Financial Sector (Business Transfer and Group Restructure) determination No. 1 of 2007

Transfer Rules No. 1 of 2004 and Transfer Rules No. 1 of 2007

EXPLANATORY STATEMENT

Prepared by the Australian Prudential Regulation Authority (APRA)

Financial Sector (Business Transfer and Group Restructure Act) 1999, subsection 46(1)

Under subsection 46(1) of the Financial Sector (Business Transfer and Group Restructure) Act 1999 (the Act), the Australian Prudential Regulation Authority (APRA) has the power to make, in writing, rules prescribing all matters required or permitted by the Act to be prescribed by transfer rules.

Financial Sector (Business Transfer and Group Restructure) determination No. 1 of 2007 (the determination), determined under subsection 46(1) of the Act:

• amends Transfer Rules No. 1 of 2004, made on 30 November 2004, to replace references to the former title of the Act (the Financial Sector (Transfers of Business) Act 1999) with references to the new title to the Act; and
• makes Transfer Rules No. 1 of 2007 (the Rules), for the purposes of subsections 36B(3) and 36P(4) of the Act.

The determination will take effect on the date of registration of the determination on the Federal Register of Legislative Instruments.

1. Background

The Act was amended, effective 28 June 2007, by the Financial Sector Legislation Amendment (Restructures) Act 2007.  Prior to the amendments, the main purpose of the Act had been to facilitate transfers of regulated business between one life insurer and another or one ADI and another.  The Transfer Rules No. 1 of 2004 were made to facilitate these transfers of regulated business under Part 3 of the Act, and will continue to do so.

The amendments that came into effect on 28 June 2007 changed the Act’s title from Financial Sector (Transfers of Business) Act 1999 to its current title, and inserted a new Part 4A.

The new Part 4A provides a mechanism for the Minister to give a restructure approval to facilitate the restructure of a corporate group that includes an ADI, life insurance company or general insurer – these entities are referred to as “operating bodies” for the purposes of the Act.

The purpose of the provisions is to remove certain impediments to an operating body becoming a subsidiary of a non-operating company (NOHC) under an arrangement approved under Part 5.1 of the Corporations Act 2001. Restructuring a group in this way enables particular activities that may not be core to the regulated business of the operating body, some of which may pose risks to the operating body, to be moved to other companies in the corporate group below the NOHC, thus separating those activities from the operating body.  APRA has power to authorise NOHCs (see, for example, s 11AA of the Banking Act 1959), and exercise certain regulatory powers over them.  

Briefly, the procedure under Part 4A of the Act is as follows:

• the operating body may apply to the Minister under section 36B of the Act for a restructure approval, including a restructure instrument and/or for APRA to be authorised to issue internal transfer certificates;
• subsection 36B(3) provides that the application must be in the form prescribed by the transfer rules, and must contain or be accompanied by the information required by the transfer rules;
• the Minister must be satisfied, prior to granting an approval (subsection 36C(1)(a)), that an application has been made in accordance with the transfer rules.  In addition, the Minister must also be satisfied that the restructure arrangement would improve the operating body’s ability to meet its prudential requirements (subsection 36C(1)(b)) and have regard to the interests of the depositors or policyowners of the operating body, the interests of the financial sector as a whole, and any other matters considered relevant (subsection 36(c)(i) and (ii)). Prior to issuing any internal transfer certificates (see below), APRA must satisfy itself that a transfer, and the terms of the transfer, are appropriate for purpose of giving effect to the restructure arrangement having regard to these matters (subsection 36M(2)(c));
• a restructure instrument gives members of the corporate group relief, for the purposes of the restructure, from certain requirements of the Corporations Act relating to restrictions in share capital, self-acquisition and control of shares, and the requirement that dividends may only be paid out of the profits of the holding company;
• after the Minister has issued the restructure approval, APRA may issue internal transfer certificates, which have the effect of transferring assets and liabilities between companies in the group, to give effect to the restructure (section 36M);
• in certain circumstances set out in section 36P, the operating body may apply to APRA for the amendment of an internal transfer certificate; and
• under subsection 36P(4), an application to APRA for an amendment of an internal transfer certificate must be made in the form prescribed by the transfer rules, and must contain or be accompanied by the information required by the transfer rules.

In summary, the Act, as amended, is designed to facilitate the adoption of a NOHC as the ultimate holding company of a financial group in Australia. It is also intended to provide financial groups with greater flexibility in choosing a corporate structure to manage their risk exposures and comply with prudential requirements without unnecessarily constraining their business efficiency and competitiveness. 

2.             Operation of the instrument

Paragraph 1 of the instrument and Part 1 of the Schedule amend the existing Transfer Rules No. 1 of 2004 to omit references to the old title of the Act and substitute the new title.

Paragraph 2 of the instrument and Part 2 of the Schedule make the Transfer Rules No. 1 of 2007.

The instrument makes the Rules to prescribe the form and content of an application for a restructure approval for the purposes of subsection 36B(3), and the form and content of an application for amendment of an internal transfer certificate for the purposes of subsection 36P(4). 

The Rules require an application to the Minister for a restructure approval to be in writing and be signed by the CEO (or equivalent) of the operating body.  Information that must be provided in the application includes the following:

• the reasons behind the proposed restructure;
• details of the names of bodies affected by the transfer and a description of the ownership chain of companies in the group post-restructure;
• how assets and liabilities are to be transferred, i.e. by way of internal transfer certificate or via some other means;
• a statement about the impact of the proposed restructure on the operating body’s ability to meet its prudential requirements, and how depositor or policy owner interests, APRA’s ability to supervise the group and the interests of the financial sector as a whole may be affected;
• details of required regulatory and court approvals, including the proposed timeframe for the creation of new entities under these approvals;
• details of the composition of the board and senior management of bodies under the proposed restructure;
• where appropriate, consent from home supervisors; and
• whether the operating body is seeking relief via way of a restructure instrument (from specific requirements in the Corporations Act).

To avoid duplication, an operating company is not required to include information that has already been included in a NOHC authorisation application.

The Minister has power to waive a requirement for an operating body to provide particular information or allow the body to supplement or vary information already provided.

The Rules also provide for the form and content of an application to amend an internal transfer certificate issued by APRA.  An application for such an amendment must be in writing and be signed by the CEO (or equivalent). An operating body must outline the nature of the requested amendment, when it is intended to take effect (including the impact of a delay on the nature and amount of assets or liabilities to be transferred) and the reasons for the change.  APRA has a power to waive a requirement for an operating to provide particular information or allow the body to supplement or vary information already provided.

3.             Consultation

The making of the Rules under subsection 36B(3) is a necessary machinery step to ensure the legislation operates as intended and there are negligible compliance costs associated with the implementation of the Rules. This reflects the assessment contained in the Explanatory Memorandum that accompanied the introduction of the legislation. APRA currently has an application for a NOHC before it, and the Rules must be finalised with some urgency as the Act requires that applications may only be made in accordance with transfer rules determined by APRA. APRA will consult more broadly on the Rules early in 2008 to provide other potential applicants the opportunity to comment on the content, scope and enforceability of the Rules.