EXPLANATORY STATEMENT
Issued by the Australian Prudential Regulation Authority
Life Insurance Act 1995
Prudential Rules Number 37
Subsection 252(1) of the Life Insurance Act 1995 (the “Act”) provides that the Australian Prudential Regulation Authority (“APRA”) may, in writing, make rules prescribing all matters required or permitted by the Act to be prescribed by Prudential Rules. Subsection 252(2) of the Act provides that such Prudential Rules are disallowable instruments for the purposes of section 46A of the Acts Interpretation Act 1901.
The Act provides for the prudent management of life companies (including friendly societies) and for their supervision by APRA.
The scope of the Act has been extended as a result of the Financial Sector Reform (Amendments and Transitional Provisions) Act (No. 1) 1999 to integrate friendly societies into the Commonwealth prudential regime for financial institutions providing life insurance products. Friendly societies were previously regulated under a State and Territory regime. Due to amendments to the Act, friendly societies are now subject to a Commonwealth regime with regulatory requirements that are largely the same as those which applied under the State and Territory regime.
Section 53 of the Act provides, inter alia, that Prudential Rules may provide for the termination of one or more of the statutory funds (which term, in accordance with section 16G of the Act, includes an approved benefit fund of a friendly society) of life companies. Section 53 and this Prudential Rule do not, however, apply to terminations that may take place as a consequence of a restructure of statutory funds pursuant to section 52 of the Act and Prudential Rules No 36 made for the purposes of that section. Such terminations would only be of statutory funds which no longer contain assets or liabilities and to which policies are no longer referable.
In the case of life companies other than friendly societies, terminations of statutory funds only occur in the context of a restructure of statutory funds occurring under section 52 of the Act. This Prudential Rule, therefore, applies only to friendly societies. For friendly societies, it is relatively common for an approved benefit fund to be terminated outside of a restructure process and for existing benefits to be paid to members.
This Prudential Rule sets out, consistent with subsection 53(2) of the Act, the requirements for termination of an approved benefit fund including:
requirements for making the application (specifically the information to be included with the application to APRA);
how the restructure takes place, including a requirement for member or Board approval of relevant proposed amendments to approved benefit fund rules or the constitution of the society;
the order of distribution of assets of the approved benefit fund;
notification of members; and
information to be lodged with APRA following the restructure.
The requirements are substantially the same as those which applied to friendly societies under the Friendly Societies Code, prior to the transfer date.
Overview
The Life Insurance Act 1995 was enacted to provide for the prudent management of life companies, including friendly societies, and their supervision by the Australian Prudential Regulation Authority (APRA). The Act was subsequently amended by the Financial Sector Reform (Amendments and Transitional Provisions) Act (No. 1) 1999, extending its scope to integrate friendly societies into the Commonwealth prudential regime for financial institutions providing life insurance products, thereby replacing the previous State and Territory regime. Prudential Rules No 37, made under the authority of the Life Insurance Act 1995, aim to provide the necessary framework for the termination of statutory funds of friendly societies, ensuring that such terminations are conducted in a manner that is consistent with the objectives of the Act and that all relevant stakeholders are appropriately informed and involved in the process.
Scope and Application
The Life Insurance Act 1995, as extended by the Financial Sector Reform (Amendments and Transitional Provisions) Act (No. 1) 1999, governs the prudent management of life companies, including friendly societies, and mandates their supervision by the Australian Prudential Regulation Authority (APRA). This Act applies to life companies and friendly societies, which are entities that provide life insurance products, and it regulates their conduct and transactions to ensure they adhere to prudential standards. The jurisdictional reach of this Act is national, extending across the Commonwealth of Australia. Notably, the Act integrates friendly societies into the Commonwealth prudential regime, previously regulated under a State and Territory regime, thereby subjecting them to largely uniform regulatory requirements. Prudential Rules made under this Act, such as Prudential Rule Number 37, extend and refine the application of the Act, detailing specific requirements for the termination of statutory funds of friendly societies, which are not applicable to the restructure of statutory funds. These rules cover aspects like the application process, member or Board approval, asset distribution order, member notification, and reporting to APRA, ensuring a comprehensive regulatory framework for the industry.
Key Provisions
The main operative sections of the Life Insurance Act 1995, as interpreted by Prudential Rules Number 37, focus on the requirements for the termination of approved benefit funds for friendly societies. Section 53 of the Act allows Prudential Rules to set out specific provisions for such terminations, which include detailed requirements for the application process, restructuring procedures, asset distribution, member notification, and post-termination reporting to the Australian Prudential Regulation Authority (APRA). The Prudential Rule specifies that the application to APRA must include comprehensive information about the proposed termination, and the restructuring must obtain member or Board approval for any relevant amendments to the society’s rules or constitution. Furthermore, the rule mandates a particular order of asset distribution, member notification, and detailed reporting to APRA following the restructuring.
The Act imposes several obligations on friendly societies regarding the termination of their approved benefit funds. These include ensuring that the application to APRA is complete and accurate, securing the necessary approvals from members or the Board for any changes to the society’s rules or constitution, following a specific order for distributing the assets of the fund, ensuring that all members are properly notified of the termination and its implications, and lodging the required information with APRA after the restructuring. These obligations are designed to protect the interests of members and ensure the orderly and fair termination of the society's benefit funds.
Breaches of the provisions outlined in the Prudential Rules Number 37 could lead to various penalties and consequences. Although the specific penalties are not detailed in the Prudential Rule, under the Life Insurance Act 1995, non-compliance with the Prudential Rules may result in regulatory action by APRA, which could include fines, corrective actions, or even the imposition of more stringent regulatory requirements. In severe cases, APRA may also take legal action against individuals or entities that fail to comply with the Act, leading to potential civil or criminal liability. The penalties for breaches of the Act are intended to enforce compliance and maintain the integrity of the prudential regime governing life companies and friendly societies.