HIH Royal Commission recommendations

Response to date

1 (proposes review of the Corporations

Act 2001 (Corporations Act), the relevant accounting standards and

the Australian Stock Exchange (ASX) Listing Rules relating to directors’

remuneration).

The Government referred this recommendation

to the ASX for its consideration.

The Government’s CLERP 9 Bill will amend the Corporations Act relating

to the disclosure of director and executive remuneration and the payment

of termination benefits to directors.

2 (proposes the Corporations Act be

changed to impose duties based on functions rather than status (for example,

director or officer)).

The Government’s CLERP 9 Bill will correct

anomalies in the current legislation relating to the definition of ‘officer’.

The Government has referred outstanding matters to the Corporations and

Markets Advisory Committee to undertake a wider review clarifying the

classes of personnel to which both the general duties (in Chapter 2D)

and other specific duties in the Corporations Act apply.

3 (proposes that the Government broaden

the membership of the Australian Accounting Standards Board (AASB) to

include non-accountants).

Current legislation already permits the appointment

of non-accountants to the AASB. In addition, the Government consulted

the Financial Reporting Council (FRC) regarding this recommendation. The

FRC, which appoints members to the AASB, recommends that the selection

criterion that candidates have relevant accounting knowledge and experience

be retained.

4 (proposes that Australia participate

in the development of international accounting standards).

This recommendation is being implemented through

Australia’s adoption of international accounting standards. The

FRC’s decision that Australia work towards adopting international

standards for financial periods beginning on or after 1January 2005 has

been endorsed by the Government.

5 (proposes Australia reserve the right

to require more stringent accounting standards that are not inconsistent

with relevant international standards).

This recommendation reflects the current situation.

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).

The Government referred this recommendation

to the FRC and AASB for consideration. Importantly, the AASB noted that

the UIG membership is not restricted to accountants and presently includes

user representation.

The AASB noted that the benefits of adopting International Accounting

Standards Board (IASB) Standards will be eroded if rival interpretations

are developed and issued by national interpretive bodies. The only body

that can issue authoritative interpretations of IASB Standards is the

International Financial Reporting Interpretations Committee.

Under the Government’s CLERP 9 Bill, a Financial Reporting Panel

(FRP) will be established to resolve disputes between companies and the

Australian Securities and Investments Commission (ASIC) on the application

of accounting standards on a case-by-case basis. It is not proposed that

the FRP’s remit cover the issuing of binding interpretations.

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).

The Government referred this recommendation

to the FRC and the AASB for consideration. Importantly, the AASB noted

this recommendation is inconsistent with the UIG charter, which does not

allow it to give guidance on resolving accounting issues that are specific

to the circumstances of a particular reporting entity. The AASB suggested

it may be necessary to establish a separate panel to provide such guidance.

The professional accounting bodies support this function being given

to the FRP.

The CLERP 9 Bill is framed so that the obligation to determine the application

of accounting standards in particular situations remains primarily with

directors and other members of company management.

There are no restrictions on those responsible for preparing accounts

to consult with third parties if appropriate.

8 (proposes amendments to accounting

standard AASB1023 Financial Reporting of General Insurance Activities

to correct a number of deficiencies that were identified in the standard).

The Government referred this recommendation

to the AASB for consideration.

The AASB is in the process of amending AASB 1023 consistent with this

recommendation and in conjunction with the adoption of international accounting

standards.

9 (proposes a standard of independence

for auditors be contained in legislation and professional standards).

The Government’s CLERP 9 Bill will require

auditors to meet a general standard of auditor independence. The standard

in the CLERP9Bill and that in the professional standards are broadly

consistent.

10 (proposes that the Corporations

Act 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, explaining why those non-audit

services do not compromise audit independence).

The Government will implement this recommendation

in the CLERP9 Bill.

11 (proposed that the CLERP 9 proposal

for a ‘waiting period’ of 2 years before a former partner

directly involved in the audit of a client can become a director or senior

manager of the client, be extended).

This recommendation will be implemented, in

part, in the Government’s CLERP 9 Bill.

Following consultations, the CLERP 9 Bill provides for a 2 year cooling

off period to apply to a former partner of an audit firm directly involved

in the audit of a client before that person can join the client as a director

or in a senior management position. The CLERP 9 Bill also applies the

2 year cooling off period to a director and lead or review auditor of

an audit company who was directly involved in the audit of the audit client.

The CLERP 9 Bill does not apply a cooling off period to partners not

directly involved in the audit of the audit client.

The prohibition on more than one former partner being a director or senior

member of the audit client is contained in the CLERP 9 Bill.

12 (proposes that the CLERP 9 proposal

for rotation of the lead engagement partner and review partner be extended

to key senior audit personnel).

The Government’s CLERP 9 Bill will implement

this recommendation by requiring mandatory rotation of the lead and review

partners of a listed company after 5consecutive years with a 2 year cooling

off period before a person who has played a significant role in the audit

can be reassigned to that client.

13 (proposed amendments to the Corporations

Act to require changes to the content of the audit report, such as the

inclusion of disclosure of alternative accounting treatments and significant

matters, the inclusion of an audited operating and financial review in

the annual report, and to require audit reports to be presented in plain

English).

These requirements are better suited for inclusion

in the auditing standards rather than being prescribed in legislation.

The Government referred this recommendation to the Auditing & Assurance

Standards Board (AuASB) for consideration. The AuASB considers that detailed

disclosure of alternative accounting treatments that could be adopted

by an entity for a particular transaction or event, by the auditor in

the auditor’s report, is likely to be confusing to users of the

financial report.

In relation to requiring disclosure in the auditor’s report about

significant matters arising in the audit process, auditors are required

under Australian Auditing Standard AUS 710 Communication with Management

on Matters Arising from an Audit to consider communicating significant

matters about the audit, or as identified from audit procedures performed,

to appropriate levels of management.

With regard to disclosures about subsequent events, this is addressed

in AASB 1002 Events Occurring After Reporting Date, while the auditor’s

responsibilities are stated in AUS 706 Subsequent Events.

The CLERP 9 Bill requires an operating and financial review be prepared

as part of the Directors’ Report.

In relation to ensuring audit reports are presented in plain English,

the AuASB has released a Guidance Note which looks to promote plain English

audit reports.

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 Government referred this recommendation to the AuASB for its consideration.

The AuASB issued an Audit and Assurance Alert in May 2002, which provides

details about the type of, and the format for, making additional voluntary

disclosures regarding the type and nature of any non-audit or other services

provided to an audit client, which are additional to the existing disclosure

requirements.

15 (proposes that both the Australian

Prudential Regulation Authority (APRA) and the Institute of Actuaries

of Australia (IAA) introduce compulsory certification of the completeness

and accuracy of data).

The Government referred this recommendation

to APRA and the IAA for consideration.

In its recent discussion paper, ‘Prudential Supervision of General

Insurance – Stage 2 Reforms,’ APRA sought the views of industry

on its proposal to extend the annual Board declaration to incorporate

these matters.

APRA is currently reviewing comments it has received

from industry and the IAA in response to this proposal.

16 (proposes that the IAA and APRA

introduce a requirement for more detailed disclosure of the exercise,

incidence and impact of subjective judgement and departure from historical

experience).

The Government referred this recommendation

to APRA and the IAA for consideration.

Prudential standards already require more detailed disclosure in the

circumstances to which the recommendation refers.

However, APRA is consulting with the IAA on whether IAA professional

standards and guidance could also set out such requirements.

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 referred this recommendation

to APRA and the IAA for consideration.

In its discussion paper, ‘Prudential Supervision of General Insurance

– Stage 2 Reforms’, APRA sought the views of industry on the

proposal that independence of actuaries and auditors be promoted by prudential

standards prohibiting the appointment of an Approved Actuary and Approved

Auditor from the same, or a related, firm.

APRA is currently reviewing comments it has received from industry in

response to this proposal.

18 (proposes changed governance arrangements

for APRA, including replacing the non-executive board with an executive

group comprising a CEO and 2-3commissioners).

The Government progressed amendments to the

Australian Prudential Regulation Authority Act 1998 (APRA Act)

last year to implement an enhanced governance structure from 1 July 2003.

The new members commenced on 1 July 2003.

19 (proposes that the APRA Act be amended

to provide the Chair with the power to establish an Advisory Board).

The Government referred this recommendation

to APRA for its consideration.

APRA is currently conducting a review of options in response to this

recommendation and has had discussions with overseas prudential regulators

on their arrangements with Advisory Boards.

The APRA Act already allows APRA to engage external advisers and consultants.

20 (proposes that the direct involvement

of representatives of ASIC and the Reserve Bank of Australia (RBA) in

the governance of APRA be discontinued).

The Government progressed amendments

to the APRAAct last year to give effect to this recommendation.

21 (proposes that the APRA Chair urgently

instigate a review of APRA’s organisational structure, balancing

its cross-sectoral responsibilities with accountability and knowledge

of financial services).

The Government referred this recommendation

to APRA for action.

APRA members have been reviewing APRA’s organisational structure

and will shortly announce revised arrangements.

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 has accepted the policy intent

of this recommendation and will remove the requirement for APRA to seek

the Treasurer’s agreement to make operational decisions that do

not involve wider policy issues. The implementation of this recommendation

is currently being examined by the Treasury. It is proposed that any necessary

legislative amendments will be included in a proposed Financial Sector

Legislation Amendment Bill.

HIH Royal Commission recommendations

Response to date

23 (proposes that the Government review

the inconsistencies between the legislative provisions for merit review

under the Insurance Act 1973 and the Banking Act 1959).

The Government has accepted this recommendation.

The implementation of this recommendation is currently being examined

by the Treasury. It is expected that any necessary legislative amendments

will be included in a proposed Financial Sector Legislation Amendment

Bill.

24, 26, 27 and 28 (propose that APRA

build the skills of staff involved in the supervision of general insurers,

develop a more sceptical approach to supervision, review supervisory processes

and continually question staff assumptions, views and conclusions about

the financial viability of supervised entities).

The Government announced in the 2004-05 Budget

an increase in APRA’s funding of $47.4 million over 4years. This

follows an increase of $21.9 million over 4years announced in the 2003-04

Budget. APRA’s funding is reviewed each year in the Budget context.

The increased funding will enable APRA to further build up staff levels

in front-line supervision and specialist risk areas. It will also enable

APRA to strengthen and establish dedicated teams of front-line supervisors

to carry out supervision in respect of large groups, and strengthen its

capacity to supervise large, complex and systemically important financial

institutions.

In addition, APRA is continuing to introduce, test and refine programmes

designed to build and strengthen the capacity of its staff to supervise

and regulate general insurers. A specialist Insurance Risk team has been

recruited with significant experience in general insurance and reinsurance.

In recent months, some experienced insurance sector people have been recruited

into front-line supervisory roles.

APRA also continues to consider and assess enhancements to prudential

standards and reporting requirements. It has also implemented a more sophisticated

risk-rating system (PAIRS and SOARS), which helps provide APRA with early

identification of issues that may require attention.

Treasury and APRA are also considering aspects of APRA’s legal

infrastructure.

25 (proposes that the Government adopt

a three-year rolling fund arrangement to set APRA’s budget).

The Government already sets APRA’s funding

for a 4year period through the Budget process. This provides an annual

opportunity (but not an obligation) to consider whether, in light of recent

happenings,APRA’s funding should be altered from its current baseline.

29 (proposes that APRA develop an internal

system for tracking all relevant information concerning regulated entities).

The Government referred this recommendation

to APRA for action.

APRA is currently implementing an Electronic Document Management System.

30 (proposes that APRA develop mechanisms

to investigate the reinsurance arrangements for general insurers on a

random but frequent basis).

The Government referred this recommendation

to APRA for action.

APRA largely complies with this recommendation already. In addition,

it has proposed in its discussion paper, ‘Prudential Supervision

of General Insurance – Stage 2 reforms’, that insurers include

additional information about their reinsurance arrangements in the Reinsurance

Management Strategy (REMS) they must already lodge with APRA.

APRA is currently reviewing comments it has received from industry on

this proposal.

31 (proposes that the effectiveness

of the current memorandum of understanding (MOU) between APRA and ASIC

be reviewed; that the processes for liaison, coordination and exchange

of information between APRA and ASIC be reviewed on a regular basis; and

that, to facilitate the exchange of information, the Commonwealth Government

should make a regulation specifying ASIC for the purposes of s.56(5)(a)

of the

APRA Act).

The Government progressed amendments to the

APRAAct last year to enhance the exchange of information between APRA

and ASIC.

APRA’s cooperation and sharing of information with other financial

sector supervisory agencies (including ASIC) is governed by the APRA Act.

Responsibility for reviewing the MOU between APRA and ASIC was referred

to APRA for its action. Consultations between APRA and ASIC are progressing.

32 (proposes that matters relating

to the co-ordination of Commonwealth regulation affecting the insurance

industry be the province of the Commonwealth Treasury).

Treasury continues to facilitate ongoing liaison

and coordination between regulators.

The Government appointed Treasury as a member of the Council of Financial

Regulators (the Council) in 2003. The Council’s membership already

included the Reserve Bank of Australia (RBA) (Chair), APRA and ASIC.

The Council’s ultimate objectives are to contribute to the efficiency

and effectiveness of regulation and to promote stability of the Australian

financial system.

33 (proposes that coordination of matters

related to the regulation of the insurance industry be addressed through

the proposed ministerial council).

Refer to recommendation 54 (below).

34, 35, 36 (propose greater public

disclosure of financial information by APRA and/or insurers).

The Government referred this recommendation

to APRA for action.

In response, APRA’s discussion paper, ‘Prudential Supervision

of General Insurance – Stage 2 Reforms’, proposes a number

of options regarding information that APRA and/or insurers should consider

releasing.

APRA is currently reviewing comments it has received from industry on

the options presented in the paper.

37 (proposes that APRA identify which

regulatory activities should be disclosed publicly and by what means).

The Government referred this recommendation

to APRA for action.

APRA is continuing to develop guidelines for disclosure of APRA’s

regulatory activities, in consultation with ASIC.

38, 39 (propose that APRA use current

supervisory powers and standards for the regulation of authorised insurers

that operate as part of a corporate group, pending development and promulgation

of a standard for such regulation).

The Government referred this recommendation

to APRA for action.

APRA is already using its powers in this area.

APRA is developing a regime of consolidated supervision where authorised

insurers operate as part of a group. This will be the subject of a separate

consultation paper.

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 referred this recommendation

to APRA for action.

New MOUs have been signed with the Financial Services Authority (UK)

and the Reserve Bank of New Zealand.

APRA is continuing to consult other overseas regulators in Germany, Singapore

and France.

APRA’s cooperation and sharing of information with other financial

sector supervisory agencies (including foreign regulators) is governed

by the APRA Act.

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 referred this recommendation

to APRA for action.

APRA’s discussion paper, ‘Prudential Supervision of General

Insurance – Stage 2 Reforms’, proposes the creation of a new

prudential standard that would require an Approved Actuary to prepare

a Financial Condition Report similar in concept to that already required

for submission to APRA by Appointed Actuaries to life insurers.

APRA is reviewing comments received from industry in response to this

proposal.

42 (proposes that the Commonwealth

Government amend the Insurance Act 1973 to extend prudential regulation

to insurance-like products, to the extent possible within constitutional

limits).

The Government commissioned Mr Gary Potts,

a former Executive Director of the Commonwealth Department of the Treasury,

to examine the role of discretionary mutual funds in the insurance market,

and that of direct offshore foreign insurers. Mr Potts provided his report

to the Government at the end of January 2004.

The Government intends to implement all of the recommendations of the

Potts Review.

43, 44 (propose that the Commonwealth

Government amend the Corporations Act to extend the grounds upon which

APRA may apply for the winding-up of authorised general insurers, and

to specify that courts may have regard to the interests of policyholders

in determining such applications).

The Government accepted this recommendation,

which is being considered by both Treasury and APRA.

45 (proposes that the ASX amend Listing

Rule 3.1 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 referred this recommendation

to the ASX for consideration.

ASX Guidance Note 8 to Listing Rule 3.1 currently indicates that a director

or executive officer who becomes aware of information must immediately

consider whether that information should be given to the ASX, and that

an entity cannot delay giving information to the ASX pending formal sign-off

or adoption by the board. This is consistent with the continuous disclosure

obligation.

46 (proposes that the ASX amend the

Listing Rules to prohibit blacklisting of analysts).

The Government referred this recommendation

to the ASX for consideration.

To ensure that implementation of this recommendation does not detract

from the primacy of the continuous disclosure obligation, the ASX has

amended Guidance Note 8 – Continuous Disclosure: Listing Rule 3.1 to include

discussion of this issue specifically. (It is important that the Rules

not endorse briefing for analysts where they are given information not

available to the wider market).

More generally, conflicts of interests of financial services licensees

are addressed in CLERP 9, which will also be supplemented by an ASIC Policy

Statement.

47, 48 (propose 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; 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; and amend 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 referred these recommendations

to the ASX for consideration.

ASX Guidance Note 12 – Change of Activities has been substantially revised

to incorporate these issues.

In addition, the Insurance Act 1973 has been amended to require

court approval for transactions involving any disposal of the whole or

substantially the whole of the assets or operations of a listed company.

49 (proposes that APRA become the sole

prudential regulator of general insurance).

The Government referred this recommendation

to the States and Territories for their consideration.

A majority of States and Territories for which this recommendation is

relevant have given in-principle support; in some cases, this support

has been expressed subject to conditions.

50 (proposes that if the States and

Territories remain involved with prudential regulation, that there be

effective information exchange with APRA).

The Government referred this recommendation

to the States and Territories for their consideration.

A majority of States and Territories have expressed general agreement

with this recommendation.

51, 52 (propose that the States and

Territories reduce inconsistencies in their statutory schemes, and apply

relevant prudential requirements to government insurers and statutory

fund schemes).

The Government referred these recommendations

to the States and Territories for their consideration.

A majority of States and Territories for which this recommendation is

relevant have indicated support for examining the impact of inconsistencies

in statutory schemes.

A majority of States and Territories considered that only prudential

standards relevant to the operation of a government authority should be

applied to statutory fund schemes.

53 (proposes that the States and Territories

consider allowing greater price flexibility in their statutory schemes,

and progress this through the proposed Ministerial Council or like arrangement).

The Government referred this recommendation

to the States and Territories for their consideration.

The States and Territories expressed mixed views on this recommendation.

Several considered that their statutory schemes provide sufficient pricing

flexibility, whilst others do not support this recommendation.

54 (proposes that the Commonwealth

use a ministerial council or like arrangement to discuss and resolve issues

relating to general insurance matters).

The Government referred this recommendation

to the States and Territories for their consideration.

A majority of States and Territories have endorsed the continuation of

the Ministerial Meeting on Insurance Issues forum as the appropriate arrangement

to implement this recommendation.

55 (proposes that the States and Territories

abolish stamp duty on general insurance products).

The Government referred this recommendation

to the States and Territories for their consideration.

A majority of the States and Territories do not support this recommendation.

56 (proposes that those States and

Territories that have not already done so, abolish fire services levies

(FSL) on insurers).

The Government referred this recommendation

to the States and Territories for their consideration.

A majority of States and Territories advise that they are reviewing or

have abolished the FSL.

57 (proposes that States and Territories

should exclude the cost of the GST for the purposes of calculating stamp

duties or any other State/Territory imposed levies on insurance premiums).

The Government referred this recommendation

to the States and Territories for their consideration.

A majority of the States and Territories do not support this recommendation.

58 (proposes that all governments avoid

imposing levies and taxes on insurers that cannot be passed on to policyholders).

The Government referred this recommendation

to the States and Territories for their consideration.

A majority of the States and Territories do not consider it necessary

to support this recommendation.

59, 60 (propose that the Income

Tax Assessment Act 1936 be amended to align it with the modified accounting

standards proposed; and the law be amended to make contributions to catastrophe

reserves tax deductible and releases assessable for tax).

Australia remains 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.

61 (proposes that the Commonwealth

Government introduce a policyholder protection scheme where insurance

companies fail).

The Government commissioned Professor Kevin

Davis to conduct a technical study of Financial

System Guarantees (announced on 12 September 2003).

As foreshadowed at the time, the Government intends to conduct a broader

consultation process before making a final decision on this matter.

The Government has released the Davis Report and invites public submissions

on the key issues and policy questions contained in the Government Discussion

Paper on Financial System Guarantees.