Law of Financial Institutions - Example

Law of Financial Institutions Student’s Name Course: Date: Introduction In addition to criticising the Australian Prudential Regulations Authority (APRA) for the alleged inaction in the HIH insurance group failure, the HIH Royal Commission report acknowledged that the organisation is bound by secrecy, and as such, cannot share information and knowledge it had attained for its sole use with other organisations. As such, the Royal Commission report recommended that APRA ‘seek to conclude MoUs with key counterparties in order to improve the exchange of confidential information’1. Section 56 of the 1998 APRA Act specifically prohibits ‘staff members and other officers’ from disclosing ‘protected information [and] protected documents’.2 This then means that APRA was to some extent limited in the information it could share with the Australian Securities and Investment Commission (ASIC). This does not however absolve APRA from blame. As indicated in the Royal Commission report, APRA ‘missed many warnings signs, was slow to act, and made misjudgements about some vital matters’.3 The above statement aside, it is worth noting that some of the working relations between ASIC and APRA were to blame for the systemic hindrances observed between the two. ASIC had the responsibility of administering corporations law provisions in the general insurance industry in order to ensure that the financial service providers meet identified disclosure and conduct obligations; while APRA had the mandate to use prudential regulation for purposes of limiting systemic risks related with breaches in financial promises, and reducing consumers’ and investors’ risks especially in circumstances where they do not have the capacity to assess a financial institution’s credit worthiness.4 According to the HIH Royal Commission, ASIC ‘limited its involvement in HIH’s affairs because of a perception that APRA was responsible for and was in fact closely and effectively monitoring the situation’.5 In response to negative media commentaries regarding the roles of both ASIC and APRA following the HIH collapse, the former responded by stating that it had ‘little direct responsibility in relation to prudential insurers’, and categorically said that regulation was APRA’s role.6 Whether or not APRA was responsible is beyond the scope of this paper. However, it is notable that the exchange of information between APRA and ASIC may be hindered by the secrecy requirements in the APRA Act 1998. In view of the aforementioned, Justice Owen recommended that the APRA Act 1998 should be reviewed in order to explicitly mention ASIC in s.56 (5) (a) of the Act.7 This then means the coordination, liaison, and information exchange between the two organisations was largely responsible for the inadequacies in regulation that probably failed to avert the HIH failure. The regulatory framework that divides responsibility for regulation between ASIC and APRA APRA’s regulatory framework seeks to supervise financial institutions in order to ensure that they are financially healthy and that the interests of depositors, superannuation fund members, and policy holders are protected.8 The mandate of APRA does not include prosecuting companies found to be operating contrary to the Insurance Act or the Corporations Act.9 APRA further seeks to help firms gauge their risk exposure, and by so doing recommend measures that would lower the same. Specifically, and as noted by Richard Grant, ‘the peak of APRA’s regulatory pyramid is ‘restructure’’. 10 In other words, its supervisory powers seek to strengthen the standing of the financial institution, especially as it seeks to shield investors and other stakeholders from losses that would follow a corporate collapse. Contrary to APRA’s regulatory framework as expounded above, ASIC has the mandate to supervise and enforce laws and regulations that govern conduct in financial institutions.11 ASIC’s mandate is divided into three categories namely: providing guidance to institutions that comply with the financial laws and regulations for purposes of helping them continue with their compliance; influencing the conduct and perceptions of opportunist firms who think they can bend the rules and get away with it; and using optimal enforcement strength to regulate financial firms that engage in illegal and improper behaviour. In other words, while APRA’s mandate is to seek disclosure for purposes of assisting corporate rehabilitation, ASIC seeks disclosure for purposes of punishing corporate greed. Based on their respective mandates, APRA is best positioned to be privy to information about a corporation’s financial wellbeing. The Financial Sector (Collection of Data) Act 2001 for example sets out APRA’s data collection and reporting standards, with section 14 requiring chief executive officers in financial institutions to ‘notify the entity’s governing body of a failure to provide reporting documents to APRA’.12 Since such a requirement is not applicable for ASIC, one can argue that APRA is better positioned to actively avert corporate failure such as the one witnessed in HIH, and although it does not have prosecutorial powers, it could have done a better job by alerting ASIC of the apparent inconsistencies in HIH. ASIC’s tough role in prosecuting those responsible for corporate collapses was on the other hand meant to inspire preventative self-regulation practices. Even having noted that APRA is better positioned to access information privy to corporate failure, and is hence better positioned to share the same with ASIC, its efficiency in supervising financial firms is pegged on its ability to maintain confidence with its beneficiaries (i.e. the financial firms and the investors) in a manner that enhances the stability in the financial system.13 However, the confidence-maintenance requirement is contradictory to the requirement for APRA to collect information for purposes of assisting ‘another financial sector agency to perform its functions or exercise its powers’ as indicated in the Financial Sector (data collection Act) 2001 s. 3(b), since ‘a financial sector agency’ is indicated as including ASIC in s. 31 of the same Act.14 More generally, even disclosing information to financial sector agencies may still expose the subject company too much as indicated in Pathway Investments Pty Ltd & Anor v. National Australia Bank Limited,15 where it was noted that APRA should uphold its secrecy provisions as provided for in the APRA 1998 (Cth) Act, except in situations where the Act made room for exceptions. In a commentary about the case however, Allens notes that such a ruling may have failed to consider APRA’s responsibility to support ASIC in its work, and the latter’s declared intention that it would provide ‘information gathered during investigations to third parties’.16 In other words, there is a probability that third parties could still access information that APRA considers confidential, and which ASIC had been granted access to by virtue of it being a financial services agency. Overall, APRA sums its mandate as the ‘prudential supervision of individual financial institutions’ and the promotion of stability in Australia’s financial system.17 In the same light, it identifies ASIC’s mandate as enhancing business conduct, integrity, consumer protection and disclosures in Australia’s financial systems.18 Looking at the individual mandate of each of the two organisations, it is evident that their roles overlap, and unless there are proper liaison and communication mechanisms (like was the case in pre-HIH collapse), the two organisations cannot attain optimal results in their individual and collective objectives. Additionally, it is notable that the two organisations have the same mandate to protect investors and consumers although their focus is different. APRA is charged with the supervision responsibility, which is meant to ensure that investors are protected from corporate failure, while ASIC is charged with the mandate to monitor the ‘practices of financial product and financial service providers to protect investors from misleading advice and scams’19. Notably, the disclosure of information by APRA to ASIC seems to have contributed to the disconnect between the two institutions, which effectively meant that they failed to work together to avert the HIH insurance failure. While ASIC’s approach relies on naming and shaming, APRA was at that time limited by the secrecy requirements in the APRA 1998 (Cth) Act. Additionally, and as indicated by Justice Owen in the HIH Royal Commission report, the aforementioned Act did not specifically mention ASIC as one of the institutions that APRA could disclose information to. Such complexities thus meant that in addition to secrecy obligations, APRA may have been cautious about disclosing information to ASIC on the assumption that the latter would disclose the information to the public, and such an approach would have undermined its (APRA’s) prudential efforts. In the HIH Royal Commission report, Justice Owen further noted that communication between ASIC and APRA was wanting.20 This was despite ASIC having a nominee on the APRA board. As such, ASIC did not deny that it was privy to information (or had the potential to access information) indicative of HIH Insurance’s imminent collapse in 2001; instead, it argued that ‘it had no direct responsibility in relation to prudential regulation of insurers’.21 The difficult relationship between the two organisations was identified by Allan John Cameron (the ASIC chairman at the time), who observed that ASIC’s culture was interventionist, while APRA’s culture was ‘the doctor-type style, looking after the institution’ and lacked enough enforcement.22 Still, APRA’s suspicions regarding operations at HIH should have been picked by Cameron who was ASIC’s representative in APRA’s board, and the fact that he (Cameron) said that perhaps the issue could have been raised ‘at an office level’ earlier is indicative of the kind of blame game that existed between the two institutions. Largely however, the blame game was only possible because of the overlapping mandate, and the less-than-clear mandate that each of the two institutions had towards ensuring that corporate collapse was averted in Australia. According to Cooper, the ASIC, APRA and other Australian regulators were conceptualised to conform to the ‘twin model’ of financial regulation, where ‘two highly specialized agencies with clearly defined and understandable regulatory roles’ were meant to be created.23 In essence however, the twin model led to Australia having several regulators with divisions across functional lines. The losses made by investors and consumers following the HIH collapse may however be the ‘sacrifice’ that Australia had to pay in order to streamline the operations of both APRA and ASIC. Changes made in the post-HIH insurance collapse period indicate that perhaps a clear mandate distinction between the two organisations could have led to a more fruitful relationship between them. Notably, the two regulators have since signed a memorandum of understanding that lays the basis for a more beneficial relationship. Additionally, consultative meetings between the two institutions are now more common and could ideally prevent future occurrences similar to what led to the two failing to act in good time in order to protect Australians from too much risk exposure following the malpractices of a few corporation heads. Bibliography Allens Linklaters, ‘Focus: APRA not required to produce documents in Class Action’, (2012) Litigation & Dispute Resolution at 31 October 2012. APRA, ‘Protecting Prudential Regulation Authority’ (2012) 3, at 31 October 2012. Australian Government, ‘Financial Sector (Collection of Data) Act 2001- c2011c00325’ (2011) 14 ComLaw at 31 October 2012. Australian Prudential Regulation Authority Act 1998, (n.d.) 28-35 < http://www.comlaw.gov.au/ComLaw/Legislation/ActCompilation1.nsf/0/04D87BE6E1273BC8CA256FBF002B051E/$file/AustPrudRegAuth1998_WD02.pdf> at 31 October 2012. Cooper, Jeremy ‘The Integration of Financial Regulatory Authorities- The Australian Experience’ (2006) Paper Presented to Securities and Exchange Commission of Brazil 3. Costello, Peter ‘Statement of Expectations from Treasurer’ (2007) Treasurer- Parliament House, Canberra. Gaskell, Chris ‘Negotiating Cooperation Agreements: the experience of the Australian Prudential Regulation Authority (APRA)’, In IMF 84. Grant, Richard ‘Australia’s Corporate Regulators- the ACCC, ASIC and APRA’, Parliament of Australia- Research Brief, (2004-05) 16. Justice Owen, ‘HIH Final Report’ (n.d.) 24.3.4< http://www.hihroyalcom.gov.au/finalreport/Chapter%2024.HTML> at 31 October 2012. Justice Owen, ‘The Failure of HIH Insurance. Vol. 1. A Corporate Collapse and its Lessons’ (2003) liii Pathway Investments Pty Ltd & Anor v. National Australia Bank Limited [2012] VSC 72 Read More