A new year’s resolution for a crisis: new APRA powers now law

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This article was written by Ian Paterson, Max Allan and Marina Lauer.

The Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018 (Act) has now passed and taken effect.  The Act confers significant new powers on the Australian Prudential Regulation Authority (APRA) to resolve financial institutions in difficulty and is the culmination of several years of work by the Government, regulators and industry, including the work done in the 2012 consultation "Strengthening APRA's Crisis Management Powers".

Importantly, the reforms not only affect regulated entities like ADIs, general insurers and life insurers, but also certain related entities, and in some cases anyone who deals with a regulated entity or its related entities.  In this article, we briefly list the broad themes of the changes and describe some of the practical impacts which the reforms may have on you and your business.

What has been resolved?

In establishing a more comprehensive framework for resolving distressed regulated institutions and clarifying and enhancing a range of other matters, the Act:

  • enhances APRA's statutory and judicial management regimes to ensure their effective operation in a crisis;

  • enhances the scope and efficacy of APRA's existing powers to give directions to regulated institutions and their related entities;

  • improves APRA's ability to implement a transfer of business under the Financial Sector (Transfer and Restructure) Act 1999 (Cth) (Transfer Act);

  • ensures the effective conversion and write-off of capital instruments which are to be converted to ordinary shares or written off where required by APRA's prudential standards;

  • enhances stay provisions and ensures that the exercise of APRA's powers does not trigger certain rights in the contracts of relevant entities within the same group;

  • enhances APRA's ability to respond when an Australian branch of a foreign regulated entity may be in distress;

  • enhances the efficiency and operation of the Financial Claims Scheme and ensures that it supports the crisis resolution framework; and

  • enhances and simplifies APRA's powers in relation to the winding-up or external administration of regulated entities under the Banking Act 1959 (Cth) (Banking Act), the Insurance Act 1973 (Cth) (Insurance Act) and the Life Insurance Act 1995 (Cth) (Life Insurance Act), and other related matters.

The Act makes a number of significant amendments to give further clarity and flexibility to APRA's powers for the recovery and resolution of ADIs, general insurers and life companies in financial distress, and to update the Australian regime consistent with recent international developments. 

The Act does not provide for a power to bail-in senior debt or deposits owed by financial institutions (although it may provide legislative backing for the conversion or write-off of non-capital instruments, or other instruments contributing to total loss-absorbing capacity, if APRA were to formulate a prudential standard for those instruments that required an instrument of that kind to be converted or written-off). 

The Act effects the reforms by amendments to the Banking Act, the Insurance Act, the Life Insurance Act, the Transfer Act, the Australian Prudential Regulation Authority Act 1998 (Cth) and the Payment Systems and Netting Act 1998 (Cth) (Netting Act).  The amendments are complex and technical, so rather than describing them we have summarised below some of the key practical issues you should consider as a result of the changes.

What does this mean for me if I am a … 

Entity type

Points to consider

… Australian ADI, general insurer or life insurer?

New resolution planning and pre-positioning powers

The Act gives APRA broad powers to make and enforce prudential standards on resolution.

In its 2018 policy priorities, APRA has foreshadowed further consultation on its prudential framework for recovery and resolution planning, as well as possible consequential amendments to legislative instruments and regulation.

The Act also gives APRA pre-positioning direction powers. The Explanatory Memorandum indicates that the Government's intention is that, as part of resolution planning, APRA will assess whether its powers can be used to resolve a relevant entity or group in a credible and orderly way, and whether there are any obstacles to resolution. It also indicates that the Government's intention is that, if there are obstacles, APRA will work with the regulated entity to address them. Where the appropriate pre-conditions are met, APRA is empowered to give a direction to a regulated entity, authorised or registered NOHC and subsidiaries to do any one or more of the following:

  • to make changes to the body corporate's systems, business practices or operations; or

  • to reconstruct, amalgamate or otherwise alter all or part of the business, structure or organisation of the body corporate or of the group constituted by the body corporate and its subsidiaries.

Accordingly, you may soon need to consider recovery and resolution plans in light of any new proposed standard and to engage with APRA's consultation processes.   Business structures that are considered by the regulator to impede resolution may need to change.

New regime for general insurers and life companies

General insurers and life companies incorporated in Australia will now be subject to a statutory management regime, which previously only applied to Australian ADIs, as well as the existing judicial management regime.

Unlike judicial management, where APRA would need to apply for a court order to appoint a judicial manager, the new statutory management regime allows APRA to take direct control of a general insurer's or life company's business or appoint an administrator to take control of that business.

Enhanced conversion and write-off for capital instruments

The changes will fortify the regime for conversion and write-off of capital instruments to which the conversion and write-off provisions in APRA's prudential standards apply. Where a prudential standard requires a preference share constituting regulatory capital to be written off, that can occur notwithstanding the Corporations Act 2001 (Cth) (Corporations Act). Holdings of convertible instruments still need to comply with laws affecting shareholdings, such as the Foreign Acquisitions and Takeovers Act 1975 (Cth), Financial Sector (Shareholdings) Act 1998 (Cth) and Chapter 6 of the Corporations Act.

Impacts on debt and hybrid issuances by regulated entities

Regulated entities issuing debt securities will need to consider the effect of the amendments on regulatory and risk disclosure.

Impact on directors and officers

The Act contains provisions that address questions regarding the powers and duties of directors and officers where an entity is subject to a direction from APRA or recovery or resolution processes. In particular, the Act overlays additional duties and certain immunities, including in relation to secrecy of APRA directions, as well as penalties for non-compliance.

Directors and officers may need to familiarise themselves with the regime. Should resolution proceedings become imminent, it is very likely that advice would be required on the application of the regime to their particular circumstances.

… holding company or NOHC of an ADI, general insurer or life insurer?

New regime for NOHCs and new prudential, transfer and recapitalisation directions powers regarding NOHCs

Authorised or registered NOHCs will now be subject to the statutory management regime and APRA's transfer powers and recapitalisation directions powers will apply to them in certain circumstances.

As APRA now has express power to make prudential standards in relation to NOHCs of all regulated entities, NOHCs may wish to participate in APRA's foreshadowed review of its prudential framework.

Impacts on debt and hybrid issuances by regulated entities

NOHCs issuing debt securities will need to consider the effect of the amendments on regulatory and risk disclosure.

… Australian subsidiary of an ADI, general insurer, life insurer or a NOHC?

New regime for subsidiaries and new prudential and transfer powers regarding subsidiaries

Australian subsidiaries that fall within the definition of "target body corporate" will now be subject to a statutory management regime. The definition of "target body corporate" is complex but includes bodies that provide essential services to the regulated entity or to whom an appointment is necessary in order to facilitate the resolution of the regulated entity.

APRA's transfer powers also apply in relation to certain "related bodies corporate" under the Corporations Act.

As APRA now has express power to make prudential standards in relation to subsidiaries of all regulated entities, you may wish to consider the impact of the prudential framework on subsidiaries which have been established on the basis that they were outside the regime and on existing arrangements.

… foreign branch of an ADI, general insurer or life insurer?

New Australian resolution regime for foreign regulated entities

Foreign ADIs, general insurers and life companies, to the extent of their Australian business assets and liabilities, will now be subject to the statutory management regime and more extensive APRA powers in relation to winding-up, transfer of business and revocation of authorisation.

You may soon need to consider the impact of these powers on your global recovery and resolution plans, and the impact of the crisis resolution reforms on any existing arrangements and advices.

APRA to coordinate with foreign regulators for consistency

In a cross-border context, the Explanatory Memorandum indicates that the Government's intention is for APRA to work with authorities in other jurisdictions to enable resolution actions to be applied in a coordinated manner where appropriate.

The Act does not contain a statutory recognition of action taken by foreign regulators. However, there is now a suite of powers available to APRA which may be relevant to the resolution of a foreign entity led by its home regulator. The interaction of home regulator action and APRA's powers and duties remains a complex subject.

You may wish to consider informing your home regulator of the change in Australian laws and the consequences of doing business in Australia.

… counterparty to a regulated entity, or a NOHC or subsidiary of a regulated entity?

Enhanced powers affect termination and enforcement rights

Counterparties to regulated entities, NOHCs or subsidiaries of regulated entities should be aware of the way that these new and extended powers affect those entities (including that they may widen the circumstances in which termination and enforcement rights, and other enforcement proceedings, are affected or stayed).

Do you know if you're contracting with a regulated entity?

In particular, counterparties may wish to consider the likelihood of whether their counterparty is currently, or will become, a subsidiary or authorised or registered NOHC of a regulated entity and to understand the effect of the expanded regime if this does happen. More generally, counterparties may wish to consider not only the regulated entity's creditworthiness but may also wish to assess the relevant resolution framework.

Recovery and resolution planning may affect you

Counterparties may also be affected by changes in the regulated entity's recovery and resolution planning, and in particular by any restructuring work which may occur.

… entering into derivatives with, or as, a regulated entity, NOHC or subsidiary?

Close-out netting and stays regimes protected, but different

Reassuringly, the crisis resolution reforms continue to uphold the framework for close-out netting and resolution-related stays established in the Netting Act and enhanced in the 2016 Resilience and Collateral Protection reforms. Our alerts providing more information on this framework are available here, here and here.

Whilst there is some complexity to the interaction of these regimes in particular fact patterns (particularly with conversion, write-off and transfer scenarios), generally, the primacy of the Netting Act has been maintained. This is good news for all those focused on financial markets transactions and the effectiveness of close-out netting.

However, the new resolution regimes for a broader range of entities (including new regimes for foreign entities) and enhanced regulatory powers will necessitate careful consideration and may require reflection on the coverage of your existing opinions.

Moving forward

The Council of Financial Regulators will continue to review crisis management powers annually.  Australia's regime will also be assessed by the International Monetary Fund's Financial System Assessment Program later this year.

If you have any questions about how the amendments affect you, please contact us. We are here to help.

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