Australian Prudential Regulation Authority instrument fixing charges No.4 of 2009

For applicants seeking authorisation or registration as a

Non-Operating Holding Company

EXPLANATORY STATEMENT

Issued by the Australian Prudential Regulation Authority (APRA)

Australian Prudential Regulation Authority Act 1998, paragraph 51(1) (b)

Instrument to which this explanatory statement relates

This explanatory statement relates to instrument fixing charges No. 4 of 2009 which is made under paragraph 51(1) (b) of the Australian Prudential Regulation Authority Act 1998 (the APRA Act) and which is dated 15 January 2010 (the instrument).

Background

Legislative Framework

The APRA Act is administered by APRA. APRA has statutory responsibility for the prudential regulation of most of the superannuation industry, the general insurance and life insurance industries and authorised deposit taking institutions (ADIs), which 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; and

(b) applications or requests made to APRA under laws of the Commonwealth.

Subsection 51(1) also specifies that an instrument fixing charges may provide for the waiver or refund of the charges. 

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

The instrument, made by the Chief Financial Officer as a delegate of APRA, imposes charges in respect of applications made to APRA for the authorisation or registration (hereinafter referred to as authorisation) of Non-Operating Holding Companies (NOHCs) under the Banking Act 1959 (the Banking Act), the Insurance Act 1973 (the Insurance Act) and the Life Insurance Act 1995[1] (the Life Act), collectively referred to as ‘the Acts’.

Factual background

One of APRA’s functions as prudential regulator is the authorisation of NOHCs. NOHCs are a special class of body corporate that do not carry on a business, other than the business consisting of the ownership or control of one or more other bodies corporate which is a subsidiary[2] of the NOHC. The Acts require that a NOHC is a body corporate incorporated in Australia[3]. Ownership of NOHCs is regulated under the Financial Sector Shareholdings Act 1998. In the context of the Australian financial industry, NOHCs permit corporate groups to separate their individual regulated and unregulated business operations.

The Acts prohibit the carrying on of regulated activity unless it is carried on by a body corporate that is authorised by APRA. APRA may refuse to authorise a body corporate if it is the subsidiary of a NOHC which is not an authorised NOHC.[4]   Each of the Acts provides for the authorisation of a NOHC[5] and confers a wide discretion on APRA regarding whether or not to grant an authorisation.  An authorisation 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).

Authorisation is a key plank of prudential regulation, enabling APRA to exclude from the regulated industry, entities that are considered to be unsuitable (whether, inter alia, due to lack of capital, lack of technical capability or lack of integrity) and to ensure that entities securing authorisation, establish the requisite capital, governance, administrative, human resources and systems to enable them to be relied upon to carry on their financial business in a prudent manner.

Processing and determining a NOHC authorisation application is a time and resource intensive exercise for APRA.  The applicant must provide in its NOHC authorisation application a considerable amount of detailed information relating to all aspects of its current and proposed business and that of its existing and proposed subsidiaries. This includes details of substantial shareholders and related entities, board and committee structures, organisational framework, amount and composition of capital, financial, administrative and human resources, its governance, compliance and risk-management systems, its investment strategy, its outsourcing policy, its business plan, and financial projections.

Thereafter, APRA staff carefully review all information, conduct interviews with the applicant’s key personnel and make site visits to the applicant’s place of business.  They also examine the background of the directors and senior executives of the applicant to determine whether they meet APRA’s “fit and proper” requirements.  They also examine, and in some cases need to formally approve, key professional service providers who are engaged by the applicant or its subsidiaries (such as approved auditors and approved actuaries).  They then make recommendations to the relevant APRA decision maker as to whether or not an applicant should be granted authorisation, including whether appropriate conditions should be imposed on the authorised NOHC.

Basis of charging

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.[6]  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 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:[7]

“ 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 authorisation or registration, 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. ”

In keeping with that philosophy, APRA has decided to charge fixed price application fees for those entities seeking authorisation as a NOHC.

Description of the charges

The instrument establishes fixed fees for NOHC authorisation applications, as follows:

• authorisation as a NOHC of an ADI that is a bank or special service provider:  $44,000
• authorisation as a NOHC of an ADI that is a building society or credit union:  $22,000
• authorisation as a NOHC of an ADI that is a specialist credit card institution:  $22,000
• authorisation as a NOHC of a general insurer :     $22,000
• registration as a NOHC of a life company (other than a friendly society):  $22,000
• registration as a NOHC of a life company that is a friendly society:   $22,000

These fees are inclusive of GST[8].

The NOHC authorisation application fee is payable by the applicant who applies for the authorisation, and is payable when the application is lodged with APRA.

The NOHC authorisation application fee is not refundable if the application is unsuccessful (that is, if APRA decides not to grant the applicant authorisation) 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 authorisation or to impose conditions upon the authorisation which the applicant considers unacceptable).

For the avoidance of doubt, it should be noted that the NOHC authorisation application fee is payable in respect of every new application, including one that is made after the refusal or withdrawal of an earlier application for which the applicant also paid an authorisation application fee.

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 2005.  A Cost Recovery Impact Statement (CRIS) has been tabled in support of this Explanatory Statement.

Through its activity costing models, APRA has an extended history of actual effort undertaken by its authorisation teams (supervisors, specialist professionals etc); sufficient to establish a standard quantum of effort required to complete an industry specific authorisation review.

While the authorisation of a NOHC follows a broadly similar application review path to that of all other regulated entities, in practice NOHC applications tend to originate from entities associated with existing APRA authorised entities.  Therefore the fees charged for NOHC applications have been set at a fee lower than the fee charged for the general authorisation in recognition of this.

The material activity and associated costs to be recovered via the NOHC authorisation application fee are summarised in Table 1 following:

 Table 1: Material activity and associated costs to be recovered

The range of consumed effort and applicable rates recognises both an applicant’s complexity and concomitant experience of APRA staffing required to undertake the NOHC reviews.

By way of example, the historic effort to complete a NOHC authorisation review for a complex ADI entity (encompassing for example, retail banking, investment banking and funds management) can run to 100+ person days, as authorisation generally requires greater use of senior management and general management resources, when contrasted with an application from a NOHC of a “single business line, multi region” life insurer.

For this reason there is a distinction in the fees charged for a NOHC of a bank or special service provider and all other NOHC applications.

Table 2 following presents the proposed NOHC authorisation fees contrasted with those already in place for general authorisation fees.

Table 2: Comparison of current general and proposed NOHC authorisation fees[9]

As for the current general authorisation fees, the proposed NOHC authorisation  fees recognise the complexity associated with the differing types of entities regulated by APRA.

In addition and as mentioned previously, the proposed NOHC authorisation fees also anticipate applications primarily from existing regulated entities where prior knowledge of applicants’ history, structure and operations while provide some efficiencies in the review process.

Note that in practice, requests for NOHC authorisation are less likely to originate from building societies, credit unions or specialist credit card institutions reflecting those entities’ mutual ownership structure or limited business foci.

Discretion to waive or refund the charges

The instrument gives APRA a limited discretion to waive or refund an authorisation 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.

An example of a case where a waiver or refund would be justified is where an applicant applies for the wrong kind of authorisation by mistake, and withdraws the application before APRA has done any substantial amount of work considering the application. 

However, as indicated above, the mere fact that the application is unsuccessful, for whatever reason, or that APRA tells the applicant that the application will be unsuccessful, would not justify a waiver or refund, either of the initial authorisation fee or of the fee payable in respect of any further application that may eventuate.

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 defray the estimated effort involved in the discharge of APRA’s responsibilities and in line with the Australian Government Cost Recovery Guidelines July 2005. 

Cost Recovery Impact Statement

A Cost Recovery Impact 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 processing and determining NOHC authorisation applications, and therefore do not constitute a tax.

No retrospectivity

The charges are prospective only, in that they are only payable in respect of NOHC authorisation applications that are lodged with APRA on and after the date of registration of the instrument on the Federal Register of Legislative Instruments.

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 affords relief from consultation where it may be determined to be unnecessary or inappropriate; for example when appropriate consultation has already been undertaken.

In regard to the current proposed instrument, no separate consultation has been undertaken by APRA. Rather APRA  relies upon its existing annual levies consultation process whereby industry participants are advised of the proposed total annual financial impost and the mix of underpinning general levies, specific levies and cost recovery fees for service that fund the operations of APRA.[10]

The annual levies consultation process explicitly adopts the Wallis Inquiry recommendations7 wherein direct services are met by specific user charges, resulting in a compensating reduction of the total general levies to be collected from industry participants. 

Coupled with the user initiated nature of the NOHC application, APRA has concluded that separate, specific consultation in support of the proposed instrument is unnecessary.

[1] As amended by the Financial Sector Legislation Amendment (Enhancing Supervision and Enforcement) Act 2009. Those amendments will take effect on a date to be proclaimed or if any provision has not commenced within the period of six months after the date of Royal Assent, they commence on the first day after the end of that period.

[2] As defined in the Corporations Act 2001.

[3] Refer to the definition of non-operating holding company in section 5 of the Banking Act, section 3 of the Insurance Act and the Schedule of the Life Act (as amended by Item 184 of the Financial Sector Legislation (Enhancing Supervision and Enforcement) Act 2009 (to be proclaimed), respectively.

[4] See section 9 of the Banking Act, section 12 of the Insurance Act and section 21 of the Life Act.

[5] See section 11AA of the Banking Act, section 18 of the Insurance Act and section 28A of the Life Act.

[6] 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.

[7] Commonwealth of Australia Final Report of the Financial System Inquiry 18 March 1997, section 12.3

[8] The NOHC application fees are eligible for GST exemption by way of Treasurer’s determination under Division 81 of A New Tax System (Goods and Services Tax) Act 1999. Exemption will be sought as part of the next Treasurer’s determination that takes effect from 1 July 2010. 

[9] Amounts are disclosed on a GST exclusive basis to aid comparison.

[10] By way of example, see the consultation paper entitled, Proposed Financial Sector Levies for 2009-10 dated 10 June 2009 at Treasury’s website - content ID: 1560.