Australian Prudential Regulation Authority instrument fixing charges No. 4 of 2010

Australian Prudential Regulation Authority instrument fixing charges No. 4 of 2010

Charges to be paid by representative offices of foreign banks in Australia

EXPLANATORY STATEMENT

Prepared by the Australian Prudential Regulation Authority (APRA)

Australian Prudential Regulation Authority Act 1998, paragraphs 51(1)(a) and 51(1)(b)

Acts Interpretation Act 1901, subsection 33(3)

This explanatory statement relates to instrument fixing charges No. 4 of 2010 which is made under paragraphs 51(1)(a) and 51(1)(b) of the Australian Prudential Regulation Authority Act 1998 (the APRA Act) and subsection 33(3) of the Acts Interpretation Act 1901, and dated 17 December 2010 (the Instrument).

The Instrument revokes Instrument Fixing Charges To Be Paid To APRA No 3 of 2004[1] (the revoked instrument) [2]and fixes the charges set out in the Schedule to the Instrument, in respect of applications by foreign banks to APRA for consent to maintain a representative office in Australia under section 67 of the Banking Act 1959, and for services provided by APRA in undertaking the monitoring of such representative offices in Australia. These charges are now reduced by an amount equal to the amount of the GST[3] previously included in the charges fixed under the revoked 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.

Subsection 33(3) of the Acts Interpretation Act 1901 provides that where an Act confers a power to make, grant or issue any instrument (including rules, regulations or by‑laws) the power shall, unless the contrary intention appears, be construed as including a power exercisable in the like manner and subject to the like conditions (if any) to repeal, rescind, revoke, amend, or vary any such instrument.

The Banking Act 1959 (the Banking Act) is a law of the Commonwealth.  Under subsection 67(1) of the Banking Act a person, other than an ADI, is guilty of an offence if:

(a)  the person carries on banking business in a foreign country but does not carry on banking business in Australia; and

(b)  the person establishes or maintains an office in Australia wholly or partly in connection with the carrying on of that banking business in that foreign country; and

 (c)  APRA did not consent, in writing, to the establishment or maintenance of that office; and

 (d)  there is no determination in force under section 11 that this subsection does not apply to the person.

Under subsection 67(2) APRA may, at any time, by notice in writing served on the person concerned:

(a)  impose conditions, or additional conditions, on a consent;

(b)  vary or revoke conditions imposed on a consent; or

(c)  revoke a consent.

Purpose of the Instrument

The Instrument revokes[4] the Instrument fixing charges to be paid to APRA No. 3 of 2004 dated 27 May 2004 (the revoked instrument), and fixes the charges specified in the Schedule to be paid:

• by applicants for APRA’s consent under s 67 of the Banking Act to establish or maintain representative offices of overseas banks in Australia; and

• for the costs or expenses incurred or to be incurred by APRA in relation to APRA’s monitoring of the operations of such representative offices in Australia and the overseas banks’ compliance with the conditions imposed upon APRA’s consent under section 67.

These charges are exempt from GST by operation of A New Tax System (Goods and Services Tax) (Exempt Taxes, Fees and Charges) Determination 2010 (No. 2) made by the Assistant Treasurer on 7 June 2010 (the GST Determination) under section 81-5 of the A New Tax System (Goods and Services Tax) Act 1999.

The revoked instrument fixed charges for the same services in amounts which included GST.

The instrument reduces the charges fixed by the amount of the GST which was previously included. In all other respects, the basis of calculation of the charges fixed under the instrument is the same as the charges fixed under the revoked instrument.

The charges are reasonably related to the costs incurred by APRA in processing applications under s 67 of the Banking Act to establish or maintain representative offices of overseas banks in Australia and in relation to APRA’s monitoring of the operations of such representative offices in Australia and the overseas banks’ compliance with the conditions imposed upon APRA’s consent under section 67.

The basis upon which the charges are calculated is set out in the Explanatory Statement for the revoked instrument, which for ease of reference is reproduced in full in the Appendix to this Explanatory Statement.

The charges are prospective only.  APRA has refunded the amount of GST paid to those entities which have paid the GST component under the revoked instrument (as varied) since the charges first became exempt in 2009.

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

EXPLANTORY STATEMENT

Australian Prudential Regulation Authority Act 1998, section 5]

INSTRUMENT FIXING CHARGES TO BE PAID TO APRA No 2 OF 2004

REPRESENTATIVE OFFICES OF FOREIGN BANKS

Instrument to which this explanatory statement relates

This explanatory statement relates to the  instrument entitled INSTRUMENT FIXING CHARGES TO BE PAID TO APRA - No 2 OF 2004 - REPRESENTATIVE OFFICES OF FOREIGN BANKS  which is made under paragraphs 51 (1)(a) and  (b)  of the  Australian Prudential Regulation Authority Act 1998

(the APRA Act) and  subsection 33(3) of the Acts Interpretation Act  1901 (the  Acts Interpretation

Act) and which is dated 27 May 2004 (the Instrument).

APRA’s authority to fix charges

The APRA Act is administered by the Australian Prudential Regulation Authority (APRA). APRA has statutory responsibility for the prudential supervision of the superannuation industry, the life  insurance and  general insurance industries and  authorised deposit-taking institutions. (Autborised deposit-taking institutions include banks, building societies and credit unions.)

Subsection 51(1) of the APRA Act provides:

“(1)   APRA may, by written instrument, fix  harges to be paid to APRA by  a person in respect

of:

(a)    services and facilities  APRA provides the  person; or

(b)    applications or requests (however described) made to APRA under any  law  of the

Commonwealth.

The instrument may also provide for the waiver or refund of 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.

Subsection 5 1(3) of the APRA Act provides that an instrument made under subsection 5 1(1)  is a disallowable instrument for the  purposes of section 46A  of the  Acts Interpretation Act.

APRA’s authority to revoke instruments fixing charges

The APRA Act does  not  contain any  provision authorising  the  revocation of a charging instrument made under subsection 51(1). However, subsection 33(3) of the Acts Interpretation Aët confers a general power to revoke or vary instruments.  It provides that  where an Act  confers a power to make, grant or issue any  instrument the  power shall,  unless the  contrary intention appears, be  construed as including a power exercisable in the  like  manner and  subject to the  like conditions (if any)  to repeal, rescind, revoke, amend or vary any  such instrument.

Purpose of the Instrument

The Instrument, made by a delegate of APRA, imposes certain charges in respect of foreign banks’ representative offices in Australia.  The charges relate to:

(a)    applications by  foreign banks for APRA’s consent under paragraph 67(1)(c) of the  Banking Act 1959 (the  Banking Act) to the  foreign bank establishing and  maintaining a representative office in Australia; and

(b)   monitoring by  APRA of the operations of the  representative office, pursuant to paragraph.

67(1)(c)  and subsection  67(2) of the  Banking Act.

The Instrument is intended to replace an  earlier instrument which imposed charges of the  same kind, which was  made on  13 May 2002 (the  Earlier Instrument).  The Instrument therefore revokes the Earlier Instrument.

Charges must be reasonably related to the costs and expenses incurred

The charges set by in the Instrument are fixed on a cost  recovery basis for the  services to which they apply. •The charges are  estimated on the basis of estimated effort involved in the  discharge of APRA’ s responsibilities and  incorporate all the  direct costs and  appropriate overheads.

Charges must not amount to taxation

As  the  charges are  reasonably related to the  costs incurred by  APRA in providing the  services concerned, the  charges do not  constitute a tax.

No retrospectivity.

The Instrument is a disallowable instrument by virtue of subsection 51(3) of the APRA Act.   The effect of section 46A of the Acts Interpretation Act is that the  rules in Part  XII  of that Act  that apply to regulations, apply to the  Instrument.  It therefore has to be gazetted and tabled in Parliament.

In accordance with subparagraph 48(1)(b)(iv) of the Acts Interpretation Act, the Instrument will take effect  from the date of notification in the Gazette.  Until the Instrument takes effect, the Earlier instrument will continue to apply.

Hence the Instrument will not have any retrospective operation.

Description of the charges, the terms applicable to them, the reason for imposing them, and how they have been calculated

Description of the charges

There are two charges fixed by the Instrument:

(a)    An  application fee  of $3,300 for  dealing with an  application by  a foreign bank for  APRA’s consent (under paragraph 67(1)(c) of the  Banking Act) to the  foreign bank establishing and maintaining a representative office in Australia.

(b)    A charge of $5,500 per financial year for APRA’s monitoring of the operations of the representative offices of a foreign bank.  (The monitoring is undertaken in discharge of APRA ‘S function of consenting to the  maintenance of the  representative offices under paragraph 67(1)(c) of the  Banking Act,  and  for the  purpose of ensuring that the  foreign bank is complying with the  conditions imposed on  it under subsection 67(2) of the  Banking Act.)

Both charges are  imposed on  the  foreign bank concerned (that is, the  one  making the  application or the  one  being monitored, as the  case  may be).

Both charges are inclusive of 10% GST, The terms applicable to the charges

The application fee referred to in paragraph (a) above is not refundable if the application  is refused.  This is because APRA will still incur the costs of dealing with the application.

The annual charge referred to in paragraph (b) above applies in respect of an individual foreign bank, regardless of how many representative offices it maintains in Australia.  That is, a foreign bank with one office and  another foreign bank with  three Offices  will  each pay only one  annual charge of $5,500.  This is because APRA’s costs of monitoring do not  vary significantly

according to the  number of offices that a given foreign bank maintains, as the  monitoring is mainly focused on the  institution rather than on  individual offices.

The  annual charge in paragraph (b)  is to be pro rated where the  foreign bank does  not  have a representative office in Australia at the  beginning of the  financial year but  establishes such  an office part  way through the  financial year.   The  effect of the  pro  rating is that  the foreign bank is only liable to pay  a proportion of the  charge corresponding to the proportion of the  financial year which follows  the  establishment of a representative office in Australia of the  foreign bank.  The reason for this pro  rating is that  APRA’s costs of monitoring will  usually be  lower if the  foreign bank maintains offices during only part  of a year.

However, the annual charge in paragraph (b) is not similarly pro  rated where the  foreign bank closes its representative offices in Australia part way  through the  financial year.  While it is true that  a consequence of such  closure is that  APRA is likely to incur less  costs associated with continuous monitoring, in that  it will  not  need to monitor the  office during the  remainder of the financial year after it has  been closed, this  likely cost  saving is counterbalanced by  the  fact  that

•the closure of a foreign banks  representative offices is likely to necessitate significant additional regulatory involvement by  APRA in supervising the  closure process, to ensure that  it conforms to local laws.   Thus, even though there is a reduction in ongoing monitoring costs, the  one-off costs involved in  supervision of such  closure are  significant.

The  application fee  in paragraph (a)  is payable on  the  lodgement of the  application.

The annual charge in paragraph (b) is levied by invoice when a foreign bank first  establishes a representative office in Australia, and  thereafter at the  beginning of each subsequent financial year.   It is payable by the foreign bank within 28  days  after it receives the  invoice.

The reason for imposing the charges

To date some twenty-four foreign banks have established representative offices in Australia.

They are primarily located in Sydney and Melbourne.  The total number of representative offices

is twenty-six, as a few  of the  banks have more than  one  office..  The offices primarily carry out

liaison activities for the  Australian residents who have dealings with their overseas offices.  The foreign banks are prohibited from undertaking banking business in Australia (such as deposit­ taking, lending and off balance sheet activities).

Applications for consent to the opening of new representative offices are received from foreign banks and considered by  APRA, which must decide whether to  grant or withhold consent.  APRA also monitors the representative offices to make sure that they operate within the  terms of their consent given under section 67 of the  Banking Act  and,  more broadly, to prevent the  offices

being used  to  engage in banking business (which requires authorisation under the  Banking Act)

or otherwise in breach of financial laws  (for  example, for  money laundering).

Foreign banks with representative offices in Australia are not covered by supervisory levy legislation and hence do not have to pay  supervisory levy.   By contrast, Australian and foreign- subsidiary banks that are authorised to carry on banking business in Australia are liable to pay supervisory levy under the Financial Institutions Supervisory Levies Collection Act 1998. The levy is used to fund APRA.

Since foreign banks that have representative offices in Australia consume some amount of APRA’s resources when APRA consents to their opening of representative offices and thereafter monitors their operations, it is reasonable to charge them the estimated cost of those services on a cost recovery basis.  This is justified by both the “user pays” philosophy in regard to the  costs of regulation and  by  considerations of fairness between Australian and  foreign banks.

Similar cost recovery practices in relation to representative offices of foreign banks are observed by overseas financial regulators such as the Financial Services Authority (United Kingdom) and the  Office, of the  Superintendent of Financial Institutions (Canada).

How the charges have been calculated

The charges are  based on the  estimated staff time involved in dealing with applications and with carrying out  ongoing monitoring.  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. GST of 10% is also added.

Reason for, and effect of, the revocation of the Earlier Instrument

Reason for the  revocation

The Earlier Instrument also imposed an  application fee  and  an annual monitoring charge in respect of the  representative offices of foreign banks. It differed from the Instrument in only two substantive respects:

the  application fee  and  the  annual monitoring charge specified in the  Earlier Instrument, which were stated to be  inclusive of GST, were 10%  lower than those specified in the  Instrument (they were $3,000 and  $5,000, respectively, instead of $3,300 and  $5,500);  and

 the  Earlier Instrument allowed for the  pro  rata  reduction of the  annual monitoring charge not only where the  foreign bank first  establishes a representative office in Australia part way through the  financial year, but  also where the  foreign bank closes its representative offices part way  through the  financial year.

The reason why the application fee  and  monitoring charge in the  Earlier Instrument were 10%. lower while still  being stated to be  inclusive of GST was  due  to a mistake in the  treatment of GST

— they should have been increased by  10%  to account for  GST or (which would have had  the

same effect) they should have been stated to be exclusive  of GST.  The Instrument rectifies that mistake.

For  the  reasons that  have been explained above, namely, the  likelihood of APRA incurring substantial additional costs of supervision where a foreign bank closes its representative offices, it was  also  inappropriate for the  Earlier Instrument to allow for the  pro  rating of the  monitoring charge in those circumstances.  The Instrument also remedies this shortcoming of the Earlier Instrument.

Effect of the revocation

As  noted above, the  Instrument will  take  effect on  the  date  it is published in the   Gazette, and  that is when the  revocation of the  Earlier Instrument will  take effect.  Until then, the Earlier Instrument will continue to apply.

The  application fee  imposed by  the  Instrument will  only apply to  applications lodged on  or after the  date  of gazettal, while the  annual monitoring charge imposed by  the  Instrument will  apply from the  date  of gazettal to  foreign banks which first  establish a representative office in Australia on  or after that  date,  but  will  only  apply to foreign banks that  established a representative office

in Australia prior to the  date  of gazettal from the  beginning of next financial year (2004-05).

[1] FRLI reference F2006BO1154

[2] The Instrument was varied by the instrument entitled Variation of two instruments fixing charges to be paid to APRA dated 15 July2004 (FRLI reference F2006BO1155) and was further varied by the instrument entitled Australian Prudential Regulation Authority instrument fixing charges No 9 of 2006 (FRLI reference F2006LO3555).

[3] GST has the meaning given in A New Tax System (Goods and Services Tax) Act 1999

[4] By operation of paragraphs 51(1)(a) and 51(1)(b) of the APRA Act and subsection 33(3) of the Acts Interpretation Act 1901.