Company Law - New Authority to assess regulator performance following Banking Royal Commission

The Financial Regulator Assessment Authority Bill 2021 and the Financial Regulator Assessment Authority (Consequential Amendments and Transitional Provisions) Bill 2021 (Bills) were introduced to Parliament on 13 May 2021. The Bills give effect to Recommendations 6.13 and 6.14 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Banking Royal Commission) by establishing the Financial Regulator Assessment Authority to assess the effectiveness and capability of both the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA).

Background

The Bills have been drafted in response to Recommendations 6.13 and 6.14 of the Banking Royal Commission.

• Recommendation 6.13 — Is to subject ASIC and APRA (the Regulators) to capability reviews at least once every 4 years.
  
  
• Recommendation 6.14 — Is to establish a new authority to assess the effectiveness and capability of the Regulators.

The Banking Royal Commission highlighted that, while the Regulators operate within complex accountability frameworks, their effectiveness in delivering on their objectives is not subject to consistent and independent expert review over time¹. In its response, the government agreed to create an independently-chaired body to regularly review and report on the Regulators’ performance.

You can read more about the Banking Royal Commission on our Pinpoint platform here.

The changes in detail

The Financial Regulator Assessment Authority Bill 2021 creates a statutorily independent Authority consisting of 4 members, appointed by the Minister.

A certain level of independence for the Regulators is critical to allow them to properly fulfil their functions and maintain the confidence of consumers, the market and overseas regulators. So that this operational independence is not unreasonably impacted, the government’s response clarified that the new Authority will not have the ability to direct, make, assess or comment on specific cases of the Regulators’ enforcement actions, regulatory decisions or complaints.

The new Authority activities are designed to complement and augment existing accountability mechanisms which apply to the Regulators (such as parliamentary scrutiny, ministerial oversight, public governance and ad-hoc audits); and not duplicate such measures. The new Authority’s reports will supplement existing measures and will also allow for comparison of the Regulators’ performance against their domestic and international peers, where practicable.

There are 3 key components to the Financial Regulator Assessment Authority Bill 2021, as follows:

1. Establish the Authority and provide for its functions and powers

The Authority will be independent from the government and will retain this strong statutory independence in the preparation of its reports and reviews. The Authority has full discretion in performing its functions and exercising its powers. The Regulators are required to cooperate with the Authority to the extent necessary to allow the Authority to perform its functions and exercise its powers. This includes providing documents and information as requested by the Authority.

The Authority will assess and report to the Minister, on the effectiveness and capabilities of the Regulators every 2 years, commencing from 1 July 2021. The Authority, in assessing and reviewing the Regulators’ capabilities, may take into account an assessment or review conducted by a third party², in order to avoid duplicating effort.

Ad hoc reviews may also be conducted but such ad hoc reviews must always be at the request of the Minister and the Minister may provide terms of reference for such reviews. The Minister may request that the Authority consider, or not consider, certain matters when undertaking an assessment of effectiveness and capability. Reviews of effectiveness will always be conducted at a higher level and any recommendations flowing from such reviews are recommendations only, not mandates.

The Authority is obliged to provide a copy of any review or assessment report to the Regulators, prior to providing the report to the Minister, and to take into account any comments or feedback from the Regulators in finalising the report. The Authority cannot publish a report unless that report has been tabled in Parliament or has been published by the Minister.

2. Set out how Authority members are appointed, and how the Authority makes decisions, including delegations

The Minister will appoint members of the Authority by written instrument. In making individual appointments, the Minister must consider the relevant expertise and qualifications of the appointee.

Members are appointed for an initial period of 5 years and can be reappointed. However, their total tenure cannot exceed a period of 10 years.

An appointed member of the Authority cannot engage in any work which could be seen as a conflict of interest. For example, working with one of the Regulators. Failure to disclose such a conflict of interest may result in termination of the appointment. Other grounds for termination include misbehaviour, inability to perform the duties of office due to physical or mental incapacity, insolvency or bankruptcy, or consecutive unexplained absences from meetings, other than on a formal leave of absence.

3. Safeguard information which the Regulators provide to the Authority

The Regulators are required to provide a broad range of information to the Authority. This is necessary to enable the Authority to make meaningful assessments of the Regulators’ effectiveness and capabilities.

However, the Authority must protect privacy and the unauthorised use or disclosure of provided to the Authority. Protected information includes information that:

• is prohibited from disclosure under a law of the Commonwealth, States or Territories,
  
  
• is protected by legal professional privilege,
  
  
• ASIC is required to protect under s 127 of the ASIC Act,
  
  
• APRA is required to protect under s 56 of the APRA Act,
  
  
• the disclosure of which would have a negative effect. For example, where publication may prejudice an enforcement matter, and
  
  
• the disclosure of which would, or could, found an action for breach of confidentiality.

Information which can be disclosed by the Authority includes where disclosure is:

• to the Regulators,
  
  
• to an enforcement body, for “enforcement-related activities”,
  
  
• for the purposes of the Financial Regulator Assessment Authority Bill 2021,
  
  
• for the Authority to perform its functions or exercise its powers, and/or
  
  
• necessary in the public interest.

The Authority cannot include any protected information in a report. Contravention of this prohibition is a criminal offence with a maximum penalty of 2 years’ imprisonment. This criminal offence also applies to any members of the Authority who may be based overseas.

Consequential amendments

The following amendments have also been made under the Financial Regulator Assessment Authority (Consequential Amendments and Transitional Provisions) Bill 2021, to support the new Authority, primarily in the domain of disclosing and protecting information:

• Protected information under s 127 of the ASIC Act or s 56 of the APRA Act, can be disclosed to members of the Authority without breaching s 127 of the ASIC Act or s 56 of the APRA Act³.
  
  
• Consequential amendments are made to secrecy provisions in the Banking Act 1959, the Insurance Act 1973 and the Life Insurance Act 1995, to permit the disclosure of information covered by these secrecy provisions, to the Authority.
  
  
• If ASIC or APRA refuse to share information with each other, pursuant to the mandate under sch 12 of the Financial Sector Reform (Hayne Royal Commission Response) Act 2020, then either Regulator must set down their reasons in writing for not complying with the request for information, and provide these written reasons to the Authority.
  
  Conclusion
  
  The Bills are expected to commence on 1 July 2021, and the Authority’s assessment and reporting timeframe is expected to commence on this date. However, the Financial Regulator Assessment Authority (Consequential Amendments and Transitional Provisions) Bill 2021 will not commence at all if the Financial Regulator Assessment Authority Bill 2021 does not commence.
  
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  Sources: Financial Regulator Assessment Authority Bill 2021, 13 May 2021, accessed 19 May 2021.
  
  Financial Regulator Assessment Authority Bill 2021, Explanatory Statement, 13 May 2021, accessed 19 May 2021.
  
  Financial Regulator Assessment Authority (Consequential Amendments and Transitional Provisions) Bill 2021, 13 May 2021, accessed 19 May 2021.
  
  Financial Regulator Assessment Authority (Consequential Amendments and Transitional Provisions) Bill 2021, Explanatory Statement, 13 May 2021, accessed 19 May 2021.
  
  Banking Royal Commission Final Report, 1 February 2019, accessed 19 May 2021.
  
  CCH Pinpoint ®, Banking Royal Commission, 27 October 2020, accessed 19 May 2021.
  
  Footnotes
  1
  For example, performance audits by the Australian National Audit Office are conducted on an ad hoc basis and the International Monetary Fund reviews the Regulators on a 5-yearly basis only.
  
  2
  For example, assessments by the International Monetary Fund.
  
  3
  Schedule 1 of the Financial Regulator Assessment Authority (Consequential Amendments and Transitional Provisions) Bill 2021