Proposal
The Government invites comments on whether APRA should be given a specific standards-making power similar to that provided to APRA in relation to the general insurance industry in the General Insurance Reform Act 2001.
Amendments to the Insurance Act 1973 (Insurance Act) included in the General Insurance Reform Act 2001 (GIRA) introduced the power for APRA to make and enforce prudential standards. High order prudential principles were included in the Act, with detailed requirements for general insurance companies to be included in Prudential Standards, and underpinned by non-binding Guidance Notes. The Prudential Standards are disallowable instruments (meaning that they may be disallowed by the Parliament) and APRA is required to undertake a consultation process with industry in developing the standards.
Views from the consultation process
Submissions expressed a wide range of views on this proposal.
There was some strong support (the Australian Bankers' Association, the Trustee Corporations Association of Australia, MAP Funds Management) on the grounds that it would enable APRA to undertake appropriate prudential regulation of superannuation and provide it with the flexibility necessary to enable prudential regulation to keep pace with the evolution of the superannuation sector. For example, MAP Funds Management indicated 'it is important that APRA is able to be responsive and flexible and this proposal may assist this process.' In addition, the Australian Bankers' Association indicated that the lack of any power enabling APRA to develop prudential standards for superannuation is a significant gap in the existing arrangements that APRA has in other prudentially-regulated regimes.
However, there was also strong opposition on the grounds that such a power could give APRA de facto legislative power that would not be subject to proper legal or Parliamentary scrutiny (the Law Council of Australia, some smaller superannuation funds) or that it had not been demonstrated that any extension of existing powers was necessary (PricewaterhouseCoopers, Westscheme). The Law Council of Australia suggested that 'it would be preferable to update and simplify existing regulations'. ASFA also indicated that, while it supported the need for a strong and pro-active regulator, it was not convinced that there was a need for this power. It was noted that better use might be made of existing powers. The Securities Institute of Australia also noted 'the highest priority is for APRA to utilise the extensive powers it already holds under the Superannuation Industry (Supervision) Act ... rather than to delay enforcement action until stronger powers are legislated.'
Among those submissions expressing some degree of support, concern was expressed about the need for APRA to have the appropriate resources to enforce any new standards and the possible costs to members (HortSuper, Meat Industry Employees Superannuation Fund), the dangers of over-regulation (Commonwealth Bank of Australia) and the need to balance other objectives such as efficiency, competition, contestability and competitive neutrality. It was also observed that, although further divergence between the requirements for small and large funds may make transition from one framework to the other difficult, universal standards would impose prohibitive costs on small funds (the Institute of Chartered Accountants, NSP Buck).
A number of submissions also emphasised that industry consultation would be necessary to ensure cost-effective implementation of any standards (the Securities Institute of Australia, AMP).
During the focus group sessions, participants queried the real benefits that a prudential standards-making power would deliver, and expressed concerns about the costs of change (for the industry as well as for the regulator and Government), especially in light of views that the amendments may provide cosmetic rather than substantive changes. Some participants also challenged the need for this power in view of the existing operating standards-making powers in the SIS Act.
A number of participants also supported the need for APRA to use its current powers more effectively in preference to change in this area.
There was also concern about whether APRA would be in a position to consult effectively with such a diverse industry. In relation to consultation, a number of stakeholders indicated they felt that the process in making operating standards provided greater transparency when compared with prudential standards. Concerns were also expressed about how APRA would manage consultation with other Government stakeholders to ensure that prudential standards prepared by APRA align with other aims objectives of the SIS Act, and general concerns about consistency of approach.
The Australian Bankers' Association strongly reiterated comments which they provided in their submission in support of a prudential standards-making power.
Consideration of the proposal
The arguments in support of the proposal for APRA to have a prudential standards-making power, as highlighted in the Issues Paper and in submissions, include that such a power would:
- implement recommendation 33 of the FSI that APRA should be empowered to establish and enforce prudential regulations on any licensed or approved financial entity independently from the Executive Government.7 This was seen as important in the process of clarifying limits to the 'regulatory assurance'. The current process of making operating standards requires Treasury to advise the Government on the content of the standards which are then made by the Governor-General, rather than APRA making the standards directly. It is argued that this is inconsistent with the FSI's recommendation. There would still be appropriate checks and balances for prudential standards, such as mandatory industry consultation and Parliamentary scrutiny;
- enable complete prudential topics to be addressed within a single statement. Under the current operating standards, matters relating to a specific topic cannot always be found in a single place in the legislative framework, but across a spectrum of regulatory instruments. To date, APRA has developed superannuation circulars to comprehensively address topics in plain English. However, these circulars are not legally enforceable;
- be a faster and more flexible process than the making of regulations (operating standards). APRA would be able to make and consult on prudential standards themselves without having to involve Treasury and the Office of Legislative Drafting in the process. Treasury would be consulted on the content of the standard, but unlike the process of the making of regulations, would not be involved in the process of making the standard. There would be no need to use drafters unfamiliar with the technical subject matter (they would be drafted in-house by APRA staff), and concerns about access to scarce Parliamentary drafting resources would be eliminated. It would enable APRA to set its own drafting priorities, rather than being subject to the drafting priorities of the Government as a whole;
- enable standards to be written in plain English. Prescribing operating standards through regulation necessitates the use of legal language and form; and
- be consistent with other prudential regimes under which APRA has the power to make prudential standards. Those for general insurance were recently introduced and require mandatory consultation on standards that are disallowable instruments.
There are a number of practical implementation issues arising from the current legislative framework into which the prudential standards-making power would be inserted that will need to be addressed in providing such a power.
The SIS Act already contains wide powers to make subordinate instruments applicable to the operation of superannuation entities. For example, the operating standards power in Pa
rt 3 of the Act is only constrained by the requirements that standards relate to the operation of superannuation entities and are not inconsistent with the Act. Operating standards currently cover a wide range of matters including: contributions and benefits; portability; investments; governance and disclosure issues; actuarial, funding and solvency requirements; and winding-up provisions. In this respect, the SIS Act is materially different from the other prudential regimes overseen by APRA prior to the introduction of prudential standards-making powers (the Banking Act 1959, the Life Insurance Act 1995 and especially the Insurance Act as amended by the GIRA).
Further, unlike the other prudential regimes, APRA is not the only regulatory body utilising the provisions of the SIS Act. ASIC also enforces certain consumer protection and disclosure provisions and the ATO administers the requirements for SMSFs. In addition, superannuation forms a key part of the Government's retirement income policy, and the SIS Act includes retirement income policy provisions as well as prudential and consumer protection provisions. The current operating standards-making power would need to remain for retirement income and consumer protection purposes.
The various types of provisions are tied through the concept of a 'complying fund' in the SIS Act. Accordingly, the bodies charged with implementing these policies - APRA, ASIC, ATO and the Treasury - all have an interest in any instruments made under the Act. Any proposed changes to give APRA a prudential standards-making power would need to take account of these other stakeholders.
In particular, there would need to be a clear delineation between prudential regulation and retirement income policy and close consultation on any prudential standards that might have the potential to impact on retirement income aims. Care would also need to be taken to ensure that there were no inconsistencies between prudential standards made by APRA and operating standards made for retirement income purposes.
While introduction of a prudential standards-making power of itself would not require significant legislative change, as prudential standards are introduced on particular topics there would need to be restructuring of the legislation and regulations to accommodate the standard. In particular, those provisions being addressed by the standard would need to be repealed and other provisions are likely to require amendment.
Care would also need to be taken to ensure that the introduction of a power to make prudential standards did not further increase the complexity of the SIS Act. The impact on implementation and compliance costs would also need to be considered. The SWG is conscious that in its draft report released in September 2001 in relation to its National Competition Policy Review of the Superannuation Industry (Supervision) Act 1993 and Certain Other Superannuation Legislation, the Productivity Commission noted giving APRA increased discretion to determine standards could contribute to greater uncertainty amongst superannuation entities, requiring them in some instances to have increased resort to legal advice about the prudential standards.8 Consideration will need to be given to how any such uncertainty can be addressed.
The SWG acknowledges that the existing operating standards power already provides a mechanism for making standards in a wide range of areas. The proposed prudential standards-making power, rather than being a new or increased power as such, can be regarded as a different process for exercising an existing power. It would provide APRA with greater flexibility in making standards, while still being subject to the same level of consultation and Parliamentary scrutiny as operating standards.
Thus, the SWG supports providing APRA with a prudential standards-making power. It acknowledges, however, that there are a number of practical implementation issues that will need to be considered and consulted on in granting such a power, in particular, the implications for the structure of the SIS Act as a whole and for the other objectives of the Act.
Recommendation 13
The SWG recommends that APRA be empowered to make prudential standards similar to the power it has in relation to general insurance. The SWG acknowledges that there are a number of practical implementation issues that will need to be addressed progressively in relation to such a power, in consultation with relevant stakeholders.