Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2004 -- 2005 -- 2006
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
SENATE
FINANCIAL SECTOR LEGISLATION AMENDMENT
(TRANS-TASMAN BANKING SUPERVISION) BILL 2006
EXPLANATORY MEMORANDUM
(Circulated by the authority of the Parliamentary Secretary to the Treasurer,
the Hon Chris Pearce MP)
Table of Contents
OUTLINE ..............................................................................................................1
FINANCIAL IMPACT STATEMENT .........................................................................2
ABBREVIATIONS ..................................................................................................3
NOTES ON INDIVIDUAL CLAUSES .........................................................................4
SCHEDULE 1 -- TRANS-TASMAN COOPERATION ................................................5
Financial Sector Legislation Amendment (Trans-Tasman Banking Supervision) Bill 2006 iii
1
Outline
1.1 This Bill implements legislative amendments to the Australian Prudential
Regulation Authority Act 1998, the Banking Act 1959 and the Financial Sector
(Transfers of Business) Act 1999, to promote a joint approach to trans-Tasman
banking supervision, as a step towards a seamless regulatory environment for
banking services in Australia and New Zealand. Legislation is being introduced
in New Zealand, to amend the Reserve Bank of New Zealand Act 1989, that
mirrors the amendments in this Bill.
1.2 Given the interdependence of Australia's and New Zealand's financial
systems, it is important that both countries' banking supervisors, the Australian
Prudential Regulation Authority (APRA) and the Reserve Bank of New
Zealand (RBNZ), can support each other in the performance of their regulatory
responsibilities and, through this process, reduce any impediments to banks
choosing the location of their systems and functions within the trans-Tasman
market.
1.3 This Bill requires APRA to support the RBNZ in the performance of its
statutory responsibilities and, to the extent reasonably practicable, avoid any
actions that are likely to have a detrimental effect on financial system stability
in New Zealand. It also requires APRA to consider the implications of its
actions for financial system stability in New Zealand and consult the RBNZ
where practicable on this matter. An administrator or statutory manager -- that
may be appointed by APRA to a bank in severe financial distress -- is also
required to consider the implications of a proposed action on financial system
stability in New Zealand.
1.4 This Bill clarifies that APRA can second staff from the RBNZ.
1.5 This Bill also clarifies that one of APRA's objectives is to promote
financial system stability in Australia.
Financial Sector Legislation Amendment (Trans-Tasman Banking Supervision) Bill 2006 1
Outline
Financial impact statement
1.6 This Bill should not have a financial impact for the Commonwealth
because APRA is self-funded through financial sector levies.
Financial Sector Legislation Amendment (Trans-Tasman Banking Supervision) Bill 2006
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1
Abbreviations
The following abbreviations are used in this explanatory memorandum.
ADI -- Authorised deposit-taking institution
APRA -- Australian Prudential Regulation Authority
APRA Act -- Australian Prudential Regulation Authority Act 1998
Banking Act -- Banking Act 1959
FSTOBA -- Financial Sector (Transfers of Business) Act 1999
NOHC -- Authorised non-operating holding company
RBA -- Reserve Bank of Australia
RBNZ -- Reserve Bank of New Zealand
Financial Sector Legislation Amendment (Trans-Tasman Banking Supervision) Bill 2006 3
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Notes on individual clauses
Part 1 -- Preliminary
Clause 1 -- Short title
1.1 Upon enactment, the Bill will be known as the Financial Sector Legislation
Amendment (Trans-Tasman Banking Supervision) Act 2006.
Clause 2 -- Commencement
1.2 This section provides for commencement of the Bill on Royal Assent.
Clause 3 -- Schedule(s)
1.3 This section states that each Act specified in a Schedule to this Act is
amended or repealed as set out in the relevant item in the Schedule. Any other
item to this Act has effect according to its terms. These Schedules are:
Schedule 1 -- Trans-Tasman cooperation
Financial Sector Legislation Amendment (Trans-Tasman Banking Supervision) Bill 2006
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1
Schedule 1 -- Trans-Tasman cooperation
Australian Prudential Regulation Authority Act 1998
Definitions
1.1 The Bill inserts several new definitions into subsection 3(1) of the APRA
Act to describe key concepts in the provisions relating to trans-Tasman
cooperation.
1.2 The definitions of an action that is likely to have a detrimental effect on
financial system stability in New Zealand, a New Zealand financial institution
and an outsourcing arrangement combine to clarify which types of actions
APRA should avoid [Schedule 1, items 1-3]. Outsourcing arrangements have
been identified as carrying a particular risk to financial system stability in New
Zealand.
1.3 The definition of a prescribed New Zealand authority describes APRA's
New Zealand counterpart(s) with which it is required to cooperate [Schedule 1,
item 4]. The definition includes the RBNZ, which is New Zealand's current
prudential supervisor. However, other provisions to describe the functions of a
relevant New Zealand agency and a regulation making power are provided for
flexibility in case any changes are made in the future to responsibilities of the
RBNZ with respect to financial system stability or prudential regulation.
Purpose for establishing APRA
1.4 Section 8 of the APRA Act outlines the statutory responsibilities of APRA.
Under subsection 8(2), APRA is required to balance the objectives of financial
safety, efficiency, competition, contestability and competitive neutrality when
performing and exercising its functions and powers. While promoting financial
system stability in Australia is implied in this objective -- especially by
financial safety -- this Bill makes it explicit. Financial system stability is a
Financial Sector Legislation Amendment (Trans-Tasman Banking Supervision) Bill 2006 5
Schedule 1 -- Trans-Tasman cooperation
high-level objective of financial sector regulation because of the potential
implications of instability for the broader economy.
1.5 The amendment to subsection 8(2) clarifies that one of the things APRA is
required to do in performing and exercising its functions and powers is to
promote financial system stability in Australia. [Schedule 1, item 5].
1.6 This amendment also supports the introduction of legislation in
New Zealand that would require the RBNZ to consult APRA on the
implications of the RBNZ's actions for financial system stability in Australia.
Trans-Tasman cooperation
1.7 Australia's legislation is being updated to reflect the high level of
commercial integration of Australia's and New Zealand's markets for banking
services.
1.8 Currently, there is no explicit requirement in Australia's legislation to
consider New Zealand's interests. While it is unlikely, there is a risk that APRA
could be required to take actions that impact the New Zealand operations of a
branch or subsidiary of an APRA-regulated institution with potentially adverse
consequences for financial system stability in New Zealand. Given the
interdependence of Australia's and New Zealand's financial systems it is
desirable to limit such risk.
1.9 As part of efforts to increase efficiency and reduce costs, financial
institutions are increasingly looking to centralise systems and processing,
including through outsourcing such functions. In the trans-Tasman context, this
has generated particular concerns relating to the impact of APRA's actions on
an Australian financial institution which provides services to subsidiaries and
branches operating in New Zealand. By addressing these concerns, the
measures in this Bill may afford financial institutions, notably banks, greater
flexibility in determining how their operations within the trans-Tasman market
are structured, bringing compliance cost and efficiency benefits.
1.10 Item 6 outlines APRA's obligations in relation to trans-Tasman
cooperation [Schedule 1, item 6, section 8A]. Given the interdependence of the
Australian and New Zealand financial systems, it is important that APRA
considers the implications of its actions for New Zealand.
1.11 APRA is to support the RBNZ in the performance of its statutory
responsibilities relating to financial system stability and prudential regulation.
[Schedule 1, item 6, paragraph 8A(1)(a)].
1.12 APRA is required to avoid taking actions, to the extent reasonably
practicable in the circumstances, which could have adverse consequences for
Financial Sector Legislation Amendment (Trans-Tasman Banking Supervision) Bill 2006
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Schedule 1 -- Trans-Tasman cooperation
financial system stability in New Zealand. [Schedule 1, item 6,
paragraph 8A(1)(b)].
1.13 Financial system stability is a high level objective of financial sector
regulation in both Australia and New Zealand because of the potential
implications of instability for both economies.
1.14 APRA's obligations that relate to trans-Tasman cooperation should be
balanced by APRA against its other objectives, in performing and exercising its
functions and powers. That means that the trans-Tasman cooperation
obligations are not intended to override APRA's existing statutory obligations.
[Schedule 1, item 6, subsection 8A(2)].
1.15 As APRA cannot always be expected to make a complete assessment of
the potential impacts of actions on financial system stability in New Zealand, it
is appropriate that this judgement be informed by the RBNZ, which is charged
with responsibility for financial system stability in New Zealand. Therefore,
APRA is required to consult the RBNZ on proposed actions that could have
implications for financial system stability in New Zealand. [Schedule 1, item 6,
subsection 8A(3)].
1.16 Some provisions are qualified for reasonableness because there may be
circumstances, where an action must be taken by APRA even though it may
have adverse implications or unintended consequences for New Zealand
[Schedule 1, item 6, paragraph 8A(1)(b) and subsection 8A(3)]. For instance,
an urgent decision may not leave APRA with time to consult before it takes an
action. However, APRA is expected to advise the RBNZ of this action as soon
as possible to meet its broader obligations.
1.17 To ensure that a regulated institution cannot avoid adhering to regulatory
requirements, this Bill makes it clear that the exercise of a power is still valid,
were APRA to not perform an obligation relating to trans-Tasman cooperation
because of the circumstances. [Schedule 1, item 6, subsection 8A(4)].
1.18 While these provisions are intended to be of general application, there is a
specific reference to the provision of outsourced services from an
APRA-regulated institution to a New Zealand bank to provide greater legal
certainty that this is covered by the requirement for APRA to avoid detriment to
financial system stability in New Zealand. [Schedule 1, items 1-3 and item 6,
subsection 3(1) and paragraph 8A(1)(b)].
Staff seconded to APRA
1.19 Section 46 is amended to clarify that APRA can second staff from the
RBNZ and other New Zealand counterpart agencies. This ensures that staff
seconded from the RBNZ can perform the same functions as if they were
Financial Sector Legislation Amendment (Trans-Tasman Banking Supervision) Bill 2006 7
Schedule 1 -- Trans-Tasman cooperation
employed by APRA and will contribute to supervisory cooperation by
simplifying arrangements for such secondments. [Schedule 1, item 7,
section 46].
Banking Act 1959
Interpretation
1.20 The Bill inserts several new definitions into subsection 5(1) of the
Banking Act to describe key concepts in the provisions relating to trans-Tasman
cooperation.
1.21 The definitions of an action that is likely to have a detrimental effect on
financial system stability in New Zealand, a New Zealand registered bank and
an outsourcing arrangement are inserted for the same purpose as outlined in
paragraph 4.2. [Schedule 1, items 8-10].
1.22 A definition of a prescribed New Zealand authority is inserted to
describe APRA's New Zealand counterpart(s) with which it is required to
cooperate in banking supervision [Schedule 1, item 11]. The definition will be
the same as in the APRA Act as outlined in paragraph 4.3.
1.23 The definition of prudential matters is amended so that it reflects
APRA's new obligations relating to financial system stability in New Zealand
and enables APRA to exercise its powers in the Banking Act for the purposes
of supporting the RBNZ. The definition of prudential matters is a key element
in describing the scope and substance of prudential supervision of authorised
deposit-taking institutions (ADIs). [Schedule 1, item 12].
1.24 A regulation that is made under Section 11A is now called a prudential
requirement regulation to allow the term prudential regulation to be used in the
Banking Act in a manner consistent with its ordinary meaning [Schedule 1,
items 13-14]. The amendment to the definition of a prudential regulation in the
Banking Act has resulted in some technical amendments to APRA's directions
powers. [Schedule 1, items 17 and 19, paragraphs 11CA(1)(a), 11CA(1)(aa)
and 11CA(2)(a)].
Revocation of authority
1.25 The ability of APRA to revoke an authority of an ADI and an authorised
non-operating holding company (NOHC) in the Banking Act is related to the
contravention of a material prudential requirement(s), or can be considered if
allowing the authority to continue would not be consistent with the high level
objectives of banking supervision.
Financial Sector Legislation Amendment (Trans-Tasman Banking Supervision) Bill 2006
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Schedule 1 -- Trans-Tasman cooperation
1.26 This Bill makes it explicit that one of APRA's high level statutory
responsibilities relates to financial system stability in Australia,
subsections 9A(2) and 11AB(2) of the Banking Act -- which relate to the
revocation of an ADI authority and a NOHC authority respectively -- is
updated to reflect this. [Schedule 1, items 15-16, paragraphs 9A(2)(ba) and
11AB(2)(ca)].
APRA may give directions in certain circumstances
1.27 Subsection 11CA(1) of the Banking Act outlines the circumstances under
which APRA may issue directions to a bank. These circumstances are linked to
the contravention of a material prudential requirement(s) and the high level
objectives of banking supervision.
1.28 APRA can issue a direction if it considers that the conduct of an ADI or
NOHC may be a risk to financial system stability in Australia to reflect the
amendment to APRA's statutory responsibilities. [Schedule 1, item 18,
paragraph 11CA(1)(da)].
APRA to protect depositors
1.29 APRA is required to protect depositors in performing and exercising its
powers and functions under Division 2 of the Banking Act. Most of the
provisions in this Division relate to distressed ADIs and include the powers and
functions of statutory managers and administrators.
1.30 The existing provision under Section 12 of the Banking Act is
renumbered for the purpose of allowing additional provisions to be inserted.
[Schedule 1, item 20]
1.31 The potential for problems in a distressed ADI to have flow-on effects in
the financial system more broadly, including for depositors in other ADIs, is a
risk that prudential regulation aims to address. Section 12 of the Banking Act is
amended to clarify that one of APRA's objectives is to contribute to the
maintenance of financial system stability in Australia [Schedule 1, item 21,
subsection 12(1)]. This also ensures that there is consistency between
references to financial system stability in Australia and New Zealand.
1.32 It is important that APRA takes into account its trans-Tasman obligations
in performing and exercising its powers and functions under Division 2. This
item also inserts a provision that ensures it is clear that APRA's new
obligations relating to trans-Tasman cooperation apply to the provisions in the
Banking Act where depositor protection exists [Schedule 1, item 22, subsection
12(2)]. This provision should be balanced against APRA's other statutory
duties under Division 2, but not override them.
Financial Sector Legislation Amendment (Trans-Tasman Banking Supervision) Bill 2006 9
Schedule 1 -- Trans-Tasman cooperation
Administrator in control -- additional duties where action may affect
financial system stability in New Zealand
1.33 APRA, when acting as a statutory manager, is bound by the amendments
to the APRA Act and Section 12 of the Banking Act that encompass its
responsibilities to support the RBNZ and avoid taking actions that may have a
detrimental impact on financial system stability in New Zealand. This Bill
ensures that an administrator (which is a statutory manager that is not APRA)
has similar obligations, where an action by the administrator may have
implications for financial system stability in New Zealand.
1.34 A requirement is inserted for an administrator to advise APRA if they
have reasonable cause to believe that the exercise of a function or power by
them is likely to have a detrimental effect on financial system stability in New
Zealand. [Schedule 1, item 23, subsection 14DA(1)].
1.35 An administrator will not be able to exercise a function or power that may
have a detrimental effect without receiving APRA's consent. This consent must
be in writing to ensure it is clear whether APRA's consent has been granted.
Also, by providing written consent, APRA's obligation to consult with the
RBNZ is on the record. [Schedule 1, item 23, paragraph 14DA(1)(b)].
1.36 These additional duties are qualified to take into account circumstances
where it may not be reasonably practicable for an administrator to meet its
obligations, particularly if a decision needs to made urgently [Schedule 1,
item 23, subsection 14DA(2)]. However, an administrator is expected to advise
APRA as early as possible of the action.
1.37 Consistent with the requirements inserted in the APRA Act regarding
trans-Tasman cooperation, APRA is obliged to consult with the RBNZ on
advice it receives from an administrator under these provisions before granting
written consent to an administrator [Schedule 1, item 23, subsection 14DA(4)].
This obligation is also qualified for reasonableness because there may be
circumstances where an action must be taken by APRA, notwithstanding the
intention, that may have adverse implications or unintended consequences for
New Zealand (such as, for similar reasons as outlined in paragraph 4.16).
[Schedule 1, item 23, subsection 14DA(5)].
1.38 Allowing an administrator to consult the RBNZ directly allows it to
directly clarify whether a proposed action might have implications for financial
system stability in New Zealand and reduces any legal uncertainty over its
ability to do so [Schedule 1, item 23, subsection 14DA(7)]. It also provides
opportunity for the RBNZ to be advised at an earlier stage than if it had to wait
for APRA to formally receive and pass on details from an administrator.
10 Financial Sector Legislation Amendment (Trans-Tasman Banking Supervision) Bill 2006
Schedule 1 -- Trans-Tasman cooperation
1.39 The performance of a function or the exercise of a power by an
administrator or APRA is not invalid because of the failure of either to comply
with these provisions [Schedule 1, item 23, subsections 3 and 6]. This is to
ensure that an action by an administrator cannot be challenged on the basis of
the failure of APRA or the administrator to meet its trans-Tasman obligations.
Such actions might otherwise hinder the speedy and efficient resolution of
problems with an ADI. The provisions also reflect that trans-Tasman
obligations are intended to be balanced against other objectives, not override
them.
Financial Sector (Transfers of Business) Act 1999
Application of sections 8 and 8A of the APRA Act
1.40 This provision ensures that it is clear that APRA's high level objectives,
including its new obligations relating to trans-Tasman cooperation, apply to the
performance and exercise of functions and powers under FSTOBA.
[Schedule 1, item 24, section 7A].
Financial Sector Legislation Amendment (Trans-Tasman Banking Supervision) Bill 2006 11
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