Banking, Insurance and Life Insurance (prudential standard) determination No. 3 of 2012 - Prudential Standard CPS 510 - Governance

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Legislation au F2012L02441 Not in force Legislative Instrument

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Banking, Insurance and Life Insurance (prudential standards) determination Nos. 1 to 4 of 2012

 

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

APRA commenced a review of the regulatory capital framework for general insurers and life companies (LAGIC review) in 2010. The broad aims of the review were to:

  • improve the risk sensitivity and appropriateness of the capital standards in general insurance and life insurance (including friendly societies); and
  • where appropriate, improve the alignment of the capital standards across the industries that APRA supervises.

APRA has made a range of amendments to its prudential framework to give effect to the findings of the review.

Changes in respect of cross-industry prudential standards are given effect through the instruments described in section 2 and comprise changes to prudential requirements concerning outsourcing, business continuity management, governance and fitness and propriety.

 

2.      Purpose and operation of the instruments

The purpose of making the instruments is to introduce amended prudential standards and revoke existing prudential standards in order to implement the changes arsing from the LAGIC review.

A small number of minor amendments to the cross-industry prudential standards have been made, to update footnotes that made reference to general insurance and life insurance prudential standards that will be amended as part of the LAGIC review. In conjunction with these updates, APRA has taken the opportunity to make a small number of other minor amendments to the cross-industry prudential standards to align the structure of these standards with the other prudential standards applicable to insurance, banking and superannuation. There has been no change to the substantive prudential requirements in these standards.

On 30 November 2012, 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 2012, which revokes Prudential Standard CPS 231 Outsourcing made on 9 September 2011 (the existing CPS 231) and determines a new Prudential Standard CPS Outsourcing (CPS 231);
  2. Banking, Insurance and Life Insurance (prudential standards) determination No. 2 of 2012, which revokes Prudential Standard CPS 232 Business Continuity Management made on 9 September 2011 (the existing CPS 232) and determines a new Prudential Standard CPS Business Continuity Management (CPS 232);
  3. Banking, Insurance and Life Insurance (prudential standards) determination No. 3 of 2012, which revokes Prudential Standard CPS 510 Governance made on 9 September 2011 (the existing CPS 510) and determines a new Prudential Standard CPS 510 Governance (CPS 510); and
  4. Banking, Insurance and Life Insurance (prudential standards) determination No. 4 of 2012, which revokes Prudential Standard CPS 520 Fit and Proper made on 9 September 2011 (the existing CPS 520) and determines a new Prudential Standard CPS 520 Fit and Proper (CPS 520).

The instruments will take effect on 1 January 2013.

 

3.      Consultation

APRA undertook consultation on the LAGIC review between May 2010 and October 2012, including four rounds of industry consultation, three technical papers and two quantitative impact studies.

APRA released the following consultation materials:

  • May 2010 – Discussion paper ‘Review of capital standards for general insurers and life insurers’[1];
  • July 2010 – Technical papers ‘Review of capital standards for general insurers and life insurers – Asset risk capital charge’[2] and ‘Review of capital standards for general insurers and life insurers – Capital base and insurance risk capital charge for life insurers’[3];
  • September 2010 – Technical paper ‘Review of capital standards for general insurers and life insurers – Insurance concentration risk capital charge for general insurers’[4];
  • Late 2010 – APRA invited insurers to participate in the first quantitative impact study[5];
  • March 2011 – Response paper ‘Review of capital standards for general insurers and life insurers’[6];
  • April 2011 – APRA invited insurers to participate in the second quantitative impact study[7];
  • December 2011 – Response paper ‘Review of capital standards for general insurers and life insurers’[8], draft prudential standards;
  • March 2012 – Letter to all CEOs (or equivalent) and Appointed Actuaries of life insurers ‘Illiquidity premium’[9];
  • May 2012 – Response paper ‘Review of capital standards for general insurers and life insurers’[10], final versions of the capital adequacy standards, draft versions of the composition of the capital base and non-capital prudential standards containing amendments that are in the main consequential to the revised capital framework;
  • June 2012 – Discussion paper ‘Review of capital standards for general insurers and life insurers – proposed revisions to reporting requirements’[11], draft versions of reporting forms and instructions, reporting standards and capital adequacy calculation workbooks and instructions;
  • August 2012 – Letter to insurers ‘Additional proposed changes to the reporting standards’[12];
  • September 2012 – Letter to all CEOs (or equivalent) of life insurers ‘Solvency standard requirements under the Life Insurance Act 1995’[13];
  • September 2012 – Letter to insurers ‘Consultation on draft prudential practice guides and information paper’[14], draft versions of prudential practice guides and an information paper[15];
  • October 2012 – Response paper ‘Review of capital standards for general insurers and life insurers’[16], final versions of all prudential standards amended as a result of the LAGIC review; and
  • October 2012 – Response paper ‘Review of capital standards for general insurers and life insurers – reporting requirements’[17], final versions of all forms and instructions and reporting standards.

APRA has considered both formal and informal feedback from industry throughout the above multi-year process. APRA has also considered feedback from the authorised deposit-taking (ADI) industry in relation to requirements for the composition of the capital base which are common to insurers and ADIs.  Submissions made by industry were broadly supportive of the changes. Issues considered to be significant or to have merit were incorporated into the revised capital framework.

 

4.      Regulation Impact Statement

A Regulation Impact Statement is required for the life and general insurance capital review. It has been prepared and is attached as supporting material.

 

5.      Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

The legislative instruments the subject of this explanatory statement 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, these legislative instruments are compatible with human rights.

 

 

 

 

[1] http://www.apra.gov.au/CrossIndustry/Documents/GLI_DP_RCSGILI_032010_v7[1].pdf

[2] http://apra.gov.au/CrossIndustry/Documents/GLI_TP_LGICR_062010_ex%5B1%5D.pdf

[3] http://apra.gov.au/CrossIndustry/Documents/GLI_TP_CBIRCC_072010_v8%5B1%5D.pdf

[4] http://apra.gov.au/CrossIndustry/Documents/Insurance-Conc-Risk-charge%5B1%5D.pdf

[5] http://www.apra.gov.au/GI/PrudentialFramework/Pages/Review-Cap-Stds-QIS1-QIS2-TechSpecs.aspx

[6] http://apra.gov.au/CrossIndustry/Documents/GLI_RS_RCSGILI_032011_ex_r%5B1%5D.pdf

[7] http://www.apra.gov.au/GI/PrudentialFramework/Pages/Review-Cap-Stds-QIS1-QIS2-TechSpecs.aspx

[8] http://apra.gov.au/GI/PrudentialFramework/Pages/General-and-Life-Insurance-Capital-Review-Consultation-on-Draft-Prudential-Standards.aspx

[9] http://apra.gov.au/lifs/PrudentialFramework/Documents/120330_LTI_LAGIC_LI_illiquidity_premium_consultation.pdf

[10] http://apra.gov.au/CrossIndustry/Pages/Life-and-General-Insurance-Capital-Review-Consultation-May-2012.aspx

[11] http://www.apra.gov.au/CrossIndustry/Consultations/Pages/LAGIC-Reporting-Requirements-June-2012.aspx

[12] http://www.apra.gov.au/CrossIndustry/Consultations/Documents/120806-letter-to-industry-LAGIC-proposed-changes-to-reporting-standards.pdf

[13] http://apra.gov.au/CrossIndustry/Consultations/Documents/120912_LAGIC_letter_life_insurance_temporary_solvency_standard.pdf

[14] http://www.apra.gov.au/CrossIndustry/Consultations/Pages/LAGIC-Prudential-Practice-Guides-September-2012.aspx

[15] Final versions of the prudential practice guides and information paper will be released in 2013.

[16] http://www.apra.gov.au/CrossIndustry/Pages/Life-and-General-Insurance-Capital-Review-October-2012.aspx

[17] http://www.apra.gov.au/lifs/ReportingFramework/Pages/LAGIC-final-reporting-requirements-LI-October-2012.aspx

Overview

The Banking, Insurance and Life Insurance (prudential standards) determination Nos. 1 to 4 of 2012, issued by the Australian Prudential Regulation Authority (APRA) under the Banking Act 1959, Insurance Act 1973, and Life Insurance Act 1995, were enacted to address the need for improved risk sensitivity and appropriateness of capital standards within the banking, insurance, and life insurance sectors. These determinations were made to implement the findings of the Life and General Insurance Capital (LAGIC) review initiated by APRA in 2010, aiming to enhance the regulatory capital framework and ensure better alignment of capital standards across the industries APRA supervises. The instruments revise existing prudential standards and introduce new ones focusing on areas such as outsourcing, business continuity management, governance, and the fitness and propriety of personnel. These amendments, which took effect on 1 January 2013, were developed following extensive consultation with industry stakeholders, with feedback being considered and incorporated where appropriate. APRA has affirmed that these legislative instruments are compatible with human rights, as they do not engage any of the applicable rights or freedoms recognised in the international instruments listed under the Human Rights (Parliamentary Scrutiny) Act 2011.

Scope and Application

The Banking, Insurance and Life Insurance (prudential standards) determination Nos. 1 to 4 of 2012, issued by the Australian Prudential Regulation Authority (APRA), apply to APRA-regulated institutions, specifically authorised deposit-taking institutions (ADIs) and authorised non-operating holding companies (authorised banking NOHCs) under the Banking Act 1959, general insurers and authorised insurance NOHCs under the Insurance Act 1973, and life companies (including friendly societies) and registered non-operating holding companies (registered life NOHCs) under the Life Insurance Act 1995. These instruments are legislative instruments for the purposes of the Legislative Instruments Act 2003. The determinations implement changes arising from the Life and General Insurance Capital Review (LAGIC review), aiming to enhance the risk sensitivity and appropriateness of capital standards in general insurance and life insurance, and to improve the alignment of these standards across the industries supervised by APRA. The instruments consist of minor amendments to cross-industry prudential standards concerning outsourcing, business continuity management, governance, and fitness and propriety, with no changes to the substantive prudential requirements. These instruments will take effect on 1 January 2013, replacing existing prudential standards with new ones to reflect the findings of the LAGIC review.

Key Provisions

The Banking, Insurance and Life Insurance (prudential standards) determinations Nos. 1 to 4 of 2012 focus on amending and implementing prudential standards for authorised deposit-taking institutions (ADIs), authorised non-operating holding companies (authorised banking NOHCs), general insurers, authorised insurance NOHCs, life companies (including friendly societies), and registered life NOHCs. These determinations are issued under the authority of the Banking Act 1959, the Insurance Act 1973, and the Life Insurance Act 1995. Each determination revokes an existing prudential standard and determines a new one, specifically addressing outsourcing, business continuity management, governance, and fitness and propriety (sections 1 to 4). These legislative instruments are considered legislative instruments under the Legislative Instruments Act 2003 (section 6(d)). The determinations impose obligations on regulated institutions to comply with the new prudential standards. For instance, ADIs, authorised banking NOHCs, general insurers, authorised insurance NOHCs, life companies, and registered life NOHCs must adhere to the updated standards on outsourcing (CPS 231), business continuity management (CPS 232), governance (CPS 510), and fitness and propriety (CPS 520). These standards require institutions to maintain adequate controls and practices in respective areas to ensure they can withstand financial stress and protect policyholders and depositors. Failure to comply with these prudential standards may result in enforcement actions by the Australian Prudential Regulation Authority (APRA). While the determinations do not explicitly outline specific penalties for non-compliance, breaches of prudential standards can lead to enforcement actions, which may include fines, public reprimands, or more stringent regulatory oversight. The severity of the penalties depends on the nature and extent of the breach, with potential financial penalties aligning with the severity of the non-compliance. In summary, the determinations mandate compliance with new prudential standards for various financial institutions, ensuring they have robust frameworks for outsourcing, business continuity, governance, and the fitness and propriety of their personnel. Non-compliance may lead to enforcement actions by APRA, underscoring the importance of adhering to these updated standards.

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