EXPLANATORY STATEMENT
Issued by the Australian Prudential Regulation Authority
Life Insurance Act 1995
Prudential Rules Number 39
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.
In accordance with paragraphs 16L(3)(c) and 16Q(3)(c) of the Act, before APRA approves benefit fund rules or amendments of approved benefit fund rules, it must be satisfied that the rules or amendments have been adequately adopted.
Subsection 16B(2) of the Act provides for adequate adoption of benefit fund rules. This Prudential Rule sets out the required method of adoption of benefit fund rules or amendments of approved benefit fund rules in order that they may be considered as having been adequately adopted for the purposes of subsection 16B(2) of the Act.
In the case of a new benefit fund with benefit fund rules not yet approved, the appropriate method of adoption may be either by resolution of the board of directors of the friendly society or by a special resolution of the members of the friendly society, at the discretion of the friendly society. A resolution by the board of directors would be the usual method of adoption for a new benefit fund, given that the benefit fund would not normally have any members. However, this Prudential Rule does not preclude the friendly society seeking the approval of the other members of the friendly society.
For a friendly society wishing to amend the approved benefit fund rules of an existing approved benefit fund, the appropriate method of adoption may be either by special resolution of the members of the friendly society (in accordance with the requirements of Corporations Law) or by resolution of the board of directors of the society. Resolution by the board of directors is appropriate in certain circumstances as set out in the Prudential Rule.
In addition to the requirements in this Prudential Rule, in accordance with paragraph 16B(2)(b) of the Act, the benefit fund rules or amendment of benefit fund rules can only be considered to have been adequately adopted if APRA considers that the method of adoption adequately takes into account the interests of the members.
If a friendly society applies to APRA for approval of a proposed amendment of its approved benefit fund rules in relation to a restructure of benefit funds pursuant to section 52 of the Act or a termination of a benefit fund pursuant to section 53 of the Act, the society may, under rule 3, adopt the amendments by a resolution of the board of directors. In this case, it is considered that resolution by the board of directors will not prejudice the rights of members of the benefit fund provided the requirements of Prudential Rule 36 or 37 (as applicable) are complied with.
Overview
The Life Insurance Act 1995, enacted by the Commonwealth Parliament, was introduced to regulate life insurance operations in Australia and to protect policyholders. It provides the Australian Prudential Regulation Authority (APRA) with the authority to create prudential rules that govern the conduct of life insurance companies and funds. The Prudential Rules Number 39, specifically, address the adoption of benefit fund rules by friendly societies, ensuring that these rules are adequately adopted and consider the interests of the members, thereby fulfilling the policy objective of protecting policyholders and maintaining the integrity of the insurance market. APRA, as the regulating body, ensures that the method of adoption aligns with the requirements set out in the Act.
Scope and Application
The Life Insurance Act 1995, as supplemented by Prudential Rules issued by the Australian Prudential Regulation Authority (APRA), applies to friendly societies engaged in life insurance activities within Australia. These rules are particularly pertinent to the adoption of benefit fund rules or amendments thereof, which must be adequately adopted for APRA's approval. For new benefit funds, the method of adoption can be either by resolution of the board of directors or by a special resolution of the members, depending on the circumstances. For existing benefit funds, amendments can be adopted through a special resolution of the members or a resolution of the board of directors, with specific conditions under which board resolution is appropriate. The Act and its associated rules ensure that the interests of the members are sufficiently considered during the adoption process, and additional provisions apply in cases of restructures or terminations of benefit funds. The rules also extend to disallowable instruments under the Acts Interpretation Act 1901, thereby ensuring the legislative framework remains robust and adaptable to the needs of the industry.
Key Provisions
The main operative sections of this Prudential Rule, under the Life Insurance Act 1995, are sections 16B(2), 16L(3)(c), and 16Q(3)(c). These sections prescribe the method by which benefit fund rules must be adopted in order to be adequately considered for approval by the Australian Prudential Regulation Authority (APRA). Specifically, section 16B(2) outlines the criteria for adequate adoption, while sections 16L(3)(c) and 16Q(3)(c) mandate that APRA ensures the rules have been properly adopted before approving them. For new benefit funds, rules can be adopted by either a resolution of the board of directors or a special resolution of the members, depending on the circumstances. For existing benefit funds, amendments can be adopted by either a special resolution of the members or a resolution of the board of directors, again depending on the circumstances. In all cases, the method of adoption must take into account the interests of the members.
The Prudential Rule imposes several obligations and requirements on the parties it governs. Friendly societies must ensure that their benefit fund rules or amendments are adopted in accordance with the specified methods. For new benefit funds, the rule allows for adoption by either the board of directors or the members, though a board resolution is usually more practical. For existing funds, amendments can be adopted by either a special resolution of the members or a board resolution. The rule also requires that APRA considers whether the method of adoption adequately considers the interests of the members. Additionally, if a society is restructuring or terminating a benefit fund, it must comply with either Prudential Rule 36 or 37 as applicable.
Failure to comply with the requirements of this Prudential Rule can lead to several consequences. If APRA determines that the method of adoption does not adequately consider the interests of the members, it may refuse to approve the benefit fund rules or amendments. This can result in the benefit fund not being able to operate legally or in the rules being invalid. Furthermore, if a society fails to adopt the rules in the prescribed manner, it may face regulatory action from APRA. In cases of non-compliance, APRA has the authority to take enforcement actions, which could include fines, sanctions, or even the revocation of the society's operating licence. The specific penalties for non-compliance are not detailed in this Prudential Rule but are subject to the broader provisions of the Life Insurance Act 1995 and other relevant legislation.