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EXPLANATORY STATEMENT
Issued by the Australian Prudential Regulation Authority
Life Insurance Act 1995
Prudential Rules Number 45
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.
This Prudential Rule is made for the purposes of subsection 16H(4A) of the Act. This subsection provides that a friendly society may invest assets of 2 or more approved benefit funds in a single investment provided that the rules of each benefit fund allow for such an investment and that the investment complies with the Prudential Rules. A health insurance benefit fund regulated under the National Health Act 1953 (Cth) is not an approved benefit fund for the purposes of the Act. A health insurance benefit fund must not, therefore, contribute to a single investment. Similarly, a joint investment must not be undertaken between one or more approved benefit funds and the management fund.
The single investment is referred to as a joint investment, each of the approved benefit funds with an interest in the joint investment is referred to as a contributing fund and the assets of a fund that are invested in the joint investment are referred to as the benefit fund’s contribution. That is, an approved benefit fund’s contribution at any time is its interest in the joint investment, both in terms of initial investment and subsequent transactions.
This Prudential Rule specifies various accounting procedures for the maintenance and administration of joint investments. The overall aim of these procedures is to maintain accountability and transparency between the joint investment and the contributing benefit funds. These procedures are necessary in order that the principles enunciated in subsection 34(3) of the Act are met. That principle is that a friendly society must keep the assets of each approved benefit fund distinct and separate from:
the assets of any other approved benefit fund; and
from any other assets of the friendly society.
Any joint investments must be able to be readily liquefied. The reason for this is that each contributing approved benefit fund must be able to redeem its investment in an expeditious manner with no undue effect on other contributing approved benefit funds. For example, a number of approved benefit funds investing in a single property would not be an appropriate joint investment, whereas a joint investment in listed shares, government securities, bank or commercial bills would be appropriate as there exists a ready secondary market for such investments.
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The operation of the joint investment must not result in the asset exposures of a contributing approved benefit fund being affected by the investment decisions of another contributing approved benefit fund. This precludes, for example, management of joint investments by way of an internal unitised pool of joint investments; as transactions between the pool and a given contributing benefit fund would alter the proportion of the different pooled assets attributable to each other contributing benefit fund participating in the pool.
A friendly society is permitted to use the services of a custodian in relation to a joint investment, provided that the joint investment is invested in the name of the friendly society.
Section 45 of the Act provides that a friendly society must not transfer an asset from one approved benefit fund to another approved benefit fund, except in the situation where the asset is transferred at fair value or in accordance with Divisions 3, 4 or 6 of Part 4 of the Act. The operation of the joint investment is not to contravene section 45 of the Act, such that loans must not be created between contributing approved benefit funds.
The Prudential Rule specifies prescribed time periods within which the benefit fund accounts must be reconciled with the investment register. In the main, the reconciliation process must be performed at least every 7 days (or at other such time as permitted by APRA), except where the investment relates to unitised contracts or where the society conducts a mark to market exercise where more frequent reconciliation may be required. APRA may permit a friendly society to conduct the reconciliation process less frequently than once every 7 days, where APRA is satisfied that the friendly society’s joint investment is relatively stable with insufficient transactions to warrant weekly reconciliation.
Overview
The Life Insurance Act 1995 was enacted to regulate life insurance in Australia, ensuring the financial stability of life insurance companies and protecting policyholders. One specific problem this Act addresses is the management of joint investments by friendly societies, which must be done in a way that maintains clear accountability and transparency between the funds and their investments. The Australian Prudential Regulation Authority (APRA), established by the Act, was given the authority to create Prudential Rules to further define and enforce these provisions. The Prudential Rule introduced here aims to specify the accounting procedures for joint investments, ensuring that the assets of each approved benefit fund remain distinct and separate, and that the joint investments can be readily liquidated. This is intended to uphold the principle that the asset exposures of a contributing fund should not be influenced by the investment decisions of other funds, thereby protecting the interests of all parties involved.
Scope and Application
The Life Insurance Act 1995, as supplemented by Prudential Rules Number 45, applies to friendly societies and approved benefit funds, establishing strict guidelines for joint investments made by these entities. These Prudential Rules, made by the Australian Prudential Regulation Authority (APRA), detail the accounting procedures required to maintain accountability and transparency in joint investments, ensuring that assets of each approved benefit fund remain distinct and separate from those of other funds and from the friendly society’s assets. The Prudential Rules apply to investments made in the name of the friendly society and prohibit the creation of loans between contributing approved benefit funds, ensuring compliance with section 45 of the Act. These rules apply across the Commonwealth of Australia, regulating how friendly societies can manage joint investments while maintaining the integrity and security of each approved benefit fund’s assets. However, health insurance benefit funds regulated under the National Health Act 1953 are excluded from being considered approved benefit funds for the purposes of these Prudential Rules, and therefore cannot participate in joint investments. Subordinate instruments may further extend or restrict the application of these Prudential Rules as deemed necessary by APRA.
Key Provisions
The key sections of this Prudential Rule establish the framework for the management of joint investments by friendly societies as outlined in the Life Insurance Act 1995. Section 3 details the process by which a friendly society can invest assets from two or more approved benefit funds in a single investment, provided that the rules of each benefit fund allow for such an investment and that the investment complies with the Prudential Rules (subsection 16H(4A) of the Act). It is important to note that health insurance benefit funds regulated under the National Health Act 1953 (Cth) are not considered approved benefit funds for these purposes, and therefore cannot contribute to a single investment.
The Prudential Rule further specifies that any joint investment must be able to be readily liquidated, ensuring that each contributing fund can redeem its investment without undue effect on other funds. The joint investment must not result in the asset exposures of a contributing fund being influenced by the investment decisions of another contributing fund. Additionally, friendly societies are permitted to use the services of a custodian for a joint investment, as long as the investment is held in the name of the friendly society (section 45 of the Act).
The obligations imposed on friendly societies by this Prudential Rule include maintaining distinct and separate accounting for the assets of each approved benefit fund, ensuring that these assets are not mixed with any other assets of the friendly society. This is to uphold the principle that the assets of each fund must be kept separate and identifiable, as mandated by subsection 34(3) of the Act. Friendly societies must also adhere to specific reconciliation processes, with benefit fund accounts needing to be reconciled with the investment register at least every 7 days, unless otherwise permitted by APRA. APRA can allow less frequent reconciliation if it is satisfied that the joint investment is stable and does not involve frequent transactions.
Breach of these obligations may result in severe consequences. The Act stipulates that any non-compliance with the Prudential Rules can lead to civil or criminal penalties. While the specific penalties are not detailed in the Prudential Rule itself, breaches of the Life Insurance Act 1995 can attract penalties under section 252(1) of the Act, which includes potential fines and imprisonment for serious violations. Additionally, the Prudential Rules are disallowable instruments under section 46A of the Acts Interpretation Act 1901, meaning that any rule that is not properly made can be annulled by Parliament. Therefore, adherence to these rules is crucial for friendly societies to avoid legal repercussions.