Financial Sector (Collection of Data) (reporting standard) determination
No. 1 of 2010
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority (APRA)
Financial Sector (Collection of Data) Act 2001, paragraph 13(1)(a) and section 15
Acts Interpretation Act 1901, subsection 33(3)
Under paragraph 13(1)(a) of the Financial Sector (Collection of Data) Act 2001 (the Act), APRA may, by writing, determine reporting standards with which financial sector entities must comply. Such standards relate to reporting financial or accounting data and other information regarding the business or activities of the entities. Section 15 of the Act gives APRA power to make a formal declaration of the date when reporting standards begin to apply. Subsection 33(3) of the Acts Interpretation Act 1901 provides that where an Act confers a power to issue an 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 revoke any such instrument.
- Background
In September 2008, APRA released the discussion paper Maximum Event Retention for Lenders Mortgage Insurers. The discussion paper made six proposals in relation to the determination of the Maximum Event Retention (MER) for lenders mortgage insurers (LMIs). The discussion paper was accompanied by a draft General Insurance Prudential Standard GPS 116 Capital Adequacy: Concentration Risk Capital Charge (GPS 116) Attachment A and a quantitative impact study (QIS).
From 1 May 2010, a new prudential standard GPS 116 will come into effect. An explanation of the changes is set out in the Explanatory Statement to the new GPS 116.
GPS 116 forms part of a comprehensive set of prudential standards that deal with the measurement of a general insurer’s capital adequacy. GPS 116 sets out the calculation of the Concentration Risk Capital Charge under the Prescribed Method of calculating the Minimum Capital Requirement (MCR) applicable to a general insurer. There are specific requirements for this calculation for LMIs detailed in Attachment A of GPS 116.
Financial Sector (Collection of Data) (reporting standard) determination No. 1 of 2010 determines a new reporting standard General Insurance Reporting Standard GRS 170.1 Maximum Event Retention and Risk Charge for Lenders Mortgage Insurers (GRS 170.1). This instrument makes changes to GRS 170.1 to clarify the reporting instructions in relation to the changes being made to Attachment A of GPS 116.
The changes are intended to achieve two objectives:
- to clarify the intention of GPS 116 Attachment A; and
- to reduce prescription in the technical application of GPS 116 Attachment A.
2. Purpose of the instrument
Amendments to GPS 116 Attachment A have required corresponding changes to the instruction guide in GRS 170.1. The changes to GRS 170.1 reflect the changes to GPS 116 Attachment A.
- Capitalised premium
GPS 116 Attachment A has clarified the requirement to include capitalised premium in the Loan-to-Valuation Ratio (LVR) calculation for the Probable Maximum Loss (PML) purposes, irrespective of whether or not the premium is insured.
Corresponding clarifications have been made in GRS 170.1 in the definition Loan-to-Valuation Ratio (LVR).
2. PML for pooled policies
APRA has made changes to GPS 116 Attachment A to clarify the calculation of PML.
Corresponding changes have been made to GRS 170.1 at page 5 in the definition of ‘Pool cover’.
3. Operation of the instrument
Under subsection 15(1) of the Act, APRA has determined that Financial Sector (Collection of Data) (reporting standard) determination No. 1 of 2010 will apply from 1 May 2010.
4. Consultation
Section 17 of the Legislative Instruments Act 2003 requires consultation when a rule-maker makes a legislative instrument. The changes to GPS 116 have been subject to an external consultation process since September 2008.
Overview
The Financial Sector (Collection of Data) (reporting standard) determination No. 1 of 2010 was enacted by the Australian Prudential Regulation Authority (APRA) under the Financial Sector (Collection of Data) Act 2001. This legislation was introduced to address the need for updated reporting standards to align with new prudential requirements, particularly concerning the Maximum Event Retention (MER) for lenders mortgage insurers (LMIs). APRA released a discussion paper in September 2008, which led to the development of a new General Insurance Prudential Standard (GPS 116) and a corresponding General Insurance Reporting Standard (GRS 170.1). The policy objective of this determination is to clarify the technical application of the new prudential standards and to reduce prescription in the reporting instructions, thereby ensuring that financial sector entities can effectively comply with the updated regulatory requirements. This instrument aims to achieve these objectives by making necessary amendments to the reporting instructions to reflect changes in GPS 116 Attachment A, such as the inclusion of capitalised premium in the Loan-to-Valuation Ratio (LVR) calculation and the clarification of the Probable Maximum Loss (PML) for pooled policies.
Scope and Application
The Financial Sector (Collection of Data) (reporting standard) determination No. 1 of 2010 applies to financial sector entities, particularly lenders mortgage insurers, as it pertains to the collection and reporting of data in relation to their business and activities. The determination, made under the Financial Sector (Collection of Data) Act 2001, mandates reporting standards that these entities must adhere to, specifically addressing the calculation of the Concentration Risk Capital Charge for capital adequacy purposes. This determination ensures that entities comply with the prescribed reporting standards by clarifying and reducing the prescriptive nature of the instructions related to the General Insurance Prudential Standard GPS 116, particularly Attachment A. The determination applies nationally across Australia, as it is an instrument made by the Australian Prudential Regulation Authority (APRA), a Commonwealth authority. The instrument will come into effect from 1 May 2010, as declared by APRA under the Act. There are no explicit exclusions mentioned in the text, but the determination is tailored to entities within the financial sector, particularly those involved in general insurance. The application of the determination can be further refined or extended through subordinate instruments as necessary.
Key Provisions
The Financial Sector (Collection of Data) (reporting standard) determination No. 1 of 2010, made under the Financial Sector (Collection of Data) Act 2001 (the Act), sets out the new reporting standard known as General Insurance Reporting Standard GRS 170.1 Maximum Event Retention and Risk Charge for Lenders Mortgage Insurers (GRS 170.1). This determination is crucial for financial sector entities, particularly lenders mortgage insurers, as it specifies the data they must report regarding their business and activities (sections 13(1)(a) and 15 of the Act). The new standard, GRS 170.1, aims to clarify reporting instructions in line with amendments to the General Insurance Prudential Standard GPS 116 Capital Adequacy: Concentration Risk Capital Charge (GPS 116). These changes are designed to achieve two primary objectives: to clarify the intention behind GPS 116 Attachment A and to reduce the prescriptive nature of its technical application.
The determination imposes several obligations on the entities it governs. Firstly, it requires these entities to report capitalised premiums in the Loan-to-Valuation Ratio (LVR) calculation for Probable Maximum Loss (PML) purposes, regardless of whether the premiums are insured. This requirement is detailed in the definition of LVR in GRS 170.1. Secondly, the determination necessitates clarity in the calculation of PML for pooled policies, as specified in GRS 170.1 at page 5 in the definition of 'Pool cover'. These obligations are essential for ensuring that financial sector entities provide accurate and relevant data to the Australian Prudential Regulation Authority (APRA).
Failure to comply with the provisions of GRS 170.1 can lead to significant consequences. While the determination does not explicitly state penalties, breaches of the Financial Sector (Collection of Data) Act 2001 can result in civil or criminal penalties. Civil penalties may include fines, and in severe cases, criminal penalties could involve imprisonment. The specific penalties depend on the nature and severity of the breach. It is imperative for entities governed by this determination to adhere to the reporting standards to avoid such repercussions.