Banking, Insurance and Life Insurance (prudential standard) determination No. 1 of 2014 - Prudential Standard CPS 231 - Outsourcing

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Legislation au F2014L01650 Not in force Legislative Instrument

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Banking, Insurance and Life Insurance (prudential standards) determination Nos.  1 and 2 of 2014

 

EXPLANATORY STATEMENT

Prepared by the Australian Prudential Regulation Authority

Banking Act 1959, subsections 11AF(1) and 11AF(3)

Insurance Act 1973, subsections 32(1) and 32(4)

Life Insurance Act 1995, subsections 230A(1) and 230A(5)

Legislative Instruments Act 2003, paragraph 6(d)

APRA may, in writing, vary or revoke a prudential standard that applies to an APRA-regulated institution under:

  • subsection 11AF(3) of the Banking Act 1959 (Banking Act), in relation to authorised deposit-taking institutions (ADIs) and authorised non-operating holding companies (authorised banking NOHCs);
  • subsection 32(4) of the Insurance Act 1973 (Insurance Act), in relation to general insurers and authorised non-operating holding companies (authorised insurance NOHCs); and
  • subsection 230A(5) of the Life Insurance Act 1995 (Life Insurance Act), in relation to life companies (including friendly societies) and registered non-operating holding companies (registered life NOHCs).

APRA may, in writing, determine a prudential standard that applies to an APRA-regulated institution under:

  • subsection 11AF(1) of the Banking Act, in relation to ADIs and authorised banking NOHCs;
  • subsection 32(1) of the Insurance Act, in relation to general insurers and authorised insurance NOHCs; and
  • subsection 230A(1) of the Life Insurance Act, in relation to life companies (including friendly societies) and registered life NOHCs. 

Pursuant to paragraph 6(d) of the Legislative Instruments Act 2003 (the Legislative Instruments Act), such prudential standards are legislative instruments for the purposes of the Legislative Instruments Act.  

 

  1.    Background

In January 2014, APRA released a new cross-industry prudential standard Prudential Standard CPS 220 Risk Management (CPS 220), to apply to ADIs, general insurers and life insurers, and Level 2 and Level 3 groups. A revised Prudential Standard CPS 510 Governance (CPS 510) was also released to ensure risk management governance principles were aligned to the new CPS 220.

The new and amended standards come into effect from 1 January 2015.

CPS 220 and revised CPS 510 necessitate a series of amendments to existing industry-specific and cross-industry standards. The majority of changes are necessary to remove duplications or to update references.

2.      Purpose and operation of the instruments

The instruments make changes to Prudential Standard CPS 231 Outsourcing (CPS 231) and Prudential Standard CPS 232 Business Continuity Management to incorporate references to CPS 220.

On 3 December 2014, APRA made the following determinations (the instruments) under the relevant provisions of the Banking Act, Insurance Act and Life Insurance Act:

  1. Banking, Insurance and Life Insurance (prudential standards) determination No. 1 of 2014, which revokes Prudential Standard CPS 231 Outsourcing made under Banking, Insurance and Life Insurance (prudential standards) determination No.1 of 2012 and determines a new Prudential Standard CPS 231 Outsourcing (CPS 231); and
  2. Banking, Insurance and Life Insurance (prudential standards) determination No. 2 of 2014, which revokes Prudential Standard CPS 232 Business Continuity Management made under Banking, Insurance and Life Insurance (prudential standards) determination No.2 of 2012 and determines a new Prudential Standard CPS 232 Business Continuity Management (CPS 232).

The instruments will take effect on 1 January 2015.

 

3.      Consultation

APRA undertook a seven week consultation on the proposed consequential changes from August 2014.

4.      Regulation Impact Statement

A Preliminary Assessment was submitted the Office of Best Practice Regulation who confirmed that a Regulation Impact Statement is not required.

5.      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 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

 

Banking, Insurance and Life Insurance (prudential standards) determination Nos 1 and 2 of 2014

 

These instruments are 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.

 

Overview of the Legislative Instruments

 

The instruments make changes to Prudential Standard CPS 231 Outsourcing) and Prudential Standard CPS 232 Business Continuity Management to incorporate references to Prudential Standard CPS 220 Risk Management.

Human rights implications

APRA has assessed these instruments and is of the view that they do not engage any of the applicable rights or freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.  Accordingly, in APRA’s assessment, the instruments are compatible with human rights.

Conclusion

These instruments are compatible with human rights as they do not raise any human rights issues.

 

Overview

The Banking, Insurance and Life Insurance (prudential standards) determination Nos. 1 and 2 of 2014 were enacted in response to the need to update and align the prudential standards for authorised deposit-taking institutions, general insurers, life insurers, and their non-operating holding companies. The Australian Prudential Regulation Authority (APRA), acting under the authority granted by the Banking Act 1959, the Insurance Act 1973, and the Life Insurance Act 1995, issued these determinations to streamline and modernise the regulatory framework governing these financial institutions. The primary objective of these determinations is to ensure that the prudential standards are current and effectively address the risks associated with outsourcing and business continuity management, aligning them with the new cross-industry risk management standard introduced by Prudential Standard CPS 220. These instruments, which took effect on 1 January 2015, were developed following a consultation period and have been assessed for compatibility with human rights under the Human Rights (Parliamentary Scrutiny) Act 2011, with the conclusion that they do not engage any of the applicable rights or freedoms.

Scope and Application

The Banking, Insurance and Life Insurance (prudential standards) determination Nos. 1 and 2 of 2014 apply to APRA-regulated institutions, specifically authorised deposit-taking institutions (ADIs), authorised non-operating holding companies (authorised banking NOHCs), general insurers, authorised non-operating holding companies (authorised insurance NOHCs), life companies (including friendly societies), and registered non-operating holding companies (registered life NOHCs). The geographic and jurisdictional reach of these instruments is primarily within Australia as they pertain to entities regulated by the Australian Prudential Regulation Authority (APRA) under the Banking Act 1959, the Insurance Act 1973, and the Life Insurance Act 1995. The instruments were designed to incorporate references to the Prudential Standard CPS 220 Risk Management, necessitating amendments to existing industry-specific and cross-industry standards, effective from 1 January 2015. These determinations do not explicitly state any exclusions or exemptions; however, they do provide APRA with the authority to vary or revoke the prudential standards as necessary, ensuring the ongoing relevance and effectiveness of the regulatory framework.

Key Provisions

The main operative sections of the Banking, Insurance and Life Insurance (prudential standards) determination Nos. 1 and 2 of 2014 are sections 11AF(1) and 11AF(3) of the Banking Act 1959, sections 32(1) and 32(4) of the Insurance Act 1973, and sections 230A(1) and 230A(5) of the Life Insurance Act 1995. These sections empower the Australian Prudential Regulation Authority (APRA) to vary or revoke existing prudential standards and to determine new ones. The determinations Nos. 1 and 2 of 2014 revoke the Prudential Standards CPS 231 Outsourcing and CPS 232 Business Continuity Management, respectively, and introduce new versions of these standards. These new standards will be effective from 1 January 2015 and are intended to incorporate references to the Prudential Standard CPS 220 Risk Management. The obligations and requirements imposed by these determinations primarily concern APRA-regulated institutions, including authorised deposit-taking institutions (ADIs), authorised non-operating holding companies (authorised banking NOHCs), general insurers, authorised insurance NOHCs, life companies, and registered non-operating holding companies (registered life NOHCs). These institutions must comply with the new Prudential Standards CPS 231 Outsourcing and CPS 232 Business Continuity Management. These standards mandate that institutions have robust frameworks for managing risks associated with outsourcing and business continuity. Specifically, they require institutions to establish and maintain effective governance structures, risk management processes, and contingency plans that align with the overarching Prudential Standard CPS 220 Risk Management. Breaches of the prudential standards determined by APRA can result in significant consequences. Although the specific offences, penalties, or consequences for non-compliance are not detailed within the text, it is well-established under the respective Acts (Banking Act, Insurance Act, and Life Insurance Act) that failure to comply with prudential standards can lead to regulatory actions. These may include enforcement actions, financial penalties, and in severe cases, the revocation of an institution's licence. The exact penalties depend on the nature and severity of the breach but can be substantial, reflecting the critical nature of prudential standards in maintaining the stability and integrity of the financial system.

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