Insurance (prudential standard) determination No. 6 of 2006: Variation to Prudential Standard GPS 520 Fit and Proper
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority
Insurance Act 1973, subsection 32(1)
Acts Interpretation Act 1901, subsection 33(3)
Under subsection 32(1) of the Insurance Act 1973 (the Act), APRA has the power to determine (in writing) standards in relation to prudential matters to be complied with by general insurers authorised under the Act (insurers) and authorised non-operating holding companies (NOHCs). Pursuant to subsection 32(5) of the Act and paragraph 6(d) of the Legislative Instruments Act 2003, such Prudential Standards are legislative instruments for the purposes of the Legislative Instruments Act 2003. Subsection 33(3) of the Acts Interpretation Act 1901 gives APRA power to vary Prudential Standards so determined.
Insurance (prudential standards) determination No. 6 of 2006 varies Prudential Standard GPS 520 Fit and Proper (GPS 520). Insurance (prudential standard) determination No. 4 of 2006 made GPS 520 which replaced the fitness and propriety provisions formerly in Prudential Standard GPS 220 Risk Management for General Insurers (which came into force on 1 July 2002, and will be revoked by Insurance (prudential standards) determination No. 1 of 2006 effective 1 October 2006). GPS 520 will come into effect on 1 October 2006.
- Background
GPS 520 is intended to ensure that insurers and authorised NOHCs (regulated institutions) prudently manage the risk that persons acting in positions of responsibility for their institution may not be fit and proper. Much international and Australian experience has demonstrated that institutions can become financially unstable and, in extreme cases, collapse as a result of incompetence or impropriety on the part of responsible persons.
Together with Prudential Standards APS 520 Fit and Proper and LPS 520 Fit and Proper for authorised deposit-taking institutions and life companies, respectively, GPS 520 forms part of a harmonised approach to fitness and propriety which is consistent across APRA-regulated institutions (with the exception of superannuation, which is subject to separate fit and proper requirements in regulation 4.14 of the Superannuation Industry (Supervision) Regulations 1994[1]).
2. Anomaly in the operation of Prudential Standard GPS 520 Fit and Proper
It has come to the attention of APRA that a drafting anomaly, which defeats the intended operation of the standard in relation to the senior officer outside Australia with delegated authority from the Board (senior officer outside Australia), is present in GPS 520. This anomaly was introduced into the standard subsequent to the final consultation undertaken on the draft standard from June 2005.
The senior officer outside Australia is defined in Prudential Standard GPS 510 Governance. The senior officer outside Australia plays an important role in the prudential regime applicable to foreign insurers (as defined in the Act) under both Prudential Standard GPS 510 Governance and GPS 520. APRA’s policy intention was that the senior officer outside Australia would be captured by the definition of ‘senior manager’ in paragraph 15 of GPS 520 and would therefore be subject to assessment under the fit and proper policy of a foreign insurer.
The current drafting of paragraph 9 of GPS 520 provides that a senior manager is only a responsible person for the purposes of that standard if they are ordinarily resident in Australia. In the case of the senior officer outside Australia, the person would not be ordinarily resident in Australia and would therefore not be included in the definition.
Accordingly, this determination varies GPS 520 to clarify that the senior officer outside Australia is included in the definition of responsible person regardless of whether they are ordinarily resident in Australia. This variation restores APRA’s policy intent as embodied in the draft standard released for second round public consultation.
As GPS 520 had not come into effect at the time of this variation, no foreign insurer was impacted by the omission.
3. Consultation
APRA undertook two rounds of public consultation on the proposed GPS 520 (and the fitness and propriety standards for ADIs) and redrafted the standard to take account of industry concerns as appropriate. Thirty-nine submissions were received from regulated entities in the first round consultation (commencing March 2004) and thirty-five in the second round of consultations (commencing June 2005). APRA conducted information sessions for regulated institutions following the second round consultations. During these sessions APRA briefed industry on the amendments it had made to the proposals in response to industry concerns.
The versions released for the second round consultation did not contain the anomaly referred to in this Explanatory Statement. As such, APRA believes that adequate consultation has taken place on the proposed operation of the standard.
Further, section 33(4) of the Act provides that APRA is not required to consult on a variation of a prudential standard if the variation is of a minor technical nature. In this instance, the proposed amendment to correct a technical inconsistency in the prudential standard is of a minor technical nature.
APRA has not, therefore, undertaken further consultation on this variation.
[1] In addition, Part 15 of the Superannuation Industry (Supervision) Act 1993 contains provisions relating to disqualified persons.
Overview
The Insurance (prudential standard) determination No. 6 of 2006, enacted under the Insurance Act 1973, addresses a drafting anomaly in Prudential Standard GPS 520 Fit and Proper, which had inadvertently excluded senior officers outside Australia with delegated authority from the Board from being subject to fitness and propriety assessments. This anomaly was identified post the final consultation phase on the draft standard in June 2005, despite the standard being intended to include such senior officers as responsible persons. The Australian Prudential Regulation Authority (APRA) has the power under the Insurance Act to determine and vary these prudential standards, with the aim of ensuring that institutions prudently manage the risk posed by unfit or improper individuals in positions of responsibility. The policy objective of this determination is to rectify the drafting error and restore the intended policy intent, ensuring consistency in the application of fitness and propriety standards across APRA-regulated institutions.
The determination was made in accordance with subsection 33(3) of the Acts Interpretation Act 1901, which allows APRA to vary Prudential Standards. APRA conducted two rounds of consultation with industry prior to the final standard being set, receiving feedback from a total of 74 submissions. The anomaly was not present in the versions released for the second round of consultations, and the amendment is considered to be of a minor technical nature, thus further consultation was deemed unnecessary under section 33(4) of the Act. This variation ensures that the senior officer outside Australia is included in the definition of responsible person, regardless of their residency status, thereby aligning the standard with APRA’s original policy intent.
Scope and Application
The Insurance (prudential standard) determination No. 6 of 2006 pertains to the variation of Prudential Standard GPS 520 Fit and Proper, which applies to general insurers authorised under the Insurance Act 1973 and authorised non-operating holding companies (NOHCs). This prudential standard is designed to ensure that individuals acting in positions of responsibility within these regulated institutions are fit and proper, thereby mitigating the risk of financial instability or collapse due to incompetence or impropriety. The Act grants the Australian Prudential Regulation Authority (APRA) the power to determine and vary these standards in relation to prudential matters. This variation aims to correct a drafting anomaly in GPS 520 that inadvertently excluded the senior officer outside Australia with delegated authority from the Board, despite their significant role in the prudential regime. The amendment ensures that this senior officer, regardless of their residency, is captured under the definition of a responsible person, aligning with APRA's original policy intent. The variation will come into effect on 1 October 2006, and as it rectifies a technical inconsistency, APRA deemed further consultation unnecessary. This legislative instrument is a Commonwealth instrument and does not include any specific exclusions or thresholds beyond what is outlined in the Insurance Act 1973.
Key Provisions
The Insurance (Prudential Standard) Determination No. 6 of 2006 (the Determination) amends Prudential Standard GPS 520 Fit and Proper (GPS 520), which was made under the authority of the Insurance Act 1973 (the Act). The primary purpose of GPS 520 is to ensure that insurers and authorised non-operating holding companies (NOHCs) manage the risk that individuals in positions of responsibility may not be fit and proper, thereby safeguarding the financial stability of these institutions (subsection 32(1) of the Act). GPS 520 came into effect on 1 October 2006, replacing Prudential Standard GPS 220 Risk Management for General Insurers, which was set to be revoked on the same date.
The Determination addresses a drafting anomaly in GPS 520 concerning the definition of 'senior manager' as it applies to a senior officer outside Australia with delegated authority from the Board. Initially, the standard defined a senior manager as a responsible person only if they were ordinarily resident in Australia, which inadvertently excluded the senior officer outside Australia from the definition. This anomaly was not present in the draft standard released for public consultation in June 2005. Consequently, the Determination clarifies that the senior officer outside Australia is included in the definition of responsible person regardless of their residency status, thereby restoring the original policy intent.
Under the Determination, insurers and authorised NOHCs must ensure that all persons acting in positions of responsibility, including the senior officer outside Australia, are assessed for fitness and propriety. This involves conducting appropriate checks and assessments to determine if these individuals are suitable for their roles, as stipulated in GPS 520. The institutions must implement policies and procedures to regularly review and assess the fitness and propriety of their responsible persons, ensuring compliance with the amended standard.
Failure to comply with the requirements of GPS 520, as varied by the Determination, could lead to regulatory action by the Australian Prudential Regulation Authority (APRA). While the Determination itself does not specify particular offences or penalties, non-compliance with prudential standards generally can result in enforcement actions under the Act. These actions may include directives to rectify non-compliance, financial penalties, or, in severe cases, the suspension or revocation of the insurer's or NOHC's authorisation. The specific consequences depend on the nature and severity of the breach and are determined by APRA in accordance with the provisions of the Act.