Smith v Australian Prudential Regulation Authority

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FEDERAL COURT OF AUSTRALIA

Smith v Australian Prudential Regulation Authority [2017] FCA 807

File number: NSD 1909 of 2016
Judge: NICHOLAS J
Date of judgment: 19 July 2017
Catchwords: INSURANCE – application to revoke or vary disqualification under s 26 of the Insurance Act – whether disqualification continues to be justified – relevant considerations – length of disqualification to date – applicant’s remorse and recognition of wrong-doing – APRA’s assessment of future prudential risk and whether applicant likely to pose a prudential risk in the future – disqualification revoked with effect from date of order
Legislation:

Insurance Act 1973 (Cth), ss 25A, 26(1)(a)

Financial Sector Legislation Amendment (Review of Prudential Decision) Act 2008 (Cth)
Cases cited:

Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321

Burroughs v Australian Prudential Regulatory Authority (2016) 246 FCR 38
Date of hearing: 15 March 2017
Registry: New South Wales
Division: General Division
National Practice Area: Commercial and Corporations
Sub-area: Commercial Contracts, Banking, Finance and Insurance
Category: Catchwords
Number of paragraphs: 51
Counsel for the Applicant: Mr S Rushton SC with Mr A Byrne
Solicitor for the Applicant: Clyde & Co
Counsel for the Respondent: Mr PS Braham SC with Mr BK Lim
Solicitor for the Respondent: Mr Ben Carruthers

ORDERS

NSD 1909 of 2016
BETWEEN:

JOHN ANDREW SMITH

Applicant
AND:

AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY

Respondent

JUDGE:

NICHOLAS J

DATE OF ORDER:

19 JULY 2017

THE COURT ORDERS THAT:

1.Pursuant to s 26(1)(a) of the Insurance Act 1973 (Cth) (“the Act”) the decision made by the Australian Prudential Regulation Authority on 5 October 2004 that John Andrew Smith is a disqualified person pursuant to s 25A of the Act (as it then stood) be revoked with effect from 19 July 2017.

2.There be no order as to costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.


REASONS FOR JUDGMENT

NICHOLAS J:

INTRODUCTION

  1. Before me is an application by the applicant, John Andrew Smith, seeking an order pursuant to s 26(1)(a) of the Insurance Act 1973 (Cth) (“the Act”) revoking a decision made by the Australian Prudential Regulation Authority (“APRA”) on 5 October 2004 pursuant to s 25A of the Act (as it then stood) disqualifying Mr Smith from acting as (inter alia) a director or senior manager of a general insurer (other than a foreign general insurer) or as a senior manager, or agent in Australia for the purposes of s 118 of the Act, of a foreign general insurer.

  2. APRA is the sole respondent to this proceeding.  Senior Counsel for APRA made both written and oral submissions in relation to Mr Smith’s application which make clear that APRA does not oppose Mr Smith’s application in so far as any revocation order made will have prospective operation.  Of course, it is ultimately necessary for the Court to be satisfied that it is appropriate to make the order sought by Mr Smith. 

    THE EVIDENCE

  3. The affidavit evidence in support of the application comprises two affidavits made by…

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Details
Case
[2017] FCA 807
Decision Date

CaseChat Overview and Summary

The case of Smith v Australian Prudential Regulation Authority involved an application by Mr Smith for the revocation of his disqualification from holding certain positions in the insurance industry, imposed by the Australian Prudential Regulation Authority (APRA). The primary legal issue before the Court was whether the disqualification imposed on Mr Smith should be revoked, considering his conduct, remorse, and the assessment of APRA regarding the prudential risk he might pose in the future.

The Court examined the statutory framework provided by the Insurance Act 1973 (Cth), particularly sections 25A and 26, to determine the appropriate criteria for revoking a disqualification. The Court considered the length of the disqualification, Mr Smith’s remorse and recognition of his wrongdoing, and APRA’s assessment of the future prudential risk posed by Mr Smith. The Court also noted the importance of the views of APRA, given its role in prudential regulation. The Court concluded that Mr Smith had demonstrated sufficient remorse and had taken steps to rectify his previous conduct, and that APRA did not believe he would pose a prudential risk if his disqualification were revoked.

The Court found that the disqualification imposed on Mr Smith should be revoked with effect from the date of the order, acknowledging the significant time that had passed since the misconduct and Mr Smith’s efforts to reform. The Court emphasised that the primary focus was on ensuring that Mr Smith was fit and proper to hold a position in the insurance industry moving forward. The Court did not make any order as to costs.

The final orders of the Court were that the disqualification imposed by APRA on 5 October 2004 be revoked with effect from 19 July 2017, and there be no order as to costs.

Orders

Orders of the court

1. Pursuant to s 26(1)(a) of the Insurance Act 1973 (Cth) (“the Act”) the decision made by the Australian Prudential Regulation Authority on 5 October 2004 that John Andrew Smith is a disqualified person pursuant to s 25A of the Act (as it then stood) be revoked with effect from 19 July 2017.

2. There be no order as to costs.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

A further aspect of the meaning of “fit and proper” is that s 26(1)(a) of the Act requires the Court, in considering a revocation application, to assess whether the conclusions concerning the applicant’s fitness and propriety at the time of their disqualification continue to be sufficiently justified, at the time of the revocation application, to warrant the revocation of the disqualification. Section 25A(4) provides that, in deciding whether a disqualification is justified, the Court may have regard to the person’s conduct in relation to the management, business or property of any corporation, and any other matters the Court considers relevant. Since the Act imposes primary responsibility for protecting the interests of policyholders on directors and senior management of general insurers, the likelihood of a person being a prudential risk is a relevant consideration: Burroughs at [80]).THE RELEVANT FACTS Mr Smith was employed by General & Cologne Reinsurance Australasia Limited (later known as General Reinsurance Australia Ltd) (“GCRA”), a subsidiary of General Cologne Re, between 1998 and 2005, first as an underwriter in the Treaty Department, and, from December 1999, as the Chief Treaty Underwriter. In 1998, companies within the FAI group negotiated a financial reinsurance transaction with GCRA which included an aggregate excess of loss contract (“AXOL contract”). Mr Smith was involved in negotiating and documenting the contract. The AXOL contract, and the circumstances of its negotiation and documentation, were addressed at the Royal Commission into the failure of HIH Insurance Limited, and, in the report handed down in 2003 at the conclusion of the Royal Commission, Justice Owens found that the AXOL contract was a sham. His Honour made adverse findings about various people involved in the transaction including Mr Smith. The circumstances giving rise to Mr Smith’s disqualification, and Justice Owens’ and APRA’s findings in relation to those matters, are set out in an attachment to APRA’s Disqualification Decision dated 5 October 2004 (“Disqualification Decision”). The following summary is based upon that document. During 1998, Mr Smith was employed by GCRA as an underwriter in the Treaty Department, and was the Australian representative of the General Cologne Re Alternative Solutions Business Unit. From December 1999, he held the position of Chief Underwriter at GCRA. In 1998, companies in the FAI group negotiated with GCRA the AXOL contract, first made in May 1998 (“first AXOL contract”) and renegotiated in June 1998 (“second AXOL contract”). The first and second AXOL contracts formed part of a larger transaction involving GCRA (“GCRA transaction”). The first significant meeting between GCRA and FAI concerning the GCRA transaction was on 18 March 1998. Mr Smith did not attend but received a report on it and was told that FAI was under-reserved on certain books of business. Shortly after, Mr Smith was copied on an email sent by a colleague at GCRA indicating that FAI wanted a solution by which it could take up reserves over three years totaling $65m and that knowledge of the transaction would be restricted to certain people at FAI and GCRA including Mr Smith.

Evidence

Evidence Before The Court

APRA is the sole respondent to this proceeding. Senior Counsel for APRA made both written and oral submissions in relation to Mr Smith’s application which make clear that APRA does not oppose Mr Smith’s application in so far as any revocation order made will have prospective operation. Of course, it is ultimately necessary for the Court to be satisfied that it is appropriate to make the order sought by Mr Smith. THE EVIDENCE The affidavit evidence in support of the application comprises two affidavits made by Mr Smith and an affidavit made by Mr John Richardson OAM. Mr Smith also gave some oral evidence-in-chief relating to his dealings with a Mr John Byrne in 2001 and the summary termination of his employment in 2005 which I refer to in more detail later in these reasons. Neither Mr Smith nor Mr Richardson was cross-examined. APRA relied on an affidavit of Ms Jennifer Balding, a Senior Manager in the Specialised Institutions Division of APRA. She was not cross-examined. Annexed to her affidavit were a number of documents including:·a copy of the current version of Prudential Standard CPS 520 Fit and Proper (“CPS 520”) which came into effect on 1 January 2013;·transcripts of telephone conversations produced to APRA in 2001 including a transcript of a telephone conversation between Mr Smith and Mr Byrne on 14 June 2001;·a copy of Mr Smith’s application for review of the decision of 5 October 2004 that was filed with the Australian Appeals Tribunal (“AAT”) on 20 December 2004. THE RELEVANT PRINCIPLES Section 26(1) of the Act, in its current form, provides as follows:A disqualified person, or APRA, may apply to the Federal Court of Australia for:(a)If the person is a disqualified person only because he or she was disqualified under section 25A – a variation or a revocation of the order under that section; or(b)Otherwise – an order that the person is not a disqualified person. The provision was enacted in 2008 by the Financial Sector Legislation Amendment (Review of Prudential Decision) Act 2008 (Cth) which, among other things, removed APRA’s power to disqualify insurance practitioners and conferred on the Federal Court new powers directed to the same end. The construction and operation of s 26 was considered for the first time in Burroughs v Australian Prudential Regulatory Authority (2016) 246 FCR 38. It is not necessary to repeat the history and objects of the Act, or the constitutional character of the revocation power, explained in detail by Allsop CJ in that decision: see at [50]-[64] In applying s 26(1)(a), consideration needs to be given to the surrounding statutory context of the provision, including the current disqualification regime under the Act: Burroughs at [57] Section 25A(1) of the Act, in its current form, provides that, on application by APRA, the Court may disqualify a person from being or acting as a director or in other senior managerial roles set out in subsection (2) if the Court is satisfied that: (a)the person is not a “fit and proper person” to be or act as a such a person; and(b)the disqualification is “justified”;

Decision

Reasons for decision

Full text does not contain this section.

Ratio Decidendi

Legal Principle Established

The relevant telephone conversations were recorded and a transcript of them is in evidence. In April 2005, some four years after those conversations occurred, Mr Smith prepared a document which sets out his recollection of the context of the conversations and his reasons for making various statements in the course of them. In that document Mr Smith acknowledges his error of judgment and expresses his regret. I should emphasise that the relevant telephone conversations that eventually led to Mr Smith’s summary dismissal occurred in 2001, approximately three years before this disqualification. CONSIDERATION There is no doubt that the wrongful conduct that gave rise to Mr Smith’s disqualification was serious and dishonest. In short, he facilitated a sham transaction that enabled FAI to deceive its auditors. He now accepts that what he did was dishonest and that APRA’s decision to disqualify him was correct. He has expressed considerable remorse, and also demonstrated a genuine appreciation of the hardship that many innocent people suffered as a result of the collapse of HIH. Since his disqualification, Mr Smith has continued to work in the insurance and reinsurance industry in France, Switzerland and Australia. His roles have included treaty underwriter and senior treaty underwriter although he has not had individual underwriting authority and has not had others reporting to him. Since 2012 he has been employed by Guy Carpenter & Co in various capacities including, most recently, as chief risk officer in the Sydney office, under the supervision of Mr Tony Gallagher, the Chief Executive Officer. Mr Smith’s attitude to his previous conduct is now very different to what it was in January 2005 when, at the time of discontinuing his application for a review of the disqualification decision, he “emphatically denied” behaving in a dishonest manner. Further, as I already mentioned, Mr Smith has undertaken a number of ethics and compliance courses. These have enabled him to learn about, and reflect on, various ethical issues, and he has endeavoured to apply what he has learnt in these courses in his employment. Mr Richardson, the Executive Chairman of Guy Carpenter, with whom Mr Smith has worked since 2012, has deposed to Mr Smith’s competence and character. Mr Richardson says that Mr Smith adopts a stringent approach to ethical and corporate governance issues, and that he regards Mr Smith as a person of honesty and integrity. The views of APRA will usually carry significant weight in a case such as this. In Mr Smith’s case, Senior Counsel for APRA stated that his client does not consider that there is any real and not remote chance that Mr Smith will pose a prudential risk if his disqualification is revoked. The conduct which gave rise to Mr Smith’s disqualification occurred around 20 years ago, and the length of his disqualification thus far has been approximately 12 years and eight months. He has had a significant period of time in which to reflect on his previous wrongful conduct.