Australian Prudential Regulation Authority instrument fixing charges
No.1 of 2010
For applications for authorisation as an ADI, General insurer or Life Company
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority
Australian Prudential Regulation Authority Act 1998, paragraph 51(1)(b)
Acts Interpretation Act 1901, subsection 33(3)
This explanatory statement relates to Australian Prudential Regulation Authority instrument fixing charges No. 1 of 2010 made under paragraph 51(1)(b) of the Australian Prudential Regulation Authority Act 1998 (the APRA Act) and subsection 33 (3) of the Acts Interpretation Act 1901[1] and dated 17 December 2010 (the Instrument).
The Instrument:
1. repeals the Instrument fixing charges to be paid to APRA for applications for authorisations as an ADI, General Insurer or Life Company dated 3 June 2003 (the original charging instrument)[2], as varied by Variation of instrument fixing charges to be paid to APRA for applications for authorisations as an ADI, General Insurer or Life Company dated 14 July 2003 (the variation instrument)[3], collectively referred to as the repealed instruments, and
2. fixes the charges set out in the Schedule to the Instrument, in respect of applications for authorisation as an authorised deposit-taking institution (ADI).for the purposes of the Banking Act 1959 (the Banking Act), as a general insurer for the purposes of the Insurance Act 1973 (the Insurance Act), and as a life company (including a friendly society), for the purposes of the Life Insurance Act 1995 (the Life Act), respectively. These charges are now reduced by an amount equal to the amount of GST[4] previously included under the repealed instruments.
This reduction in the charges fixed takes account of the fact that the charges are exempt from GST, by operation of A New Tax System (Goods and Services) (Exempt Taxes, Fees and Charges) Determination 2010 (No.1)[5], for the purposes of subsection 81-5(2) of the A New Tax System (Goods and Services Tax) Act 1999.
The basis of calculation of the charges fixed in the Instrument is otherwise the same as for the charges fixed in the original charging instrument, as varied by the variation instrument.
The Instrument also provides that the charges concerned are payable by the applicant when the application is lodged, are not refundable if the application is refused, withdrawn or not proceeded with, and may be waived or refunded by APRA in specified circumstances, (as permitted under subsection 51(1) of the APRA Act). These provisions are also consistent with the provisions in the repealed instruments.
Background
APRA administers the provisions of the APRA Act and is the prudential regulator of the banking, general insurance, life insurance and superannuation industries.
Paragraph 51(1)(b) of the APRA Act permits APRA, by legislative instrument, to fix charges to be paid by persons in respect of applications or requests made to APRA under laws of the Commonwealth.
Subsection 51(2) of the APRA Act provides that a charge fixed under subsection
51(1) must be reasonably related to the costs and expenses incurred or to be incurred in relation to the matters to which the charge relates, and must not be such as to
amount to taxation.
On 3 June 2003 APRA, made the original charging instrument.
The reasons for imposing the charges and the basis for calculation of the charges is set out in the Explanatory Statement and Regulation Impact Statement for the original charging instrument which, for ease of reference is, reproduced in full in the Appendix to this Explanatory Statement.
The original charging instrument was varied by APRA making the variation instrument on 14 July 2003, to include a default category of charge in Item 3A, to apply to those applications under the Banking Act which did not meet the description of the applications provided for in items 1, 2 and 3 respectively, of the original charging instrument. The reasons for the default category and the basis of calculation are set out in full in the Explanatory Statement for the variation instrument, which for ease of reference, is reproduced in full in the Appendix to this Explanatory Statement.
The charges fixed by the original charging instrument (as varied by the variation instrument) were subject to GST until December 2005[6]. when they were determined to be exempt from GST by A New Tax System (Goods and Services Tax) (Exempt Fees and Charges) Determination 2005 (No 2) for the purposes of subsection 81-5(2) of the A New Tax System (Goods and Services Tax) Act 1999 and subsequent determinations[7] until the current determination, A New Tax System (Goods and Services) (Exempt Taxes, Fees and Charges) Determination 2010 (No.2)[8].
APRA has refunded the amount of the GST paid to those entities which have paid the GST component under the original charging instrument as varied by the variation instrument since the charges first became exempt from GST in 2005.
Purpose of the Instrument
The Instrument sets out the charges fixed by APRA for applications for authorisation as an ADI for the purposes of the Banking Act, as a general insurer for the purposes of the Insurance Act, and as a life company (including a friendly society), for the purposes of the Life Act, respectively, which reflect the removal of the GST component of the charges. In all other respects, the basis for calculation of the charges is the same as those fixed in the original charging instrument, as varied by the variation instrument.
The charges which are fixed are set out in the Schedule to the Instrument and are summarised below:
The Instrument also provides that the charges concerned are payable by the applicant when the application is lodged, are not refundable if the application is refused, withdrawn or not proceeded with, and may be waived or refunded by APRA in specified circumstances, (as permitted under subsection 51(1) of the APRA Act).
For the avoidance of doubt, it should be noted that the fee is payable in respect of every new application, even one that is made after the refusal or withdrawal of an earlier application for which the applicant also paid a fee.
These provisions are also consistent with those contained in the repealed instruments.
Summary of the charges fixed by the Instrument
Item 1: Authorisation of an ADI that is a bank or special service provider: $62,000
Item 2: Authorisation of an ADI that is a building society or credit union: $20,000
Item 3: Authorisation of an ADI that is a specialist credit card institution: $30,000
Item 3A: Authorisation of an ADI – in any case that is not covered by $20,000
item 1, 2 or 3:
Item 4: Authorisation of a general insurer: $62,000
Item 5: Registration of a life company (other than a friendly society): $50,000
Item 6: Registration of a life company that is a friendly society: $20,000
These charges are all GST exempt.
Operation and commencement of the Instrument
The Instrument operates to repeal the original charging instrument and the variation instrument, and fix the charges set out in the Schedule to the Instrument, to reflect the removal of the GST component of the charges, to replace those charges fixed under the repealed instruments.
The Instrument commences on the date of registration on the Federal Register of Legislative Instruments.
Consultation
Consultation has not been undertaken as the changes are considered to be of a minor or machinery nature and do not substantially alter existing arrangements within the meaning of paragraph 18(2) (a) of the Legislative Instruments Act 2003.
Regulation Impact Statement
A Regulation Impact Statement has not been provided because the Instrument does not increase, but makes only a minor reduction (to the extent of the exemption from GST), in the regulatory burden upon the entities to which the charges fixed apply.
Cost Recovery Impact Statement
A Cost Recovery Impact Statement, executed by APRA’s Chairman and dated 17/12/2010 has been prepared which reflects the removal of the GST component of the charges.
APPENDIX
EXPLANATORY STATEMENT
Australian Prudential Regulation Authority Act 1998, section 51
VARIATION OF
INSTRUMENT FIXING CHARGES TO BE PAID TO APRA
FOR APPLICATIONS FOR AUTHORISATION AS AN ADI, GENERAL INSURER OR LIFE COMPANY
The instrument to which this explanatory statement relates
1. This explanatory statement relates to the instrument of variation described in paragraph 6 below.
Background
2. On 3 June 2003 Jim Flaye, Chief Financial Officer of the Australian Prudential Regulation Authority (APRA) and a delegate of APRA, made an instrument entitled INSTRUMENT FIXING CHARGES TO BE PAID TO APRA FOR APPLICATIONS FOR AUTHORISATION AS AN ADI, GENERAL INSURER OR LIFE COMPANY (the original charging instrument).
3. The original charging instrument fixed charges payable by applicants for authorisation as an ADI, general insurer or life company. It was made under paragraph 51(1)(b) of the Australian Prudential Regulation Authority Act 1998 (the APRA Act), which authorises APRA to fix charges to be paid by persons in respect of applications or requests made to APRA under laws of the Commonwealth.
4. By virtue of subsection 51(3), a charging instrument made under subsection 51(1) is a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901.
5. A full explanation of the original charging instrument is contained in the combined explanatory statement and regulatory impact statement which accompanied the
original charging instrument (the original explanatory statement). The original explanatory statement is reproduced in the Attachment. This explanatory statement should be read together with the original explanatory statement.
6. Mr Flaye, as a delegate of APRA, has now made an instrument of variation entitled VARIATION OF INSTRUMENT FIXING CHARGES TO BE PAID TO APRA FOR APPLICATIONS FOR AUTHORISATION AS AN ADI, GENERAL INSURER OR LIFE COMPANY which is dated 14 July 2003 (the instrument of variation). The instrument of variation was made under paragraph 51(1)(b) of the APRA Act, read with subsection 33(3) of the Acts Interpretation Act 1901. (The latter confers a general power to repeal, rescind, revoke, amend or vary statutory instruments.)
Reason for and explanation of the instrument of variation
7. The original charging instrument imposes three different charges in respect of applications for authorisation as an authorised deposit-taking institution (ADI), depending on which category of ADI the applicant desires to be authorised as:
(1) $68,200 where the applicant applies to be authorised to carry on business as a
bank or special service provider;
(2) $22,000 where the applicant applies to be authorised to carry on business as a
building society or credit union; and
(3) $33,000 where the applicant applies to be authorised to carry on business as a
specialist credit card institution.
(The above three charges are imposed by items 1, 2 and 3, respectively, of the table of charges in the Schedule to the original charging instrument.)
8. At present, APRA treats all ADIs as falling into one of the five categories just mentioned (namely, banks, building societies, credit unions, specialist credit card institutions and special service providers), depending on the nature of the deposit- taking activities which the applicant proposes to carry on. APRA has no present plan to recognise any new ADI categories.
9. However, it is conceivable that in the future, an applicant for authorisation as an ADI may seek to carry on some new kind of deposit-taking activity which does not fall into any of the five existing categories. APRA will incur significant costs in processing and determining such an application, but will not be able to charge an application fee for it under the original charging instrument, unless it can be made to fit into one of the five existing ADI categories referred to in that instrument. Clearly, this would be an undesirable outcome: either APRA could not charge any fee for dealing with such an application, which would give the applicant an unmerited “free ride” at the expense of the general body of ADIs which would be forced to subsidise the cost of dealing with its application through the annual supervisory levy paid by all prudentially supervised bodies; or APRA would have to authorise the applicant to carry on business under one of the five existing ADI categories, an approach which might not be appropriate to the applicant’s business plan and which could stifle innovative developments in the deposit-taking industry.
10. Hence there is a need to include a “default category” of ADIs in the original charging instrument, to enable a charge to be imposed in respect of applications for authorisation as an ADI which do not fall into any of the five existing ADI categories.
11. The instrument of variation provides such a default category, by inserting a new item 3A into the table of charges in the Schedule to the original charging instrument. The new item 3A imposes a charge of $22,000 in respect of applications for authorisation as an ADI where the applicant does not seek to be authorised under any of the five existing ADI categories (which are covered by items 1, 2 and 3 of the table of charges).
12. The conditions set out in the Schedule to the original charging instrument also apply in respect of the new item 3A – that is, the charge of $22,000 is inclusive of GST, it is payable by the applicant when the application is lodged, is not refundable if the application is refused, withdrawn or not proceeded with, and may be waived or refunded by APRA in specified circumstances.
How the charge has been calculated
13. Subsection 51(2) provides that a charge fixed under subsection 51(1) must be reasonably related to the costs and expenses incurred or to be incurred by APRA in relation to the matters to which the charge relates, and must not be such as to amount to taxation.
14. Paragraphs 19 and 20 of the original explanatory statement explain how the charges imposed by the original charging instrument have been calculated, based on the cost of the average amount of APRA staff time spent dealing with the relevant category of application and a share of overhead costs apportioned to that staff time. The charge of $22,000 added by the instrument of variation is worked out the same way, based on the cost of APRA staff time and apportioned overheads.
15. Because the precise nature of the deposit-taking business that applicants who will be charged the $22,000 imposed by the instrument of variation will seek to carry on is by definition presently unknown (because, as explained above, the charge will only apply to novel categories of deposit-taking business), the amount of APRA staff time that will be spent in dealing with their applications is also unknown. Therefore, the charge reflects the minimum amount of APRA staff time that would be reasonably required to process and determine an application for authorisation as an ADI, based on the assumption that the applicant will only be seeking authorisation to carry on
deposit-taking business of a very limited scope. APRA considers that in no case will dealing with such an application be likely to take less staff time than is required to
deal with the average application for authorisation as a building society or credit
union. APRA has therefore set the charge at $22,000, which is the same as the charge set by the original charging instrument for authorisation as a building society or credit
union.
16. Thus, the charge imposed by the instrument of variation represents a minimum figure, which may well be less than the actual cost to APRA of dealing with the relevant applications, but will almost certainly not exceed the actual cost.
17. The charge therefore complies with subsection 51(2) of the APRA Act.
No retrospectivity
18. The charge imposed by the instrument of variation is prospective only, in that it is only payable in respect of licence applications that are lodged with APRA on and after the date of gazettal of the instrument of variation.1
1 By virtue of subparagraph 48(1)(b)(iv) of the Acts Interpretation Act 1901.
APPENDIX
EXPLANATORY STATEMENT
AND
REGULATORY IMPACT STATEMENT
Australian Prudential Regulation Authority Act 1998, section 51
INSTRUMENT FIXING CHARGES TO BE PAID TO APRA
FOR APPLICATIONS FOR AUTHORISATION AS AN ADI, GENERAL INSURER OR LIFE COMPANY
PART 1 - EXPLANATORY STATEMENT Instrument to which this explanatory statement relates
1. This explanatory statement relates to the instrument fixing charges which is made under paragraph 51(1)(b) of the Australian Prudential Regulation Authority Act 1998 (the APRA Act) and which is dated 3 June 2003 (the instrument).
APRA’s authority to fix charges
2. The APRA Act is administered by the Australian Prudential Regulation Authority (APRA). APRA is the prudential regulator of the banking, general insurance, life insurance and superannuation industries.
3. Subsection 51(1) of the APRA Act provides that APRA may, by written instrument, fix charges to be paid to it by persons in respect of:
(a) services and facilities which APRA provides to such persons; and
(b) applications or requests made to APRA under laws of the Commonwealth. (These paragraphs reflect the contents of paragraphs 51(1)(a) and (b).)
4. Subsection 51(1) also specifies that an instrument fixing charges may provide for the waiver or refund of the charges.
5. Subsection 51(2) of the APRA Act provides that a charge fixed under subsection
51(1) must be reasonably related to the costs and expenses incurred or to be incurred in relation to the matters to which the charge relates, and must not be such as to
amount to taxation.
Purpose of the instrument
6. The instrument, made by a delegate of APRA, imposes charges in respect of applications made to APRA for the authorisation or registration (in other words, the licensing) of authorised deposit-taking institutions (ADIs), general insurers and life companies. (ADIs principally comprise banks, building societies and credit unions.)
Background
7. One of APRA’s functions as prudential regulator is the licensing of ADIs, general insurers and life companies. Basically, the Acts under which ADIs, general insurers and life companies are regulated2 prohibit the carrying on of the regulated activity (respectively, banking business, general insurance business and life insurance business) unless it is carried on by a body corporate that is licensed by APRA.3 Each of the Acts confers a wide discretion on APRA regarding whether or not to grant the licence.
8. A licence is only granted to an entity once, when it first begins to carry on the regulated activity. The licence continues in force until such time as it is revoked by APRA (for example, because the regulated entity is no longer carrying on the regulated business, has become financially unsound, or has breached the relevant legislation).
9. Licensing is a critically important aspect of prudential regulation. Licensing requirements play a “gatekeeper” role, enabling the prudential regulator (APRA) to keep out of the regulated industry players that are considered to be unsuitable for one reason or another (whether due to lack of capital, lack of technical capability or lack of integrity) and to ensure that entities seeking to be licensed have the requisite capital, administrative and human resources and systems to enable them to be relied on to carry on their financial business in a prudent manner.
10. Processing and determining a licence application from a prospective new entrant to the regulated industry is a very time-consuming and resource-intensive exercise for APRA. The applicant is required to provide in its licence application a considerable amount of detailed information relating to all aspects of it current and proposed business, including its financial, administrative and human resources, its governance, compliance and risk-management systems, its investment strategy, its outsourcing policy, its business plan, and so on. APRA staff with the relevant technical expertise carefully assess this information. Often they will conduct interviews with the applicant’s key personnel and make site visits to the applicant’s place of business. They also examine the backgrounds of the directors and senior executives of the applicant to determine whether they meet APRA’s “fit and proper person” requirements. They also examine, and in some cases need to formally approve, key professional sevice providers who are engaged by the applicant (such as approved auditors and approved actuaries). They then advise the relevant APRA delegate whether or not the applicant should be granted a licence. Appropriate conditions are often imposed on the licence.
11. Although resource-intensive and frequently onerous for all concerned, if performed properly the licensing process is likely to pay dividends down the track by helping to ensure that the licensed entity will be up to the job of carrying on its business prudently, thereby minimising the chances of depositors or policyholders suffering loss due to the licensed entity’s dishonesty or imprudent behaviour.
2 Respectively the Banking Act 1959, the Insurance Act 1973 and the Life Insurance Act 1995.
3 The provisions empowering APRA to grant licences are respectively section 9 of the Banking Act
1959, section 12 of the Insurance Act 1973 and section 21 of the Life Insurance Act 1995.
12. APRA is principally funded by the annual supervisory levy imposed on regulated entities by the Financial Institutions Supervisory Levies Collection Act 1998 and the related levy imposition Acts.4 However, section 51 of the APRA Act empowers APRA to impose charges in respect of services or facilities provided by it and in respect of applications made to it under Acts which it administers. Underlying section
51 is the philosophy of “user pays” – that parties who receive special services or benefits from APRA should, where appropriate, have to pay the cost of providing them, rather than leaving them to be funded out of the supervisory levy which is paid by the general body of regulated entities. This reflects the views of the Wallis inquiry
into the regulation of the financial system, which recommended that, in the interests of equity and efficiency, the costs of prudential regulation should be recouped from the financial industry, saying:5
“ The arrangements should involve a mix of direct service fees and annual levies and should distinguish, where possible:
□ services provided at the instigation of individual entities, such as authorisations or registrations, for which per-item cost recovery fees are appropriate; and
□ regulatory activities undertaken at the discretion of the agency and for the general benefit of customers, such as inspections, enforcement and policy development, for which annual industry-wide levies are most appropriate.
...
Recommendation 104: Regulatory agencies’ charges should reflect their costs
Regulatory agencies’ charges should reflect their costs. The regulatory agencies should collect from the financial entities which they regulate enough revenue to fund themselves, but not more. As far as practicable, the regulatory agencies should charge each financial entity for direct services provided, and levy sectors of industry to meet the general costs of their regulation. ”
13. In keeping with that philosophy, APRA has decided to charge entities that apply for a licence to carry on business as an ADI, general insurer or life company the fees fixed by the instrument. The various charging options that were available to APRA and their relative merits are discussed in the Regulatory Impact Statement below.
Description of the charges and how they have been calculated
Description of the charges
14. The instrument sets a series of fixed fees for licence applications, as follows:
• application for licensing as an ADI that is a bank or special service provider:
$68,200
• application for licensing as an ADI that is a building society or credit union:
$22,000
• application for licensing as an ADI that is a specialist credit card institution:
$33,000
• application for licensing as a general insurer:
$68,200
4 The relevant levy imposition Acts include the Authorised Deposit-taking Institutions Supervisory Levy Imposition Act 1998, the General Insurance Supervisory Levy Imposition Act 1998 and the Life Insurance Supervisory Levy Imposition Act 1998.
5 Commonwealth of Australia Final Report of the Financial System Inquiry 18 March 1997 section
12.3 (p 532).
• application for licensing as a life company (other than a friendly society):
$55,000
• application for licensing as a life company that is a friendly society:
$22,000.
15. These fees are inclusive of GST.
16. The licence fee is payable by the applicant who applies for the licence, and is payable when the application is lodged with APRA.
17. The licence fee is not refundable if the application is unsuccessful (that is, if APRA decides not to grant the applicant a licence), or if the applicant withdraws the application or decides not to proceed with it (for instance, because APRA has intimated that it intends to refuse a licence or to impose conditions on the licence which the applicant considers unacceptable).
18. For the avoidance of doubt, it should be noted that the licence fee is payable in respect of every new application, even one that is made after the refusal or withdrawal of an earlier application for which the applicant also paid a licence fee.
How the charges have been calculated
19. The fee for each type of licence reflects APRA’s costs of processing and determining the licence application.
20. The costs are based on the amount of APRA staff time directly devoted to processing and determining the average application for a licence of that type, based on the recent experience of APRA’s two operational divisions which are responsible for licensing, namely the Specialised Institutions Division and the Diversified Institutions Division. The levels of seniority of the staff concerned are determined and the mid- point salary of those levels is used in the calculation. Overhead costs are then added
to the salary costs on a weighted average cost basis.
21. In this manner, APRA’s costs of processing and determining licence applications have been quantified as follows:
• licensing of an ADI that is a bank or special service provider: $62,000
• licensing of an ADI that is a building society or credit union: $20,000
• licensing of an ADI that is a specialist credit card institution: $30,000
• licensing of a general insurer: $62,000
• licensing of a life company (other than a friendly society): $50,000
• licensing of a life company that is a friendly society: $20,000. GST of ten per cent has been added to each of these amounts to arrive at the GST- inclusive fees that are fixed by the instrument (which are reproduced in paragraph 14 above).
22. The cost of licensing a regulated entity in a particular category (bank, building society, credit union, and so on) does not vary significantly with the size of the entity, judged by either its capitalisation or the (anticipated) size of its revenues or deposit or policy liabilities. This is because the same “checklist” of issues is addressed when
processing licence applications relating to a particular category of regulated entity, each applicant being vetted with a similar degree of thoroughness.6
23. The cost of licensing specialist credit card institutions has been estimated rather than being based on actual experience of licensing such entities, because they are a new category of ADIs – the first specialist credit card institutions are expected to be licensed early next financial year. They will cost significantly less to license than a
bank, because they will only be licensed to engage in the limited business of issuing or acquiring credit cards. This kind of business carries less prudential and systemic risk
and hence requires less capital and less complex systems than the deposit-taking and
lending business engaged in by banks.
24. Credit unions generally have a mutual structure under which they are owned collectively by their depositors and under which they do not generate profits for other parties. They offer a limited range of products and services, which are sometimes “niche” products or services that fill a need that is not adequately catered for by the banks. They also normally service a limited geographical area or a limited class of depositors (for example, people who work in a particular industry or profession). In view of these characteristics, the cost of licensing them is considerably less than the cost of licensing banks.
25. Building societies and friendly societies have similar characteristics to those of credit unions to which reference has just been made. Many building societies, and most friendly societies, have a mutual structure, and they have a relatively limited product range and customer base. Hence, the cost of licensing them is also considerably less than the cost of licensing banks or life companies that are not friendly societies.
26. Special service providers are ADIs that provide special services such as payment clearing facilities to building societies and credit unions. Although they only provide a narrow range of services, the specialised nature of those services and the systemic importance of special service providers means that the cost of licensing them is likely to be similar to the cost of licensing banks. (No special service providers have been licensed in recent years, hence precise information about the work involved in their licensing is not available.)
Discretion to waive or refund the charges
27. The instrument gives APRA a limited discretion to waive or refund a licence fee, in whole or in part. The discretion can only be exercised if APRA is satisfied that special circumstances apply which would make it unjust or oppressive to charge the fee, or the full amount of the fee.
28. An example of a case where a waiver or refund would be justified is where an applicant applies for the wrong kind of licence by mistake, and withdraws the application before APRA has done any substantial amount of work considering the application. However, as indicated in paragraph 17 above, the mere fact that the application is unsuccessful, for whatever reason, or that APRA tells the applicant that
6 As regards the last point, once APRA has begun monitoring a regulated entity it is able to categorise it as high risk or low risk and to tailor the intensity of its supervision accordingly. However, APRA is not in a position to make such judgements about an applicant before it has thoroughly checked out the applicant.
the application will be unsuccessful, would not justify a waiver or refund, either of the initial licence fee or of the fee payable in respect of any further application that the applicant may subsequently make.
Charges must be reasonably related to the costs and expenses incurred
29. As indicated above, the charges set by the instrument are fixed on a cost recovery basis for the services to which they apply. The charges are based on the average amount of effort involved in the discharge of APRA’s statutory licensing responsibilities, and incorporate all the direct costs and appropriate overheads.
Charges must not amount to taxation
30. As the charges are reasonably related to the costs incurred by APRA in processing and determining licence applications, the charges do not constitute a tax.
No retrospectivity
31. The charges are prospective only, in that they are only payable in respect of licence applications that are lodged with APRA on and after the date of gazettal of the instrument.7
PART 2 - REGULATORY IMPACT STATEMENT Identification of issue
32. The issue is how to fund APRA’s costs of processing and determining licence applications lodged by bodies corporate seeking to be licensed as ADIs, general insurers and life companies.
Objective
33. The objective is to ensure that APRA’s processing and determination of licence applications for ADIs, general insurers and life companies is funded in a way that is efficient, that is fair as between regulated entities, that does not have a negative impact on competition and innovation in the financial industry, and that ensures that APRA is able to perform its licensing functions to the standard of quality and thoroughness that is prudentially warranted, without impairing APRA’s ability to perform its other regulatory functions.
Identification of options
34. There are only two funding sources available to APRA from which its costs of processing and determining licence applications can be funded:
- APRA’s annual budget, which is funded by the annual supervisory levy paid by all
regulated entities; and
- a specific charge for licensing imposed under subsection 51(1) of the APRA Act.8
7 By virtue of subparagraph 48(1)(b)(iv) of the Acts Interpretation Act 1901.
8 A third potential source of funding is afforded by subsection 9A(2) of the APRA Act (which provides that APRA may, with the approval of the Minister, enter into an agreement with a State, Territory or other person under which APRA is, for a fee, to provide prudential regulation or advice
35. The legislation under which the annual supervisory levy is imposed is mentioned in paragraph 12 above. The levy is quantified (in annual Treasurer’s determinations made under the levy imposition Acts) as a specified percentage of the value of the regulated entity’s assets, subject to maximum and minimum limits. The specified percentage and the specified maximum and minimum levy amounts are different for different categories of regulated entities.
36. The available options are built around these two available funding sources. The options that are reasonably practicable are considered to be:
Option 1 – Do not charge a licence fee, but fund the licensing from APRA’s annual budget.
This is the current position – at present APRA does not charge licence fees but funds its licensing activities from its annual budget.
Option 2 – Charge a licence fee, quantified at the average cost of licensing each category of regulated entity.
That is, charge a fixed licence fee of $X in respect of applications for licensing as a bank, $Y in respect of applications for licensing as a building society or credit union, and so on, where $X is the average cost of dealing with applications for licensing as a bank and $Y is the average cost of dealing with applications for licensing as a building society or credit union.
Option 3 – Charge a licence fee, quantified as the actual cost of dealing with each individual application.
That is, charge each applicant the actual cost of dealing with their application, on a time and materials basis. This would necessitate recording the amount of staff time actually spent on the application, and possibly also disbursements such as photocopying, faxing, long distance phone calls, courier fees, taxi fares and so on that are expended in the course of dealing with the application (although a variant of this option would be to simply charge a standard mark-up on the staff time to cover disbursements).
Option 4 – Charge a licence fee, quantified either as under option 2 or option 3, but discounted for some or all categories of regulated entity.
For example, ascertain that the average cost of dealing with applications for licensing as a credit union is $20,000 (as under option 2), and then set the licence fee for credit unions at the discounted sum of, say, $10,000. Resort to this option would only be warranted if and insofar as charging the
licence fee at the full cost recovery level constituted a significant barrier to entry for a particular category of regulated entity. The purpose of the discount would be to reduce the fee to a level where it ceased to be a barrier to entry.
services). However, services provided under subsection 9A(2) agreements only constitute a very small proportion of APRA’s total activities. Moreover, most of the fee earned under such an agreement would go to cover the cost of providing the service for which the fee was charged, with only the profit component being available to fund APRA’s other activities, including licensing. Hence, fees earned under subsection 9A(2) agreements do not represent a significant potential funding source for licensing.
Impact identification
37. Options 2, 3 and 4 will have a direct financial impact on entities applying to be licensed as ADIs, general insurers or life companies, as they will have to pay the licence fees.
38. Option 1 (which represents the current state of affairs) will not impose any specific financial burden on licence applicants, but it will impose an indirect financial burden on the general body of regulated entities, because they will have to subsidise the cost of licensing applicants through the annual supervisory levy they pay (which will have to be higher than it would be if APRA’s costs of licensing were met by licence fees).
39. All the options have a relatively small indirect financial impact on depositors and policyholders of ADIs, general insurers and life insurers, insofar as regulated entities pass on to them either the licence fee or the higher annual supervisory levy that results from the absence of licence fees. (Depending on market conditions, regulated entities may be forced to absorb some or all of such costs themselves rather than passing them on to their customers.)
40. Options 2 and 3 could potentially also have an indirect non-monetary impact on consumers if the licence fee acts as a barrier to entry by new ADIs or insurers, especially smaller ones. In that case, the licence fee could result in a diminution of competition and innovation in the banking, general insurance or life insurance sectors. (The discount in option 4 would be designed to minimise or eliminate the possibility
of the licence fee acting as a barrier to entry.)
Assessment of costs and benefits
41. Option 1 (which involves funding APRA’s licensing activity out of its annual budget derived from the annual supervisory levy paid by all regulated entities) has several disadvantages.
42. First, it is lacking in fairness and equity as between licence applicants and other regulated entities. Licence applicants generate significant costs for APRA of dealing with their licence application, and they obtain a valuable commercial benefit if their application is successful, namely the right to carry on business as a financial institution of the relevant kind in a regulated market to which entry is controlled. It is
prima facie fair and reasonable that they should bear the costs of their licensing, rather than forcing the general body of regulated entities to subsidise those costs through the
supervisory levy.
43. Second, option 1 can potentially undermine the quality and effectiveness of APRA’s prudential regulation. This is because it is not designed to provide APRA with sufficient funds to enable it to carry out both its licensing function and its other regulatory responsibilities effectively and to the optimum standard. APRA cannot accurately predict the number and type of licence applications it will receive in a given financial year. If it has to fund licensing from its annual budget, then if it receives more licence applications than it has budgeted for, but receives no matching increase in revenue to fund its processing of them, it will be faced with a choice between:
- not expending as much staff time and resources on processing the licence applications as is prudently required (which will create increased prudential risk due to inadequate vetting of the applicants); or
- cutting back on its other regulatory activities and functions such as policy development, setting prudential rules and standards, monitoring regulated entities and enforcement (which will create increased prudential risk due to such cutting
back).
44. The charging of licence fees, as advocated under options 2 to 4, overcomes these disadvantages. Charging licence fees gives effect to the user pays philosophy under which those who obtain the benefit of a service are expected to foot the bill. User pays is also fairer to the general body of regulated entities, who no longer have to subsidise the cost of dealing with licence applications. It also eliminates the potential
distortions of APRA’s regulatory functions referred to in paragraph 43 above – licence fees will enable APRA to devote sufficient time and resources to licensing, without detracting from its ability to carry out its other important regulatory responsibilities.
45. For these reasons, option 1 should be rejected in favour of one of the other three options which involve the imposition of a licence fee.
46. A potential disadvantage of licence fees is that, if they are set at a high level relative to the financial capacity of prospective new entrants, they could constitute a barrier to their entry, thereby having a deleterious impact on competition and innovation. Option 4 is designed to avoid this. However, option 4 is unnecessary. This is because small entrants are likely to fall into the building society, credit union or friendly society categories, and the costs of licensing these kinds of entities is
relatively low at $20,000, and hence the licence fee for them is set at the same amount plus GST (which they are able to reclaim). An impost of $20,000 is unlikely to be a serious obstacle for any viable building society, credit union or friendly society applicant, even a small one.
47. The position is similar as regards the relatively small amount of $30,000 payable by specialist credit card institutions.
48. Banks, general insurers and life companies other than friendly societies will have to pay higher fees of $62,000 and $50,000 respectively. However, by their very
nature these businesses require a large amount of capitalisation and infrastructure, and in the context of such requirements licence fees of these amounts will not act as
barriers to entry.
49. Thus, option 4 should be rejected as unnecessary in the circumstances.
50. This leaves options 2 and 3 to choose from. Option 3, where the licence fee is tailored individually to reflect the actual cost of handling the particular licence application, may be theoretically superior, but implementing it would be too costly and impractical, because APRA does not have the sophisticated individual client- based cost recording and billing system that would be needed to implement it. It
would be too costly to introduce such a system solely in order to enable option 3 to be adopted, especially as the fixed lump sum licence fees under option 2 do reasonably
approximate actual cost.
51. Thus, option 3 should also be rejected.
Consultation
52. APRA holds annual consultations with financial industry representative organisations as well as the Australian Consumers’ Association (which represents the interests of consumers of financial services) concerning the level of the following financial year’s supervisory levy. The consultations concerning the levy for the 2003-
2004 financial year took place in April and May 2003.9 During those consultations
APRA advised of its proposal to introduce licence fees (as well as fees for other elective services).10 APRA has also foreshadowed the introduction of such fees in the course of the consultations with industry currently occurring as part of the wider- ranging “Review of Financial Sector Levies” which was established by the Minister for Revenue and Assistant Treasurer in October 2002.11
53. There has been general support from the industry organisations for fees for specific services, including licensing. This is mainly because such fees reduce the supervisory levy and hence the cross-subsidy by the general body of existing regulated entities of services which are only provided to, and which only benefit, individual entities. Indeed, this cross-subsidy effect is magnified in the case of the licensing of new applicants, as they will not yet have made any contribution to APRA through the supervisory levy – and if their application is unsuccessful, they will never make such a contribution.
54. The licence fees will by definition be payable by entities that are not yet regulated. The interests of such entities are not necessarily adequately represented by industry organisations whose membership comprises currently regulated entities. However, potential applicants for licensing do not have their own representative organisation, and are too diffuse and indeterminate a group to make it practicable for APRA to consult them. APRA is conscious that this is a shortcoming in the consultation process, but it cannot be helped. APRA has (as noted in paragraphs 46 to
49 above) taken into consideration the potential for the licence fee to act as a barrier against new entrants to the industry, concluding however that it will not in fact
constitute such a barrier.
9 The industry organisations consulted were: Australian Bankers’ Association; National Credit Union Association Inc; Australian Association of Permanent Building Societies; International Banks and Securities Association of Australia; Credit Union Services Corporation (Australia) Ltd; Insurance Council of Australia; Australian Friendly Societies Association; Investment and
Financial Services Association Ltd; Australian Finance Conference; Retirement Funds Association;
and Australian Institute of Superannuation Trustees.
10 Australian Prudential Regulation Authority Discussion Paper for Consultation with the Financial
Sector Industry on Levies for 2003-04 section 9 (p 11).
11 Media release by Senator Helen Coonan, Minister for Revenue and Assistant Treasurer, entitled
Review of Financial Sector Levies No C115/02 dated 29 October 2002.
.
Conclusion and recommended option
55. For the reasons set out in paragraphs 41 to 51 above, option 2 is the preferable
option. That is the option implemented by the instrument.
[1] Subsection 33(3) of the Acts Interpretation Act 1901 confers a general power to repeal, rescind, revoke, amend or vary statutory instruments.
[2] FRLI reference F2006BO1150.
[3] FRLI reference F2006BO1151.
[4] GST has the meaning given in A New Tax System (Goods and Services Tax) Act 1999.
[5] FRLI reference F2009LO4667, see items 15.54, 15.56 and 15.57 of Part 1 of Schedule 1.
[6] See:
A New Tax System ( Goods and Services Tax) (Exempt Fees and Charges) Determination 2005 (No 2) (FRLI reference F2005LO4268);
A New Tax System (Goods and Services Tax) (Exempt Fees and Charges) Determination 2006 (FRLI reference F2006LO2017);
A New Tax System (Goods and Services Tax) (Exempt Fees and Charges) Determination 2006 (No 2) (FRLI reference F2006LO);
A New Tax System (Goods and Services Tax) (Exempt Fees and Charges) Determination 2007 (No.1) (FRLI reference F2007LO18363);
A New Tax System (Goods and Services Tax) (Exempt Fees and Charges) Determination 2008 (No.1) (FRLI reference 2008LOO100);
A New Tax System (Goods and Services Tax) (Exempt Fees and Charges) Determination 2008 (No.2) (FRLI reference F 2008LO2269);
A New Tax System (Goods and Services Tax) (Exempt Fees and Charges) Determination 2009 (No.1) (FRLI reference F2008LO4667); and
A New Tax System (Goods and Services Tax) (Exempt Fees and Charges) Determination 2009 (No.2) (FRLI reference F2009LO2436).
[7] See note 6 above.
[8] FRLI reference F2010LO1559.