Long delayed banking and financial institution reforms are being addressed in a Bill to enhance APRA’s ‘crisis management’ powers in relation to distressed or insolvent banks and insurance companies. The Bill has now been referred to the Senate Economics Legislation Committee to report by 9 February 2018.
My involvement in this law reform arises from my 2008 INSOL Shanghai conference co-presentation on bank crisis regulation. Shortly thereafter, on that day, Lehman Bros collapsed.
That obvious trigger for the unfolding of the GFC has ultimately led to this Bill now before parliament, nearly 10 years later.
Submissions are due in less than 3 weeks, by 18 December 2017.
Among other things, the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017 would harmonise APRA’s powers across banks, insurers and life insurers, in relation to APRA directions powers and its authority to apply to the court for the external administration of these regulated entities – for example “APRA may apply to the Federal Court of Australia for an order that an ADI be wound up if APRA considers that the ADI is insolvent and could not be restored to solvency within a reasonable period”; ensure that APRA’s existing powers in the winding up of a regulated entity extend to where a provisional liquidator is appointed; provide for statutory and judicial management, and to enable APRA to apply for the winding up of an ADI without the ADI having first been placed in statutory management.
This Bill has a long history. First there was the GFC in 2008, the Lehman Bros collapse coincidentally or otherwise occurring on the day of an INSOL conference in Shanghai when Professor Ros Mason and myself were presenting a paper on handling the cross-border insolvency of banks.[1]
In 2012, the government issued a consultation paper, ‘Strengthening APRA’s Crisis Management Powers’ (2012 Consultation Paper), which canvassed a range of proposals as part of an ongoing review of APRA’s crisis management powers. These proposals sought to address the identified gaps and areas that could be strengthened with reference to domestic and international developments at the time. It called for submissions by December 2012, and, with a particular focus on the legal difficulties in the external administration regime, a submission from the IPA was made, among others.
The 2012 consultation process was then put on hold pending the outcome of the 2014 Financial System Inquiry (FSI).
The Final Report of the FSI, delivered in December 2014, recommended that the Government complete the process for strengthening APRA’s crisis management powers (recommendation 5). In its response to the FSI, the Government agreed that regulatory settings should provide regulators with clear powers in the event that a prudentially regulated financial entity or any part of the financial market infrastructure failed.[2]
Meanwhile, many other comparable jurisdictions have enacted necessary changes to their laws.
In 2017, the government now seeks to implement the crisis‑oriented proposals in that 2012 Consultation Paper. Other important proposals in the 2012 Paper that are “less resolution‑centric” are being progressed separately.
Summary of new law
The Bill amends a series of ‘industry Acts’: Banking Act 1959, Insurance Act 1973, Life Insurance Act 1995, APRA Act 1998, the Corporations Act 2001 and others.
Among many provisions on APRA’s powers, the Bill would clarify the fact that while APRA has the ability to seek the appointment of a liquidator or provisional liquidator, this does not preclude it from exercising its other crisis management powers, including appointing or seeking the appointment of a statutory or judicial manager, in appropriate circumstances, whether or not the entity is insolvent.
APRA’s powers in relation to what Professor Mason and I call the “pre-positioning”[3] of an insolvent bank with a view to its restructure or more managed liquidation, are necessarily more significant than and different from any powers of ASIC. The role of the liquidator or statutory or judicial manager is also different, in particular in its relationship with, and authority and direction from, APRA. As one example, both APRA, and the liquidator, must give each other notice of any application to the court, and each is entitled to be heard on each other’s application. APRA has particular involvement in the assessment of claims and distribution of funds, via the liquidator, through the Financial Claims Scheme.
The Bill retains the right of APRA to choose to apply to the Federal Court (only) under either the Industry Acts or the Corporations Act for external administration orders. For example, it may apply under proposed section 62ZU for an order that a general insurer be wound up. Alternatively, APRA may choose to apply under the Corporations Act for an order that the general insurer be wound up (for example, under section 459P or 462 of that Act).
Some sections of the Corporations Act would be adapted, for example that s 440B applies during a period in which a life company is under judicial management in the same way it applies during the administration of a company save that the reference in paragraph 440B(2)(a) to the administrator’s written consent would become the judicial manager’s written consent.
A judicial manager is protected from any liability, save for an act or omission in bad faith, and is protected from insolvent trading under s 588G.
And it remains that if any disgruntled customer of a bank applies to a court to put the bank in liquidation, without first telling APRA, they commit an offence, the penalty for which is $12,600.
Submissions are due by 18 December 2017.
[1] See Model Law on Cross-Border Insolvency: Exclusion of Australian Banks, Mason & Murray (2008) 20(4) A Insol J 4
[2] See Australian Banks and Crisis Management, Mason & Murray, Ch 6, in Banking and Financial Insolvencies: The European Regulatory Framework, INSOL Europe, 2015
[3] See Chapter 18 – Australia Country Report, Mason & Murray, in Research Handbook on Crisis Management in the Banking Sector, Haentjens and Wessels (eds), 2015.
