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.