Australian Regulatory Compliance Review

Legislation to remove same-sex discrimination

The Attorney-General Robert McClelland has announced that the government will introduce legislation to remove same-sex discrimination from a wide range of Commonwealth laws .

This reform follows the 2007 report of HREOC, Same-Sex: Same Entitlements, which focussed on financial and work-related legislation.  On coming to office, the Rudd Government commissioned an audit of Commonwealth laws, which identified other areas of discrimination.

Areas where discrimination will be removed include tax, superannuation, social security, health, aged care, veterans’ entitlements, workers’ compensation, employment entitlements, and other areas of Commonwealth administration.

The Rudd Government will begin introducing legislation in the Winter Sittings of Parliament. Most reforms will commence soon after the legislation is passed. In some areas (such as social security, tax and veterans’ affairs), the reforms will be phased-in to allow time for couples to adjust their finances, and for administrative arrangements to be implemented. All of the changes are expected to be implemented by mid-2009.

The changes will not alter marriage laws.

Regulation of Direct Offshore Foreign Insurers - Draft Regulations

Treasury has released draft regulations setting out the details of the exemption provisions for licensing of foreign insurers announced on 8 April.

Submissions close on 19 May 2008.

ACCC report on anti-competitive practices by health funds or providers

The ACCC has released its 2006-2007 report to the Senate of ‘any anti-competitive practices by health funds or providerswhich reduce the extent of health cover for consumers and increase their out-of-pocket medical and other expenses’.

The report covers:

• Portability of health fund membership
• contracts and contract negotiation between hospitals and health funds
• the availability of useful consumer information on private health insurance products and health services

The Report noted a decrease in the overall complaints and inquiries received by the ACCC and the Private Health Insurance Ombudsman.

It has a useful overview of Australia's health fund market (although this has since changed with the public listing of NIB and the prposed demutualisation of MBF).

Prudential supervision of general insurance groups

The Australian Prudential Regulation Authority (APRA) has released its draft prudential framework for supervision of general insurance groups.

  The package consists of three draft prudential standards and a discussion paper. The package also responds to recommendations 38 and 39 of the HIH Royal Commission. Initial consultation with the general insurance industry on this topic began in May 2005.

The foundation of APRA's approach to the supervision of general insurance groups is that the group as a whole should meet essentially the same minimum capital requirements as apply to individual general insurers. Being part of a wider insurance group can alter the risk profile of an individual insurer through financial and operational inter-relationships with other group members and through decisions and initiatives taken at group level.

It is intended that the final prudential standards implementing general insurance group supervision will be released in the third quarter of 2008 and will become effective on 1 January 2009.

MBF demutualisation scheme

The Federal Court has authorised MBF Australia Limited to convene a meeting of its members to consider a scheme of arrangement which involves the company's demutualisation ( MBF Australia Limited, in the matter of MBF Australia Limited [2008] FCA 428)

The reasons for the decision are of interest because they consider, in addition to the Court’s consideration of whether to approve the Scheme under s 411(4)(b) of the Corporations Act, the conditions imposed by the Private Health Insurance Administration Council (PHIAC) namely:

(a) that the conversion scheme would not result in a financial benefit to any person who is not a policy holder of, or another person insured through, a health benefits fund conducted by the insurer; and

(b) that the conversion scheme would not result in financial benefits from the Scheme being distributed inequitably between such policy holders and insured persons.

The Scheme Information Memorandum has been published on MBF's website here.

Foreign insurers in Australia

  The Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) are jointly reminding direct offshore foreign insurers (DOFIs) and local insurance brokers about the new authorisation requirements for foreign insurers that come into effect on 1 July 2008.

Following the passage of the Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Act 2007, DOFIs wishing to continue operating in the Australian market must be authorised by APRA. The new authorisation requirements are designed to ensure that general insurers are prudentially regulated and consumers are protected from dealing with unauthorised DOFIs that would not meet the standards required of an APRA-authorised insurer. Some business will still be able to be placed with DOFIs that are not authorised as long as this business is placed in accordance with the exemption regime outlined below.

Overseas insurers that provide a substantial application for authorisation by 31 May 2008 will be allowed to continue operating as DOFIs for a limited transition period after 1 July where consideration of their application by APRA is not complete by that time. Foreign insurers will be subject to the sanctions provided for under the Insurance Act 1973 if they have not applied to APRA for authorisation and continue to write business not covered by the exemption provisions after 1 July 2008.

From 1 July 2008, intermediaries (such as agents and brokers) holding an Australian financial services licence (AFSL) will be able to place insurance business only with APRA authorised insurers or in accordance with the exemption regime.

Exemption arrangements

The Assistant Treasurer and Minister for Competition Policy and Consumer Affairs, Chris Bowen has announced the limited exemption arrangements for direct offshore foreign insurers (DOFIs).

An exposure draft of the regulations implementing the exemption arrangements will be released for consultation by late April 2008.

The exemption balances the need for protection for Australian business and consumers with the acknowledged need that some insurance will not be able to be placed in Australia.

The exemption is comprised of three main limbs:

• high-value insured;
• atypical risk; and
• customised

Demutualisation of Health Insurers and Capital Gains Tax

Treasury has issued a discussion paper on implementation of the Government's announcement to provide capital gains (CGT) relief for policyholders of health insurers who receive shares when their health insurer demutualises.

Online financial services disclosures

ASIC has released a Consultation Paper (pdf) proposing to facilitate disclosure of financial services information through email and the internet as part of the Retail Investor Taskforce work to improve access to such information.

ASIC is proposing relief to enable providers to give their financial services disclosures by:

• notifying clients via email that the relevant information is available from a website and with instructions on where the information can be found; or
• sending clients an email with a hyperlink to the relevant information.

ASIC is also proposing relief to enable trustees of superannuation entities to use a website as the default method of delivering annual superannuation information (other than personal disclosures, such as periodic statements of a member's holding). The proposed relief will mean that annual superannuation information is treated in much the same way as company annual reports.

Comments are invited by 28 May 2008 

APRA finalises key general insurance refinements proposals

The Australian Prudential Regulation Authority (APRA) has released the final draft version of the proposed general insurance refinements package following industry consultation. 

There will be a short period of consultation on the related amendments to draft prudential standards when they are released later in April.

Demutualisation of Health Insurers: CGT relief for policyholders

The Assistant Treasurer has announced that the new Government intends to confirm's the previous Government's policy of providing relief from capital gains tax (CGT) for policyholders of health insurers who receive shares when their health insurer demutualises.

The Government will ensure that policyholders who receive shares will not be subject to a CGT taxing point at the time they receive the shares.The Government also intends to provide relief from CGT for transactions that relate to the mechanism that allows policyholders to receive shares.

Issued shares will be held on trust for ‘lost policyholders', who, for example, are unable to receive shares because they reside overseas or have not agreed to receive their shares.  This framework will facilitate the issue of shares to the trustee and the transfer of shares from the trustee to policyholders without adverse or advantageous CGT consequences to either the trustee or the policyholder.

The Government will also provide policyholders with a cost base for their shares that is based on their share of their health insurer's net tangible assets. Pre‑CGT policyholders will receive a market value cost base. A similar ‘net tangible assets' based cost base will also be provided for any rights that post‑CGT policyholders surrender for a cash payment, rather than shares, as part of their health insurer's demutualisation.

Legislation giving effect to this measure will be introduced as soon as practicable, following consultation on the design and the implementation of the amendments. A discussion paper will be released shortly.

The changes will apply from 1 July 2007.

APRA consults on refinements to the general insurance prudential framework

The Australian Prudential Regulation Authority (APRA) has issued its second consultation package on proposed refinements to the general insurance prudential framework to recognise the differing risk profiles of insurers. The package comprises a response paper and draft prudential standards and prudential practice guides. The proposed refinements have been developed to comply with the Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Act 2007. The refinements are expected to apply from 1 July 2008.

Insurers affected by these proposals and by changes to the Insurance Act more generally are:
• all existing APRA-authorised insurers;
• DOFIs that intend to become APRA-authorised insurers;
• Australian-owned sole parent captive insurers that are not APRA-authorised; and
• Australian-owned association captive insurers that are not APRA-authorised.

Topics covered include:

• proposals for the categorisation of insurers that are largely aimed at clarifying and simplifying APRA’s requirements of branches and subsidiaries of foreign insurers.
• The proposals to scale back some of the requirements of smaller insurers and captives while maintaining the integrity of APRA’s prudential framework.
• for all insurers, the recognition of ‘kangaroo bonds’, the measurement of capital and certain reinsurance and investment-related measures.
• On reinsurance, the paper contains a proposal aimed at encouraging foreign reinsurers not authorised by APRA to lodge security in Australia, after a grace period, in respect of amounts recoverable by APRA-authorised insurers from these reinsurers. In cases where these reinsurers do not lodge security, APRA-authorised insurers will be required, after the grace period, to hold capital to match the unsecured recoverables.

APRA releases revised standards on governance for ADI's and insurers

The Australian Prudential Regulation Authority (APRA) has released revised prudential standards on governance for authorised deposit-taking institutions (ADIs) (APS 510)and life insurers (including friendly societies)(LPS 510).

The amendments to the prudential standards result from recent changes to the Australian Securities Exchange (ASX) Corporate Governance Council’s Corporate Governance Principles and Recommendations.

The key amendments to the governance standards are that:

• in addition to the principle of independence of directors set out in the standards, APRA has incorporated the ‘relationships affecting independent status’ in the ASX Corporate Governance Council’s Principles as circumstances that would preclude a director from being treated as independent on the Board of an ADI or life insurer. The circumstances are identical to the five “relationships affecting independent status” in the 2nd edition of the ASX Corporate Governance Council Principles. They represent a non-exhaustive list of specific circumstances that would preclude a director from being regarded as independent for the purposes of serving on the Board of an APRA-regulated institution. A director in any of these circumstances would still be able to serve on such a Board, but not as an independent; and
• a Board should give consideration to the length of service of directors as part of its Board renewal policy.

The revised standards will take effect from 1 January 2008.

The revised prudential standard on governance for general insurers (GPS 510) are a result of the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007.

Demutualisation of Health Insurers

Both NIB and MBF are well advanced in their plans to demutualise and list on the ASX and the Government has confirmed its intention to sell Medicare Private in 2008.

To facilitate these changes, the Treasurer has announced that the Government intends to amend the income tax laws to provide capital gains tax (CGT) certainty for policyholders of health insurers who receive shares as part of their health insurer’s demutualisation.

These changes will ensure that policyholders, including policyholders holding a beneficial membership interest via a trust, who give up any rights they may have in their health insurer in exchange for shares will not be subject to a CGT taxing point at the time of the exchange and will provide consistency between the income tax laws and the requirements of the Private Health Insurance Act 2007.

In addition, the Government will make changes to provide relief from CGT for transactions that relate to the mechanism that allows policyholders to receive shares. 

The Government will also provide a legislative framework for issued shares to be held on trust for ‘lost’ policyholders, who, for example, are unable to receive shares because they reside overseas or have not agreed to receive their shares. Broadly, the Government intends to facilitate the issue of shares to the trustee, the transfer of shares from the trustee to policyholders and the cancellation of any remaining shares in the trust after a certain period of time without adverse or advantageous CGT consequences to either the trustee or the policyholder. It is the Government’s intention that the trustee will otherwise be subject to the existing income tax rules.

The Government proposes that post‑CGT policyholders receive a cost base for their shares that is based on their share of their health insurer’s net tangible assets and that pre‑CGT policyholders receive a market value cost base. The Government also intends to provide a similar ‘net tangible assets’ based cost base for any rights that post‑CGT policyholders surrender for a cash payment, rather than shares, as part of their health insurer’s demutualisation.

These changes will apply from 1 July 2007.

UPDATE 7 November: NIB successfully lists on ASX

UPDATE 25 December 2007: new government will not privatise Medibank Private

MBF Board recommends BUPA merger offer

General Insurance Prudential Framework update

APRA has extended the closing date for submissions on its Discussion Paper on Refinements to the General Insurance Prudential Framework to 28 September 2007.

The extension will allow sufficient time for respondents to consider APRA’s proposals while also considering an options paper on exemptions for DOFIs that the Treasury is expected to release during September. This will give respondents an opportunity to identify whether there are any issues arising from the Treasury consultation paper that would affect their submission to APRA’s Discussion Paper.

APRA has clarified its comments on capital recognition of reinsurance recoverables older than 12 months. It also noted that the Discussion Paper made no reference to transitional provisions for this proposal. APRA is nevertheless considering transitional provisions relating to pre-existing reinsurance arrangements.

APRA releases proposed amendments to governance standards

The Australian Prudential Regulation Authority (APRA) has released a discussion paper on proposed amendments to prudential standards on governance for authorised deposit-taking institutions (ADIs), general insurers and life insurers and a revised Prudential Standard APS 510 Governance for ADIs. The change is expected to take effect from 1 January 2008.

  These amendments follow the release of the ASX Corporate Governance Council’s Principles and Recommendations (2nd ed) which contained changes to the provisions on the independence of board directors.

As the ASX document no longer provides a definition of independence but identifies a number of “relationships affecting independent status” that Boards should consider in determining a director’s independence, APRA proposes to redraft its standard.

APRA will remove reference to the definition of independence in the 1st edition of the ASX Corporate Governance Council Principles. Instead, the paragraph will refer to circumstances that will not satisfy the principle of independence.

The circumstances are identical to the five “relationships affecting independent status” in the 2nd edition of the ASX Corporate Governance Council Principles. They represent a non-exhaustive list of specific circumstances that would preclude a director from being regarded as independent for the purposes of serving on the Board of an APRA-regulated institution. A director in any of these circumstances would still be able to serve on such a Board, but not as an independent.

APRA is also proposing that an ADI's Board Renewal policy must give consideration to whether directors have served on the Board for a period which could, or could reasonably be perceived to, materially interfere with their ability to act in the best interests of the regulated institution. 

Written submissions on these proposals should be submitted by 28 September 2007.

Prudential standards on governance for general insurers and life insurers (GPS 510 and LPS 510) will also be revised in the same way, but will be finalised subject to a number of other changes required as a result of the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Bill 2007. APRA will consult separately on those other changes.

UPDATE 28 November 2007: Final standards issued

Professional Indemnity and Public and Product Liability Insurance

APRA has released the National Claims and Policies Database (NCPD) publication Overview of Professional Indemnity and Public and Product Liability Insurance, for the period 1 January 2003 to 31 December 2006

You need to register in order to obtain access.

APRA consults on Life Insurance standards

The Australian Prudential Regulation Authority (APRA) has released a consultation package on its proposals to maintain the prudential framework for life companies, including friendly societies, in the light of amendments being made to the Life Insurance Act 1995 (Life Act) by the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Bill 2007.

To ensure the continued operation of the existing prudential framework, APRA proposes to replicate most of the provisions removed from the Life Act in new and amended prudential standards. These include:

• two new prudential standards to ensure that key provisions relating to actuaries, auditors and reinsurance continue to operate;
• the reissue of actuarial standards, which are currently set by the Life Insurance Actuarial Standards Board, as APRA prudential standards; and
• minor amendments relating to governance and ‘fit and proper’ requirements.

APRA is proposing that the new prudential standards will be available in the fourth quarter of 2007 and take effect on 1 January 2008.

APRA releases discussion paper on new rules for foreign insurers in Australia

APRA has issued a discussion paper on proposed refinements to the general insurance prudential framework which will affect not only direct offshore foreign insurers (DOFIs) (previously discussed here) that wish to become APRA-authorised but also all APRA-authorised general insurers.

The proposed refinements to the prudential framework are intended to apply from 1 July 2008.

The proposals recognise five different categories of insurer, based on their risk profiles, while maintaining adequate protection for policyholders.

The five categories of insurer are locally incorporated insurers, wholly owned subsidiaries of local or foreign insurers, foreign insurers operating as foreign branches, association captives, and sole parent captives.

The Government intends that offshore foreign reinsurers will not be required to be authorised in Australia.

APRA's discussion paper does not address the proposed exemptions from prudential regulation foreshadowed in the Government's announcement on foreign insurers. The Treasury is developing options for such exemptions and intends to issue a separate consultation paper on this topic.

APRA invites written submissions  by 11 September 2007.

APRA continues HIH disqualifications

APRA's announcement of the  disqualification of Mr Robert Stitt QC from being or acting as a director or senior manager of a general insurer or authorised non-operating holding company, or a senior manager or agent of a foreign general insurer in Australia, as a result of his conduct as a non-executive director of HIH Insurance Limited (HIH), a member of the HIH Audit Committee from 1992 until 2001 and the Human Resources Committee from its inception in 1993 and as a director of HIH Investment Holdings Ltd., a subsidiary of HIH, continues its firm stance on enforcement as a result of the HIH collapse.

To date APRA has disqualified 26 individuals in connection with HIH, five of whom are currently subject to Administrative Appeals Tribunal appeal. A further three individuals are still subject to assessment.

New rules for foreign insurers in Australia

The Minister for Revenue and Assistant Treasurer, Peter Dutton MP, has announced reforms to enhance protection for Australian consumers and businesses from unauthorised direct offshore foreign insurers (DOFIs).

DOFIs are not currently subject to the provisions of the Insurance Act 1973 because they are not considered to be ‘carrying on insurance  business in Australia’ for the purposes of the Act.

The HIH Royal Commissioner’s report raised concerns about the regulation of DOFIs and DMFs. On 12 September 2003 the Government commissioned the Review of Discretionary Mutual Funds and Direct Offshore Foreign Insurers (the Potts review).

The Government will amend the Insurance Act 1973 (Insurance Act) so that anyone carrying on insurance business in Australia, either directly or through the actions of another, must become an authorised insurer.

As a result, the Insurance Act will apply to: DOFIs, including ‘captives’; foreign insurers and foreign reinsurers currently operating in Australia via an APRA-authorised branch or subsidiary; and domestic insurers and domestic reinsurers.

Limited exemptions will exist for DOFIs that underwrite risks that cannot be underwritten in Australia, either because the Australian general insurance market is too small or because it is not sufficiently specialised to underwrite the risk.

Offshore foreign reinsurers will not be required to be authorised in Australia, but they may be indirectly subject to the regulatory regime through the prudential standards applied to insurers. The Insurance Act provisions relating to Lloyd’s underwriters will not change.

A person who breaches the requirement to be authorised or who is complicit in such a breach will be liable to prosecution. A new Part will also be inserted into the Insurance Act 1973 to ensure APRA has  the power to investigate breaches.   Compliance will also be enforced through Federal Court injunctions. 

To complement these changes, the Australian Prudential Regulation Authority (APRA), will modify its prudential regulatory framework to ensure that there is clear recognition in prudential standards of different types of insurers. Tailored prudential standards will apply, so that categories of insurers posing a lower risk will face a reduced regulatory burden. Limited exemptions from the new Government reforms will be provided, enabling those unable to obtain appropriate cover domestically to access the world insurance market.

APRA will publish a discussion paper and consult with the insurance industry and other interested parties, as part of the development of the modified framework that is intended to apply from 1 July 2008.

UPDATE 21 June 2007: Bill introduced

ASIC and general insurance

In a recent speech to the Insurance Council of Australia, ASIC Chair Jeffrey Lucy observed that:

• One of ASIC's continuing areas of focus is the quality and reliability of product disclosure, including advertising. Some PDS's are not adequately updated with information about some of the significant benefits, characteristics or features of the product when products are enhanced with new features, and do not meet the disclosure requirements in the Corporations Act.
• ASIC had concerns about insurers advertising that they had the ‘cheapest’ or ‘lowest’ price in these cases when the comparisons were based on different assumptions to those made by competitors.
• ASIC also had issues regarding advertising ‘maximum no claim discounts’ or ‘rating 1 for life’, which represented that an actual accident would not affect the premium when in fact it may.
• new product disclosure requirements for general insurance products will commence on 21 June 2007.
• ASIC recently extended its transitional relief for issuers of general insurance products from the dollar disclosure requirements in PDSs from 1 April 2007 to 30 June 2008.

Private Health Insurance Acts

The Private Health Insurance Acts have now been published at ComLaw:

Private Health Insurance Act 2007

Private Health Insurance (Collapsed Organization Levy) Amendment Act 2007

Private Health Insurance (Council Administration Levy) Amendment Act 2007

Private Health Insurance (Prostheses Application and Listing Fees) Act 2007

Private Health Insurance (Reinsurance Trust Fund Levy) Amendment Act 2007

Private Health Insurance (Transitional Provisions and Consequential Amendments) Act 2007

Private Health Insurance Complaints Levy Amendment Act 2007

Insurance Acts updated

ComLaw has issued updated consolidated versions of the Insurance Act 1973 and the National Health Act 1953.

New prudential standards for life insurance companies

APRA has released new prudential standards and prudential practice guides on risk management (LPS 220) and business continuity management (LPS 232) for life insurance companies (including friendly societies).

The new prudential standards take effect on 1 January 2008.

Is the decision of an external dispute resolution scheme binding?

Many industries have established schemes for resolving disputes between industry participants and their customers. Are these schemes legally effective?

This issue was recently decided in the case of Financial Industry Complaints Service Limited (FICS) which was originally established by the life insurance industry as Life Insurance Complaints Services Limited to resolve disputes with policy holders. When FSR required investment advisers (many of whom were insurance agents) to be a member of an external dispute resolution scheme FICS Terms of Reference were extended to include investment advice on securities to retail investors. ASIC approved FICS as an external dispute resolution scheme for the purpose of the Corporations Act which requires AFS licensees to be a member of such a scheme.

In Financial Industry Complaints Service Ltd v Deakin Financial Services Pty Ltd [2006] FCA 1805 (21 December 2006) Deakin challenged FICS' jurisdiction to resolve disputes by clients of Deakin. The complainants claim that Deakin or its representative recommended that the client invest in a project undertaken by the Westpoint group.  Following the collapse of the Westpoint group, several clients (at least sixteen and perhaps more) filed complaints with FICS against Deakin.  In broad outline each client alleges that Deakin or its representative recommended the investment in the Westpoint group (specifically purchase of promissory notes with a face value of $50,000 or more) without giving adequate warning of the risk involved.

While Judge Finkelstein found that the FICS Constitution only deals with its right to regulate a member relating to membership issues, he found that FICS' authority to resolve disputes could be found in a contract between Deakin and FICS to the general effect that Deakin would be bound by FICS’ rules that establish its dispute resolution scheme.

Judge Finkelstein also considered whether the advice allegedly given by Deakin relates to a "financial service" or "product". He was "in no doubt that a promissory note issued by a Westpoint group company is a "financial product"." 

Draft Private Health Insurance Rules released

The Commonwealth Minister for Health and Ageing has released draft Private Health Insurance Rules (PHI Rules) for comment by 26 February 2007.

The PHI Rules will commence at the same time as the Private Health Insurance Act, which is expected to commence on 1 April 2007.

There are 13 subject headings of the draft PHI Rules with more to come.

The drafts include the Private Health Insurance (Complying Product) Rules which set out the form and content for a standard information statement about a complying health insurance product which will be a new requirement under the PHI Act.

Private Health Insurance

The Private Health Insurance Bill was introduced into Parliament on 7 December 2006. It has been referred to the Senate Community Affairs Committee which is due to report on 26 February 2007.

It is part of a package of Bills which will implement a new regulatory regime for private health insurance. The changes are due to come into effect on 1 April 2007.

The changes include Standard Information Statements about health insurance products.

APRA and general insurance

APRA's latest Insight publication (Issue 2/2006) contains an overview of the general insurance industry and the results of APRA's stage 2 reforms for the industry.

Queensland incorporated associations

The Associations Incorporation and Other Legislation Amendment Bill 2006 has been introduced into Queensland Parliament.

The key policy objectives of this Bill are to address the following issues through amendments to the Associations Incorporation Act 1981:

• The mandatory public liability insurance requirement will be removed but, as a safeguard, associations will be required to investigate the need to take out public liability insurance and report their decision to all members and inform other parties that might be affected. (The mandatory public liability insurance requirement has been retained, for reasons set out in the Explanatory Notes, for associations that hold land on trust under the Land Act 1994 or that own or lease land.)

• associations with total income and current assets of less than $100,000 will be exempt from full audit and reporting requirements.

Privatising Medibank Private: is it a mutual?

The proposed sale of Medibank Private has raised an interesting legal issue: who ‘owns’ or enjoys rights in the Medibank Private fund? Is it a mutual fund?

In other words, is there a difference between ownership of Medibank Private Limited (the managing organisation of the Medibank Private fund) and the fund itself and, if so, do members of the fund have certain rights to the benefit of the fund and associated assets which need to be considered in any scheme for the sale of Medibank Private?

This issue was considered in Parliamentary Library Research Brief no. 2 2006–07 which concluded that the fund was not a mutual fund and "members could not, in the event of a sale, claim entitlement to compensation on the basis that they were the owners of the fund. They would not, for instance, have an entitlement to share in any premium or goodwill paid by a purchaser for the organisation. That does not mean, however, that members could not claim compensation for loss of certain statutory rights over the fund and associated assets."

The Finance Minister has responded by releasing the advice of Blake Dawson Waldron which considers the matters raised in the Research Brief.

The BDW advice rejects the Research Brief's conclusion that "Medibank Private fund (as opposed to Medibank Private Limited) is best characterised as a government-controlled not-for-profit entity".

The advice considers the nature of "membership" and the interests of "contributors": "“The Fund” is simply a shorthand expression for a set of certain assets and liabilities of MPL. The Fund is not a separate entity. It has none of the hallmarks of a legal entity—it is not able to contract, to own property or to be sued. A person becomes a contributor (a member of the Fund) by entering into a contract with MPL, not the Fund."

It concludes that "Contrary to what is stated in the Brief, contributors have no interests or property rights in assets comprising the Fund, or enforceable rights to the benefit of Fund assets. For this reason, the Commonwealth will not be liable to pay compensation as suggested in the Brief."

UPDATE 21 December 2007: the Rudd Labor Government will not privatise Medibank Private

Must authorised representatives refer to their licensee?

In QFS 165 ASIC has reminded authorised representatives (and general insurance distributors) they must generally refer to their Australian financial service (AFS) licensee in their business documents that are connected to the provision of a financial service.

Their business documents must not create the impression that they act as principal in relation to the financial services that they provide.

The FAQ gives examples of when disclosure is required.

APRA issues outsourcing prudential standards

The Australian Prudential Regulation Authority (APRA) has issued new prudential standards on outsourcing for authorised deposit-taking institutions (ADIs), general insurers and life companies.

The standards are designed to ensure regulated institutions manage the risks from outsourcing material business activities in a prudent manner.

The prudential standards will take effect on 1 January 2007. Transition arrangements may apply in some cases.

Prudential supervision of insurance groups

The Australian Prudential Regulation Authority (APRA) has released a paper setting out its response to industry submissions on its proposed approach to the prudential supervision of insurance groups. APRA is seeking industry comments on the response paper, Prudential supervision of general insurance groups. The closing date for industry comments is 31 December 2006.

APRA intends to release the final prudential standards in the second quarter of 2007, to take effect from 1 July 2007.

APRA has refined its original proposals after incorporating feedback from industry on the draft prudential framework outlined in its May 2005 discussion paper, Prudential supervision of corporate groups involving authorised general insurers which was developed in response to HIH Royal Commission's recommendations.

APRA had initially proposed a three-level supervision framework for general insurance groups. APRA is now of the view, however, that a staged implementation of corporate group supervision is the best way forward.

APRA will continue to supervise individually licensed insurance companies (known as Level 1 supervision) and proposes to introduce a new level of supervision of the general insurance group, incorporating all general insurers in the group, both domestic and international, on a consolidated basis (Level 2 supervision). Level 3 supervision, which would take into account all entities within the group including those not licensed by APRA, is being deferred.

Life insurance: draft prudential standards issued

The Australian Prudential Regulation Authority (APRA) has released for consultation a package of draft prudential standards and guidance for the life insurance industry, including friendly societies.

The package aims to establish APRA's minimum expectations for risk management and business continuity in the life industry and to bring a number of prudential requirements for life companies and friendly societies into line with other APRA‑regulated industries.

The package comprises:

• a discussion paper;
• draft prudential standard and prudential practice guide on risk management;
• draft prudential practice guides on:
  • asset and liability management;
  • conflicts of interest under Section 48 of the Life Insurance Act (duties of directors to policyholders);
  • operational risk; and
  • insurance risk and reinsurance management.
• a draft prudential standard and prudential practice guide on business continuity management.

Comments on the discussion paper, draft standards and draft prudential practice guides are invited by 31 December 2006.

When is a director "fit and proper"?

VBN and Ors and Australian  Prudential Regulation Authority and Ors contains a detailed analysis of APRA's powers to decide that a director is not "fit and proper". In the decision the AAT reviewed decisions by the Australian Prudential Regulation Authority (APRA), to disqualify seven of nine former directors of a Trustee of a superannuation fund (Trustee) as a director of the Trustee.

APRA had made its decisions on the basis that the Trustee had contravened the Superannuation Industry (Supervision) Act 1993 (SIS Act) and that the nature or seriousness of the Trustee’s contraventions provided grounds for the disqualification of each of them.

In relation to two of them, APRA also decided that two of them were not fit and proper persons to be responsible officers of a body corporate that is a trustee and disqualified them under s 120A(3).

The AAT set aside the decisions after finding that the Trustee had not contravened the SIS Act and that it was not satisfied that two of them were not fit and proper persons to be responsible officers of a body corporate that is a trustee. The effect of the setting aside all of APRA’s decisions is that none of the applicants is a disqualified person within the meaning of the SIS Act.

In respect of the 2 directors deemed not fit and proper the AAT said there were 2 issues:

• what is meant by the expression “fit and proper”?
• did the 2 directors, or either of them, have a conflict of the duties they owed to the Employer and those they owed as Directors of the Trustee?

The decision analyses the investigatory powers of APRA and the construction of the section which deals with disqualification of a person who is not fit and proper:

Section 120A(3) of the SIS Act encompasses two steps. The first is to decide whether or not either VBN or VBW is a fit and proper person to be a trustee, investment manager or custodian or a responsible officer of a body corporate that performs one of those functions. If we decide that they are not, we must take the second step to decide whether or not they, or either of them, should be disqualified. We must take that second step because there is, inherent in the use of the word “may” in s 120A(3) a discretion. [para 519]

a person who was a responsible officer of a trustee at the time that it contravened the SIS Act, and the nature, seriousness or number of the contraventions provided grounds for disqualification of that person under s 120A(2), would not be a fit and proper person. A similar analysis would mean that a person who had contravened the SIS Act in circumstances justifying disqualification under s 120A(1) would not be a fit and proper person.[para 528]

That there is a potential for conflict between the interests of the directors and their role is an integral part of the scheme established by the SIS Act. ... The potential for conflict by virtue of their appointment alone does not mean that there is a conflict of the sort that means that an individual director is in breach of a fiduciary duty. There must be something more that shows that there is in fact a conflict of duty between the interests of the directors of a trustee of a fund. This must be determined by reference to the circumstances and not by reference to a formula or recitation of principle. Do the circumstances show that a director was in a position in which that director’s interests or those of another for whom he or she had responsibility or to whom he or she owed a duty conflicted with the interests of the trustee?...

Having regard to all of these matters, we are satisfied that VBW disclosed his interest and the nature of his interest as a result of his position with the Employer. Taken in the context of their appointments and their decisions to give him and others the task of dealing with the Employer, he did so in sufficient detail to reveal his position and to ensure that the Directors were fully informed of all the information that they needed to make a proper decision. We are satisfied that he was not in a position of conflict of interest...

the Trustee’s Board had all of the information that they needed in order to make a decision about what it should do about the Employer’s Offer. VBN was not in possession of any information that it did not have but that it should have known or that could have assisted it with its deliberations. There is no evidence that satisfies us that he influenced, or attempted to influence, the course of the Board’s deliberations.

New General Insurance Code of Practice

The new General Insurance Code of Practice commenced on 18 July 2006. It applies to all general insurance policies taken out and any new claims received after 18 July 2005.

The Code covers all general insurance products except workers compensation, marine insurance,medical indemnity insurance, and compulsory third party insurance including where there is linked driver protection cover. It does not cover reinsurance.

The Code does not apply to life and health insurance products issued by life insurers or registered health insurers.

The objectives of this Code are:
a) to promote better, more informed relations between insurers and their customers;
b) to improve consumer confidence in the general insurance industry;
c) to provide better mechanisms for the resolution of complaints and disputes between insurers and their customers;
and
d) to commit insurers and the professionals they rely upon to higher standards of customer service.