Australia: Proposed Regulatory Amendments to increase APRA's Powers in Respect of General and Life Insurers
Look out ... here comes APRA!

Proposed changes to Australia's insurance regulatory regime will enhance the powers of the Australian Prudential Regulatory Authority (APRA), including granting APRA the power to effectively force insurers to recapitalise and provide self-incriminating material.

The Financial Sector Legislation Amendment (Prudential Refinements and Other Measures) Bill 2010 (the Bill) and Corporations Amendment Regulations 2010 (the Regulations) were released for public comment by the Federal Minister for Financial Services, Superannuation and Corporate Law on 19 January 2010. The proposed amendments seek to provide APRA with greater investigative and monitoring powers in their dealings with the regulated financial services sector.

These include the power to appoint a Statutory Manager to facilitate takeovers and transfers of company assets and liabilities where necessary, and the power to issue recapitalisation orders to ensure insurers are capable of meeting their obligations.

The Regulations, if passed, will require authorised deposit-taking institutions and general insurers to provide information in their Product Disclosure Statements relating to the Financial Claims Scheme (FCS). This is to inform potential clients and investors of protected accounts and insurance policies of their means of access to, and entitlements under, the FCS. Implementation of the disclosure requirements in the Regulations would become effective from 17 April 2010 for general insurers and from 12 October 2011 for authorised deposit-taking institutions.

The Bill proposes a number of amendments to various Acts including the Insurance Act 1973 (Cth) and the Life Insurance Act 1995 (Cth) (the Acts). The proposed amendments indicate a regulatory trend to streamline the approach taken to the financial sector. The proposed amendments grant APRA greater powers to investigate, detect, and compel compliance with prudential requirements and standards in addition to greater powers to administer the FCS. The amendments further seek to amend the financial sector levies framework to reduce regulatory costs.

The Bill includes some substantive proposed changes to the Acts, including:

• granting powers to APRA to issue 'recapitalisation directions', enabling APRA to require an insurer to increase its level of capital to a level specified in the direction, if the insurer informs APRA that it is unlikely to meet its obligations. This could be a powerful tool to assist APRA in preventing future insurer collapses. Prior to recapitalisation, APRA will be required to seek an independent expert's report on the fair value of shares in order to exercise additional enforcement and disclosure powers;
• removing the privilege against exposure to penalties arising out of proceedings commenced under, or out of, the Acts. Persons will no longer be entitled to refuse or fail to comply with requirements to answer questions, produce information, or perform other requested acts on the ground of self-incrimination, regardless of any other provision of the Acts or the Administrative Appeals Tribunal Act 1975;
• providing APRA with discretionary power to set authorisation criteria for body corporates carrying on insurance business in Australia;
• defining 'Principal Auditor' as the regulated party's selected auditor, while APRA appointees and additional auditors will be referred to as 'Auditors' in general. The amendments propose greater emphasis on auditors' obligations to inform APRA of any undue influence, or misleading and deceptive conduct by insurers;
• granting Judicial Managers the powers and functions of members of the board of directors, and the power of delegation; and
• classifying reinsurance businesses as an 'Insurance Business', as they are no longer exempt. However, an entity will no longer be deemed to carry on an 'Insurance Business' if it is solely engaged in the business of reinsurance.

What this means for you?

Both general and life insurers may come under greater scrutiny, investigation and intervention from APRA should the proposed amendments become law.

In many respects, the changes are welcome to the extent that they further strengthen Australia's prudential regulation, provide greater disclosure to consumers and address some of the teething problems experienced to date in connection with the FCS.

Nevertheless, creeping expansion of APRA's powers calls for them to exercise such powers reasonably, particularly in light of Justice Perram's recent comments in Porter v Australian Prudential Regulations Authority 2009 FCA 1148.

The proposals provide further incentive for insurers to ensure that their houses are in order.

The closing date for submissions for the Bill is 16 March 2010 and 16 February 2010 for the Regulations.

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