterly basis to APRA.
Option 2: Potts review recommendation -- no contingent risk
.30 Under this option, the Government would implement the Potts review
recommendations that required discretionary mutual cover to be offered
only as a contract of insurance under the Insurance Act, except where
APRA considered that the DMF had no contingent risk that would need to
be met by additional undefined member contributions. (Such risks would
fall on a general insurer providing top up or drop down cover.) APRA
would also be required to collect information on business written by
DMFs under the exemption.
.31 Under this option, all DMFs would have to submit information to
APRA on an ongoing basis, at least annually, so that APRA could assess
whether or not the DMF retained any contingent risk. This information is
likely to include information on the structure of the DMF, the amount of
money the DMF retained in its fund, information on the products it
provided to members and copies of the insurance policies it had taken out
to cover any claims in excess of its fund.
.32 APRA would decide whether or not the DMF retained any contingent
risk. If it found that the DMF did retain contingent risk, APRA would
require the DMF to either cease providing the product or to set up as an
insurer and comply with all the requirements detailed above in option 1,
including the consumer protection and information collection
requirements and the potential for a restructure of the DMF and its
product offerings. APRA would have responsibility for ensuring that the
DMF complied with its assessment. If, however, APRA determined that
the DMF did not retain any contingent risk, then it would not prudentially
regulate the DMF. DMFs would still be required to have an AFSL and
comply with the consumer protect provisions in the Corporations Act that
currently apply to them.
Regulation impact statement: Discretionary Mutual Funds
.33 DMFs would also, depending on how they were structured, still be
required to comply with the general Corporations Act provisions that
apply to corporations or trust law obligations that apply to trusts.
.34 In addition, if the DMF was not APRA-regulated it would still be
required to submit information to APRA on an ongoing basis under the
FSCODA APRA would enforce the provisions of the FSCODA. APRA
would be likely to require information on the number of members,
premium income, lines of business, insurers and additional information on
its financial statements.
Option 3: No prudential regulation at this stage but collect information
and strengthen consumer protection and commence a review within
three years after implementation
.35 Under this option, DMFs would not be prudentially regulated at this
stage. However, DMFs would continue to be subject to the consumer
protection provisions of the Corporations Act and the provisions that
apply to DMFs' clients would be strengthened and extended to DMFs'
wholesale clients. DMFs would also become subject to the FSCODA. The
Government would review within three years after implementation these
provisions to determine whether or not to prudentially regulate DMFs.
.36 DMFs would also, depending on how they were structured, still be
required to comply with the general Corporations Act provisions that
apply to corporations or trust law obligations that apply to trusts.
.37 The FSCODA would be amended so that it applies to DMFs. APRA
would collect information on the risks DMFs cover, the volume of
business and any additional information (for example, information on
their structure) that would assist the Government in determining whether
or not DMFs need to be prudentially regulated, including information on
the DMF's financial statements.
.38 Information would also be collected from Australian financial service
licence holders who promote or develop DMFs through an amendment to
the Corporations Regulations.
.39 Consumer protection provisions would be strengthened by inserting a
regulation into the Corporations Regulations to specify information a
DMF must provide to its members before they join the fund. This would
include information on the mutual rights and obligations that flow from
becoming a member of a DMF, whether and to what extent they would be
subject to a call, the discretionary nature of the product they are
purchasing and how the rules governing their membership could be
altered.
45
Option 4: Status quo -- no prudential regulation
.40 Under this option, the current arrangements regarding DMFs would
continue. DMFs would not be prudentially regulated. ASIC would
continue to regulate DMFs under the Corporations Act as an AFSL holder
and they would be required to comply with the Corporations Act
disclosure requirements for retail clients. For example, they are required
to disclose key characteristics in their PDSs to retail clients.
.41 DMFs would also, depending on how they were structured, still be
required to comply with the general Corporations Act provisions that
apply to corporations or trust law obligations that apply to trusts.
Analysis of the impact of the options
.42 The groups most affected by the regulation of DMFs are: DMFs,
DMF members, insurers and the regulators, APRA and ASIC.
.43 In accordance with Government requirements, attached to this RIS is
a Business Cost Calculator Quickscan Report outlining the costs to DMFs
of adopting the various options detailed in this RIS. A full cost report was
not undertaken due to the lack of information available on the number of
DMFs operating in the Australian risk market and their role.
Option 1
Option 1: Full prudential regulation
Benefits Costs
DMFs Moderate -- increased financial Large -- costs of becoming an
stability and implied endorsement by Australian authorised insurer
the regulators
DMF Moderate -- to the extent that the Large -- significant increases in the
members DMF members can obtain insurance contributions of DMF members
not subject to a DMFs discretion or
additional calls
Insurers Small to moderate -- insurers could Small -- should an insurer choose to
increase their market share if they offer cover to former DMF members it
insure former DMF members may incur the increased administrative
costs for a large number of small
claims currently borne by the DMF
Regulators Nil Small to moderate -- the exact costs
will depend on the number of DMFs
that become insurers and their asset
levels. There will be the cost of
authorising DMFs and collecting
Regulation impact statement: Discretionary Mutual Funds
information from them.
Benefits
DMFs
.1 DMFs would benefit from prudential regulation through their
increased financial stability and implied endorsement by APRA. DMFs
would be APRA regulated as general insurers and this implies that the
regulator assesses the entity as solvent and that the claims of
policyholders will be honoured in all normal circumstances.
.2 In addition, to the extent that they were APRA-regulated entities
providing their financial services to wholesale clients only they would be
exempt from the requirement to hold an AFSL. DMFs who meet the
above criteria would have cost savings because they would not have to
obtain an AFSL or meet the ongoing compliance obligations imposed on
AFS licensees, for example the requirement to provide a PDS to their
clients. The number of DMFs that may only have wholesale clients and so
benefit from this exemption is not known.
DMF members
.3 Potential and existing DMF members would benefit from the
prudential regulation of DMFs as they would not need to understand the
unique rights and obligations associated with being a member of a DMF
or the discretionary nature of the DMF product they were purchasing.
Under this option, DMFs would become insurers and offer insurance
policies.
.4 DMF members would be assured that if an event covered by the DMF
occurred, they would be covered for that loss according to the terms of the
insurance contract. The DMF would not have any discretion to reject a
claim meeting the policy's terms and conditions.
.5 Furthermore, DMF members would not be subject to any additional
calls, as there are no calls on the holder of a insurance policy. As a result,
there would be more certainty for the DMF members about the price they
pay for their cover. (However, most DMFs that can call on their members
explicitly outline the percentage of total premiums they can seek in a call
when the DMF member purchases the DMF product.)
.6 The increased certainty that a claim that met the terms and conditions
of the policy would be paid out would flow on to third party beneficiaries.
If a third party beneficiary suffered a loss as a result of the action of a
DMF member that was within the terms of that member's insurance cover,
they would be compensated by the insurer. They would not have to rely
47
on a fund, with a discretion, deciding whether or not to pay their claim or,
if it did not, on the capital of the DMF member. (However, this benefit is
limited by the fact that generally there is no requirement to take out
insurance.)
.7 DMF members and third party beneficiaries would also benefit from
the protections in the Insurance Act, the Insurance Contracts Act and the
Corporations Act that apply to general insurers. For example, under the
Insurance Act, DMF members and third party beneficiaries benefit from
the prudential requirement that insurers must keep sufficient assets in
Australia to cover their liabilities. In the event of a failure of a fully
regulated DMF, the assets maintained in Australia are to be used to pay
claims to Australian creditors before being available to other creditors.
.8 Third party beneficiaries would also have the benefit under the
Insurance Contracts Act that certain insurance policies provide the right to
have their claim paid out even if the insured disappears. Again, this is a
benefit only to the extent that a DMF member takes out insurance to cover
the risk previously covered by the DMF.
Insurers
.9 Insurers would benefit from a requirement for DMFs to become
authorised insurers as some DMFs that cannot or would not comply with
APRA prudential standards would exit the market. DMF members
currently using DMFs to manage their risks would have to either self
insure or seek replacement cover from an insurer. A number of these DMF
members are likely to seek insurance cover to replace the risk cover they
obtained from the DMF. This would increase the market share for
insurers. The exact benefit to insurers would depend on the number of
DMFs that cease operations. This may lead to reduced competition in
particular lines of insurance business.
.10 Brokers, too, would also be likely to benefit. Former DMF members
or people requiring cover for difficult to place risks may approach brokers
for assistance in finding replacement cover from insurers. Again, the exact
scope of the benefit to brokers would depend on which, and how many,
DMFs cease operating. It would depend on the risk products these DMFs
provide and the ease with which a DMF member can access an insurance
product to cover the risk previously covered by the DMF. DMFs argue
that they cover risks that Australian insurers choose not to insure.
Regulators -- APRA/ASIC
.11 There would be no direct benefit to APRA or ASIC under this option.
Regulation impact statement: Discretionary Mutual Funds
Costs
DMFs
.12 Under this option, DMFs would be subject to the same prudential,
reporting and licensing requirements as Australian general insurers. This
would eliminate the significant benefits that DMFs obtained from not
having to comply with these requirements, in particular the minimum
capital requirements, and from not incurring state insurance taxes on
products they sold (although DMFs do incur taxes on the top up and drop
down insurance products they buy).
.13 This option would impose significant costs on DMFs doing business.
In particular, DMFs would be required to comply with the APRA's
minimum capital requirements for insurers (currently $5 million). DMFs
unable to produce a fund of $5 million or to restructure so as to be able to
offer contractual cover would cease operating.
.14 In addition, DMFs would have to apply to APRA to become
Australian authorised general insurers. The APRA application fee for a
licence for general insurers is currently $68,200 (including GST).
.15 There would also be the cost to the DMF of ongoing supervision. The
current levy arrangements provide the best estimate of ongoing levies.
The following excerpt from the Financial Sector Levies Discussion Paper
provides a basis for the estimate.
Table 15: Levy Amounts On General Insurers ($'000)
Asset Base $5m $25m $250m $750m $3b $9b
2006-07 5.1 6.9 69.2 207.5 830.0 1,364.0
.1 For those DMFs that provide professional indemnity and public
liability cover there would also be the additional NCPD levy. The levy is
a function of an institution's premium income in those classes as detailed
in the following excerpt from the Financial Sector Levies Discussion
Paper:
Table 9: Levy Parameters for NCPD Levy
Approximate levy parameters based on recouping 1 year's costs
Professional Indemnity Public and Product Liability
Minimum ($) 5,000 5,000
Maximum ($) 32,000 50,000
Rate (% of 0.086 0.085
premiums)
49
DMF members
.1 As a result of the capital requirements alone, it is likely that a number
of DMFs would be unable to become authorised Australian general
insurers and would instead exit the market. This would reduce the number
of risk management tools available for Australians to choose between. The
impact on DMF members would depend on how difficult it is for them to
obtain replacement cover from the insurance market and how readily they
can afford the additional premiums likely to be charged by the insurer. For
many DMF members the cost is likely to be significant, as they have
found it difficult to obtain insurance from traditional insurers, either
because the risks they seek to insure do not fit neatly within the standard
insurance products offered by insurers or because the cost of coverage is
beyond what they can afford to pay.
.2 DMF members may be unable to get insurance for some risks and
may have to pay more to insure other risks, obtaining a less tailored
product in the process.
.3 For other DMF members the costs may be minimal, although there is
likely to be an increase in the premiums that they are charged, due to taxes
being levied on the entire risk and not just on the top up or drop down
insurance policies that a DMF may take out to cover its risk products.
Some DMF members may have risks for which it is relatively easy to find
replacement cover from an insurer. For example, cover for a large
business seeking property cover for an ordinary building is likely to be
readily available in the Australian insurance market.
.4 DMF members, if they become insureds, are also likely to be more
greatly impacted by the Australian general insurance market cycle. At the
moment, with a softening insurance market, they may be able to obtain
insurance cover. As the cycle moves and the market hardens, they may
find it more expensive or more difficult to obtain or renew cover.
Anecdotal evidence suggests that a number of DMFs were set up after the
collapse of HIH and UMP, at a time when the insurance market had
hardened, precisely because their members could not obtain coverage
from insurers either at all or at a price they were willing to pay.
Insurers
.5 Insurers would also be under some pressure to provide cover at
affordable prices for former DMF members whose DMF no longer covers
their risk. This is particularly the case with community groups that had
great difficulty in obtaining public liability cover when the insurance
market hardened in 2001. Although a moderate cost for insurers, there
could be reputational damage to the industry if former DMF members are
unable to obtain replacement risk cover.
Regulation impact statement: Discretionary Mutual Funds
.6 In addition, DMF members would have less incentive to minimise or
take responsibility for their risks where they transfer that risk to an
insurer. DMFs are funded by members who often have a common
association and thus are likely to exert pressure on other members to
minimise their risk. In contrast, there is little or no `peer pressure' or risk
management skill transfer between the different policyholders of an
insurer (although, the number and amount of claims may affect the
insurance premiums that a DMF member will pay in the future).
Regulators -- APRA/ASIC
.7 For APRA there would be the additional costs of granting more
insurance licences. For APRA and ASIC there would be additional
monitoring and enforcement costs associated with extending prudential
regulation to these entities.
.8 However, APRA is mainly funded through industry levies and licence
fees, therefore any increased costs for APRA are likely to flow through to
DMFs through levies. The exact estimate of these costs would depend on
the number of DMFs that become insurers.
.9 ASIC would have a minor cost saving because it would not have to
issue licences to DMFs that were APRA-regulated and had only wholesale
clients or monitor compliance with licensing requirements for these
DMFs.
Option 2
Option 2: Potts review -- no contingent risk
Benefits Costs
DMFs Large -- most DMFs have no Moderate -- some DMFs will cease
contingent risk and could continue to operating, resulting in members
operate and offer an alternative to needing to find replacement cover
insurance for Australians
DMF Moderate -- to the extent that DMF Moderate -- increases in premiums
members members can still obtain cover not to the extent that the DMF members
subject to a discretion or additional can obtain replacement cover where
calls DMFs exit the market
Insurers Small -- DMFs will need to take out Small -- reputational damage if
insurance to cover their risk products former DMF members cannot access
and some DMFs may cease replacement cover and perhaps some
operating, with members needing additional administration costs
replacement cover
Regulator Nil Moderate -- estimate cost of
s establishing separate regime
51
$500,000--$1 million plus ongoing
enforcement and monitoring
Benefits
DMFs
.1 Anecdotal evidence suggests that a large number of DMFs would
have no contingent risk and would be able to continue to operate in
Australia. This option would provide a substantial benefit to DMF
members and the Australian community, as DMFs would continue to
provide an alternative risk management tool for DMF members. This
option would also allow DMF members, who have been unable to obtain
traditional insurance, to continue to transfer their risk to another entity, in
this case the DMF.
DMF members
.2 DMF members and third party beneficiaries would also have the
significant benefit that there would be no contingent risk to them. If the
DMF had insufficient funds to cover a claim, the DMF's top up or drop
down insurance policies would cover the claim.
.3 In addition, DMF members would have certainty as to the premium
payable to cover their risk. The DMF would not be able to place a call on
its DMF members.
Insurers
.4 A number of DMFs may be unable to restructure or obtain insurance
policies to cover some or all of their risks. As a result, these DMFs would
have to cease operations. This could result in a moderate benefit to
insurers in that they could potentially obtain more business from DMF
members whose DMF ceased operation.
.5 Finally, insurers would also have the substantial benefit that all DMFs
remaining would need to insure the risks they cover for their members, so
as to satisfy the no contingent risk condition.
.6 Brokers, too, would obtain a moderate benefit under this option. A
number of the DMFs, particularly those with difficult to place risks, may
seek assistance in finding insurance to cover the risk above the DMF fund.
Regulation impact statement: Discretionary Mutual Funds
.7 In addition, former DMF members, whose DMF has ceased
operations, may also seek assistance from brokers in placing their risks
and in obtaining the best insurance cover.
Regulators -- APRA/ASIC
.8 There would be no additional benefits to APRA or ASIC from this
option.
Costs
DMFs
.9 This option would impose significant costs on some DMFs. Some
DMFs would not be able to obtain insurance cover for some or all of the
risk products they offer their members. As these DMFs would retain some
contingent risk, these DMFs would have to become insurers, cease
operating or sever the lines of business for which they cannot obtain
insurance cover.
DMF members
.10 This option would result in a significant cost to some DMFs
members, who may not be able to obtain insurance cover for their risks
and will have to self insure. As a result, in the event that there is a claim
for that risk they would have to bear that claim themselves. Depending on
the size of the claim and how they are organised, this would see them
potentially being liable for the claim or their business ceasing operations
because the business has insufficient assets to meet the claim.
.11 In addition, DMF members have the substantial cost of also losing an
alternative risk management tool, potentially making them even more
reliant on insurance and insurers and more susceptible to the insurance
cycle. They would also have to pay in most cases a higher premium for
their risk cover, as insurance taxes will be added to the pure risk insurance
premiums.
.12 The exact impact of applying this sort of regulation is not known as it
is not clear exactly how many DMFs operate in Australia, the precise
covers they offer, how many members they have or what is the scope of
their activities. The decision to cease operating or to cease providing a
particular risk cover would be made by the individual DMF based on its
financial situation, the views of its members and the difficulty it had in
obtaining insurance to cover its risk product. As a result, it is not possible
at this stage to predict with any certainty what a particular DMFs would
do or what would happen to the availability of particular lines of business.
53
.13 Even those DMF members who remain part of an operating DMF are
likely to have somewhat higher contributions. DMFs would have the
additional administrative costs of providing financial statements and
coverage details to APRA (so that APRA can determine they retain no
contingent risk) and pass on the additional costs of obtaining top up and
drop down insurance to cover the risks in the DMF fund. While, it is not
anticipated that these administration costs would be significant, the cost of
the additional insurance could be moderate. The exact costs to each DMF
member would vary depending on how many members there are in the
DMF, its lines of business and the complexity of its financial affairs.
.14 It is not anticipated that the DMF's provision of information to APRA
is likely to add significant costs to most DMF members.
.15 Finally, this option does not strengthen the consumer protection
provisions that would apply to potential DMF members determining
whether or not to cover their risk through a DMF. The current
arrangements outlined above under the policy objective would continue to
apply. As noted, there are a number of DMF members who, although they
are wholesale clients and therefore are not required to be given a PDS,
nonetheless may not have the expertise to obtain information about the
characteristics of the product they are considering purchasing.
Insurers
.16 Insurers would be under some pressure to provide insurance policies
to cover the DMF risk cover, given that the consequence of the DMF
being unable to obtain cover is that it must cease to write that line of
business.
.17 The insurers would also face the same costs as outlined under option
1 where a DMF stops covering a member's risk and the member seeks to
replace their DMF risk cover with insurance cover.
.18 Although these are a minor cost for insurers, there could be
reputational damage to the industry if former DMF members are unable to
obtain replacement risk cover.
Regulators -- APRA/ASIC
.19 This approach is likely to result in significant costs for APRA, in the
form of greater complexity and uncertainty, as APRA would have to
establish, monitor and enforce a separate prudential regulatory regime
applying only to DMFs. In particular, APRA is concerned that it is likely
to be held responsible if a DMF collapses, as it developed the regime.
Regulation impact statement: Discretionary Mutual Funds
This has significant reputational costs for APRA and significant costs for
Australia's reputation as a well regulated insurance market.
.20 APRA has estimated the costs of establishing a separate prudential
regulatory regime at $500,000 to $1 million. This is, as noted earlier, a
high level estimate.
.21 APRA has no basis for estimating the cost of authorisation without
considering in more detail the separate prudential regulation regime. It is
suggested that the current general insurance licence fees provide an
estimate of these costs in the absence of better information.
.22 Similarly, APRA has no basis for estimating the on-going costs of
monitoring, supervising and enforcing this new prudential regime without
determining what monitoring, supervising and enforcing may entail. The
current general insurance levies detailed above provide an estimate of
these costs in the absence of better information.
.23 The Government too is concerned with how it would define
contingent risk and apply the test in a meaningful way to allow at least
some DMFs to continue to operate in the Australian market. It would take
time to determine what constituted no contingent risk.
.24 In addition, it is unlikely that any concept developed will fully cover
the range of activities that the Government is seeking to capture. This
would require the Government to review the initial interpretation of
contingent risk and to modify that definition. These changes would create
uncertainty in the risk management market.
.25 Moreover, given that the Potts review found that DMFs only account
for 0.5 per cent of the Australian general insurance market, the
Government may be seen to be overregulating DMFs, particularly in light
of the Banks Taskforce report and the `regulate first, ask questions later'
culture identified in that report.
55
Option 3
Option 3: No prudential regulation but collect information and strengthen
consumer protection and review in three years time the need for
prudential regulation
Benefits Costs
DMFs Moderate - improved Very small -- very small
understanding of their market and increase in administration costs
role from strengthened consumer
protection and providing
APRA with information, but
this will be passed on to
members
DMF Large -- continue to have access Very small -- very small
members to an alternative risk management increase in costs flowing from
tool, but with strengthened strengthened consumer
disclosure to ensure they have the protection and information
information to make an informed provision
decision about the risk
management product they use
Insurers Nil Nil
Regulator Large - APRA obtains the Small - $200,000 - $400,000 to
s information required for establish and then $1,500 -
Government to determine whether $2,000 ongoing costs per entity
or not to prudentially regulate per receipt of information
DMFs and for the Government it
will assist in determining whether
there are any market gaps in the
Australian insurance market.
Benefits
DMFs
.1 This option would have the significant advantage of being
proportionate, in that it seeks to address the critical concern of consumer
protection in a targeted way, addressed specially at the provisions most
directly created to enhance consumer protection, that is the disclosure
requirements in the Corporations Act, while at the same time not imposing
a form of prudential regulation on a group of entities, where there is
insufficient information currently available to understand the extent and
nature of their presence in the market and the risks they pose.
Regulation impact statement: Discretionary Mutual Funds
DMF members
.2 This approach ensures substantial benefit to DMF members as they
continue to have a range of risk management tools available to them, so
that they can determine how to manage their risks. However, it also allows
DMF members to make these risk management decisions based on
disclosed information of the costs and benefits of using a DMF product
over insurance to cover their risks.
Insurers
.3 There would be no direct benefit for insurers from this option,
although insurers may benefit from consumers being more well informed
about the DMF product and as a result, choosing to have their risk
covered by an insurance policy, rather than a DMF product.
Regulators -- APRA/ASIC
.4 APRA would collect information on DMF activities under this
approach. For APRA, this is a significant benefit, in that it will be able to
use this information to determine clearly the size, structure and lines of
business of DMFs. They would also have the information necessary to
assist Government in determining whether or not there is a need to
prudentially regulate DMFs.
.5 ASIC, too, would benefit. Requiring all DMF members to be given
information on the key characteristics of the DMF product before they
decide to cover their risks using the DMF product may reduce complaints
from DMF members who did not fully understand the product they were
obtaining. Because of the way complaints are made to ASIC and then
recorded by ASIC, it is not clear how many complaints ASIC has received
against DMFs. As a result, it is unclear how significant this benefit would
be to ASIC.
.6 The Government would also be seen to be taking a targeted approach
and obtaining the necessary information to determine where or not there
are prudential reasons to impose significant and costly regulatory
requirements on business. This approach would have a significant benefit
to the Government, in that it is in keeping with the Government's
response to the Banks Taskforce. Moreover, by collecting information on
DMFs, Government may also benefit by getting an early indication of
gaps in the insurance market and signs when the insurance market is
beginning to harden.
57
Costs
DMFs
.7 DMFs would have slightly higher administration costs from this
option as the DMF would have to provide APRA with information on its
activities and its members with information on the key characteristics of
the DMF product they are purchasing. At the moment they only need to
provide this information to their retail clients.
.8 It is not possible to calculate exactly what these additional costs will
be because the costs will vary depending on the number of its members,
whether these members are wholesale clients not currently receiving this
information, the lines of business of the DMF and the complexity of its
financial situation. It is likely that this amount will be very small as it
would be spread across all the DMF members. In fact, anecdotal evidence
suggests that those DMFs with both retail and wholesale clients will face
no additional cost as they already provide wholesale clients with PDSs.
.9 The DMFs that experience the highest administration costs are those
DMFs that have only wholesale clients and presumably are not providing
these clients with a PDS. However anecdotal evidence suggests that there
are very few DMFs that fit into this category and as noted above the cost
of printing and providing a information on the key characteristics of the
product to members is likely to be very small, when spread across all of a
DMFs' members.
.10 Anecdotal evidence also suggests that the cost to DMFs of collecting
the information APRA would require is likely to be comparatively small.
A number of DMFs are already collecting information on the lines of
business they write, the premiums they receive, the claims they pay out
and the insurance premiums they pay for their own risk management
purposes. As a result, it is unlikely to impose a significant cost on DMFs
to pass this information to APRA. There is unlikely to be a significant
increase in the administration cost on members.
.11 DMFs are also required to provide annually to ASIC copies of their
financial statements as a condition of their AFSL. Passing that
information to APRA is unlikely to result in significant costs to the DMF
and hence to its members.
DMF members
.12 As noted above, it is not possible to calculate exactly what the costs
of this option would be, but it is likely to be very small, as it would be
spread across all DMF members.
Regulation impact statement: Discretionary Mutual Funds
Insurers
.13 There would be no direct costs to insurers from this option.
Government regulators -- APRA/ASIC
.14 APRA would require additional resources to undertake the collection
of information on DMFs. They estimate they would require $200,000 to
$400,000 to establish the collection of information. Again, this is a high
level estimate.
.15 The ongoing cost per entity per receipt of information is likely to be
$1,500 to $2,000. APRA developed these figures based on some work
done in relation to superannuation licensing and so is reasonably
confident with their robustness.
.16 For those DMFs that provide professional indemnity and public
liability cover there would also be the NCPD levy as detailed under
Option 1 above.
Option 4
Option 4: No regulation
Benefits Costs
DMFs No additional compliance costs Nil
DMF No additional costs and members Moderate to large -- DMFs
members continue to have access to a wide members may not have information
range of risk management tools on the characteristics of the
product that would then enable
them to make an informed decision
on whether to become a member
Insurers Nil Moderate -- DMFs will continue
to compete with insurers in the risk
management market, but will not
be subject to the prudential
requirements and their products
will not have insurance taxes
applied to proportion of the
members' contribution that
remains in the DMF fund
Benefits Costs
Regulator Nil Moderate -- APRA will not be
s able to provide information to
Government so that Government
can decide whether or not to
prudentially regulate DMFs
59
Benefits
DMFs
.1 This approach has the benefit of not creating any additional
compliance costs or paperwork for the DMF. Moreover, it also ensures
that DMFs would continue to offer alternative risk cover. DMFs would
continue to have the benefit of not being prudentially regulated or subject
to state insurance taxes, to the extent that they do not pay insurance taxes
on the proportion of the members' premiums that is pooled in the DMFs'
fund. They would not have to retain a minimum level of capital and will
not be subject to the risk management, reinsurance, or assets in Australia
prudential standards outlined above, which insurers argue allows DMFs to
provide their products at lower prices and gives them a significant
competitive advantage. In addition, DMFs would not be required to
provide information to APRA and will not face that additional cost.
DMF members
.2 This option has the benefit that DMF members would have DMF
products as an alternative risk management tool. In addition, DMF
members would not be faced with the costs of the DMF providing
information to APRA.
Insurers
.3 There would be no direct benefit for insurers from this option.
Regulators -- APRA/ASIC
.4 This approach would not create additional compliance costs or
paperwork on the regulators.
Costs
DMFs
.5 This option has no cost for DMFs.
DMF members
.6 This approach potentially imposes a cost on DMF members.
Consumer protection provisions that protect potential DMF members are
not strengthened, so it is not certain how well informed these potential
members are and whether they understand the consequences that flow
Regulation impact statement: Discretionary Mutual Funds
from choosing a DMF product over an insurance product. As a result, they
may not have considered the financial implications to themselves if they
are required to meet a claim and the DMF exercises its discretion to refuse
the claim or there is a call on members.
Insurers
.7 Insurers would also have the significant costs of having to compete
with DMFs.
Regulators -- APRA/ASIC
.8 This approach also imposes a potentially significant cost on APRA,
APRA may be concerned about leaving DMFs unregulated, particularly in
the event that one of the DMFs collapses. In particular, APRA has made
the point that Australian policyholders are unlikely to understand the
distinction between a DMF product and an insurance product, in the event
that a DMF does not pay out on a claim where the member expects it to or
where the DMF collapses.
.9 Under the current approach, there is a limited understanding of what
DMFs must disclose to their retail members and there is less information
required to be disclosed to wholesale members before they agree to
purchase the product. As a result, ASIC cannot be certain that the
members have fully understood the characteristics of the product they are
purchasing. This may result in complaints to ASIC against the DMF
which they will have to spend resources investigating.
.10 In addition, without gathering information to understand the DMFs'
role in the market, the Government also has the significant cost, under this
approach, that it can not determine whether it should be concerned about
the possible long term impacts of DMFs on the viability of the general
insurance market in Australia. In particular, it cannot measure their effects
on lines of business where Australian insureds have traditionally had
difficulty obtaining insurance or determine whether any market gaps may
be developing.
Consultation
.11 The Government has undertaken a public inquiry into the regulation
of DMFs and their role in the general insurance industry. It has also
released a Treasury discussion paper and had continual consultation with
key stakeholders over the last three years.
61
.12 In 2003, the Government undertook the Potts review. The Potts
review sought submission from the public on the extent and nature of
DMF operations in Australia and their contributions to overall risk
capacity. The Potts review received 19 submissions from a range of
stakeholders including DMFs, Australian authorised general insurers,
brokers and agents, industry associations, State governments and the
regulators, ASIC and APRA. In response to comments in these
submissions, the Potts review developed its key recommendations, which
were accepted by the Government in May 2004.
.13 In December 2005, Treasury released its public discussion paper
seeking comments from all interested stakeholders on the implementation
of the Potts review recommendations. It received 28 submissions from a
range of stakeholders, including Australian insurers, DMFs, brokers,
industry associations, the regulators, ASIC and APRA and a number of
State governments.
.14 Throughout this period, Treasury has also consulted with interested
stakeholders. It has held a number of meetings with DMFs, insurers,
brokers and both regulators to better understand DMFs and their role and
regulation, and also to determine how to implement the Potts review
recommendations.
.15 From the various submissions and discussion held with key
stakeholders varying views emerged, although most stakeholders have
held largely consistent views throughout the consultations to date.
.16 Insurers believe that DMFs should either be required to become
authorised general insurers or be required to abide by the same regulatory
requirements as insurers; that is, they should be required to comply with
APRA prudential standards, the Insurance Act, Corporations Act and the
Insurance Contracts Act. They want to ensure a level playing field and
protect Australian policyholders and third party beneficiaries.
.17 Brokers believe that DMFs should either be captured under the
`carrying on insurance business in Australia' definition in the Insurance
Act and have to comply with that Act, or that their activity should be
regulated through the financial intermediaries that provide their products
and that they should be subject to increased disclosure requirements but
not prudentially regulated.
.18 DMFs do not believe that they should be regulated by APRA, either
because of the structure of their business (that is they are a corporation
limited by guarantee and as such they should be regulated by ASIC) or
because they do not have any contingent risk because they have insurance
policies to cover their risk cover beyond the money in the fund.
Regulation impact statement: Discretionary Mutual Funds
.19 All stakeholders however do agree that it would be helpful to collect
information on the activities of DMFs and their role in risk management
market in Australia.
.20 The views of these stakeholders have been taken into consideration in
determining the options contained in this RIS. In essence, the options in
this RIS were developed from the range of options suggested by
stakeholders. These options were examined taking into consideration the
key concerns raised by these stakeholders -- competitive neutrality, the
protection of DMF members and third party beneficiaries, the range of
risk management tools available to provide capacity in the Australian risk
management market and the potential broader systemic risk that DMFs
pose to the risk management market, the financial system and other key
markets in Australia.
Conclusion and recommended option
.21 At the moment there is insufficient information to determine the role
and size of DMFs operating in the market nor the type of prudential
regulation that would be appropriate if they were to be licensed. There is
no evidence that the collapse of a DMF would result in any broader
systemic risk to the financial system and other markets in Australia. As a
result, there is insufficient evidence to justify the prudential regulation of
DMFs (either full prudential regulation [option 1] or partial regulation, by
only allowing DMFs with no contingent risk to continue to operate
[option 2]).
.22 However, it is important to collect information on DMFs so that the
Government can determine whether DMFs pose any greater risk to their
members or the broader risk management market, financial system and
other key markets in Australia. In the meantime, it is also prudent to
ensure that those who use a DMF product to cover their risks have
information available to them to allow them to weigh up the costs and
benefits of using a DMF product over self insuring or taking out an
insurance policy. As a result, the preferred approach is option 3. This does
not involve prudential regulation at this stage, but would instead
strengthen consumer protection, collect information on DMFs and review
these arrangements and the need for prudential regulation within three
years after the commencement of these arrangements.
.23 This option rests on the assumption that full prudential regulation of
DMFs is likely to result in DMFs exiting the market, reducing the risk
management tools available to Australians and increasing the costs of risk
transfer for those Australians that cannot get insurance to cover their risks.
63
.24 Finally, it also rests on the assumption that, while DMFs account for
a very small percentage of the Australian risk management market, they
fill market gaps or provide products that may be more suitable for their
clients than conventional insurance contracts.
.25 This option balances the need to ensure that Australians can access a
range of risk management products, while at the same time protecting
DMF members, by ensuring that they have information about the product
they are purchasing. In addition, it also provides for a review of the need
for prudential regulation within three years after the commencement of the
provisions and once the regulators have sufficient information to identify
the role and markets of DMFs.
Implementation and review
.26 It is proposed that option 3 will be implemented through legislative
amendments to the FSCODA, Corporations Act and the Corporations
Regulations.
.27 The FSCODA will be amended so that it applies to DMFs. APRA,
using its powers under the Act, will collect information on the risks DMFs
are covering, the volume of business and any other information (for
example, information on their structure) that the Government will require
in order to determine whether there is a need to prudentially regulate
DMFs. APRA will collate this information and it may be published,
subject to confidentiality considerations. Limiting the information
collected and collecting it only twice a year will reduce the compliance
costs and paper burden on DMFs.
.28 Information will also be collected from Australian financial service
licence holders who promote or develop DMFs through an amendment to
the Corporations Regulations.
.29 Consumer protection provisions will be strengthened by inserting a
regulation into the Corporations Regulations that specifies the information
that a DMF must provide to its members before they join the fund, namely
the mutual rights and obligations that flow from becoming a member of a
DMF, including whether and to what extent they will be subject to a call,
the discretionary nature of the product they are purchasing and how the
rules governing their membership can be altered. This protection will
cover both retail and wholesale clients of a DMF. The exact form that this
regulation will take will be developed by ASIC and Treasury in
consultation with industry. The intention is not to prescribe a set of words
that must be used in the regulation, but rather to specify what the key
characteristics of the DMFs' product are.
Regulation impact statement: Discretionary Mutual Funds
.30 This approach is flexible, in that these items represent the minimum
information that DMFs must disclose. The individual DMF and ASIC can
determine whether there any other items that a particular DMF should
disclose.
.31 Finally, under this option the Government will undertake a review
within three years of implementing these arrangements to determine
whether or not DMFs should be prudentially regulated and, if so, how.
Moreover, information will provide Government with information on the
place DMFs occupy in the Australian risk management market in
particular lines of business, to help it make this decision.
65
Discretionary Mutual Funds Quickscan report
What is the problem you wish to address?
Anecdotal evidence suggests that purchasers of DMFs products may not
be aware that they are not purchasing insurance. In addition, as DMF
products are not insurance, DMFs are not subject to the prudential
requirements in the Insurance Act. As a result, some argue that DMFs
have a greater risk of collapsing or of being forced to exercise their
discretion against paying claims because they have insufficient funds.
However, Government does not have sufficient information to determine
what role DMFs play in the Australian risk market and whether they pose
a greater risk of collapsing because they are not prudentially regulated.
What is the objective of the policy?
The objective of Government action is to ensure that Australians have a
range of risk management tools available to them and information about
the characteristics of the options they are considering, so that they are in a
position to make an informed decision on how to best manage their own
risks.
At the same time, the Government is seeking to maintain not only
contestability, competitiveness and innovation in the insurance sector and
community confidence in the Australian general insurance market, but
also Australia's reputation as a sound, well-regulated insurance market.
To do this, Government must obtain more information on DMFs.
Businesses Affected:
unknown due to the lack of information. Anecdotal evidence suggests
between 50-100.
Supporting evidence for the following options:
Information is not currently available on the number of DMFs operating
in the Australian market. As a result, it is not possible at this time to
accurately calculate the costs to DMFs or the DMF industry of the various
options outlined below. However, classes of costs to DMFs are described
below and in the RIS.
Level of certainty for the following options:
Low
66
Regulation impact statement: Discretionary Mutual Funds
Option 1: Full prudential regulation
Under this option, DMFs would be required to become Australian
authorised general insurers under the Insurance Act in order to continue
operating. As an Australian authorised general insurer, they would be
subject to the consumer protection provisions that apply to general
insurers under the Corporations Act and Insurance Contracts Act 1984
and APRA would collect information from them under FSCODA.
Option 2: Potts Review -- no contingent risk
Under this option, the Government would implement the Potts review
recommendations that required discretionary mutual cover to be offered
only as a contract of insurance under the Insurance Act, except where
APRA considered that the DMF had no contingent risk that would need to
be met by additional undefined member contributions. (Such risks would
fall on a general insurer providing top up and drop down cover.) APRA
would also be required to collect information on business written by
DMFs under the exemption.
Option 3: No Prudential Regulation, but collect information, strengthen
consumer protection and review within 3 years
Under this option, DMFs would not be prudentially regulated at this stage.
However, DMFs would continue to be subject to the consumer protection
provisions of the Corporations Act and the provisions that apply to
DMFs' retail clients would be strengthened and extended to DMFs'
wholesale clients. DMFs would also become subject to FSCODA.
Information would also be collected from AFSL holders who promote or
develop DMFs through an amendment to the Corporations Act. The
Government would review these arrangements within three years of their
implementation to determine whether or not to prudentially regulate
DMFs.
Option 4: Status quo -- no prudential regulation
Under this option, the current arrangements regarding DMFs would
continue. DMFs would not be prudentially regulated. ASIC would
continue to regulate DMFs under the Corporations Act as an AFSL holder
and they would be required to comply with the Corporations Act
disclosure requirements for retail clients. For example, they are required
to disclose key characteristics in their PDS to retail clients.
67
68
Financia
Notification Education Permission Purchase Cost Record Keeping Enforcement Publication/ Procedural Other
l Sector
Documentation Legislati
Option 1: Full Nil DMFs would be DMFs Nil DMFs would be DMFs would be Nil Nil NIl on
prudential required to tell would be required to comply required to Amendm
regulation their clients that required to with the annual comply with the ent
they were become reporting same APRA
required to APRA requirements that enforcement and (Discreti
become authorised APRA requires inspection onary
insurers. DMFs general from general requirements Mututal
would also have insurers insurers. that apply to Funds
to educate their and comply general insurers.
officers about with the and
the prudential Australian Direct
standards and prudential Offshore
reporting standards. Foreign
requirements
they must
Insurers)
comply with as Bill
an APRA 2007
authorised andCorp
general insurer.
orations
(Nationa
l
Guarant
ee Fund
Levies)
Amemd
ment Bill
2007
Corpora
tions
Regulation impact statement: Discretionary Mutual Funds
Notification Education Permission Purchase Cost Record Keeping Enforcement Publication/ Procedural Other
Documentation
Option 2: Potts DMFs DMFs would DMFs would DMFs that DMFs that became DMFs would be DMFs would be Nil Nil
review would have be required to have to sought to authorised insurers required to required to disclose
recommendation to notify tell their satisfy continue to would be required comply with any the fact that they
APRA if clients that APRA that operate as to comply with the APRA retained no
they either they they retained DMFs would annual reporting enforcement and contingent risk in
retained a were required no have to purchase requirements that inspections the fund and had
contingent to become contingent insurance to APRA requires requirements insurance to cover
risk and insurers or that risk or they cover the risks from general that were put in the risks of the fund
then have to they were would have of the fund so insurers. DMFs that place to ensure to their members
become an required to to become that the fund continued to operate that the DMF and prospective
APRA take out APRA retained no as DMFs would be retained no members.
authorised insurance to authorised contingent risk. required to report on contingent risk
insurer. cover the risks general their business and and to ensure
of the fund, so insurers. satisfy APRA that information was
as to ensure no they retained no collected from
contingent risk contingent risk in DMFs.
was retained the fund. These
in the fund. DMFs would also
They would have to provide
also have to information to
educate their APRA on the
officers business they wrote.
regarding the
obligation to
report the
retention of
contingent risk
to APRA.
69
Notification Education Permission Purchase Cost Record Keeping Enforcement Publication/ Procedural Other
Documentation
Option 3: No Nil DMFs would Nil Nil DMFs would have DMFs would be DMFs would be Nil Nil
prudential have to to provide subject to required to provide
regulation now, educate their information to APRA's all their clients with
review, officers about APRA on the enforcement a document
information information business they wrote. powers with outlining the key
collection, about the Financial regard to the characteristic of
strengthen DMF product intermediaries information their product.
consumer they must would have to collection
protection disclose to provide information requirements.
their clients. to ASIC on the Financial
DMF business they intermediaries
were placing. will be subject
to ASIC
enforcement
provisions if
they breach the
reporting
requirements.
Notification Education Permission Purchase Cost Record Keeping Enforcement Publication/ Procedural Other
Documentation
Option 4: Status Nil Nil Nil Nil Nil Nil Nil Nil Nil
quo
1 Chapter 6
Regulation impact statement: Direct
Offshore Foreign Insurers
Background
.1 The issue of the regulation of DMFs and DOFIs arose within
the context of the collapse of HIH Insurance Limited. The HIH
Royal Commissioner recommended that the Australian
Government amend the Insurance Act to extend prudential
regulation to all discretionary insurance-like products -- to the
extent possible within constitutional limits. He also made some
comments regarding DOFIs.
.2 In response to the HIH Royal Commission report, the
Government commissioned the Potts review to examine the extent
and nature of DMFs and DOFIs operating in Australia and their
contribution to overall risk capacity.
.3 DOFIs are foreign insurers that sell insurance to Australians,
either directly or via an insurance agent or broker licensed in
Australia under the Corporations Act, without establishing a
subsidiary or branch. These foreign insurers are not subject to the
provisions of the Insurance Act because they are not considered
to be `carrying on insurance business in Australia' under sections
9 and 10 of the Insurance Act. However, these DOFIs may be
subject to prudential and consumer regulation in their home
jurisdiction.
.4 The Potts review recommended that the APRA regulate all
DMFs with contingent risk and all DOFIs that did not come from
a regime with prudential regulation that APRA considered
comparable to the Australian prudential regime. In May 2004, the
Government accepted the Potts review recommendations.
.5 Since then there have been a number of structural and cyclical
changes to the Australian general insurance market, including a
fuller understanding of the impact of the Financial Services
Reform Act 2001, tort law reforms and a softening of the
insurance market, altering the impetus for regulation.
.6 In December 2005, Treasury released a discussion paper
seeking public input on proposals to implement the Potts review
71
recommendations. Treasury received submissions from Australian
general insurers, DOFIs, DMFs, captives, reinsurers, brokers and
agents, State governments and regulators.
.7 As a result of these submissions and the release of the Banks
Taskforce report Rethinking Regulation: Report of the Taskforce
on Reducing Regulatory Burdens on Business on 7 April 2006,
the Government is seeking to depart from the Potts review
recommendations. This regulation impact statement (RIS) seeks
policy approval for that departure.
.8 The Potts review found that DOFIs accounted for
approximately 2.5 per cent of the general insurance market and
that their number was growing steadily. DOFIs appeared to often
fill market niches, either by way of specialised insurance (such as
insuring classic cars) or policies that authorised insurers were not
prepared to offer (for example, public liability cover for
waterslides and theme parks). However, the Potts review also
found that there was a significant amount of property insurance
for wholesale clients being written by DOFIs. In recent years
there has been an increasing trend for offshore insurers to move
into the longer tail classes of insurance, such as professional
indemnity and public liability insurance. Anecdotal evidence also
indicated that the type of public liability risk being insured
overseas was primarily tourism and recreation related cover, for
activities such as waterslides and theme parks, horse riding
schools and motor racing.
Problem identification
.9 The HIH Royal Commission report noted that Australian
entities may insure risks in Australia with offshore foreign
insurers that are not authorised under the Insurance Act.
Australian policyholders can purchase such insurance directly or
through an Australian agent or broker. The report noted that in
some cases it might be unnecessary to regulate insurance written
offshore. Much of this business is likely to involve large
commercial insurance contracts where a purchaser would
normally be considered able to judge for itself the risks involved
in the transaction. However, there were suggestions that such
arrangements constituted a gap in APRA's current regulatory
reach. This could have implications for Australians unaware that
they were purchasing an overseas insurance product.
.10 The Potts review found that the current regulatory treatment
of foreign insurers operating in Australia lacked consistency.
Foreign insurers were treated in different ways depending on
whether they were foreign insurers authorised by APRA
Regulation impact statement: Discretionary Mutual Funds
operating in Australia; Lloyd's underwriters authorised under
special provisions of the Insurance Act; or unauthorised foreign
insurers conducting business in Australia directly or through
agents or brokers. Foreign insurers not authorised in Australia
were domiciled in jurisdictions with different regulatory regimes.
This meant that the degree of protection afforded to policyholders
with similar insurance risks would vary depending on the country
of origin of the insurer they selected.
.11 At the same time, however, the Potts review was concerned
to avoid prohibiting commercial arrangements that have worked
satisfactorily to date. It considered that the Government should
target its regulation at areas of highest risk, such as foreign
insurance companies operating out of low status regulatory
jurisdictions with minimal prudential requirements.
.12 ASIC media releases outlined actions and orders that ASIC
obtained against overseas insurers and their local agents within
Australia. A number of investigations have followed complaints
that foreign insurers were not paying claims, or trading while
insolvent. One example related to International Unity Insurance
(General) Limited and its Australian agent, International Unity
Insurance Pty Ltd, a Solomon Island insurer providing motor
vehicle insurance products to Australians.
Objectives
.13 The policy objective is to ensure that policyholders with
similar risks are afforded a similar degree of protection regardless
of the origin of their insurer, while ensuring that commercial
arrangements that have worked satisfactorily to date are not
prohibited. It is also to ensure that no higher standard is imposed
on foreign insurers than domestic general insurers.
.14 As noted above, foreign insurers are treated in different ways.
Foreign insurers authorised by APRA and Lloyd's underwriters
are regulated through the Insurance Act, administered by APRA.
However DOFIs (those foreign insurers conducting business in
Australia through brokers and agents and those who market their
product directly to Australians through the internet for example)
are not required to be prudentially regulated in Australia under
the Insurance Act.
.15 DOFIs, like any other Australian general insurer carrying on
a financial services business in Australia are required to hold an
73
AFSL and comply with the conditions of that licence. These
conditions are set out in Chapter 7 of the Corporations Act.
.16 DOFIs must also alert purchasers of particular insurance
products (generally those aimed at retail clients) through their
Product Disclosure Statement (PDS) that they are a foreign
insurer and not authorised in Australia.
.17 In addition, the conduct in relation to DOFI products is also
subject to the consumer protection provisions of the Australian
Securities and Investments Commission Act 2001 (ASIC Act) (for
example, DOFIs are prohibited from engaging in misleading or
deceptive conduct, misleading representation or unconscionable
conduct in dealing with their clients).
.18 Foreign insurers operating through a branch or subsidiary in
Australia as authorised Australian general insurers are required to
provide information on their activities under FSCODA. However,
DOFIs that do not operate through such a structure are not subject
to any information collection requirements on their activities in
Australia.
Identification of options
.19 There are three options to address the issues raised in relation
to the regulation of DOFIs.
Option 1: Targeted prudential regulation
.20 Under this option, anyone who is `carrying on insurance
business in Australia' either directly or through the actions of
another would be required to become an authorised insurer under
the Insurance Act and would be subject to Australian prudential
regulation. The activities to be caught under this expanded
definition are the activities up to and including entry into an
insurance contract. These include: activities currently caught
under the definition -- undertaking liability and business
incidental to undertaking liability -- and actions of
intermediaries, including inducing an Australian to enter into an
insurance contract (for example advertising targeted at
Australians). Australians who physically go overseas to take out
insurance or who surf the internet and take out insurance that way
will not be caught under the expanded definition.
.21 The entities to be caught under this expanded definition of
`carrying on insurance business in Australia' are domestic
insurers, foreign insurers currently operating via a branch or
Regulation impact statement: Discretionary Mutual Funds
subsidiary, DOFIs (captives are a subset of any of these
categories) and reinsurers authorised by APRA.
.22 Foreign reinsurers will be exempt from having to be
authorised in Australia, This approach would recognise that
reinsurance is a global business. Australia does not have any
domestic reinsurers at this time. Requiring offshore reinsurers to
be authorised by APRA would severely limit the ability of
Australian insurers to place part of their risk with reinsurers. This
approach is in keeping with the international treatment of
reinsurers, where they are regulated in their home jurisdiction.
However, as noted above, APRA would regulate a domestic
reinsurer established in Australia under the Insurance Act and any
foreign reinsurer, who chooses to establish a branch or subsidiary
in Australia. Foreign reinsurers who do not establish a branch or
subsidiary in Australia would continue to be indirectly subject to
the regulatory regime through the prudential standards applied to
insurers.
.23 Once captured under the regulatory regime, APRA will, in
applying Australian prudential standards, use its current powers to
tailor the application of those standards according to the insurer's
risk profile, regardless of whether the insurer is a domestic or
foreign insurer. These targeted prudential standards will take into
account the insurer's customer base, home regulatory
environment, ownership structure and type of business offered.
.24 APRA would also make modifications to the existing
prudential standards for insurers already authorised in Australia,
depending on their client base and the type of entity providing the
product. The exact modifications that would be made to the
prudential standards will be developed in consultation with
industry during the transition period.
.25 Another key concern is to ensure that the regulation of
DOFIs does not reduce the capacity for sophisticated
policyholders (such as large corporations) to make their own
insurance arrangements. To that end, there would be an
exemption to the proposed regulatory regime for insurance
business that cannot be placed in the Australian insurance market,
either because of the nature of the risk, the capacity of the
Australian insurance market or because there is simply
insufficient expertise in Australia to assess that risk. This
exemption would allow risks that could not be placed in the
Australian market to be placed offshore with foreign insurers that
are not APRA authorised under the Insurance Act.
75
.26 As insurers authorised by APRA, DOFIs would continue to
be subject to the consumer protection provisions in the
Corporations Act outlined above and would be required to
provide the same information to APRA as Australian domestic
insurers under FSCODA. Information would also be collected
from the financial intermediaries on the business they were
placing with exempt DOFIs.
.27 There would also be a prohibition on financial intermediaries
that would prevent them from providing an insurance product
from all but APRA authorised insurers or exempt insurers and
collect information on the business financial intermediaries are
placing with DOFIs.
Option 2: Potts review -- comparable regime
.28 Under this option, DOFIs marketing insurance in Australia
would be exempt from prudential regulation in Australia if they
were domiciled in a country APRA considers to have comparable
prudential regulation, subject to a market significance threshold to
prevent established authorised insurers moving offshore. DOFIs
not meeting this test would be required to become authorised
under the Insurance Act, if they wished to continue to conduct
insurance in Australia.
.29 APRA would also assume a information collection role in
relation to DOFIs.
Option 3: No prudential regulation
.30 Under this option, there would be no prudential regulation of
DOFIs. However, they would still have to obtain an AFSL and
comply with the disclosure requirements in the Corporations Act.
They would not have to provide APRA with information on their
activities in Australia. Foreign insurers with a branch or
subsidiary in Australia would continue to be APRA-authorised
and would be required to comply with the same requirements as
all other Australian authorised general insurers.
Analysis of the impact of the options
.31 The groups most affected by the regulation of DOFIs are:
DOFIs; the Australian insureds that use DOFIs; financial
intermediaries; Australian authorised insurers; and the regulators,
APRA and ASIC.
.32 In accordance with Government requirements, attached to
this RIS is a Business Cost Calculator Quickscan Report outlining
Regulation impact statement: Discretionary Mutual Funds
the costs to DOFIs of adopting the various options detailed in this
RIS. A full cost report was not undertaken because, even though
each option provides a regulatory framework, some of the detail
within the framework have yet to be finalised. For example, if
option 1 were to be adopted, APRA will spend a year developing
its modified prudential standards in consultation with
stakeholders and prepare a RIS at that stage of the process.
Similarly, the collection of information from DOFIs and financial
intermediaries would be undertaken after consultation with
industry and APRA to determine exactly what information is
required and how frequently.
Option 1
Option 1: Targeted prudential regulation
Benefits Costs
DOFIs Moderate -- APRA would apply Moderate to large -- DOFIs
modified prudential standards to will be required to become
all insurers, including DOFIs, APRA authorised or cease
taking into consideration the operating in Australia
DOFI's profile and home
jurisdiction
Australian Large -- DOFI required to have Moderate -- some DOFIs may
insureds a presence and capital in choose to cease writing
Australia, so insureds would be Australian business rather than
able to access assets if the DOFI becoming authorised -- this
collapses will reduce the Australian
insured's choice (in some
cases there may be no
insurance product available to
cover their risk)
77
Benefits Costs
Australia Large -- DOFIs will be subject Small -- Australian authorised
authorised to the same prudential standards insurers will be required to
insurers as Australian authorised insurers adapt to the modified
prudential standards
Financial Large -- financial intermediaries Moderate -- financial
intermediaries will continue to be able to place intermediaries will be unable
some large commercial and to place risks with
specialised risks offshore unauthorised DOFIs unless an
exemption applies
Regulators Large -- greater clarity as to Small to Moderate -- APRA
who is required to be authorised estimates that establishing the
and facilitates the enforcement modified prudential regime
of prudential standards against will cost $500,000 - $1 million
DOFIs + on-going monitoring and
enforcing
Benefits
DOFIs
.1 DOFIs would have the substantial benefit that the regulatory
requirements that they must comply with in their home
jurisdiction would be taken into consideration by APRA in
applying the Australian prudential standards. This would reduce
duplication for the DOFI in complying with more than one
prudential regime. For example, if the DOFI was part of a global
corporate group and that group had a good risk management
process, the DOFI may be able to satisfy the APRA prudential
standard by applying this risk management process to its
Australian business. The extent to which a DOFI's home
jurisdiction is taken into account will depend on the home
regulatory regime and the DOFI concerned. The more comparable
a home jurisdiction is with the Australian prudential regulatory
regime, the more APRA may be able to use that situation to
satisfy Australian prudential standards.
.2 In addition, APRA would also consider the clients of the
DOFI in determining whether the DOFI has satisfied APRA's
prudential standards. For example, a DOFI that is part of a global
corporate group and that only provides insurance to other
companies within the global corporate group may not need to
hold as much capital in Australia, or meet other prudential
standards to the same degree as a DOFI writing insurance lines
for Australian retail insureds.
Australian insureds that use DOFIs
.3 APRA will require all DOFIs that wish to operate in Australia
to have, at a minimum, a presence in Australia and assets in
Regulation impact statement: Discretionary Mutual Funds
Australia equal to their liabilities. This offers a significant benefit
to Australian policyholders in that it protects them by ensuring
that, in the event of the DOFI's collapse, they have an increased
ability to access the assets of the insurer.
.4 This option also has the significant benefit of allowing some
sophisticated players in the general insurance market (for
example, large corporations) to continue to access the global
insurance market. In general, it does not affect commercial
arrangements that the Potts review found had worked well to date
and where the insureds is able to judge the risks involved in the
transaction.
.5 At the same time, Australians and most businesses would be
dealing with an APRA-authorised insurer unless they had a risk
that they could not place with such an insurer. In this case, they
would still have the choice to either place the risk through a
Lloyds underwriter or to seek an appropriate exemption in order
to place the risk with a DOFI not authorised by APRA.
.6 For DOFIs and their clients, this option would achieve the
objective of ensuring that Australian policyholders are protected
(that is, they are given a similar level of protection if they use a
DOFI product or an Australian insurer's product). At the same
time it recognises that there are some risks that cannot be placed
in Australia and allows Australians to access the overseas market.
Targeted prudential regulation will allow DOFIs to gain
authorisation using their risk profiles. This will ensure DOFIs are
not overregulated.
Australian authorised insurers
.7 This option would require all insurers providing insurance
products in Australia to be subject to the same prudential
standards (including the capital adequacy requirements) and
required to have a presence in Australia. This approach would
have a significant benefit for Australian authorised insurers as
they will no longer be at a regulatory disadvantage (that is, forced
to comply with more stringent regulation compared with DOFIs).
In addition, it would be much easier to enforce collection from
DOFIs of those insurance taxes currently collected from
Australian general insurers, because they would have a local
presence. This would eliminate the competitive advantage that
Australian insurers argue DOFIs have gained from it being very
difficult to enforce the collection of state taxes against these
DOFIs. (State and Commonwealth taxes may not be being
79
collected for many insurance policies they write, resulting in a
lower premium price.)
Financial intermediaries
.8 Financial intermediaries would benefit by being confident
that, when they place business with an authorised insurer, APRA
is monitoring the insurer's financial soundness, client's claims are
paid out when they occur and clients are able to access funds in
the event that the insurer collapses.
.9 However, financial intermediaries also have a significant
benefit in that they would continue to be able to access the global
insurance market for their large commercial clients and would be
able to place risks that could not be insured in Australia offshore.
Regulators -- APRA/ASIC
.10 For APRA there would be greater clarity about the
application of the legislation. A number of stakeholders consulted
expressed frustration with the definition of `carrying on insurance
business in Australia' and the difficulty that lay in determining
when a DOFI has met the test. Under this option, a DOFI would
be required to be authorised if it is directly, or through the actions
of another, `carrying on insurance business in Australia'. In
addition, the actions of the financial intermediary, to the extent
that they target Australians to enter into contracts with DOFIs,
would be brought under the expanded definition of `carrying on
insurance business in Australia'.
.11 Given that it would be easier to identify who is regulated
under this option, it would be easier to identify where there was a
DOFI acting in breach of the Insurance Act and to take action
against that entity.
.12 Finally, because DOFIs that wish to operate in Australia
would require a local presence, it would be easier for APRA to
enforce its prudential standards against the DOFI. This is because
there would be a responsible officer subject to the penalties under
the Insurance Act.
.13 This option would mean that information collection under
FSCODA would automatically apply. As Australian authorised
general insurers, they would already be captured under the current
regime.
Regulation impact statement: Discretionary Mutual Funds
Costs
DOFIs
.14 This option also has a potentially significant cost for DOFIs,
as it would require all DOFIs to be authorised by APRA. That
means that all DOFIs who wanted to continue carrying on
business in Australia, have to apply for an APRA licence and
comply with the reporting and prudential standards APRA sets for
them, outlined above. These costs would be significant for the
DOFIs.
.15 DOFIs would also be required to apply to become authorised.
The current licence application fee of $68,200 provides an
estimate of authorisation costs.
.16 DOFIs would also have ongoing APRA reporting costs. The
current general insurance levies provide an estimate of these
costs, in the absence of better information. The following excerpt
from the Financial Sector Levies Discussion Paper provides a
basis for the estimate.
Table 15: Levy amounts on general insurers ($'000)
Asset $5m $25m $250m $750m $3b $9b
Base
2006-07 5.1 6.9 69.2 207.5 830.0 1,364.0
.1 For those DOFIs that provide professional indemnity and
public liability cover there would also be the NCPD levy. The
NCPD levy is a function of an institution's premium income in
those classes, as detailed in the following excerpt from Financial
Sector Levies Discussion Paper dated May 2006:
Table 9: Levy parameters for NCPD Levy
Approximate levy parameters based on recouping 1 year's costs
Professional Indemnity Public and Product Liability
Minimum ($) 5,000 5,000
Maximum ($) 32,000 50,000
Rate (%) 0.086 0.085
Australian insureds that use DOFIs
.1 Anecdotal evidence from brokers suggests that a number of
DOFIs may cease operating in the Australian market, as the cost
of meeting Australia's prudential regulations would outweigh the
benefits, especially where the DOFI is only writing a small
81
volume of business in Australia. This may result in lower capacity
in the Australian market, particularly in niche markets, and less
choice for Australian insureds. This has potential consequences
for some Australian insureds, who may have difficulty obtaining
insurance cover.
.2 Once DOFIs are authorised by APRA, it would be possible to
enforce Australian taxes on DOFIs and they must comply with
Australian prudential standards, these costs may result in
premium increases for some Australian insureds. However, there
is insufficient information currently available on DOFIs to be able
to ascertain the extent of any such increase.
Australian authorised insurers
.3 There may also be small costs for local Australian domestic
insurers as they adapt to the modified prudential standards that
apply to them under this approach. However, it is envisaged that
the standards would be modified to reduce the costs on certain
types of insurers to take into account their risk profile. It is not
envisaged that any strengthening of existing standards would
occur under this process. Domestic insurers would be able to
choose whether to continue to be bound by the stricter standards
or comply with the modified standards.
Financial intermediaries
.4 It may also create some costs for financial intermediaries,
who will be unable to provide insurance products from
unauthorised DOFIs to some of their clients. However, the costs
are difficult to estimate, given that there is insufficient
information on the amount of insurance business placed with
DOFIs and the number of these DOFIs that may cease operating
in Australia.
Regulators -- APRA/ASIC
.5 This option would also impose a number of administrative
costs on APRA, as it would be required to process applications
from DOFIs for Australian licences. In addition, it would have to
monitor these DOFIs and ensure that they comply with Australian
prudential standards, or enforce their compliance.
.6 APRA estimates the costs of establishing modified prudential
regulation standards at $500,000 to $1 million.
.7 APRA would also require additional resources and expertise
to monitor the exemption and collect information on what risks
are being placed offshore through that mechanism.
Regulation impact statement: Discretionary Mutual Funds
Option 2
Option 2: Potts Review
Benefits Costs
DOFI Moderate to large -- target Large -- it would be difficult
DOFIs from regulatory regimes to determine whether or not a
that APRA does not consider DOFI was from a comparable
comparable, these DOFIs regime and it creates
would have to become uncertainty for the DOFI as to
authorised. But DOFIs from how long their regime will
comparable regimes would be remain comparable
exempt from APRA
authorisation
Australian Moderate -- Australian Small to moderate --
insureds insureds would still have access Australian insureds would
to DOFIs from comparable have no protection in the event
regimes but this would not be that a DOFI from a well
as great as the protection regulated regime collapsed and
offered by Australian prudential without a presence in
regulation. They would be Australia, it would be very
protected from DOFIs from less difficult to get a claim paid out
comparable regimes, who if the DOFI refused to pay
would have to become
authorised to operate in
Australia
Australian Small to moderate -- Moderate to large -- exempt
authorised Australian authorised insurers DOFIs would continue to be
insurers will gain the indirect benefit of able to charge lower premiums
having less competition as as they would not be subject to
DOFIs from non-comparable Australia's prudential
regimes will be required to standards and their premiums
become authorised or exit the would continue to reflect the
Australian insurance market difficulty of collecting state
insurance taxes on their
premiums
Benefits Costs
Financial Large -- they could still place Moderate -- financial
intermediaries risks with DOFIs from intermediaries would need to
comparable regimes check that the DOFI was from
a comparable regime and
would have to continually
monitor both the DOFI and its
home jurisdiction to ensure it
continued to be eligible for the
exemption
Regulators Nil Moderate to Large - $500,000
- $1 million to establish the
regime and on going
83
monitoring, enforcing and
assessing comparable regimes
of $2 million - $4 million
annually
Benefits
DOFIs
.1 This option has a significant benefit for reputable DOFIs and
their members in that it would target those DOFIs that pose the
greatest risk of collapsing, because they are not subject to
comparable prudential regulation in their home jurisdiction.
DOFIs from countries with comparable prudential regulation
would be able to rely on their home jurisdiction and not become
APRA authorised. This significantly reduces the compliance costs
for well-regulated DOFIs; they do not need to apply to APRA for
a licence to carry on insurance business in Australia; they are not
required to hold a minimum level of capital in Australia; and they
are not subject to Australia's consumer protection, financial
reporting and information collection provisions.
Australian insureds that use DOFIs
.2 The approach would ensure that well regulated DOFIs would
continue to write business in the Australian market and would not
create a barrier to these DOFIs continuing to supply their
products to Australians. This would have the substantial benefit
of having continuing competition in the Australian market. In
some specialised niche markets, where only overseas insurers
operate, Australian insureds would be able to access those lines
directly or through a financial intermediary. While the risk posed
by DOFIs from well regulated regimes is lower than for other
DOFIs, the well regulated regime will still not provide the same
level of protection to Australian insureds as the Australian
prudential regulatory regime. Authorised insurers are required to
maintain assets at least equal to Australian liabilities. On the
liquidation of an authorised insurer, Australian liabilities must be
settled from those Australian assets before foreign liabilities can
be settled from those Australian assets. This protection will not be
available to insureds, who use DOFIs, irrespective of the home
regulatory regime.
.3 In addition, as these DOFIs are exempt from the Australian
prudential regulatory regime they may be able to offer their
products to Australians at a lower price than Australian insurers,
although this is offset against the cost of complying with
comparable home jurisdiction regimes. The extent to which state
insurance taxes are being collected on DOFI insurance policies is
not clear. Insurers argue limited state insurance taxes are currently
Regulation impact statement: Discretionary Mutual Funds
being collected on DOFI insurance policies. Maintaining
competition from DOFIs may result in lower costs to Australians.
Australian authorised insurers
.4 There is no direct benefit from this option for Australian
authorised insurers, although it would have the indirect benefits
of removing competition from DOFIs from non-comparable
regimes.
Financial intermediaries
.5 This option would also allow financial intermediaries to
source a range of products from global well-regulated insurers,
thereby allowing them to find and negotiate with insurers to
provide a targeted solution for their clients.
Regulators -- APRA/ASIC
.6 There would be no direct benefits to APRA and ASIC of this
option.
Costs
DOFIs
.7 Consultations with stakeholders suggested that it was very
difficult to determine which countries would have a prudential
regulatory regime comparable with that of Australia. There are
significant risks associated with this approach for the DOFI, in
that it is unclear what constitutes a comparable regime and how
comparability will be measured. Moreover, it also creates
uncertainty because it is not clear what a home jurisdiction must
do for APRA to deem its prudential regime to be comparable with
that of Australia.
.8 DOFIs from regimes that APRA did not consider comparable
would have the costs of becoming APRA-authorised and
complying with Australian prudential standards (including
holding capital here and having a presence in Australia) or
alternatively withdrawing from the market.
Australian insureds that use DOFIs
.9 If DOFIs from well-regulated regimes are not required to
have a presence in Australia or to hold capital here, it would be
very difficult for Australian insureds to get access to capital in the
85
event that the DOFI collapses or where a claim is not paid. Even
if the DOFI does not collapse, there may be no capital in
Australia that the Australian courts can access to pay out a
policyholder's claim. In this situation, the Australian policyholder
would need to take action against the DOFI in a foreign court.
.10 This would be a significant risk for the Australian
policyholders, particularly small businesses and retail clients who
may not understand the significance of the DOFI not being
regulated in Australia and having assets here until their claim
goes unpaid. Although the exact number of DOFIs that have
collapsed or refused to pay out claims is not known, ASIC has
applied to the court to wind up or stop DOFIs from operating in
Australia on several occasions in the past couple of years.
Australian authorised insurers
.11 DOFIs from well-regulated regimes may be able to provide
their product at lower prices because they do not need to comply
with Australian prudential standards. The cost of complying with
prudential standards in their home jurisdiction may be less than
the cost for Australian insurers of complying with the Australian
prudential standards. Also, it may be difficult to enforce the same
state insurance taxes faced by Australian insurers. Australian
authorised insurers argue this is a significant cost and that this
results in DOFIs obtaining a competitive advantage. This may
result in Australian insurers losing market share to DOFIs and in
some cases getting out of particular lines of insurance altogether.
It may also encourage Australian insurers that have overseas
subsidiaries to transfer their business offshore, so as to take
advantage of the competitive advantage enjoyed by
well-regulated DOFIs.
.12 Reduced competition in the Australian insurance market
would be likely to have a cost to Australians, as they would have
fewer products to chose from when placing their risk and the
products that remain may offer fewer protections. In addition,
reducing the size of the Australian insurance market may also
affect Australia's reputation overseas for having a well-regulated,
robust and competitive general insurance market may be
compromised by the proposal. This may have an impact on
Australian insurers with foreign operations.
Financial intermediaries
.13 Financial intermediaries would have the additional costs of
having to determine whether the insurer they were recommending
to their clients came from a comparable regime or not. They
would need to determine whether that DOFI needed to be APRA
Regulation impact statement: Discretionary Mutual Funds
authorised. In addition, they would need to continue to monitor
that DOFI and its home jurisdiction to ensure the DOFI continued
to be exempt from having to comply with the Australian
prudential regime. Although not a significant cost for brokers,
depending on how the system was set up, it nonetheless would
require brokers to devote resources to ongoing monitoring.
Regulators -- APRA/ASIC
.14 If this option is adopted, APRA would have the significant
costs of establishing a regulatory regime to cover DOFIs. Those
from a robust prudential regime would be exempt and all other
DOFIs would be required to become APRA authorised. This
creates a separate regime that APRA would enforce and monitor,
increasing complexity for both the DOFIs and the system of
insurance regulation more generally.
.15 The costs of Option 1 would be the same as for Option 2 with
the additional ongoing costs of assessing and maintaining up to
date knowledge of foreign regulatory regimes. APRA estimates
this ongoing cost to be $2 million to $4 million per year.
.16 In order to provide a robust regime under this option APRA
envisages needing an additional cell of dedicated staff and a
considerable amount of international participation in on-site
supervision work with offshore regulators.
Option 3
Option 3: No prudential regulation
Benefits Costs
DOFI Large -- no additional Nil
compliance costs
Australian Large -- broadest range of Large - Australian insureds
insureds insurers available and lower would have no protection in
premiums the event that a DOFI
collapsed and without a
presence in Australia, it
would be very difficult to get
a claim paid out if the DOFI
refused to pay
Australian Nil Large - DOFIs would
authorised continue to be able to charge
insurers lower premiums as they
would not be subject to
Australia's prudential
87
standards and their premiums
would continue to reflect the
difficulty of collecting state
insurance taxes on their
premiums
Financial Large -- broadest range of Nil
intermediaries insurers available for their
clients
Regulators Nil Moderate -- if a DOFI
collapses regulators may face
reputational costs.
Benefits
DOFIs
.1 This option is the current position. It has the advantage that
there would be no additional compliance costs on those DOFIs
that do not choose to establish a branch or subsidiary in Australia.
It allows all DOFIs to operate in the Australian market, so long as
they or their financial intermediary have an AFSL.
Australian insureds that use DOFIs
.2 This option provides Australians and financial intermediaries
with a major benefit as they would have the broadest range of
products from which to choose when placing their risk. The fact
that many of these DOFIs do need to pay state taxes, but those
taxes are not enforced, means that they can provide their products
at lower prices to Australian consumers.
Australian authorised insurers
.3 There would be no direct benefits to Australian insureds from
this option.
Regulators -- APRA/ASIC
.4 There would be a lower administration costs on APRA, as
APRA would not be required to prudentially regulate DOFIs.
Although, given that APRA does not regulate DOFIs now, it is
only a benefit from the perspectives of the two other alternative
options being considered.
Costs
DOFIs
.5 There would be no direct costs to DOFIs from this option.
Regulation impact statement: Discretionary Mutual Funds
Australian insureds that use DOFIs
.6 This approach would have significant costs for Australian
policyholders. It leaves them unprotected in the event that the
DOFI collapses. Australian insureds, especially Australian retail
clients, may have difficulty ascertaining the financial soundness
of an overseas insurer. The fact that they are from a comparable
regime does not directly indicate the financial soundness of the
insurer.
.7 Similarly, the fact that a DOFI is from a robust prudential
regime does not assist Australian insureds in the event that the
insurer collapses. In that situation, Australian insureds may have
difficulty in recovering the money they paid in premiums or
having their claims paid. Depending on the jurisdiction, it may be
difficult to have an Australian court judgment enforced against
the assets of the insurer. This would particularly be the case in
countries where priority is given to domestic policyholders over
foreign policyholders.
Australian authorised insurers
.8 For domestic insurers, the ability of DOFIs to access the
market and yet not be prudentially regulated or pay the same state
insurance taxes creates a significant competitive disadvantage and
cost for Australian authorised insurers. This can lead to a
reduction in an Australian domestic insurer's market share and at
the margins of the industry create an incentive for some
Australian insurers to move offshore.
.9 Although the exact number of DOFIs that have collapsed or
refused to pay out claims is not known, ASIC has applied to the
court to wind up or stop DOFIs from operating in Australia on
several occasions in the past couple of years.
Regulators -- APRA/ASIC
.10 Finally, the regulators may also face criticism in the event
that a DOFI collapses and are likely to have substantial
reputational costs.
Consultation
.11 The Government has undertaken two public inquiries into the
regulation of DOFIs and their role in the general insurance
89
industry, as well as continual consultation with key stakeholders
over the last three years.
.12 The first public inquiry was the Potts review that took place
in 2003. The Potts review sought submissions from the public on
the extent and nature of DOFI operations in Australia and their
contributions to overall risk capacity. The Potts review received
19 submissions from a range of stakeholders including DOFIs,
Australian authorised general insurers, captives, reinsurers,
brokers and agents, industry associations, State governments and
the regulators, ASIC and APRA.
.13 In response to the comments of these submissions, the Potts
review developed its key recommendations, which were accepted
by the Government in May 2004. In December 2005, Treasury
released a public discussion paper seeking comments from all
interested stakeholders on how to implement the Potts review
recommendations. It received 28 submissions from a range of
stakeholders, including Australian insurers, reinsurers, captives,
DOFI, brokers, industry association, the regulators ASIC and
APRA and a number of State governments.
.14 Throughout this period, Treasury has also consulted with
interested stakeholders. It has held a number of meetings with
DOFIs, insurers, brokers and the regulators both to better
understand DOFIs, their role in the Australian general insurance
market and how to regulate them but also how to practically
implement the Potts Review recommendations.
.15 From the various submissions and discussion held with key
stakeholders varying views emerged, although most stakeholders
have held largely consistent views throughout the consultations to
date.
.16 Australian authorised insurers believe that DOFIs should be
subject to the same prudential and regulatory requirements as
domestic insurers. In particular, they argue that DOFIs should be
required to hold capital in Australia and establish a presence here.
Australian authorised insurers are particularly concerned about
DOFIs obtaining a competitive advantage by not being required
to hold capital here and Governments not being able to enforce
the collection of Australian taxes on their insurance policies that
cover Australian risks.
.17 DOFIs, on the other hand, believe that APRA should not
disadvantage overseas insurers from operating in Australia if they
are established in a comparable prudential regime. DOFIs from
comparable regimes do not believe that they should be
prudentially regulated in Australia as they are already subject to
prudential regulation in their home jurisdiction.
Regulation impact statement: Discretionary Mutual Funds
.18 Financial intermediaries do not believe that foreign insurers
should be prudentially regulated in Australia. Instead, they
believe that the disclosure requirements applying to DOFIs
should be strengthened. Australian financial intermediaries
suggest they should be required to disclose to all their clients,
regardless of whether these clients are retail or wholesale clients,
that the DOFI is not APRA authorised and that they may not be
able to enforce their claims against the DOFI or access funds to
pay their claims if the DOFI collapses.
.19 In developing the options in this regulation impact statement,
the concerns of insurers to have a level playing field and protect
consumers, the concerns of brokers to able to continue to access
insurance products to meet the needs of their clients and the
concerns of DOFIs from robust prudential regulatory regimes not
be subject to regulatory duplication were all taken into
consideration.
Conclusion and recommended option
.20 Option 2 was rejected as being unworkable because
stakeholders' submissions during the consultations suggested that
it would be very difficult, if not impossible, to determine what
constituted a comparable regime; that is, the criteria that would be
used to make that assessment. It would also create added
complexity in the regulation of insurers in Australia because it
would create another regime to regulate DOFIs.
.21 Stakeholder comments indicated that some form of regulation
for DOFIs was required to protect Australian insureds and third
party beneficiaries from a DOFI not paying claims and/or
collapsing and not paying claims. Also, DOFIs enjoy a
competitive advantage over Australian insureds, in not
maintaining a presence in Australia or being subject to APRA's
prudential standards, particularly the capital requirements. As a
result, option 3 was rejected as it did not address these two
concerns.
.22 Given the above comments and the analysis, option 1,
targeted prudential regulation, is recommended. This option
allows APRA to take into consideration the range of unique risk
factors associated with each insurer that seeks to operate in the
Australian market, while at the same time ensuring that at a
minimum there is sufficient capital in Australia to cover
Australian insureds liability in the event that an overseas insurer
91
fails. It also ensures that information is collected on the role of
DOFIs in the general insurance market so that APRA can develop
increasingly targeted prudential standards.
Implementation and review
.23 It is proposed that option 1 be implemented through
legislative amendments to the Insurance Act, Corporations Act,
Corporations Regulations and FSCODA.
.24 The definition of insurance business in the Insurance Act
would be amended to cover the expanded activities and entities
described above. There may also need to be an exemption from
needing to be authorised for foreign reinsurers and an additional
exemption for insurance business that cannot be placed in the
Australian market.
.25 In addition, to ensure that APRA can enforce option 1,
APRA's existing powers under the Insurance Act to:
· require production of information, books, accounts
or documents;
· access premises; and
· initiate investigations
.26 would be expanded to include persons APRA reasonably
believes are carrying on insurance business in Australia without
authorisation or aiding, abetting, procuring or counselling a
second person to carry on insurance business in Australia without
authorisation.
.27 In addition, APRA would be given a power to seek
restraining, consent and interim injunctions from the Federal
Court with respect to unauthorised insurers and persons involved
in the activities of unauthorised insurers. This power would
enable APRA to act quickly in situations where unauthorised
insurers are carrying on insurance business in Australia. The
injunction power would only permit APRA or any person whose
interests are affected by the conduct of the entity to seek an
injunction.
.28 The administration costs associated with these enforcement
measures would be met out of APRA's existing budget.
.29 Insurers and financial intermediaries consulted have
acknowledged the need to expand APRA powers under the
Regulation impact statement: Discretionary Mutual Funds
Insurance Act to ensure that APRA has sufficient power to
effectively monitor and ensure compliance with the proposed
DOFI regime.
.30 APRA would develop its modified prudential standards in
consultation with Treasury and stakeholders, including existing
APRA authorised insurers, DOFIs and financial intermediaries.
.31 No changes will need to be made to the consumer protection
provisions of the Corporations Act. As an APRA-authorised
insurer, DOFIs will be subject to the same consumer protection
provisions that currently apply to Australian general insurers
under the Act.
.32 However, it is also proposed that a prohibition would be
inserted in the Corporations Act preventing Australian financial
service licence holders from providing a general insurance
product to their clients that is not from an Insurance Act
authorised or exempt insurer. The enforcement powers that ASIC
already has under the ASIC Act will be used to enforce the
prohibition.
.33 No changes will need to be made to FSCODA to collect
information from DOFIs as they will fit within the category of
APRA regulated entities already in the Act. However, it is
proposed that the Corporations Act be amended to allow ASIC to
collect and provide to APRA information from financial
intermediaries on the business they are placing with DOFIs.
.34 As it will require time for APRA to develop its modified
prudential standards and DOFIs currently operating in the
Australian market will need time to apply for authorisation, it is
proposed that the new regulatory regime commence on 1 July
2008. This provides APRA with a timer to develop its modified
prudential framework in consultation with industry and for DOFIs
to apply to become authorised.
93
Direct Offshore Foreign Insurers Quickscan report
What is the problem you wish to address?
The current regulatory treatment of foreign insurers operating in Australia
lacks consistency. Foreign insurers are treated in different ways
depending on whether they are: foreign insurers authorised by APRA
operating in Australia; Lloyd's underwriters authorised under special
provisions of the Insurance Act; or unauthorised foreign insurers
conducting business in Australia directly or through agents or brokers.
Foreign insurers not authorised in Australia may be domiciled in
jurisdictions with different regulatory regimes. This means that the degree
of protection afforded to policyholders with similar insurance risks would
vary depending on the country of origin of the insurer selected.
At the same time, however, there is a concern to that commercial
arrangements that have worked satisfactorily to date not be prohibited.
What is the objective of the policy?
The policy objective is to ensure that policyholders with exactly the same
risk are afforded the same degree of protection regardless of the origin of
their insurer, while ensuring that commercial arrangements that have
worked satisfactorily to date are not prohibited.
Businesses Affected:
exact numbers of DOFIs affected is not known due to the lack of
information. Anecdotal evidence from financial intermediaries suggests
between 10 -50.
Supporting evidence for the following options:
Information is not currently available on the number of DOFIs operating
in the Australian market. As a result, it is not possible at this time to
accurately calculate the costs to DOFIs of the various options outlined
below. However, the classes of costs to DOFIs are described below and in
the RIS.
Level of certainty for the following options:
Low -- Medium
94
Regulation impact statement: Discretionary Mutual Funds
Option 1 -- Targeted prudential regulation
Under this option, all DOFIs would be subject to full Australian
prudential regulation, that is they would be required to be licensed under
the Insurance Act and meet prudential requirements. However in applying
the prudential standards APRA would use its current powers including
discretionary and exemption powers to tailor the application of those
standards according to the DOFI's risk profile. These tailored prudential
standards will take into account the insurer's customer base, home
regulatory environment, ownership structure and type of business offered.
As APRA authorised insurers, DOFIs would continue to be subject to the
consumer protection provisions in the Corporations Act and would be
required to provide the same information to APRA as Australian domestic
insurers under FSCODA. Information would also be collected from the
financial intermediaries on business placed with DOFIs.
Option 2 -- Comparable regime
Under this option DOFIs marketing insurance in Australia would be
exempt from prudential regulation in Australia if they are domiciled in a
country APRA considers to have comparable prudential regulation,
subject to a market significance threshold to prevent established
authorised insurers moving offshore. DOFIs not meeting this test would
be able to market insurance in Australia as an authorised insurer through a
branch or subsidiary.
APRA would assume an information collection role in relation to offshore
insurers.
Option 3 -- Status quo
Under this option, there would be no prudential regulation (that is, no
requirement for the DOFI to establish a presence or have assets in
Australia etc.) of DOFIs. However, they would continue to have to obtain
an Australian financial services licence and comply with the disclosure
requirements in the Corporations Act. They would not have to provide
APRA with information on their activities in Australia. Foreign insurers
with a branch or subsidiary in Australia would continue to be APRA
authorised and would be required to comply with the same requirements
as Australian authorised general insurers.
95
96 Re
gul
Notification Education Permission Purchase Cost Record Keeping Enforcement Publication/ Procedura Other
ati
Documentation l on
Option 1: DOFIs will be DOFIs will DOFIs will be Nil DOFIs will be DOFIs will be Nil Nil Nil im
Targeted required to have to required to required to comply subject to pa
prudential notify their educate their apply to with APRA's APRA's
ct
regulation financial officers on APRA to reporting enforcement and
intermediaries Australian become an requirements for reporting sta
as to whether prudential and authorised authorised general requirements te
they are APRA reporting insurer, unless insurers. Financial that apply to me
authorised or requirements. exempt. intermediaries will general insurers. nt:
not. Financial Australian be required to Financial
intermediaries insureds that provide ASIC with intermediaries Di
will have to cannot have information on the will be subject to rec
educate their their risks DOFI business they ASIC t
officers on the underwritten are placing. enforcement Off
new by an provisions if
prohibition authorised they breach the sh
that makes it insurer will prohibition or ore
an offence for have to apply reporting Fo
financial to use an requirements. rei
intermediaries unauthorised
to offer an DOFI. gn
insurance Ins
product from ure
an rs
unauthorised
insurer, unless
an exemption
applies.
Regulation impact statement: Discretionary Mutual Funds
Notification Education Permission Purchase Cost Record Keeping Enforcement Publication/ Procedura Other
Documentation l
Option 2: Nil DOFIs will DOFIs will Nil Both exempt and Exempt DOFIs Nil Nil Nil
Potts Review have to have to apply authorised DOFIs and authorised
-- educate their to APRA and will be required to DOFIs will be
comparable officers on the satisfy APRA provide APRA with subject to
regime new that they are the same APRA's
Australian from a information that information
regime and comparable APRA authorised collection
whether they regime so as to general insurers enforcement
are exempt or obtain the provide on the provisions.
must become exemption business they write Authorised
APRA from having to in Australia. DOFIs will also
authorised be APRA Authorised DOFIs be subject to
general authorised. will have the APRA's
insurers. For additional reporting enforcement
DOFIs that requirements provisions that
must become associated with apply to all
authorised, being authorised. APRA
there will also authorised
be the general insurers.
additional
education
costs outlined
in option 1
above.
Notification Education Permission Purchase Cost Record Keeping Enforcement Publication/ Procedura Other
Documentation l
Option 3: No Nil Nil Nil Nil Nil Nil Nil Nil Nil
prudential
regulation
97
Index]
[Search]
[Download]
[Bill]
[Help]