Australian Prudential Regulation Authority instrument fixing charges No. 2 of 2015
Models-based capital adequacy requirements for ADIs: 2014-15
EXPLANATORY STATEMENT
Issued by the Australian Prudential Regulation Authority (APRA)
Australian Prudential Regulation Authority Act 1998, paragraphs 51(1) (a) and (b)
Instrument to which this explanatory statement relates
This explanatory statement relates to the instrument fixing charges which is made under paragraphs 51(1) (a) and (b) of the Australian Prudential Regulation Act 1998 (the APRA Act) and which is dated 4 June 2015 (the instrument).
Background
Legislative framework
The APRA Act is administered by APRA. APRA has statutory responsibility for the prudential supervision of most of the superannuation industry, the life insurance and general insurance industries, and authorised deposit-taking institutions (ADIs). ADIs include banks, building societies and credit unions.
Subsection 51(1) of the APRA Act provides that APRA may, by legislative instrument, fix charges to be paid to it by persons in respect of:
(a) services and facilities which APRA provides to such persons; or
(b) 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 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.
Purpose and operation of the instrument
The instrument, made by the Executive General Manager as a delegate of APRA, imposes a charge for certain services provided by APRA relating to the on-going supervision of the capital adequacy of banks which have adopted the models-based approach under the Basel Capital Framework (Basel II) for ADIs to determine their capital adequacy requirements and to the accreditation of other ADIs which have applied to APRA for accreditation to use that approach.
Factual background
In June 2004, the Basel Committee on Banking Supervision (the Committee) released Basel II, reforming the 1988 Basel Capital Accord (the 1988 Accord).
APRA implemented Basel II in Australia for all ADIs on 1 January 2008, through new prudential standards under section 11AF of the Banking Act 1959. Under these standards ADIs are able to determine their capital adequacy requirements using one of two methods: a standardised (default) method (the standardised method) or a models‑based approach that more closely aligns with an ADI’s individual risk profile (the models-based approach). ADIs seeking to use the models-based approach must have APRA’s approval to do so.
Basis of charging
APRA is principally funded by the annual supervisory levy imposed by the Financial Institutions Supervisory Levies Collection Act 1998 and the related levy imposition Acts. 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 principle 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 institutions.
APRA continues to charge fees that recover the assessment cost for, and ongoing supervision of, those ADIs seeking Basel II accreditation.
How the charges have been calculated
The charges set by the instrument are fixed on a cost recovery basis and in line with the Australian Government Cost Recovery Guidelines July 2014.
The charge is based on the need to recover APRA’s costs of carrying out the on-going monitoring of the capital adequacy of ADIs using the models-based approach and assessing applications for approval. Those costs are based on an estimation of APRA staff time involved with an addition of direct overhead costs. On this basis, APRA’s total cost recovery in respect of the models-based approach for 2014-15 is $1.83 million (2013-14: $1.65 million).
The costs incurred in monitoring the capital adequacy of ADIs using the standardised method are recovered through financial sector levies.
In 2014-15, the focus has been upon the on-going supervision of the capital adequacy of ADIs approved to use the models-based approach (Australia and New Zealand Banking Group Limited (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank limited (NAB), Westpac Banking Corporation (WBC) and Macquarie Bank Limited (MBL)) and the continued assessment of the accreditation application of ING Bank (Australia) Limited (ING).
As there is no material difference in APRA’s approach to the monitoring of the models-based approach between ADIs who have received approval, each of these will be charged an equal amount of the relevant costs. ING’s application for accreditation continued across 2014-15 and the charge determined reflects the cost recovery of APRA’s associated effort.
Description of the charges
The charge imposed by the instrument is based on a two-tiered structure:
(a) $333,000 plus GST (which totals $366,300) for ANZ, CBA, MBL, NAB and WBC; and
(b) $165,000 plus GST (which totals $181,500) for ING.
Charges must be reasonably related to the costs and expenses incurred
As indicated above, the charges set by the instrument are fixed on a cost recovery basis to recover the estimated effort involved in the discharge of APRA’s responsibilities and in line with the Australian Government Cost Recovery Guidelines July 2014.
Cost Recovery Implementation Statement
A Cost Recovery Implementation Statement (CRIS) has been tabled in support of this Explanatory Statement.
Charges must not amount to taxation
As disclosed in the accompanying CRIS, the charges are reasonably related to the costs incurred by APRA in providing the services concerned and therefore do not constitute a tax.
Consultation
The Legislative Instruments Act 2003 (LIA) requires that consultation be undertaken with those impacted by the instrument and section 17 of the LIA outlines the circumstances and processes underpinning consultation. However, section 18 of the LIA provides for relief from consultation where it may be determined to be unnecessary or inappropriate - for example, when appropriate consultation has already been undertaken.
The annual levies consultation process explicitly adopts the Wallis Inquiry recommendations that direct services be met by specific user charges, resulting in a compensating reduction of the total general levies to be collected from industry participants[1].
Before making the instrument, APRA informed the affected ADIs of the proposed charges.
Statement of Compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
A Statement of Compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 is provided at is Attachment A to this Explanatory Statement.
Attachment A
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Australian Prudential Regulation Authority instrument fixing charges No. 2 of 2015
This Legislative Instrument is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (HRPS Act).
Overview of the Legislative Instrument
This Legislative Instrument will fix charges to be paid to APRA by ADIs for specific costs associated with the supervision of the capital adequacy of ADIs using a model-based approach and assessing applications by ADIs to utilise the models-based approach.
Human rights implications
APRA has assessed this Legislative Instrument against the international instruments listed in section 3 of the HRPS Act and determined that this Legislative Instrument does not engage any of the applicable rights or freedoms, as the charges payable by the ADIs will not have any direct or indirect effect on the rights of individual persons.
Conclusion
This Legislative Instrument is compatible with human rights as it does not raise any human rights issues.
[1] See the Consultation Paper Proposed Financial Industry Levies for 2015-16 at The Treasury website.