Banking, Insurance and Life Insurance (prudential standards) determination No. 1 of 2011

EXPLANATORY STATEMENT

Prepared by the Australian Prudential Regulation Authority

Banking Act 1959, section 11AF

Insurance Act 1973, section 32

Life Insurance Act 1995, section 230A

APRA may, in writing, 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.  

1.    Background

APRA has powers under the Banking Act, Insurance Act and Life Insurance Act to determine prudential standards that apply to ADIs and authorised banking NOHCs, general insurers and authorised insurance NOHCs, and life companies and registered life NOHCs.

APRA's policy is to issue prudential standards that apply across the banking, general insurance and life insurance industries that are broadly consistent in their requirements. Specifically, APRA considers that the risks arising from outsourcing, the management of business continuity, governance and the fitness and propriety of responsible persons are similar regardless of the industry within which the regulated institution operates.

To date, APRA has issued three individual prudential standards covering outsourcing requirements in relation to each APRA-regulated industry. The content of these standards is nearly identical and requires outsourcing arrangements involving material business activities entered into by a regulated institution to be subject to appropriate due diligence, approval and ongoing monitoring. The prudential standards are as follows:

• Prudential Standard APS 231 Outsourcing (APS 231) applying to ADIs;
• Prudential Standard GPS 231 Outsourcing (GPS 231) applying to general insurers; and
• Prudential Standard LPS 231 Outsourcing (LPS 231) applying to life companies.

In line with its publicly stated desire to supervise regulated institutions operating in different industries in a consistent manner, APRA is consolidating the requirements contained in these three industry-specific prudential standards into a single prudential standard with cross-industry application. The requirements currently contained in APS 231, GPS 231 and LPS 231 are consolidated into a new prudential standard, Prudential Standard CPS 231 Outsourcing (CPS 231).

2.      Purpose of the instrument

This instrument revokes APS 231, GPS 231 and LPS 231 and replaces them with a new prudential standard, CPS 231. CPS 231 must be complied with by ADIs and authorised banking NOHCs, general insurers and authorised insurance NOHCs, and life companies (including friendly societies) and registered life NOHCs.

CPS 231 aims to ensure that all outsourcing arrangements involving material business activities entered into by a regulated institution are subject to appropriate due diligence, approval and ongoing monitoring. All risks arising from outsourcing material business activities must be appropriately managed to ensure that the regulated institution is able to meet its financial and service obligations to its depositors and/or policyholders.

3.      Operation of the instrument

The key differences between CPS 231 and the industry-specific prudential standards it replaces include that CPS 231:

• applies to all APRA-regulated institutions in the banking, general insurance and life insurance industries, rather than operating via separate, although nearly identical, standards applying to different regulated institutions in individual industries;
• contains requirements for Level 2 insurance groups to comply with certain outsourcing requirements that were previously contained in  Prudential Standard GPS 221 Risk Management: Level 2 Insurance Groups;
• requires the Board of the Head of a Level 2 banking group to develop an outsourcing policy that covers a group approach to outsourcing material business activities;
• extends application of the standard to include registered life NOHCs;
• clarifies application of the standard to foreign branches;
• clarifies the role and obligations of the Board (or equivalent) in complying with the standard; and
• contains a number of minor amendments to clarify or harmonise the existing obligations. These minor amendments do not alter the substance of these obligations.

4.      Consultation

In December 2010, APRA publicly consulted on CPS 231 as part of a broader consultation package on its initiative to harmonise certain prudential standards across regulated industries. APRA received a small number of submissions that were generally supportive of the approach and has implemented specific feedback received, where appropriate, in CPS 231.

5.      Regulation Impact Statement

A Regulation Impact Statement for the changes described in this Explanatory Statement was not required.