EXPLANATORY STATEMENT
Issued by the Australian Prudential Regulation Authority
Life Insurance Act 1995
Prudential Rules Number 46
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(4) of the Act. This subsection provides that a friendly society may maintain a single bank account for money that constitutes assets of 2 or more approved benefit funds if the account is maintained in accordance with the Prudential Rules. A single bank account may only be maintained for 2 or more approved benefit funds and must not include money that constitutes assets of either the management fund or a health insurance benefit fund registered and regulated under the National Health Act 1953 (Cth). (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). For the purposes of the Act, the expression ‘bank’ extends to any Authorised Deposit-Taking Institution registered under the Banking Act. A friendly society may, therefore, utilise a single building society or credit union account as the single ‘bank account’ if it is maintained in accordance with this Prudential Rule.
This Prudential Rule specifies various accounting procedures for the maintenance and administration of a single bank account. The overall aim of these procedures is to maintain accountability and transparency between the bank account and the affected approved 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.
The Prudential Rule specifies prescribed time periods within which the transactions of the bank account must be allocated to and reconciled with the benefit fund accounts. In the main, the reconciliation process must be performed at least every 7 days (or at such other time, as permitted by APRA), except where the bank account 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 single bank account is relatively stable with insufficient transactions to warrant weekly reconciliation.
Section 45 of the Act provides that a 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 single bank account must not contravene section 45 of the Act, such that one approved benefit fund operates an overdraft. All benefit fund accounts must be in funds at all times. For example, if one approved benefit fund was in funds with the bank account and another was in overdraft, the effect is that an unspecified asset would have been transferred from the latter fund to the former fund and the latter fund would have borrowed cash from the former.
Overview
The Life Insurance Act 1995, enacted by the Australian Parliament, was introduced to address the need for regulation in the life insurance industry to ensure the financial soundness of life insurance companies and the protection of policyholders. A key component of this regulation is the ability of the Australian Prudential Regulation Authority (APRA) to make Prudential Rules under subsection 252(1) of the Act, which are subject to disallowance under the Acts Interpretation Act 1901. One such Prudential Rule, Prudential Rule Number 46, addresses the maintenance of a single bank account by friendly societies for multiple approved benefit funds. This rule is necessary to maintain the distinct and separate nature of the assets of each approved benefit fund, as required by subsection 34(3) of the Act. The Prudential Rule outlines specific accounting procedures and reconciliation processes, primarily requiring reconciliation at least every seven days, to uphold accountability and transparency between the bank account and the benefit funds. APRA retains the discretion to permit less frequent reconciliation in certain stable circumstances. These measures ensure compliance with section 45 of the Act, which prohibits the transfer of assets between approved benefit funds except under specific conditions.
Scope and Application
The Life Insurance Act 1995 applies to friendly societies that manage approved benefit funds, specifically those that may maintain a single bank account for assets of two or more approved benefit funds, provided the account adheres to the Prudential Rules. These Prudential Rules are instrumental in maintaining accountability and transparency, ensuring the assets of each approved benefit fund are distinct from those of other funds and any other assets of the friendly society. The Act's jurisdiction is Commonwealth, and it extends to any Authorised Deposit-Taking Institution registered under the Banking Act, which includes building societies and credit unions. Notably, health insurance benefit funds regulated under the National Health Act 1953 (Cth) are excluded from being considered approved benefit funds. The Prudential Rules mandate that the transactions of the bank account must be allocated and reconciled with the benefit fund accounts within prescribed periods, typically every seven days, unless otherwise approved by the Australian Prudential Regulation Authority (APRA). APRA may allow less frequent reconciliations if the friendly society's single bank account is relatively stable and has few transactions. These rules also ensure that the single bank account's operation does not contravene the Act, particularly by preventing the transfer of assets between approved benefit funds at unfair values or through unauthorised means.
Key Provisions
The Prudential Rule Number 46 under the Life Insurance Act 1995 (the "Act") outlines specific accounting procedures for the maintenance and administration of a single bank account that friendly societies may use for holding assets from two or more approved benefit funds (subsection 16H(4)). This bank account cannot include assets from a management fund or a health insurance benefit fund regulated under the National Health Act 1953 (Cth) (subsection 16H(4)). The overarching aim of these procedures is to ensure that the assets of each approved benefit fund are kept distinct and separate from the assets of any other approved benefit fund and from any other assets of the friendly society (subsection 34(3)).
Friendly societies must adhere to prescribed time periods for allocating and reconciling the bank account transactions with the benefit fund accounts. Generally, this reconciliation process must be performed at least every seven days (subsection 16H(4)). However, the Australian Prudential Regulation Authority (APRA) may allow less frequent reconciliations if the society’s bank account is relatively stable and does not have a high volume of transactions warranting weekly reconciliations. In cases involving unitised contracts or mark-to-market exercises, more frequent reconciliations might be necessary.
The Prudential Rule also mandates that the operations of the single bank account must not contravene section 45 of the Act, which prohibits the transfer of assets between approved benefit funds unless done at fair value or in accordance with Divisions 3, 4, or 6 of Part 4 of the Act. Furthermore, it ensures that all benefit fund accounts must maintain sufficient funds at all times, thus preventing one approved benefit fund from operating an overdraft that could result in an unspecified asset transfer to another fund.
Failure to comply with these Prudential Rules could result in regulatory action from APRA. The Act provides for civil and criminal penalties for breaches, including fines and imprisonment, depending on the severity of the non-compliance. The maximum penalties can vary based on the specific breach and the courts' discretion, but they are designed to enforce adherence to the prescribed accounting procedures and ensure the integrity and transparency of the friendly society’s financial operations.