Life Insurance (prudential standards) determination No.2 of 2008
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority (APRA)
Life Insurance Act 1995, section 230A
Under subsection 230A(5) of the Life Insurance Act 1995 (Life Act) APRA may, in writing, revoke a prudential standard made in relation to prudential matters to be complied with by all life insurance companies (including friendly societies). Under subsection 230A(1) APRA may, in writing, determine a prudential standard made in relation to prudential matters to be complied with by all life insurance companies (including friendly societies).
- Background
The Financial Sector Legislation Amendment (Review of Prudential Decisions) Act 2008 (RPD Act) amended the Life Act. Amongst other things, the RPD Act introduced a court-based process for disqualifying an individual from certain roles in a life company; it removed the necessity for ministerial consent for some decisions; and it streamlined some of APRA’s directions powers where appropriate.
The Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007 (SRR Act) also amended the Life Act. Amongst other things, the SRR Act introduced whistleblower protection; it provided for APRA to exercise discretion to vary prudential requirements for a regulated institution; and it harmonised breach reporting across the Life Insurance Act 1995, the Insurance Act 1973, the Banking Act 1959 and the Superannuation Industry (Supervision) Act 1993.
Prudential standard LPS 510 Governance (LPS 510) applies to all life companies (including friendly societies). It sets out minimum foundations for good governance of life companies. It aims to ensure that life companies are managed in a sound and prudent manner by a competent Board of directors, which is capable of making reasonable and impartial business judgements in the best interests of the life company and which gives due consideration to the impact of its decisions on policyholders.
2. Purpose of the Instrument
In light of the recent amendments to the Life Act, outlined above, APRA is revoking and re-making LPS 510 with minor amendments. This is to ensure that LPS 510 continues to be consistent with the Life Act.
3. Operation of the Instrument
This Instrument revokes LPS 510 and re-makes the prudential standard with the following minor amendments:
(i) a footnote has been inserted in to the heading above Paragraph 57. It has been included to ensure this part of the prudential standard is read in conjunction with the whistleblowing provisions in the Life Act and in LPS 520;
(ii) paragraph 59 has been amended to preserve transitional relief for auditors that was available under the previous version of LPS 510; and.
(iii) paragraph 60 has been inserted to improve consistency between the fit and proper prudential standards across the different APRA-regulated industries. Paragraph 60 of the new LPS 510 replicates paragraph 65 of Prudential Standard GPS 510 Governance (May 2006), a prudential standard made under section 32 of the Insurance Act 1973 (Insurance Act). Paragraph 60 reflects subsection 230A(4) of the Life Act, which was amended by the SRR Act so as to be consistent with subsection 32(3D) of the Insurance Act.
4. Consultation
APRA considered that public consultation was not necessary for the amendments to LPS 510. The amendments are minor and consequential to amendments to the Life Act. The Treasury conducted public consultation in relation to these amendments to the Life Act.
APRA undertook public consultation on the broader proposal to introduce governance requirements across all APRA-regulated institutions.
Overview
The Life Insurance (prudential standards) determination No.2 of 2008 was enacted to address gaps and problems identified in the Life Insurance Act 1995 following amendments by the Financial Sector Legislation Amendment (Review of Prudential Decisions) Act 2008 and the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007. These amendments introduced measures such as a court-based process for disqualifying individuals from certain roles in life insurance companies, the removal of ministerial consent for some decisions, and streamlined directions powers for the Australian Prudential Regulation Authority (APRA). The Prudential standard LPS 510 Governance (LPS 510) was revoked and re-made to align with these legislative changes, ensuring consistency with the updated Life Act. The determination also included minor amendments to improve the alignment of governance standards across APRA-regulated industries. APRA determined that public consultation was unnecessary for these specific amendments, as they were minor and consequential to broader legislative changes that had already been subject to public consultation by the Treasury.
Scope and Application
The Life Insurance (prudential standards) determination No. 2 of 2008, made by the Australian Prudential Regulation Authority (APRA) under section 230A of the Life Insurance Act 1995, applies to all life insurance companies, including friendly societies. The purpose of this determination is to revoke and re-make the prudential standard LPS 510 Governance (LPS 510) with minor amendments to ensure consistency with recent legislative changes to the Life Act. These changes include amendments introduced by the Financial Sector Legislation Amendment (Review of Prudential Decisions) Act 2008 and the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007, which among other things, streamlined APRA’s directions powers, introduced a court-based disqualification process for certain roles in life companies, and provided for whistleblower protection. The geographic reach of this Act is limited to Australia as it pertains to entities regulated under Australian law. The amendments to LPS 510 are considered minor and consequential, thus APRA did not undertake public consultation on these specific changes but relied on the broader consultation conducted by the Treasury regarding the legislative amendments.
Key Provisions
The Life Insurance (Prudential Standards) Determination No. 2 of 2008, prepared by the Australian Prudential Regulation Authority (APRA), primarily focuses on the revocation and re-making of Prudential Standard LPS 510 Governance (LPS 510) under section 230A of the Life Insurance Act 1995 (Life Act). This determination ensures that the governance standards for life companies remain consistent with recent legislative amendments. The primary sections involved in these provisions include section 230A(1) and 230A(5), which empower APRA to determine and revoke prudential standards respectively. These standards are crucial as they establish the minimum requirements for good governance within life insurance companies, including friendly societies, to ensure they are managed prudently and in the best interests of policyholders.
The obligations imposed by LPS 510 on life companies are centred around ensuring effective governance by their boards of directors. The prudential standard requires these boards to be competent, make reasonable and impartial business judgements, and consider the impact of their decisions on policyholders. This governance framework is designed to maintain the financial stability and integrity of life insurance companies, ensuring they operate in a sound and prudent manner. Companies must ensure their boards are appropriately constituted, with directors who are fit and proper persons, capable of fulfilling their roles effectively.
Failure to comply with the provisions of LPS 510 can result in significant consequences. While the determination itself does not explicitly outline penalties for breaches, non-compliance with prudential standards can lead to enforcement actions by APRA. These actions may include issuing directions, imposing financial penalties, or even revoking the license of the life company. Under the Life Act, breaches of prudential standards can also lead to civil or criminal liability, with penalties varying depending on the severity and nature of the breach. The consequences underscore the importance of adherence to these governance standards to maintain the trust and confidence of policyholders and the broader financial system.