Peter Costello

HIH RECOMMENDATIONS

GOVERNMENT RESPONSE

Recommendation 1 proposes that the Corporations Act 2001 (Corporations Act), the relevant accounting standards and the ASX Listing Rules relating to directors' remuneration be reviewed to ensure they achieve clear and comprehensive disclosure of all remuneration paid to directors.

Accept. This recommendation is being implemented under the CLERP 9 process.

Recommendation 2 proposes that the Corporations Act be changed to impose duties based on functions rather than status (eg director or officer).

Anomalies in the definition of officer will be corrected in CLERP 9. The Government does not propose to recast the duties of directors and officers at this time but will ask the Companies and Markets Advisory Committee, taking wider submissions, to review this question in light of the Royal Commission's observations.

Recommendation 3 proposes that the Government broaden the membership of the AASB to include non-accountants.

Accept. Current legislation provides for this to be implemented. The Government will write to the Financial Reporting Council (FRC) about this matter.

Recommendation 4 proposes that Australia participate in the development of international accounting standards.

Accept. This recommendation is being implemented through Australia's adoption of international accounting standards.

Recommendation 5 proposes that Australia reserve the right to require more stringent accounting standards that are not inconsistent with relevant international standards.

Accept. This recommendation reflects the current situation.

Recommendation 6 proposes that the AASB alter its Urgent Issues Group (UIG) or create a separate group to promptly issue binding rules on the interpretation / application of accounting standards; and that this group include lawyers and users of financial statements.

Accept. The Government will write to the Australian Accounting Standards Board (AASB) and the FRC about this recommendation.

Recommendation 7 proposes that the accounting bodies encourage their members to consult independent third parties or the UIG when there is disagreement with company management about the interpretation or application of accounting standards.

Implementation of this recommendation is an issue for the professional accounting bodies. The Government will draw this recommendation to the attention of the accounting bodies. The Government will consult the FRC and AASB regarding the role of the Urgent Issues Group (UIG).

Recommendation 8 proposes amendments to accounting standard AASB 1023 Financial Reporting of General Insurance Activities to correct a number of deficiencies that were identified in the standard.

The AASB's current work program provides for a revision of AASB1023 as part of the program to converge Australian standards with standards issued by the International Accounting Standards Board (IASB). The AASB will be requested to consider the terms of recommendation 8 as it continues to work with the IASB in finalising the international standard on insurance contracts.

Recommendation 9 proposes that a standard of independence for auditors should be contained in legislation and professional standards.

Accept. This recommendation is being implemented under the CLERP 9 process.

Recommendation 10 proposes that the Corporations Act should be amended to require the board to provide a statement in the annual report that identifies all non-audit services provided by the audit firm and the fees applicable to each item of work and explains why those non-audit services do not compromise audit independence.

Accept. This recommendation is being implemented under the CLERP 9 process.

Recommendation 11 proposes that the CLERP 9 proposal for a "waiting period" of 2 years before a former partner directly involved in the audit of a client as a director or in senior management be extended.

Accept. This recommendation is being implemented under the CLERP 9 process.

Recommendation 12 proposes that the CLERP 9 proposal for rotation of the lead engagement partner and review partner be extended to key senior audit personnel.

CLERP 9 requires rotation of lead engagement and review partners after 5 years. It is these audit partners who are responsible for forming the final opinion on the financial statements of the client. In these circumstances, the Government does not consider that extending the rotation requirement to parties subordinate to the lead engagement and review partners will enhance auditor independence.

Recommendation 13 proposes changes to the content of the audit report and the inclusion of an audited operating and financial review in the annual report.

The Auditing and Assurance Standards Board (AuASB) will be consulted about the proposals for the audit report to contain comment on alternative accounting treatments, disclosure regarding significant matters arising in the audit process and for audit reports to be presented in plain English. These requirements are better suited for inclusion in the auditing standards rather than as prescriptive legislative requirements.

A requirement for an operating and financial review (otherwise known as MD&A) is supported and it is intended that this be included in the CLERP 9 legislation. As MD&A material is descriptive in nature, it does not readily lend itself to audit processes.

Recommendation 14 proposes that the Corporations Act be amended to require listed companies to include a brief summary of the nature and scope of the audit services provided by their auditor each year.

This requirement is better suited for inclusion in the auditing standards rather than being prescribed in legislation. The AuASB will be consulted concerning an amendment to the relevant auditing standard.

Recommendation 15 proposes that both the Australian Prudential Regulation Authority (APRA) and the Institute of Actuaries of Australia introduce compulsory certification of the completeness and accuracy of data.

The Government will refer this recommendation to APRA and the Institute of Actuaries of Australia.

Recommendation 16 proposes that the Institute of Actuaries of Australia and the APRA introduce a requirement for more detailed disclosure of the exercise, incidence and impact of subjective judgment and departure from historical experience.

The Government will refer this recommendation to APRA and the Institute of Actuaries of Australia.

Recommendation 17 proposes that APRA extend the qualifications of the approved actuary to require that they not be an employee or partner of the organisation to which the approved auditor belongs.

The Government will refer this recommendation to APRA and the Institute of Actuaries of Australia.

Recommendation 18 proposes changed governance arrangements for APRA, including, replacing the non-executive board with an executive group comprising of a CEO and 2-3 commissioners and discontinuing the involvement of representatives from the Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia on the board of APRA.

The Government has amended the APRA Act to implement an enhanced corporate governance structure for APRA that took effect from 1 July 2003. The new members and Chair and Deputy Chair of APRA commenced on 1 July 2003.

Recommendation 19 proposes that the Australian Prudential Regulation Authority Act 1998 (APRA Act) be amended to provide the chief executive with the power to establish an advisory board.

The Government supports this recommendation and will recommend to APRA that an Advisory Board be established.

Recommendation 20 proposes that the direct involvement of representatives of ASIC and the RBA in the governance of APRA be discontinued. This will require amendment of the APRA Act.

The Government has amended the APRA Act to implement an enhanced corporate governance structure for APRA that took effect from 1 July 2003. The new members and Chair and Deputy Chair of APRA commenced on 1 July 2003. Representation of the Australian Securities and Investment Commission (ASIC) and the Reserve Bank of Australia in the governance of APRA has been discontinued.

Recommendation 21 proposes that the APRA chief executive urgently instigates a review of APRA's organisational structure, balancing its cross-sectoral responsibilities with accountability and knowledge of financial services.

The Government will refer this recommendation to APRA for its action.

Recommendation 22 proposes that the Commonwealth Government consider removing the requirement for the Treasurer's agreement to operational decisions involving APRA's prudential oversight of general insurers.

The Government accepts the policy intent of this recommendation and will remove the requirement for APRA to seek the Treasurer's agreement to make operational decisions which do not involve wider policy issues.

Recommendation 23 proposes the Government review the inconsistencies between the legislative provisions for merit review under the Insurance Act 1973 and the Banking Act 1959.

The Government accepts this recommendation.

Recommendation 24 proposes that APRA implement a programme to build the skills of staff involved in the supervision of general insurers. This should involve a review of its human resource management policies to assess APRA's competitiveness in the financial services sector labour market. The review should take account of the adequacy of remuneration, training and career structures as well as other steps to increase APRA's attractiveness as an employer.

The Government will refer this recommendation to APRA for its action.

Recommendation 25 proposes the Government adopt a three-year rolling fund arrangement to set APRA's budget.

This already occurs in practice under existing funding arrangements.

Recommendation 26 proposes that APRA develop a more sceptical, questioning and, where necessary, aggressive approach to its prudential supervision of general insurers. Consultation, inquiry and constructive dialogue should be balanced by firmness in its requirements and a preparedness to enforce compliance with applicable standards. In particular, APRA should take a firm approach to ensuring regulated entities' timely compliance in the lodging of returns and the provision of information.

The Government will refer this recommendation to APRA for its action.

Recommendation 27 proposes that APRA continue to develop and review processes, guidelines and training to assist its staff in considering the appropriate approach to take towards supervised entities in different situations.

The Government will refer this recommendation to APRA for its action.

Recommendation 28 proposes that APRA develop systems to encourage its staff and management continually to question their assumptions, views and conclusions about the financial viability of supervised entities, particularly on the receipt of new information about an entity.

The Government will refer this recommendation to APRA for its action.

Recommendation 29 proposes that APRA develop an internal system for tracking all relevant information concerning regulated entities.

The Government will refer this recommendation to APRA for its action.

Recommendation 30 proposes that APRA develop mechanisms to investigate the reinsurance arrangements for general insurers on a random but frequent basis.

The Government will refer this recommendation to APRA for its action.

Recommendation 31 proposes that the effectiveness of the current memorandum of understanding (MOU) between APRA and ASIC be reviewed; the processes for liaison, coordination and exchange of information between APRA and ASIC should be reviewed on a regular basis; to facilitate the exchange of information, the Commonwealth Government should make a regulation specifying ASIC for the purposes of s.56(5)(a) the APRA Act.

The Government has already implemented enhanced exchange of information arrangements between APRA and ASIC through recent amendments to the APRA Act. ASIC is specified for the purposes of the APRA Act.

The Government will refer the responsibility for reviewing the existing memorandum of understanding (MOU) between APRA and ASIC to APRA for its action.

Recommendation 32 proposes that matters relating to the coordination of Commonwealth regulation affecting the insurance industry be the province of the Commonwealth Treasury.

Accept. This already occurs in practice. Treasury will continue to facilitate ongoing liaison, coordination and exchange of information between regulators.

Recommendation 33 proposes that coordination of matters related to the regulation of the insurance industry be addressed through the proposed ministerial council (see recommendation 54 below).

Accept. Since March 2002 the Commonwealth has regularly convened a meeting of Commonwealth and State and Territories Insurance Ministers to discuss insurance matters generally. The forum will continue to consider insurance matters as they arise.

Recommendations 34 deals with the disclosure of information by authorised general insurers.

The Government will refer this recommendation to APRA for its action.

Recommendation 35 proposes that information that enables external users to make an informed assessment of an insurer's outstanding claims provisions and reinsurance arrangements be published by the insurer or APRA. APRA should develop reporting returns for insurers that would enable this to occur if existing returns are insufficient.

The Government will refer this recommendation to APRA for its action.

Recommendation 36 proposes that insurers be required to make greater disclosure of qualitative information relating to their risk and reinsurance management strategies. Other qualitative information - where the prospect of disclosure may affect the quality of information provided to companies - need not be disclosed.

The Government will refer this recommendation to APRA for its action.

Recommendation 37 proposes that APRA identify which regulatory activities should be disclosed publicly and by what means.

The Government will refer this recommendation to APRA for its action.

Recommendation 38 proposes that APRA develop and promulgate a standard for the effective regulation of authorised insurers that operate as part of a corporate group.

The Government will refer this recommendation to APRA for its action.

Recommendation 39 proposes that APRA monitor the financial condition of corporate groups, including those with foreign operations. Pending the development of the proposed prudential standard on supervision of corporate groups, APRA should use existing powers to require groups to provide any information it considers necessary to perform this role.

The Government will refer this recommendation to APRA for its action.

Recommendation 40 proposes that APRA take steps to ensure that it effectively exchanges with relevant foreign regulators information and intelligence on the operations of Australian insurers with international operations.

The Government will refer this recommendation to APRA for its action.

Recommendation 41 proposes that APRA modify the prudential standards to require the annual production by an authorised general insurer's approved actuary of a report on the overall financial condition of the insurer.

The Government will refer this recommendation to APRA for its action.

Recommendation 42 proposes that the Commonwealth Government amend the Insurance Act 1973 to extend prudential regulation to all discretionary insurance-like products - to the extent that it is possible to do so within constitutional limits.

The Government will commission a review to examine the role of discretionary mutual funds in the insurance market. The review will also include an examination of the role of direct offshore foreign insurers in the insurance market. Details of the review including the terms of reference will be available on the Treasury website.

Recommendation 43 proposes that the Corporations Act be amended so that the APRA may apply to wind up a company that is an authorised insurer if any of the criteria specified in s.52(1)(aa), (ab) or (a) of the Insurance Act 1973 are met.

The Government accepts this recommendation.

Recommendation 44 proposes that the Corporations Act be amended to specify that the interests of policyholders are interests to which the court should have regard in deciding whether to make a winding-up order.

The Government accepts this recommendation and notes this already occurs in practice.

Recommendations 45 proposes that the Australian Stock Exchange (ASX) amend Listing Rule 3.1 to require-or publish a guidance note making it clear-that price-sensitive announcements have the approval of either the board or a delegate of the board subject to ratification by the board.

The Government will refer this recommendation to the Australian Stock Exchange for its action.

Recommendation 46 proposes that the ASX amend the Listing Rules to prohibit `blacklisting'-defined as exclusion of a person or organisation from briefings by a company or a pattern of such exclusion in the face of negative reports on the company by those analysts over a specific period.

The Government will refer this recommendation to the Australian Stock Exchange for its action.

Recommendation 47 proposes that the ASX clarify Listing Rule 11.1, so that it applies to any significant change in the business or assets of a listed company, whether it be by acquisition, disposal, amalgamation or otherwise. Further, that the ASX amend the Listing Rules to define `significant change', so that it encompasses financial and geographic factors as well as the nature and scale of the company's business.

The Government will refer this recommendation to the Australian Stock Exchange for its action.

Recommendation 48 proposes that the ASX amend Listing Rule 11.2, so that it applies to any disposal of the whole or substantially the whole of the assets or operations of a listed company.

The Government will refer this recommendation to the Australian Stock Exchange for its action.

Recommendation 49 proposes that APRA should become the sole prudential regulator of general insurance.

The Commonwealth will refer this recommendation to the States and Territories for their consideration.

Recommendation 50 is that if the States and Territories remain involved with prudential regulation, that there be effective information exchange with APRA.

The Commonwealth will refer this recommendation to the States and Territories for their consideration.

Recommendations 51-52 propose that the States and Territories reduce inconsistencies in their statutory schemes, and that they apply relevant prudential requirements.

The Commonwealth will refer this recommendation to the States and Territories for their consideration.

Recommendation 53 proposes that the States and Territories consider allowing greater price flexibility in their statutory schemes. This is a matter that would be appropriate for consideration by the proposed ministerial council.

The Commonwealth will refer this recommendation to the States and Territories for their consideration.

Recommendation 54 recommends that the Commonwealth use a ministerial council to discuss and resolve general insurance and perhaps other financial services matters with the States.

Accept. Since March 2002 the Commonwealth has convened a meeting of Commonwealth and State and Territories Insurance Ministers to discuss insurance matters generally. The forum will continue to consider insurance matters as they arise.

Recommendation 55 is that the States and Territories abolish stamp duty on general insurance products.

The Commonwealth will refer this recommendation to the States and Territories for their consideration.

Recommendation 56 is that those States and Territories that have not already done so abolish fire services levies on insurers.

The Commonwealth will refer this recommendation to the States and Territories for their consideration.

Recommendation 57 is that the States and Territories exclude the cost of the GST for the purposes of calculating stamp duties or any other state or territory levies that are imposed on insurance premiums.

The Commonwealth will refer this recommendation to the States and Territories for their consideration.

Recommendation 58 is that governments avoid imposing on insurers levies and other taxes that cannot be passed on to policyholders.

The Commonwealth will refer this recommendation to the States and Territories for their consideration.

Recommendation 59 is that the Income Tax Assessment Act (ITAA) 1936 be amended to align it with the modified accounting standards proposed.

Australia is committed to adopting international accounting standards and considers it appropriate to await consideration by the AASB of recommendation 8 to examine the behavioural impacts arising from any new model before aligning the taxation treatment of general insurers with their accounting treatment.

Recommendation 60 is to amend the law to make contributions to catastrophe reserves tax deductible, and releases assessable for tax.

Australia is committed to adopting international accounting standards and considers it appropriate to await consideration by the IASB of arrangements for catastrophe reserves to examine the behavioural impacts arising from any new model before aligning the taxation treatment of general insurers with their accounting treatment.

Recommendation 61 recommends the Commonwealth Government introduce a systematic scheme to support policy holders of insurance companies in the event of a failure.

This matter was last considered under the Financial System Inquiry (the Wallis Inquiry) which recommended against establishing such a scheme. The Government will commission a study by an eminent person into the merits of financial system guarantees. The study will include how any guarantee might be funded and how it might impact on consumers and incentives in financial markets. Details of the study including the terms of reference and how the study will be conducted will be available on the Treasury website.