Gaps and weaknesses in our system of financial regulation

The government is yet to respond to weaknesses in our laws that deal with the financial distress or collapse of financial institutions – banks, insurers, life companies and more. Some of these weaknesses and gaps were identified over 5 years ago and were the subject of a major government consultation paper in 2012. In 2015, the government said it would further consult, “by mid-2016”, on measures needed to ensure that APRA and other financial regulators have the tools they need to manage any crisis in Australia that might arise.  In the meantime, in its narrow focus on insolvency issues in the Insolvency Law Reform Act 2016, the government has missed clear opportunities to remedy at least some of the gaps in APRA’s powers.


In the aftermath of the GFC, in September 2012, the government consulted through a Treasury paper on a comprehensive law reform package to strengthening APRA’s “crisis management powers” over its prudentially regulated entities – including banks, insurers and life companies. A large number of submissions in support were made, including from APRA itself.

A year later, in 2013, these processes were put on hold pending the outcome of the then pending Financial System Inquiry, chaired by David Murray. 

That Inquiry reported in December 2014, and in relation to APRA, its Report said that the government should proceed with the law reform task of ensuring APRA and regulators have comprehensive powers to manage crises that might arise.  The 2014 FSI Report strongly supported enhancing crisis management ‘toolkits’ for regulators, given the importance of banks, insurers, and superannuation funds to the functioning and stability of the financial system and economy.

The Report noted that international standards and G20 initiatives seek to promote resilient financial systems and frameworks that resolve financial distress in all countries. These frameworks need to include powers in APRA, and ASIC, to manage pending financial collapse and “pre-position” the bank or insurer for its effective disposal.

Any identified gaps and areas of weakness lessen that resilience. 

One such gap, among many raised in the 2012 paper is in relation to the powers of APRA to have an insurer wound up in insolvency.  

The gap

Back in 2011, APRA applied to wind up what was Rural and General and found the law wanting. The decision of Justice Perram in APRA v ACN 000 007 492 (in Liq) [2011] FCA 353 (Rural & General) exposed disconnections in the operation of the winding up provisions between the Insurance Act and Corporations Act.  This infected the Life Insurance Act 1995, which had been harmonised with the Insurance Act; but not the Banking Act 1959.       

APRA has the power to apply to the Court to initiate winding up proceedings under the respective industry Acts or the Corporations Act or both. The triggers for the exercise of this power vary across each of the prudentially regulated industries.

But in Rural & General, it was found that a judicial manager appointed to an insolvent insurer could not apply to the court to wind up that insurer.  The Judge resorted to a principle of statutory interpretation of ‘implied amendment’, to s 459A and s 459P of the Corporations Act, to allow the insurer to be wound up. 

The 2012 Treasury paper proposed to change the law to ensure the powers of APRA were clear.

Other problems

The Rural & General decision also found that the voidable transaction provisions in Part 5.7B of the Corporations Act would not apply if a Court makes an order to wind up a regulated entity under the Insurance Act. A voidable transaction must be entered into within a specified time before the ‘relation‑back day’ defined in s 9 of the Corporations Act by reference to a winding up taken to have begun ‘because of Division 1A of Part 5.6’ of the Corporations Act. Therefore, if a Court orders that an insurer be wound up under the Insurance Act, for example, the voidable transaction provisions will not apply.

The 2012 Treasury paper therefore also proposed to amend the Corporations Act provisions concerning voidable transactions (in particular, the definition of ‘relation‑back day’) to make them applicable where a Court has made a winding up order under the Insurance Act or Life Insurance Act.

Insolvency Law Reform Act 2016

The ILRA 2016 substantially amends the insolvency provisions in Ch 5 and elsewhere of the Corporations Act.  In relation to the requirement for corporate insolvency practitioners to have appropriate insurance, it contains over 30 references to the word “insurance”. 

This accords with the political (if no other) principle that if something is mandated in the law often enough, it happens.

But the ILRA does not have any word on the significant issues raised over five years ago now concerning the limitations for APRA in being able to deal with any major insolvency crises in the Australian financial sector. 

While the ILRA amends the Insurance Act 1973, the Life Insurance Act 1995 and the Banking Act 1959, it does so only incidentally. 

And while it amends the relation back day definition, the ILRA perpetuates the problem identified in Rural & General. The words “the day on which the winding up is taken, because of Division 1A of Part 5.6, to have begun” are retained: s 91.


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