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Summary of Commonwealth Transitional Regulations Relating to the Transfer of Financial Institutions Code Institutions to the Banking Act

The Commonwealth has made Financial Sector Reform (Amendment and Transitional Provisions) Regulations 1999 (FSR Regulations) and Banking (Statistics) Amendment Regulations 1999 (Banking Statistics Regulations) that address transitional matters arising out of the transfer of State and Territory regulated deposit-taking institutions to the Commonwealth prudential regulatory regime (that is the Banking Act 1959). These Regulations were developed with a view to easing the burden on transferring institutions.
 
Financial Sector Reform (Amendment and Transitional Provisions) Regulations 1999
 
Preserving Prudential Standards
Authorised Deposit-taking Institutions (ADIs) regulated under the Commonwealth regime are subject to prudential standards issued by the Australian Prudential Regulation Authority (APRA) under the Banking Act. The FSR Regulations preserve the bulk of the Australian Financial Institutions Commission Code (AFIC Code) prudential standards that apply to transferring institutions as APRA transitional prudential standards. It is envisaged that, after the transitional period, APRA will revise these transitional standards with a view to developing a harmonised set of Banking Act prudential standards.
 
Details of the proposed treatment of the AFIC prudential standards relevant to building societies, credit unions and special service providers are set out under the heading AFIC Code Prudential Standards Transitional Arrangements available at http://www.apra.gov.au.
 
The Regulations explicitly omit a number of AFIC Code prudential standards that have no application in the Commonwealth regime or which fall more to the Corporations Law regime. In particular these exclusions cover the Books which detail the functions of the regulators and the sections dealing with: ownership and control, emergency liquidity support schemes, deposits and other funding from non-members, capital raising and demutualisation, mutuality, and public financial reports.
 
A provision is included in the Regulations that also carries over all instruments, exemptions, directions etc. that may have been issued under the prudential standards by either AFIC or the State Supervisory Authorities (SSAs).
 
Consistent with the Banking Act, APRA is able to revoke and amend the transitional prudential standards. Any changes to these standards must be done on the same basis as outlined in section 11AF of the Banking Act.
 
The sections of the Financial Institutions Code (FI Code) that deal with the Chairperson of the board of a society and management contracts are also being preserved as transitional prudential standards.
 
A number of the AFIC prudential standards are also preserved as Australian Securities and Investment Commission (ASIC) transitional standards. These include standards dealing with disclosure and other issues for which ASIC has principal responsibility.
 
It should be noted that the AFIC Code prudential standards that deal with statistical reporting to the prudential regulator will also be preserved for a transitional period until APRA has time to issue a new set of harmonised reporting requirements. Separate Banking Act Regulations have been made which will enable APRA to collect, on behalf of the Reserve Bank, the statistical information that transferring financial institutions previously provided to the Reserve Bank under the Financial Corporations Act 1974 (see the Banking (Statistics) Amendment Regulations 1999 below).
 
Other Instruments Made, Exemptions etc of AFIC and SSAs
AFIC and the SSAs had powers to modify the application of the FI Code or AFIC Code to a particular entity or class of entities. For instance, an SSA was able to extend or shorten the time periods for reporting information for a particular institution, preclude an institution from taking deposits or modify the application of disclosure provisions.
 
Where there are comparable Commonwealth powers, these exemptions and modifications have been dealt with explicitly in legislation or in the Regulations. For example, modifications to standards have been dealt with as part of the transitional Regulation on prudential standards outlined above.
 
The remaining instruments, exemptions etc. for transferring institutions will cease from the transfer date, as many of these exemptions etc. are no longer relevant. However, APRA and ASIC will have the ability to declare, in writing, that an instrument, exemption etc. covered by this Regulation continues to be in force (if appropriate), with or without modification, either individually or as a specified class. If APRA or ASIC has not made a declaration within 18 months of the transfer day then the instruments, exemptions etc. will automatically cease.
 
Shareholdings
The Financial Sector (Shareholdings) Act 1998 (FSSA) requires a person to seek the Treasurer’s approval to hold more than a 15 per cent stake in a financial sector company. A financial sector company includes an authorised deposit-taking institution (ADI) or life insurance company.
 
A person who held a stake of more than 15 per cent in a transferring entity immediately before the transfer date and was not in contravention of the FI Code or the Friendly Societies Code (FS Code) has 18 months to seek any necessary approvals for their current stake under the FSSA. This transitional provision is contained in the Financial Sector Reform (Amendments and Transitional Provisions) Act (No. 1) 1999.
 
In consulting with industry on this legislation, it became apparent that these transitional provisions may not be as effective as originally intended. The purpose of this Regulation is to ensure that the 18 month shareholding transitional provision is not invalidated as a result of:
  • transferring financial institutions breaching the FSSA on the transfer date purely due to the change in the definition of associates; and
  • fluctuations in shareholdings caused by factors outside of the shareholders control, such as the members leaving the society by ceasing to hold deposits with the institution.

Transferring institutions should approach their State APRA office for shareholdings approvals.

Ongoing Enforcement Actions taken under the FI Code and AFIC Code
As part of their regulatory powers, AFIC and the SSAs had recourse to various enforcement powers under both the AFIC Code and the FI Code. These included the power to obtain information, to appoint a liquidator, to place a society under direction, to appoint an administrator, and to appoint a special investigator. APRA has similar powers under the Banking Act including the power to appoint an investigator, to issue directions, and the power to appoint a statutory manager. Transfers of engagements and wind-up are dealt with separately in the legislation and in other Regulations.
 
As a consequence of the transfer, instances may arise where AFIC or an SSA has initiated some enforcement action that has not been completed prior to the transfer date. The States and Territories financial sector reform legislation continues the application of various FI Code and AFIC Code enforcement provisions in regard to actions done before the transfer date and allows APRA and ASIC to take over where the State authorities left off. Where the State legislation has not explicitly continued these enforcement provisions, the actions are generally continued and deemed to be as if APRA had issued the equivalent request under the comparable Banking Act provision.
 
The Regulation also makes it clear that actions that commenced under the FI Code regime can lead to subsequent actions being taken under the Banking Act – eg. investigations conducted under the FI Code could lead to the appointment of a statutory manager under the Banking Act.
 
Financial Institutions Bodies that had Commenced Wind-up before the Transfer Date
Under the FI Code, an FI body may be wound-up in accordance with the provisions of the Corporations Law under which all debts and claims generally rank equally. However, building societies and credit unions may accord depositors lower or equal priority with other creditors and holders of shares (other than permanent shares) in the event of a wind-up. In contrast, in the event of a wind-up under the Banking Act, depositors in an ADI receive first priority (over creditors and shareholders) on the assets of the ADI.
 
The purpose of the Regulation is to ensure that the rights of creditors and depositors are unaffected by the transfer in the event that a building society, credit union or special service provider has commenced, but not completed, wind-up on the transfer date.
 
Registration Applications in Progress
There may arise an instance where a proposed society or special service provider (SSP) has lodged an application to register as a society or an SSP with an SSA prior to the transfer date and the application has not been determined prior to the transfer date.
 
This Regulation deems such an application to be an application for authority to carry on banking business submitted to APRA under the Banking Act. This allows APRA to carry through the processing of this application without requiring the applicant to re-lodge its application. The Regulations provides that APRA is able to request supplementary information from the applicant in order to assist in finalising such applications.
 
It should be noted that these arrangements are in addition to the requirement that entities separately seek to become corporations with ASIC.
 
Unclaimed Moneys/Dormant Accounts
The Banking Act deems moneys in accounts held by ADIs to be unclaimed if they have not recorded a bona fide transaction for a period of seven years. In the events of an account being deemed unclaimed, the details of that account must be included in an annual statement that is provided to the Treasurer, and the balance of the account must be transferred to the Commonwealth. All States and Territories have similar provisions that apply to deposit-takers.
 
In addition to State and Territory unclaimed moneys arrangements, the FI Code allows dormant accounts to be closed and the money transferred elsewhere if the account has not recorded a transaction for a period of one year. There is no equivalent Commonwealth provision.
 
In order to facilitate the transfer to the Commonwealth regime, the States’ legislation deems that these dormant accounts moneys are transferred back to the original accounts ready for the Commonwealth unclaimed moneys regime. For the sake of clarity, this Regulation deems that this transfer of moneys back to original accounts does not reset the Banking Act seven year unclaimed moneys rule.
 
Where a society cannot reasonably recover the transaction records of a dormant account, the last transaction on that account is deemed to have occurred on the day that the account was deemed dormant.
 
It should be noted that this Regulation does not effect the operation of the unclaimed moneys transitional arrangements set out in the Financial Sector Reform (Amendments and Transitional Provisions) Act (No. 1) 1999.
 
Commonwealth Treasury administers Unclaimed Moneys – Queries in regard to transitional arrangements can be directed to Petar Vujanovic, Financial Institutions Division, The Treasury, Parkes Place, Canberra ACT 2600. His phone number is (02) 6263 2825 and e-mail address is pvujanovic@treasury.gov.au. Queries in regard to the administrative arrangements should be directed to the Resource Planning and Management Directorate on (02) 6263 2885.
 
Banking (Statistics) Amendment Regulations 1999
Currently, many transferring institutions are subject to the statistics reporting requirements under the Financial Corporations Act 1974 (the FCA). The Reserve Bank of Australia (RBA) requires this data for the purposes of calculating the monetary aggregates and for its monetary policy functions. These requirements are in addition to the quarterly information required under the AFIC Code prudential standards (transitional issues related to these are addressed separately in the FSR Regulations outlined above).
 
Currently, ADIs are exempted from the FCA – the weekly information banks provide under the Banking Act is sufficient to meet the RBA’s requirements and is passed on to the RBA by APRA. Consequently, as all transferring deposit-takers have become ADIs, they are exempt from the FCA and its statistical reporting requirements even though the RBA still requires this information for large transferring institutions.
 
The Banking (Statistics) Amendment Regulations 1999 provide that transferring institutions with assets over $50,000,000 should, in addition to other statistical reports submitted to APRA, submit a monthly report in the format set out in these Regulations. These requirements are similar to the existing FCA reporting requirements faced by these institutions. It is envisaged that these arrangements will only be transitional and will be rationalised when APRA develops a new statistics collection regime.
 
The proposed new Banking Statistics reporting schedule is available at http://www.apra.gov.au. APRA has written to all affected institutions with further details of the new statistical arrangements.