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 Streamlining Prudential Regulation
15th February, 2007
Andre Moore
Streamlining Prudential Regulation Project
Financial System Division
The Treasury
Langton Crescent
PARKES ACT 2600
Dear Mr Moore,
Administrative Review Council Submission: Streamlining Prudential
Regulation
The Administrative Review Council is pleased to provide a submission in
relation to the Streamlining Prudential Regulation Project and looks forward to
providing further input into the drafting of proposed legislative amendments at
an early stage.
The Council was established by the Administrative Appeals Tribunal Act 1975. The
Council’s role is to monitor and provide advice to Government, through the
Attorney-General, in relation to Commonwealth administrative review and
administrative law generally. The Council is required to review and inquire into
the Commonwealth administrative law system and to recommend to the
Attorney-General improvements that might be made to the system. This
includes assessing the adequacy of procedures used in exercising administrative
discretions and reviewing classes of decisions, including new legislative
proposals, to determine if they should be subject to administrative review.
The Council comprises a diverse range of Members who are appointed for their
high standing in business, public administration or academia and for their
significant knowledge and understanding of public administration and
administrative law.
Three ex-officio members are appointed by virtue of the office that they hold,
being the Commonwealth Ombudsman, the President of the Australian Law
Reform Commission and the President of the Administrative Appeals Tribunal.
Through its membership and standing, the Council is particularly well placed to
provide comment and advice to government on proposed activities involving
administrative law.
The areas of particular concern for the Council relate to the administrative law
standards and principles that need to be taken into account in any proposed
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changes to legislative powers and in administrative decision making likely to
affect individuals and entities.
The Council has a current interest in complex business regulation having been
provided with terms of reference by the Attorney-General in August 2006 for a
new project: Administrative review in areas of complex and specific business
regulation. In developing the report for this project, the Council will consider the
most effective and efficient accountability mechanisms for decisions in the area
of complex business regulation. It is with this context in mind that the Council
considers that it can offer comment in this submission on efficiency issues and
implications for business as well as broader administrative standards.
General Comments
The Council notes the project’s overall objective is to streamline prudential
regulation through the harmonising of legislation administered by APRA. The
Council recognises that such a move requires a balance between maintaining
compliance with regulatory requirements in the conduct of business and
ensuring that regulated entities are not unduly constrained.
The Council is firmly of the view that in responding to the need for regulatory
reform, changes to the current prudential scheme need to be appropriate and
well targeted and should not introduce further compliance requirements for
business. Council is also keen to ensure that regulatory changes undertaken as
part of the streamlining proposals translate into practical benefits for regulated
entities. Council’s position is that in order to strengthen and maintain openness
and accountability, merits review rights should be available to ensure fair
treatment for all persons affected by a decision, whether individuals or entities.
The Council is mindful that the HIH Royal Commission was dealing with an
extreme example in the failure of a large insurance company and that the
principles of regulator accountability should be maintained.
In addressing the apparent lack of uniformity between provisions in legislation
administered by APRA, the Council strongly recommends that changes to the
various pieces of legislation in the prudential regulation scheme should be
carried out in such a way that the resultant powers and procedures can be
effectively operationalised. A failure of consistent regulatory action may lead to
additional changes and over-regulation.
Proposals
Proposal 1.1
The Council does not disagree in principle with the proposal to include a
“materiality test” under the prudential Acts in line with Section 912D of the
Corporations Act but considers that there are a number of related issues that
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need to be clarified. As a preliminary comment, Council notes that the model for
this test in s 912D of the Corporations Act uses the term “significant” rather than
“material” and the Council suggests that in the interests of legislative
consistency, the same terminology should be adopted in the prudential
legislation.
The Council understands that the proposal seeks to address the cost to industry
associated with breach reporting. It is probable that cost savings would in
practice stem more from administrative rather than legislative reform. In its
Breach Reporting Guide 2006, ASIC considers that a regulated entity should use a
documented breach register to ensure that it has adequate arrangements in place
to identify and report all significant breaches and likely breaches as required by
the Corporations Act. If an entity does have such a register in place, it should
enable the entity to make simultaneous reports at little cost to different
government agencies.
As a related consideration, there can be an advantage in an entity reporting
separately to both APRA and ASIC. A regulated entity will generally be
concerned to ensure that it maintains a relationship of trust and close
communication with both regulators. If, however, it is thought preferable that
one regulator should have an obligation to pass information promptly to the
other regulator, the scope of that obligation should be clearly enunciated.
Another administrative reform that is necessary to reduce cost and uncertainty is
for the regulators to enunciate a clear policy on the legislative requirements. The
Council notes the recommendations of the HIH Royal Commission that APRA
balance consultation, inquiry and constructive dialogue with firmness in its
requirements and a preparedness to enforce compliance with applicable
standards.1 In this regard Council notes that the Explanatory Memorandum
foreshadows guidance from the regulator. Council suggests that APRA provide
appropriate guidance, including case study examples, to clarify the proposed
standards of breach reporting including what is ‘significant’ or ‘material’, and to
reduce over-reporting of breaches. . Such guidance should also take into account
ASIC’s breach reporting guide so that a corporate entity can adopt a coordinated
method of breach reporting.
The Council further notes that the proposals do not appear to make any
distinction between information gathering, general reporting obligations and
breach reporting. Recommendation 5.11 of Rethinking Regulation2 states that
“The Australian Government … should review the data collection and regulatory
reporting obligations imposed on regulated entities”. In this context, the Council
1
The Failure of HIH Insurance Vol 1: A corporate collapse and its lessons, April 2003 p.221
2
Rethinking Regulation : Report of the Taskforce on Reducing Regulatory Burdens on Business, January
2006 p.96.
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recommends consideration be given to streamlining the data collection and
reporting requirements on business.
Proposal 1.2
The Council notes the proposal to require the reporting of material breaches to
the regulator no later than 10 business days after a breach is first notified to a
responsible person. Given the consequences of failure to report significant
breaches within time and the need for regulated entities to determine if breaches
are indeed significant, the Council suggests there is a need to provide for an
extension of time, upon application.
In addition, the Council recommends that the definition of “likely breach” in the
proposed legislative amendments be consistent, as far as possible, with the
definition in the Corporations Act.
Proposal 1.3
The Council notes the proposal to remove the requirement for a regulated entity
to report breaches to the regulator if an actuary or auditor is required to report
and has informed the licensee. The Council does not disagree with the aim of
removing the need for multiple reporting of breaches but notes that, in practice,
most regulated entities will want to maintain a “constructive dialogue” with the
regulator .
Proposal 1.4
It is proposed to amend the prudential Acts to ensure that breaches that relate to
provisions administered by both APRA and ASIC are only reported to APRA
which in turn will provide the information to ASIC. Council is concerned that
ASIC and APRA may have different views as to what constitutes a significant
breach. Council notes that APRA’s focus is on prudential regulation while ASIC
is concerned with commercial regulation for the protection of consumers,
investors and creditors. Agreed and transparent protocols on potentially
different views of “significant” may need to be established to protect industry.
The Council is encouraged in this regard by the establishment of the
APRA/ASIC joint working group detailed in the Information Release of 5th
February, 2007 that seeks to coordinate policy, compliance and enforcement
issues common to both agencies.
Proposal 1.6
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The Council is supportive of adequate protections being available to
whistleblowers who act in good faith.
Proposal 2.1
The Council notes the intention to remove Ministerial consent where it is
presently required as a trigger to the commencement of investigations.
Following removal of Ministerial consent, the Council recommends APRA
ensure that there is adequate opportunity to “show cause” as a substitute trigger.
If a show cause trigger is adopted a time limit would be required for a response.
The Council notes that in section 52 of the Insurance Act 1973, APRA may serve
on a body corporate a notice requiring it to show cause within a period of not
less than 14 days as to why APRA should not investigate the business or appoint
a person to investigate the business. In section 52 (1AB) APRA currently may
specify a period of less than 14 days if the Treasurer has agreed. If this power
remains with APRA once removal of the Minister’s consent is required Council
recommends that there should be some limits on the power such as defined
circumstances in which APRA may shorten the “show cause” timeframe.
The Council is also of the view that there should be a clear distinction between
the grounds for conducting an investigation and the procedure that is followed. At
present the provision of Ministerial consent operates to ensure that the activation
of an agency’s investigative powers where other triggers are not available is
conducted according to government policy and on public interest grounds. In
the absence of that pathway APRA would need a well defined trigger for the
commencement of an investigation.
In its recent draft report, Government Agency Coercive Information Gathering
Powers3, the Council consulted with a number of government agencies including
APRA and ASIC about appropriate investigation triggers as part of their
regulatory responsibilities. The Council’s view as stated in the report is that the
minimum threshold for the use of investigative powers should be that the
exercise is consistent with the objects of the legislation and that the state of mind
for the use of the powers is that the decision-maker has “reasonable grounds”4
for commencing the investigation. These “grounds” need to be established, not
merely by the regulator determining that circumstances warrant an
investigation, but by some internal process which is verifiable and which sets out
reasonable grounds for the formation of the view that an investigation is
required.
Proposal 2.2
3
Administrative Review Council draft report, December 2006: see www.ag.gov.au/arc
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ibid p.18
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The Council notes that the proposal to introduce a trigger into the Insurance Act
1973 based on section 136(g) of the Life Insurance Act 1995 gives APRA wider
powers to investigate an entity in the absence of the requirement for Ministerial
consent. The Council notes that section 136(g) of the Life Insurance Act relates to
the issuing of a “show cause notice”, not an actual investigation, while the
explanatory material accompanying the proposals refers to providing APRA
with an effective power to initiate an investigation in a timely manner.
Proposal 2.4
The general approach to merits review reflected in this proposal appears
consistent with that advocated in the Council’s publication 'What Decisions
Should Be Subject To Merits Review?' (‘What Decisions’)5. Merits review is an
important part of a system of accountability aimed at protecting the legitimate
rights of those affected by administrative decisions and making a regulatory
body accountable in the exercise of powers and functions.
Proposal 2.4 states that certain decisions would be subject to merits review while
some would not. The decisions suggested for exclusion are monitoring and
investigation decisions which are characterised as “preliminary in nature”. In
‘What Decisions’, the Council states that preliminary or procedural decisions that
facilitate, or lead to, the making of a substantive decision are not the type of
decision suitable for merits review. It should be noted, however, that this
statement is qualified by the observation that in the case of preliminary or
procedural decisions, merits review may not be necessary because such
decisions do not generally have substantive consequences.
In the case of a regulated entity in the prudential market that is subject to
monitoring and investigation by APRA, there is potential for such an
investigation to damage the business and reputation of the entity, as is
illustrated by the HIH collapse. In such circumstances the preliminary or
procedural nature of the decision would not be a reason to exclude merits
review.
Table 3 in the attachments to the Proposals Paper sets out decisions where it is
proposed that merits review should be made available. The Council would be
particularly interested in a similar table indicating the decisions of the regulator
that will be outside the scope of merits review. This will ensure that decisions
for which exclusion of merits review is proposed are truly preliminary or
procedural and do not have substantive consequences.
In assessing whether exclusion is warranted, the Council suggests that the
principles contained in the decision of the Full Federal Court in South Australia v
Slipper be followed These principles referred to the exclusion of natural justice
5
Administrative Review Council report, July 1999.
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but can be applied equally to the proposal to oust merits review. The Court
noted that Parliament must make its intentions very clear if it wants to exclude
or limit the obligations of natural justice. Finn J (with whom Branson and
Finkelstein JJ agreed) summarised the principles as follows:
i.
ii.
iii.
iv.
when a statute confers a power on a public official the exercise of which
affects a person’s rights, interests or expectations, the rules of procedural
fairness regulate the exercise of that power unless those rules are
excluded by express terms or by necessary implication
a legislative intention to exclude the rules will not be assumed or spelled
out from indirect references, uncertain inferences or equivocal
considerations
an intention to exclude should not be inferred merely from the presence in
the statute of rights which are commensurate with some of the rules of
procedural fairness
while the rules may be excluded because the power in question is of its
nature one to be exercised in circumstances of urgency or emergency,
“urgency cannot generally be allowed to exclude the right to natural
justice”, although it may in the circumstances reduce its content.6
Critical to the finding in South Australia v Slipper was the ‘profound’ effect of any
exercise of the power.
Proposal 2.5
The Council has a particular interest in proposal 2.5 as it relates directly to limits
on the scope and availability of merits review in prudential regulation. The
Council is concerned that it is proposed that merits review be excluded in
respect of certain APRA decisions relating to an entity “where APRA reasonably
believes that failure by APRA to act immediately would materially prejudice the
interests of beneficiaries or the stability of the Australian financial system”. It is
further stated that where merits review is excluded, the decision would be
judicially reviewable. The Council notes that judicial review is no substitute for
merits review since the court can not change the substantive outcome, which is
usually what the entity is seeking.
The proposal that APRA would have an overriding power to decide that a
particular decision is one that requires certain rapid action to restore or maintain
investor confidence, and is therefore not reviewable would not only be
unconventional but would, in the Council’s view and as a matter of principle, be
an unacceptable method for determining whether a decision is merit reviewable
by a tribunal. The jurisdiction of a tribunal ordinarily depends on whether a
decision fits a statutory description of a particular kind, not on whether the
decision-maker separately decides that its own decision is unsuitable for some
6 (2004) 136 FCR 259 at [93]. also Australian Government Solicitor, Legal Briefing No. 78, July 2006.
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additional reason. If there are categories of APRA decisions that are unsuitable
for review, those categories should be defined clearly and separately in the
legislation. APRA should not have an overriding power to exempt from review a
decision that would be reviewable aside from the exercise of that overriding
power. A clear and accountable objective test is required when the result is the
exclusion of merits review and that is not what is presently proposed..
The Council in ‘What Decisions’, sets out the classes of decisions likely to be
justifiably excluded from merits review. Although these include where there is
“a need to take rapid action to restore or maintain investor confidence in the
market”, ‘What Decisions’ further states that such decisions would typically
require complex evaluation of competing facts, be expected to have a high
impact on the market and involve a high level of political accountability.
Ultimately …“it is rare for decisions to come within this exception”.
In the view of the Council, a review of an administrative decision in the
Administrative Appeals Tribunal would not delay action by APRA unless an
applicant obtained a stay of the decision. Section 41(1) of the Administrative
Appeals Tribunal Act 1975 states that “subject to this section, the making of an
application to the Tribunal for a review of a decision does not affect the
operation of the decision or prevent the taking of action to implement the
decision.” It is unlikely that an applicant would be granted a stay of APRA
action in the event of urgency. The HIH Royal Commission found little evidence
of review processes being used to frustrate regulatory activities. The
Commission also concluded that it was unlikely that the AAT would grant a stay
of an APRA decision where this would pose an unacceptable risk to
shareholders.
Proposal 2.6
The Council notes the proposal to provide APRA with exemption powers to
allow greater flexibility in the regulatory scheme affecting prudential entities.
Council is concerned with the second part of the proposal which aims to clarify
that decisions relating to classes of persons are legislative in nature while those
relating to a particular person are administrative and therefore
merits-reviewable.
The suggestion is that the regulator may determine whether instruments should
be treated as legislative in nature and subject to the requirements of the
Legislative Instruments Act 2003 or are administrative in nature and therefore
merits reviewable. In the view of the Council, it is difficult to predetermine
whether an instrument is legislative or administrative in character. Such an
interpretation flows from the character of the instrument and depends on the
drafting of the legislation.
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Council strongly believes that the regulatory controls on commercial decisions
which are classified as legislative are no substitute for merits review (see
Legislative Instruments Act 2003 section 17). Consultation with industry is not an
effective replacement for a system of accountability through merits review. In
particular, there is no sanction for failure to consult and no requirement to take
any particular action or consider issues raised by the consultation process.
However, where APRA makes a general exemption, properly classed as
legislative, upon its own initiative, clearly merits review is not applicable. If a
party requests an exemption from APRA, an adverse decision should in
principle be reviewable. This will be the case whether the exemption is refused
outright, or because the exemption (even a legislative-type exemption) was in
different terms to what the person requested.
Proposal 2.8
In relation to the confidentiality of AAT hearings, it is proposed to replace the
confidentiality provisions in the prudential Acts with public hearings allowing
an applicant the option to apply for a private hearing. The Council supports this
proposal.
The Council also notes that the AAT does need to have the discretion to grant
private hearings and to decide in particular circumstances whether the decision
should be released in full and if so whether the applicants should be identified.
In recent decisions the AAT has shown a sensitivity to this issue.
In Re Slee and Australian Prudential Regulation Authority7 the AAT considered
whether the decision should be released in full and sought submissions from the
parties on the issue. The AAT held that subsection 63(14) of the Insurance Act
does not prohibit the AAT from publishing its reasons with the applicant being
identified. In fact, to construe the provision otherwise would be contrary to
public policy, open justice and the policy of the Insurance Act 1952 in enabling
disqualification. The AAT also reasoned that, given the protective nature of a
disqualification decision, it is important for the insurance industry and other
interested parties, including the general public, to be informed of the status of
participants. The AAT decided in that case that the applicant's name should not
be suppressed.
There may well be circumstances in which it will be appropriate to suppress the
name of an applicant or other identifying details in a published decision. It
remains open to the AAT to make confidentiality orders to this effect. On the
approach taken in Re Slee, this will be a decision to be made in the particular
7
[2006] AATA 206; 6 March 2006
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circumstances of an application rather than one that flows from the fact that
proceedings have taken place in private.8
8
"The Administrative Appeals Tribunal - Its Role in the Regulation of the Insurance Industry"
Justice Garry Downes AM
Speech delivered to the Australian Insurance Law Association - Northern Territory Branch - Seminar, Darwin
11 April 2006
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The Council also notes the decision in Re VBN and Australian Prudential
Regulation Authority9 where the AAT decided to vacate confidentiality orders
except for “personal information” within the meaning of the Privacy Act 1988.
The decision stated that the public needs to have confidence in the Tribunal’s
independence and fairness in carrying out its functions which includes being
able to scrutinise tribunal proceedings.
Proposal 3.1
The Council notes that APRA proposes to ensure flexibility and accountability in
the administration of prudential standards through the provision of greater
discretionary powers. To the extent that the proposal relates to APRA’s powers
to make prudential standards for an individual entity and there is no impact
upon merits review, the Council does not disagree with the proposal.
Streamlining of powers and discretions under the Banking Act, the Life
Insurance Act and the Insurance Act is a logical step and accords with the
recommendations in the Banks Report that the regulator has greater flexibility in
order to address issues affecting individual businesses.
Proposal 3.2
The Council has concerns with proposal 3.2. In this regard note the comments
made in relation to proposal 2.6.
Council’s understanding is that APRA is seeking to remove the ability to exercise
a discretionary power under regulations made pursuant to, for example,
paragraph 32(3D)(c) of the Insurance Act. The proposal applies to different
classes of entities and is to replace the discretion with a legislative power that
would be open to scrutiny through the parliamentary process but would not be
merits-reviewable. The explanatory material states “it is proposed that
amendments be made to clarify that all variations or modifications to prudential
standards which affect a class of persons are legislative instruments and are
subject to the requirements of the LIA” (Legislative Instruments Act 2003).
The rationale for the proposed change appears to be that any changes which
affect classes of persons need to be made in a transparent manner, including
after appropriate consultation. The Council’s view is that transparency and
accountability is best served by the availability of administrative review on the
merits of a decision. As was noted in the Banks Report, some stakeholders
considered that the absence of an appropriate review mechanism undermines
confidence in the regulatory regime and diminishes the accountability of the
regulators.
In the Council’s publication What Decisions it is stated that the potential for a
relatively large number of people to seek merits review does not justify
9
(No 4) (V2005/686) – (2006) 92 ALD 475.
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excluding those decisions from review. Instead other methods are suggested for
containing costs and to avoid the delay associated with review. These include
ensuring a high standard of primary decision-making and the creation of an
intermediate level of review that can operate speedily and informally.
Proposal 4.2
Council notes the proposal to extend the disqualification power currently
available to APRA under the Insurance Act 1973 to other prudential legislation.
Section 25A of the Insurance Act 1973 provides
(1) APRA may disqualify a person if it is satisfied that the person is not a fit and proper
person to be or to act as someone referred to in paragraph 24(1)(a), (b) or (c).
The relevant persons under paragraph 24 are a director or senior manager of a
general insurer (other than a foreign general insurer); a senior manager, an agent
in Australia of a foreign general insurer for the purpose of section 118; or a
director or senior manager of an authorised Non Operating Holding Company.
It appears that such decisions would currently be reviewable under section 63 of
the Insurance Act. As such, the proposed legislative changes would need to
ensure that disqualification decisions under the other prudential legislation
would similarly be open to merits review.
Proposal 4.4
The Council notes the proposal that APRA have the power under all prudential
Acts to refer matters relating to an actuary or auditor to the relevant professional
body. The Council’s view is that in drafting the legislative amendments, it would
be prudent to comply with Principles 10 and 11 under section 14 of the Privacy
Act 1988 that relate to limits on use and disclosure of personal information.
Conclusion
In view of the substantive nature of the Council’s comments, the Council would
welcome the opportunity to comment on draft legislation and in this regard,
would be grateful to receive an exposure draft at the earliest opportunity. The
Council would also be happy to make itself available for further consultation on
these proposals before drafting if that would be helpful.
The Council’s acting Executive Director, Ms Wendy Banfield, can be contacted
on (02) 6250 5800 or by email at wendy.banfield@ag.gov.au.
Yours sincerely,
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Jillian Segal AM
President
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