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Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017

2 016-2017 THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA HOUSE OF REPRESENTATIVES Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017 EXPLANATORY MEMORANDUM (Circulated by authority of the

Treasurer, the Hon Scott Morrison MP)





Table of contents Glossary.............................................................................................................. 1 General outline and financial impact............................................................ 5 Chapter 1 Overview of crisis management......................................... 7 Chapter 2 Statutory and judicial management................................ 23 Chapter 3 Directions powers............................................................... 65 Chapter 4 Transfer powers.................................................................. 91 Chapter 5 Conversion and write-off of capital instruments......... 107 Chapter 6 Stays................................................................................... 117 Chapter 7 Foreign branches............................................................. 145 Chapter 8 Financial Claims Scheme.............................................. 161 Chapter 9 Wind-up and other matters............................................. 179 Chapter 10 Resolution planning........................................................ 201 Chapter 11 Regulation impact statement......................................... 211 Chapter 12 Statement of Compatibility with Human Rights.......... 217





Glossary The following abbreviations and acronyms are used throughout this explanatory memorandum. Abbreviation Definition ADI Authorised deposit-taking institution Administrator A person appointed by APRA to take control of an entity as statutory manager under section 13A of the Banking Act, new section 62ZOA of the Insurance Act or new section 179AA of the Life Insurance Act, where APRA itself does not take over control of the entity under those sections. APRA Australian Prudential Regulation Authority APRA Act Australian Prudential Regulation Authority Act 1998 AT1 Additional Tier 1 ATO Australian Tax Office Authorised NOHC A non-operating holding company that is authorised either under the Banking Act 1959 or Insurance Act 1973 , or registered under the Life Insurance Act 1995 Banking Act Banking Act 1959 BCBS Basel Committee on Banking Supervision Bill Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017 CET1 Common Equity Tier 1 Commencement time The day the Bill receives the Royal Assent CFR Council of Financial Regulators Corporations Act Corporations Act 2001 Court Federal Court of Australia FCS Financial Claims Scheme FSB Financial Stability Board Foreign ADI A foreign ADI as defined in subsection 5(1) of the Banking Act 1959 Abbreviation Definition Foreign general insurer A foreign general insurer as defined in subsection 3(1) of the Insurance Act 1973 Foreign insurer A foreign general insurer or foreign life insurer Foreign life insurer An eligible foreign life insurance company as defined in the Schedule Dictionary of the Life Insurance Act 1995 Foreign regulated entity A foreign ADI, foreign general insurer, or foreign life insurer FSCODA Financial Sector (Collection of Data) Act 2001 Holding company In relation to a body corporate, refers to another body corporate of which the first body corporate is a subsidiary IADI International Association of Deposit Insurers IAIS International Association of Insurance Supervisors Industry Acts Refers collectively to the Banking Act 1959 , Insurance Act 1973, and Life Insurance Act 1995 but does not include the Superannuation Industry (Supervision) Act 1993 or the Private Health Insurance (Prudential Supervision) Act 2015. Insurance Act Insurance Act 1973 Insurer Refers collectively to general and life insurers Key Attributes Financial Stability Board, ‘ Key Attributes of Effective Resolution Regimes for Financial Institutions ’ (15 October 2014) Life Insurance Act Life Insurance Act 1995 NOHC Non-operating holding company PGPA Act Public Governance, Performance and Accountability Act 2013 Policyholder Means a ‘policyholder’ as per the Insurance Act 1973 and a ‘policy owner’ as per the Life Insurance Act 1995 PSN Act Payment Systems and Netting Act 1998 Regulated entity An ADI, general insurer, or life insurer Abbreviation Definition Relevant group of bodies corporate A group of bodies corporate comprising a regulated entity and all of its subsidiaries or an authorised NOHC and all of its subsidiaries Statutory manager Refers to APRA, or an administrator appointed by APRA, when it takes control of an entity under section 13A of the Banking Act, new section 62ZOA of the Insurance Act or new section 179AA of the Life Insurance Act. Target body corporate A body corporate that is an authorised NOHC, subsidiary of a regulated entity or a subsidiary of an authorised NOHC. Transfer Act Financial Sector (Business Transfer and Group Restructure) Act 1999 (the Bill amends the title of this Act to the Financial Sector (Transfer and Restructure Act) 1999 )) T2 Tier 2 2012 Consultation Paper ‘Strengthening APRA’s Crisis Management Powers’ Consultation Paper (September 2012)





General outline and financial impact Crisis management powers Schedules 1 to 7 to the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017 (the Bill) makes amendments to the Banking Act 1959, Insurance Act 1973, Life Insurance Act 1995, Australian Prudential Regulation Authority Act 1998, Payment Systems and Netting Act 1998, Financial Sector (Business Transfer and Group Restructure) Act 1999, Corporations Act 2001 and the Income Tax Assessment 1997 . The Bill strengthens the powers of the Australian Prudential Regulation Authority (APRA) to facilitate the orderly resolution of an authorised deposit-taking institution (ADI) or insurer so as to protect the interests of depositors and policyholders, and to protect the stability of the financial system. The Bill also ensures that APRA has powers to set appropriate prudential requirements and take action in relation to resolution planning so that ADIs and insurers are better prepared for resolution. Date of effect : The amendments will commence on the day the Bill receives Royal Assent. Proposal announced : The Government announced on 20 October 2015 its intention to provide regulators with clear powers in the event a prudentially regulated financial entity fails as part of its response to the Financial System Inquiry (FSI). Financial impact : Nil. Human rights implications : This Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights — Chapter 12. Compliance cost impact : $1.3 million annually. Summary of regulation impact statement Impact: The amendments to the above listed Acts impact ADIs, insurers and related group entities as well as their respective depositors and policyholders. Main points : â¢ The Government considered the regulatory impacts of various reform options through three papers (and their associated consultation processes) - the Financial System Inquiry (Murray Inquiry) Final Report, the 2012 consultation paper ‘Strengthening APRA’s Crisis Management Powers’, and the 2011 consultation paper ‘Financial Claims Scheme’ - as well as through extensive consultation with industry stakeholders. â¢ The Murray Inquiry noted that CFR agencies reviewed Australia’s existing crisis management toolkit and found that although Australia has a strong framework, there are gaps in powers that could be strengthened. â¢ The Murray Inquiry also noted that there are high costs associated with the disorderly failure of an institution, particularly where this creates financial system instability or the need for Government support. These costs would be exacerbated should reforms to strengthen resolution powers and support pre-planning for financial failure not proceed. â¢ The CFR will continue to review and test the effectiveness and efficiency of the crisis management powers every year. These crisis management powers will also be independently assessed as part of the International Monetary Fund’s Financial System Assessment Program in 2018.

















Chapter 4

Transfer powers Outline of chapter 4.1 Schedule 4 to this Bill amends the Transfer Act to enhance the operation and scope of APRA’s compulsory transfer powers. Context of amendments 4.2 Part 4 of the Transfer Act provides for compulsory transfers of business between regulated entities. Following amendments to the Act in 2008 and 2010, the compulsory transfer of business provisions now extend to ADIs (and related parties of ADIs), general insurers, and life companies. 4.3 Compulsory transfer of business powers are an important tool in the package of resolution options available to APRA. The Transfer Act enables some or all of the business of a regulated entity (including assets, liabilities, legal rights and obligations, data and systems) to be transferred to another regulated entity in the same category, which could include transfers to a newly established bridge entity or asset management vehicle. 4.4 APRA may effect a compulsory transfer without the need for the approval of owners, shareholders, creditors, or the separate novation (by private contractual means) of liabilities. The power to implement transfers in this way could be used, in the course of resolution, to facilitate the sale of all or part of the business of a distressed entity to one or multiple buyers, depending on the situation. This may be particularly relevant in ensuring the continuity of an entity’s critical functions in resolution, where part or all of the regulated business of a regulated entity might be transferred to another existing regulated entity or a newly established bridge entity for this purpose. 4.5 By international standards, the existing Transfer Act provides a comprehensive framework for compulsory transfers of business in resolution. However, there are certain areas in which the provisions could be enhanced to provide APRA with greater flexibility and certainty when arranging a compulsory transfer in a resolution. 4.6 For example, in some situations, rather than transferring all of the assets and liabilities comprising the business of a failed regulated entity, it would be more expedient for APRA to be able to transfer ownership of the shares in the entity. Additional amendments, which ensure that compulsory transfer of business powers apply to certain related entities of a regulated entity, will further align the Transfer Act with international best practice. The Key Attributes note that resolution authorities should have at their disposal a broad range of resolution powers, including those necessary to effect transfers of business from a failed entity (and, in certain circumstances, its related entities), and the power to transfer the ownership of shares in a failed entity. Summary of new law 4.7 Schedule 4 to this Bill amends the Transfer Act to: â¢ enable APRA to compulsorily transfer the shares in a failing regulated entity to another body corporate; â¢ widen the scope of Part 4 of the Transfer Act to apply to related entities of insurers; and â¢ remove the requirement for complementary State or Territory legislation to be in place in relation to transfers of business. Comparison of key features of new law and current law New law Current law Compulsory transfer of shares In certain circumstances aligned with the preconditions for a compulsory transfer of business under the Transfer Act, APRA may transfer the shares in a failing regulated entity from the existing shareholders to a body corporate. Under the Transfer Act, APRA has no power to transfer the shares in a failing regulated entity to another body corporate. Widening the scope to include related entities of insurers In addition to what APRA may determine under the current law, APRA may determine that there is to be a total or partial transfer of business from a body corporate that is related to a general or life insurer (but is not itself an ADI, general insurer or life insurer) to another body corporate under certain circumstances. Under the Transfer Act, APRA may determine that there is to be a total or partial transfer of business from a body corporate that is related to an ADI (but is not itself an ADI, general insurer or life insurer) to another body corporate under certain circumstances. There are no equivalent provisions in the Transfer Act in respect of a body corporate related to an insurer. Removing the requirement for complementary State or Territory legislation to be in place APRA may give effect to transfers of business even in the absence of State or Territory legislation being in place to facilitate transfers of business. For a transfer of business to occur, APRA must be satisfied that legislation to facilitate the transfer is in place in the State or Territory in which the transferring and receiving bodies are established. Detailed explanation of new law Compulsory transfer of shares 4.8 APRA’s powers under the Transfer Act enable it to compulsorily transfer all of the assets and liabilities of a failing regulated entity to another regulated entity. However, there is no explicit power to transfer the failing entity’s shares to another body corporate as a means of achieving the same outcome. This is because shares in an entity are not assets of the failing entity but rather are assets of the shareholders. The interest of a shareholder in a share is not ‘business’ that is transferrable under the Transfer Act. 4.9 The ability to transfer the shares of a failing regulated entity could in some circumstances provide a more efficient and simpler means of achieving an orderly resolution, than effecting a full transfer of all of the assets and liabilities of the entity. 4.10 The amendments in the Bill rely to a large extent on the existing architecture and mechanics of the Transfer Act to enable a compulsory transfer of shares in certain circumstances, with the majority of amendments being minor consequential changes to existing definitions and supporting provisions, as articulated below. Title 4.11 The Bill amends the long title of the Transfer Act by inserting ‘to provide for transfers of shares and other interests in some kinds of financial institutions’. [Schedule 4, item 1, Title of the Transfer Act] 4.12 The Bill also amends the short title of the Transfer Act, which may be cited as the Financial Sector (Transfer and Restructure) Act 1999 . [Schedule 4, item 2, section 1 of the Transfer Act] 4.13 These amendments reflect the expanded operation of the Act, which now provides for compulsory transfers of shares. Definitions 4.14 The Bill amends a variety of definitions under subsection 4(1) of the Transfer Act to enable a compulsory transfer of shares. 4.15 Firstly, the Bill amends paragraph (b), and includes a new paragraph (c), in the definition of ‘certificate of transfer’ to mean the following, respectively: â¢ in relation to a voluntary transfer of business - a certificate issued under section 18; â¢ in relation to a compulsory transfer of business - a certificate issued under section 33; and â¢ in relation to a compulsory transfer of shares - a certificate issued under section 33. [Schedule 4, item 4, subsection 4(1) of the Transfer Act] 4.16 The Bill amends the definitions of ‘partial transfer’ and ‘total transfer’, to mean, respectively: â¢ a partial transfer means a transfer of business described in existing subsection 8(2) (which provides that a transfer of business is a partial transfer if it relates to some, but not all, of the transferring body's business); and â¢ a total transfer means a transfer of business described in existing subsection 8(3) (which provides that a transfer of business is a total transfer if it relates to all of the transferring body's business. [Schedule 4, items 7 and 13, subsection 4(1) of the Transfer Act] 4.17 The Bill amends the definition of ‘compulsory transfer determination’, to mean: â¢ a compulsory transfer of business determination; or â¢ a compulsory transfer of shares determination. 4.18 The Bill further defines these two new terms as: â¢ ‘compulsory transfer of business determination’ means a determination under existing section 25 (the section conferring power on APRA to determine a compulsory transfer of business in certain situations); and â¢ ‘compulsory transfer of shares determination’ means a determination under section 25AA (which is a new provision inserted by the Bill, discussed below). [ Schedule 4, items 5 and 6, subsection 4(1) of the Transfer Act] 4.19 These amendments clarify that there are now two potential options available to APRA under which to determine a compulsory transfer. 4.20 The Bill expands the definition of ‘receiving body’ to clarify that in relation to a transfer of shares under Part 4 of the Transfer Act, the receiving body is a body corporate to which shares in another body corporate are to be transferred, or have been transferred under that Part. [Schedule 4, item 8, subsection 4(1) of the Transfer Act] 4.21 This amendment is to differentiate a receiving body in the context of the two different types of compulsory transfers. 4.22 The Bill also expands the definition of ‘transferring body’ to clarify that in relation to a transfer of shares under Part 4, the transferring body is a body corporate, shares in which are to be transferred, or have been transferred, to another body corporate under that Part’. [Schedule 4, item 14, subsection 4(1) of the Transfer Act] 4.23 This amendment is to ensure that the existing architecture and mechanics of the Transfer Act can apply in the context of a share transfer. However, it is recognised that in the case of a transfer of shares, the actual transfer of ownership will be from the holders of the shares, not from the body corporate itself. 4.24 Separately, the Bill extends the definition of ‘regulated body’ to include a general insurer, and subsequently extends the definition of ‘regulated business’ to include a general insurer’s business (within the meaning of the Insurance Act). [Schedule 4, items 9 and 10, subsection 4(1) of the Transfer Act] 4.25 These amendments correct technical errors in the Transfer Act, which did not previously include a general insurer in the definitions, despite the compulsory transfer provisions applying equally to general insurers as a result of amendments to the Transfer Act in 2010. It should be noted that these amendments will not bring general insurers within the voluntary transfer of business provisions in Part 3 of the Transfer Act. 4.26 The Bill repeals the existing definition of ‘related’ in the Transfer Act and inserts a new definition of ‘related’ and a separate definition of ‘related body corporate’ The existing stand-alone definition of ‘related’ (in relation to bodies corporate) is replaced with a standard definition providing that whether a body corporate is related to another body corporate is to be determined in the same way as in the Corporations Act. This does not change the substantive meaning of the term ‘related’ in the Transfer Act. ‘ [Schedule 4, items 12 and 15, subsection 4(1) and section 4A of the Transfer Act] 4.27 The Bill extends the meaning of ‘share’ to mean: â¢ a legal or equitable right or interest in a share; and â¢ an interest in a share that is an interest of a kind specified in the regulations. [Schedule 4, item 79, section 36AD of the Transfer Act] 4.28 The adoption of a broad definition for ‘share’, including the ability to specify additional interests in regulations, ensures that the powers in the Transfer Act can operate to transfer all relevant ownership interests in the shares of the regulated entity. Substantive transfer of shares amendments 4.29 The Bill amends the overview provisions in existing section 8 of the Transfer Act to include a transfer of shares as a kind of transfer that is permitted under the Act,noting that the Act also provides for compulsory transfers of shares in regulated entities. [Schedule 4, item 19, subsection 8(1A) of the Transfer Act] 4.30 For a compulsory transfer of shares to take effect, APRA must: â¢ assuming the preconditions for doing so are satisfied (see 4.35), make a determination (the compulsory transfer of shares determination) that there is to be a transfer of shares in a body (the transferring body) to another body corporate (the receiving body); and â¢ issue a certificate (the certificate of transfer) stating that the transfer is to take effect under existing section 33 of the Act. 4.31 For clarity, the transfer of shares takes effect when the certificate of transfer comes into force. [Schedule 4, item 22, subsection 8(5A) of the Transfer Act] 4.32 Separately, the Bill inserts notes into the Transfer Act to clarify that regulated entities making applications under the voluntary provisions in Part 3 cannot be general insurers. [Schedule 4, items 20 and 23, subsections 8(4) and 9(1) of the Transfer Act] 4.33 This is because the Insurance Act provides the mechanism for facilitating a voluntary transfer of a general insurer’s business (see existing Part III Division 3A of the Insurance Act). Preconditions for a transfer of shares 4.34 The Bill amends the Transfer Act to specify the preconditions under the Act that must be satisfied for a compulsory transfer of shares to be determined. 4.35 APRA may only make a compulsory transfer of shares determination if any of the following preconditions are met: â¢ for an ADI, either the Minister has declared that a transfer of shares should occur, or APRA is satisfied that any of the various specified conditions have been satisfied; â¢ for a life insurance company, APRA is satisfied that any of the various conditions have been satisfied; or â¢ for a general insurer, APRA is satisfied that any of the various conditions have been satisfied; and â¢ APRA has considered the interests of depositors or policy owners (as applicable) of the transferring body (when viewed as a group) and considers that, having regard to their interests, it would be appropriate for the transfer to be made; and â¢ if the receiving body is an ADI, life company or general insurer, APRA is satisfied that the transfer is appropriate, having regard to the interests of depositors or policy owners of the receiving body (as applicable) when viewed as a group; and â¢ the conditions relating to the consent of the receiving body, the interests of the financial system as a whole and other relevant matters, and the consent of the Minister (or a decision by the Minister that their consent is not required). 4.36 The amendments provide that APRA cannot make a compulsory transfer of shares determination if the transferring body is any of the following: â¢ a foreign ADI (has the same meaning as in the Banking Act); â¢ a foreign general insurer (has the same meaning as in the Insurance Act); or â¢ an eligible foreign life insurance company (has the same meaning as in the Life Insurance Act). 4.37 APRA, in making a determination, must include particulars of the transfer, including the names of the transferring body and the receiving body, as well as a statement of the reasons detailing why the determination has been made. 4.38 The Bill provides that such determinations made by APRA are not legislative instruments. The provision is included to assist readers, as such a determination is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003 . [Schedule 4, item 55, section 25AA of the Transfer Act] Ministerial declaration 4.39 The Bill extends the scope of existing section 25A in the Transfer Act to allow the Minister to also declare that a compulsory transfer of shares in a specified ADI to another specified body corporate can occur. 4.40 The Bill provides that such declarations made by the Minister are not legislative instruments. The provision is included to assist readers, as such a determination is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003 . [Schedule 4, item 56, section 25A of the Transfer Act] 4.41 The Bill extends the scope of existing section 29 in the Transfer Act to also provide that a Minister’s consent to a compulsory transfer of shares is not required if the Minister has determined prior that his or her consent is not required in relation to the transfer. [Schedule 4, items 62 and 63, subsection 29(1) of the Transfer Act] 4.42 The Bill further clarifies the status of determinations made under existing subsection 29(1) to bring consistency and certainty to the legislation. As a result, for a determination dealing with the consent for a particular transfer, the Bill clarifies that this is not a legislative instrument. The provision is included to assist readers, as such a determination is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003. Alternatively, for a determination that consent is not required in relation to a class of transfers, the Bill clarifies that this is a legislative instrument. [Schedule 4, item 64, subsections 29(2) and 29(3) of the Transfer Act] Content of a compulsory transfer of shares determination Agreements about matters connected with the transfer 4.43 The Bill extends the scope of existing section 30 in the Transfer Act to also include a compulsory transfer of shares. In this instance, the transferring and receiving bodies may provide APRA with a written statement specifying a mechanism for determining things that are to happen, or that are to be taken to happen, in relation to a transfer of shares. [Schedule 4, item 65, subsection 30(1) of the Transfer Act] 4.44 This mechanism, read in conjunction with existing subsection 35(3) of the Transfer Act, can be used to ensure that legal and practical issues arising from the transfer of shares are dealt with, resolved or satisfied, or this is taken to be the case. This might be relevant, for example, where registration requirements need to be addressed following a transfer of shares. Certificate of transfer 4.45 The Bill extends the scope of existing section 33 in the Transfer Act to also include a compulsory transfer of shares, so that APRA can rely on the existing machinery to specify provisions within the certificate of transfer to help facilitate a transfer of shares. [Schedule 4, item 73, subsection 33(3) of the Transfer Act] 4.46 This amendment affords APRA flexibility to include provisions specifying, or specifying a mechanism for determining, things that are to happen, or that are taken to be the case, in relation to shares that are to be transferred, or in relation to the transfer of shares that is to be effected. Process for a compulsory transfer of shares determination 4.47 The Bill amends the Transfer Act to specify the timing and effect once a compulsory transfer of shares has been determined. In this instance, when the certificate of transfer comes into force, all the shares in the transferring body, wherever those shares are located, become shares held by the receiving body without any transfer, conveyance or assignment, and free from any trust, liability or other encumbrance. [Schedule 4, item 76, section 35A of the Transfer Act] 4.48 All the shares in the transferring body, wherever those shares are located, become (respectively) shares held by the receiving body without any transfer, conveyance or assignment, and free from any trust, liability or other encumbrance. [Schedule 4, item 76, section 35A of the Transfer Act] Ancillary provisions Regulations 4.49 The Bill inserts a regulations-making power in the Transfer Act to allow special provisions to be made in regard to a compulsory transfer of shares. As such, the regulations may provide in relation to any of the following matters: â¢ the payment to the holder of shares in the transferring body of a purchase price for those shares; â¢ the resolution of disputes involving a holder of shares in the transferring body (including the resolution of such disputes by the Federal Court); â¢ the conferral of jurisdiction on the Federal Court for the purpose of the resolution of such disputes; â¢ the publication of information relating to the compulsory transfer of shares by APRA, the transferring body and the receiving body; â¢ the freeing of shares in the transferring body from any trust, liability or other encumbrance when they become shares held by the receiving body; and â¢ any matter incidental to the compulsory transfer of shares, or proposed compulsory transfer of shares, or any of the other matters mentioned in this subsection. [Schedule 4, item 79, subsection 36AE(1) of the Transfer Act] 4.50 In the case of a transfer of shares, calculating and arranging payment of a purchase price or compensation to shareholders (who may be numerous), and/or persons who have securities or similar interests in relation to shares, might require special arrangements. Rather than set out detailed machinery for these sorts of arrangements in the Bill, it will be possible to do so in the regulations. This is not intended to limit APRA’s ability to provide for such matters and payment and compensation in approved section 30 statements or under a certificate of transfer. The regulations may also address other incidental matters relating to compulsory share transfers. It is not intended that this limit the general regulation-making power in section 47 of the Transfer Act. Existing section 44 of the Transfer Act, which provides for compensation in certain circumstances where there has been a compulsory transfer of business, will also apply as a ‘safety net’ to a compulsory transfer of shares. [Schedule 4, item 79, subsection 36AE(3) of the Transfer Act] 4.51 The regulations may prescribe penalties, not exceeding 50 penalty units, for offences against the regulations. It is not anticipated that this will be used extensively, but if it is, a possible example of use may be to ensure that false or improper claims for compensation are not made in relation to any arrangements of the kind described above. [Schedule 4, item 79, subsection 36AE(2) of the Transfer Act] Information sharing 4.52 The Bill extends the scope of existing section 42 in the Transfer Act to allow APRA to provide information (including personal or confidential commercial information) to the receiving body in connection with: â¢ the transferred shares; and â¢ the business of the transferring body. [Schedule 4, item 92, section 42 of the Transfer Act] 4.53 For clarity, information about the business of the transferring body would be covered by the secrecy provision under section 56 of the APRA Act, so this amendment would allow APRA to share information with the receiving body without breaching the secrecy provision. Widening the scope to include related entities of insurers 4.54 Currently, under subsection 25(1B) of the Transfer Act, APRA may determine that there is to be a total or partial compulsory transfer of business from a body corporate related to an ADI, which is not itself an ADI, general or life insurer, to another body corporate in certain circumstances. 4.55 This may be necessary, for example, where an ADI’s assets and liabilities are being transferred under the Transfer Act as part of a resolution, and a related entity of the ADI provides critical intra-group services essential to the ADI’s continued operation. The same rationale applies to insurers but there is no equivalent to subsection 25(1B) in respect of a body corporate related to an insurer. 4.56 The Bill amends the Transfer Act to enable APRA to make a determination concerning a transfer from a body corporate related to an insurer to another body. [Schedule 4, items 47 and 52, subsections 25(1DA) and 25(1G) of the Transfer Act] 4.57 The Bill also amends existing subsections 25(1D) and 25(1F) in the Transfer Act by omitting ‘only the business’ and substituting ‘only business’. [Schedule 4, items 45 and 50, subsections 25(1D) and 25(1F) of the Transfer Act] 4.58 Accordingly, instead of reading ‘APRA may make a written determination that there is to be a transfer of only the business that is not regulated business from [an insurer] to a body corporate that is not [an insurer]’ these subsections will provide ‘APRA may make a written determination that there is to be a transfer of only business that is not regulated business from [an insurer] to a body corporate that is not [an insurer]’. 4.59 These amendments clarify that a transfer of unregulated business of a regulated entity to a non-regulated entity does not have to be a transfer of all the unregulated business of the transferor. Removing the requirement for complementary State or Territory legislation to be in place 4.60 To give effect to transfers of business, the Transfer Act currently imposes the precondition that APRA be satisfied that legislation to facilitate the transfer must be in place in the State or Territory in which the transferring and receiving bodies are established. 4.61 A number of other Commonwealth transfer regimes, for instance those under the Insurance and Life Insurance Acts, do not impose preconditions of this nature. Although this is a matter which APRA and other relevant bodies would expect to address in the ordinary course, the absence of such State or Territory legislation should not prevent APRA from making a transfer of business under the Transfer Act. 4.62 The Bill therefore amends the Transfer Act so that APRA may make a voluntary or compulsory transfer determination, even in the absence of relevant State or Territory legislation. [Schedule 4, items 28 to 31, 53, 54, 59 and 61, paragraphs 11(1)(d) and 25(2)(f), subsections 11(1A) and 25(2A), and sections 14 and 28 of the Transfer Act] 4.63 The Bill clarifies that the requirement for State or Territory legislation referred to in paragraph 25(2)(f) must include provision to ensure that when a certificate of transfer comes into force under Division 3 of the Transfer Act, the receiving body is taken to be the successor in law to the transferring body (to the extent of the transfer). This only applies in relation to a compulsory transfer of business. This requirement does not apply to a compulsory transfer of shares. [Schedule 4, item 60, section 28 of the Transfer Act] Consequential amendments Compulsory transfer of shares and restructure approvals 4.64 The Bill makes consequential amendments to Part 4A of the Transfer Act (Restructures) to widen the application of that Part so that it covers a restructure arrangement (under Part 5.1 of the Corporations Act) that facilitate compliance with a requirement under a direction or prudential standard. [Schedule 4, items 80 to 86, sections 36A to 36L of the Transfer Act] 4.65 Part 4A of the Transfer Act currently applies to a restructure that for the purposes of making a regulated entity (an ‘operating body’) a subsidiary of a NOHC. An operating body may apply to the Minister for a restructure approval, including a restructure instrument. A restructure instrument may give relief to the operating body and group entities from certain provisions in Division 1 of Part 2J.1, or Part 2J.2, of the Corporations Act in relation to restrictions on share capital and the self-acquisition of shares. A restructure instrument may also give relief from section 254T of the Corporations Act, which relates to the circumstances in which dividends may be paid. The instrument comes into force when a court makes an order under subsection 411(4) of the Corporations Act approving the restructure arrangement. Further, if the Minister issues a restructure approval, APRA may issue internal restructure certificates giving effect to the transfer of specified assets and liabilities between entities within the group. 4.66 As a result of the amendments to Part 4A, an operating body (an ADI, general insurer or life insurer) may apply to the Minister for a restructure approval where the restructure would facilitate compliance by the operating body (or a related body corporate of the operating body) with a direction (under section 11CA of the Banking Act, 104 of the Insurance Act or 230B of the Life Insurance Act) or prudential standard. (under section 11AF of the Banking Act, 32 of the Insurance Act or 230A of the Life Insurance Act). This would include, for example, a restructuring to meet general requirements of a prudential standard relating to group structure for the purposes of addressing potential barriers to resolution during normal times, in case a crisis should occur at some time in the future. [Schedule 4, items 80 to 83, sections 36A and 36B of the Transfer Act] 4.67 As is currently the case in relation to NOHC restructures of the kind currently covered by Part 4A of the Transfer Act, the Minister may impose conditions on a restructure approval made under the amended provisions. [Schedule 4, item 84, section 36E of the Transfer Act] 4.68 A restructure approval under the amended Part 4A may include a restructure instrument granting relief from Part 2J.1, or Part 2J.2 and section 245T of the Corporations Act, as is currently the position. [Schedule 4, item 85, section 36G of the Transfer Act] 4.69 APRA’s power to issue an internal transfer certificate, giving effect to the transfer of assets and liabilities for the purposes of the restructure, is extended to cover both types of restructures under the amended Part 4A (that is, the kinds of NOHC restructures currently covered, and the prudential/direction restructures covered by the amended provisions). [Schedule 4, item 86, section 36L of the Transfer Act] 4.70 Consequential amendments are also made to the information-gathering power in existing section 41 of the Transfer Act. [Schedule 4, items 88 to 91, section 41 of the Transfer Act] 4.71 Section 41 currently confers power on APRA to exercise information- gathering powers in the Industry Acts for purposes connected with a voluntary or compulsory transfer of business under the Transfer Act. The situations where APRA can currently use those powers to obtain information are where a transfer is from or to an ADI or from or to a life company. APRA may also obtain information for the purposes of an internal restructure of a group that includes an ADI, life company or general insurer. 4.72 The amendments will ensure that the information-gathering powers apply in the following additional situations. First, they will correct a gap in subsection 41(3) which does not currently allow APRA to use the Insurance Act information-gathering powers to obtain information for the purposes of a (compulsory) transfer of business from or to a general insurer. Secondly, it will be possible to use the information-gathering powers for the purposes of a transfer of shares in an ADI, general insurer or life insurer. In summary, the powers may be used to obtain information for the purposes of: a transfer of business from or to an ADI, general insurer or life company; a compulsory transfer of shares in an ADI, general insurer or life company; and an internal restructure (under Part 4A of the Transfer Act) of a group that includes an ADI, general insurer or life company. [Schedule 4, items 88 to 91, section 41 of the Transfer Act] 4.73 The Bill makes consequential amendments to the Transfer Act to insert provisions and update references in multiple provisions to reflect the addition of a compulsory transfer of shares, and to help differentiate where necessary between the two different types of compulsory transfer available under the Act. [Schedule 4, items 16 to18, 21, 22, 32 to 38, 42, 47, 50, 52, 57, 58, 63, 66 to 72, 74, 75, 79, 87 and 93 to 95, paragraphs 8(1)(a), 8(1)(b), subsection 8(1), paragraph(8)(5)(a), subsection 8(5), paragraph 24(1)(a), subsections 24(1A) and 24(1B),24(2) to 24(5), paragraphs 25(1B)(a), 25(1DA)(a), subsection 25(1F) paragraph25(1G)(a) section 26, subsection 27(1), section 29, subsection 31(1), paragraphs 31(1)(a),31(1)(b), section 32, paragraphs 33(1)(c), 33(2)(b), 33(2)(c), section 35, subsection 35(1), section 36AC, paragraphs 37(1)(c) and 37(1)(d). subsections 43(4), 43(9), and paragraphs 43(9A)(a) and 43(9A)(b) of the Transfer Act] 4.74 The Bill amends the existing paragraphs 25(1)(a)(iii) and (v) to correct an anomaly in the existing provisions. Under section 13A of the Banking Act, APRA has power to investigate an ADI or appoint a person to investigate the ADI. APRA also has power to take control of an ADI or appoint a person to take control of the ADI. The intention is that each of these four actions be a potential trigger for transfer of business (subject of course to any other relevant preconditions being satisfied as well). However the wording of the existing paragraphs (iii) and (iv) only covers where APRA has appointed an investigator and where APRA has appointed a statutory manager (the latter inadvertently being covered twice, once in each paragraph). The amendments will correct this by defining the relevant preconditions as APRA investigating or appointing a person to investigate, or a statutory manager being appointed (which will cover both where APRA is the statutory manager and where APRA appoints an administrator as statutory manager). [Schedule 4, item 41, paragraph 25(1)(a) of the Transfer Act] 4.75 The Bill makes consequential amendments to the Income Tax Assessment Act 1997, Insurance Act, Life Insurance Act, APRA Act and PSN Act to update references to reflect the new short title of the Transfer Act. [Schedule 2, item 51, paragraph 62ZI(2)(aa) of the Insurance Act; Schedule 3, items 46 and 61, paragraph 175(2)(aa) and subsection 190(5) of the Life Insurance Act; Schedule 5, item 2, section 5 of the PSN Act; Schedule 6, item 1, paragraph 3(1)(f) of the APRA Act; Schedule 7, items 4, 5, 6, 9, 10, and 11, paragraph 202-47(1)(a),section 320-300, paragraphs 320-305(b), 615-35(a), subsection 703-37(1) and paragraph 703-37(4)(a) of the Income Tax Assessment Act 1997; 4.76 The Bill makes consequential amendments to the Insurance and Life Insurance Acts to include a compulsory transfer of shares as a possible course of action that a judicial manager can recommend in its report. [Schedule 2, item 52, paragraph 62ZI(2)(ab) of the Insurance Act; Schedule 3, item 47, paragraph 175(2)(ab) of the Life Insurance Act] 4.77 The Bill amends the triggers for a transfer of business from a life insurance company or general insurer to include the appointment of a statutory manager to the insurer as a trigger (subject to any other relevant preconditions for transfer). [Schedule 4, items 44, 46, 49 and 51, paragraphs 25(1C)(a)(iv), 25(1D)(a)(iii),25(1E)(a) and 25(1F)(a)(iii) of the Transfer Act])] 4.78 The Bill clarifies that section 28, which sets out the matters to be included in State or Territory legislation supporting transfers of business, is enacted only for the purposes of paragraph 25(2)(f). As noted above, paragraph 25(2)(f) will be amended to provide that APRA must consider whether such legislation is in place in certain circumstances but may decide to undertake a transfer of business even if it is not or does not meet the requirements of section 28. Neither paragraph 25(2)(f) nor section 28 will apply to a compulsory transfer of shares under Part 4 [Schedule 4, item 61, subsection 28(2) of the Transfer Act]





Chapter 5

Conversion and write-off of capital instruments Outline of chapter 5.1 Schedules 1-3 and 7 to this Bill amend the Industry Acts and the Corporations Act to provide certainty that capital instruments can be converted or written off as provided for in APRA’s prudential standards. Context of amendments 5.2 APRA’s prudential standards require regulated entities to maintain minimum levels of regulatory capital. The prudential standards currently establish three categories of regulatory capital - ‘Common Equity Tier 1’ (CET1), ‘Additional Tier 1’ (AT1), and ‘Tier 2’ (T2) capital. AT1 and T2 capital instruments comprise securities (preference shares and subordinated notes, for example) that satisfy the eligibility criteria for AT1 and T2 capital set out in APRA’s prudential standards. 5.3 In relation to AT1 and T2 capital, the prudential standards include particular requirements on the capacity of an instrument to ‘absorb’ losses experienced by a regulated entity through the conversion or write-off of these instruments in certain circumstances. 5.4 Under APRA’s current prudential standards, the terms of AT1 and T2 instruments must provide that they absorb losses in the event of a ‘non-viability trigger event’. 5.5 Further, in order for AT1 instruments that are accounted for as liabilities to be considered as regulatory capital of an ADI, they must also convert or be written off where the ADI holds CET1 capital equal to or less than 5.125 per cent of its risk weighted assets (as calculated using the relevant capital requirements set by APRA’s prudential standards). 5.6 APRA’s prudential framework provides for two mechanisms by which AT1 and T2 capital instruments may absorb losses: conversion of those instruments into ordinary shares (or equivalent for mutually-owned ADIs); or the write-off of the instruments. 5.7 While such provisions in AT1 and T2 capital instruments are expected to function in accordance with their terms, APRA and market participants have identified some potential legal impediments to the effective operation of conversion or write-off provisions in AT1 and T2 capital instruments in certain circumstances. 5.8 It is important that contractual conversion and write-off provisions in AT1 and T2 capital instruments operate as intended in the event that the circumstances of a regulated entity meet the relevant conditions. 5.9 In June 2014, the Government released a consultation paper on proposals to make certain the effective operation of contractual loss absorption provisions in regulatory capital instruments. The amendments described in this chapter follow from that consultation. 5.10 The amendments are applied to capital instruments other than those issued as AT1 or T2 capital to provide flexibility in the event of future changes to the regulatory capital framework. In order for the amendments to apply, any such instrument will need to be issued with terms included for the purposes of conversion and write-off provisions in APRA’s prudential standards at the time. Summary of new law 5.11 The Bill amends the Industry Acts to provide increased certainty in relation to the conversion and write-off of capital instruments, including amendments to provide that: â¢ conversion or write-off can happen despite any impediment there may be in: â¢ any domestic or foreign law (other than, for conversion, any laws specified in the amendments or regulations made for that purpose, including laws applying to holdings in companies under Chapter 6 of the Corporations Act or under the Financial Sector (Shareholdings) Act 1998 ); â¢ the constitution of the entity that has issued the instrument or of an entity that is a party to the instrument and (for conversion) the constitution of the entity into whose shares the instrument converts (if different); â¢ any contract or arrangement to which the issuing entity, or an entity that is a party to the instrument, is a party, and (for conversion) to which the entity into whose shares the instrument converts (if different) is a party; and â¢ any listing rules or operating rules of a financial market in whose official list the issuing entity, an entity that is a party to the instrument, or (for conversion), an entity into whose shares the instrument converts (if different), is included; and â¢ any operating rules of a clearing and settlement facility through which the instrument is traded. â¢ a stay provision applies to contractual close-out rights that may arise as a result of the conversion or write-off of a capital instrument or the making of a determination by APRA that results in a requirement for the conversion or write-off of a capital instrument. Comparison of key features of new law and current law New law Current law It is certain that the terms of capital instruments that provide for the instrument to absorb losses by converting or being written off are effective despite potential legal impediments. In some situations it is unclear that certain capital instruments will absorb losses - either by conversion or write off - due to potential legal impediments. Detailed explanation of new law Conversion and write-off of capital instruments Definitions 5.12 The Bill amends the Industry Acts to incorporate several new definitions for the purpose of the amendments to provide certainty for the conversion and write-off of capital instruments. 5.13 The new term 'clearing and settlement facility' refers to a clearing and settlement facility as defined by section 761A of the Corporations Act. The provisions of this Bill use this definition to ensure that instruments may be converted or written off despite the operating rules of a clearing and settlement facility through which the instrument is traded. [Schedule 1, item 31, section 11CAA of the Banking Act; Schedule 2, item 17, section 36A of the Insurance Act; Schedule 3, item 64, section 230AAB of the Life Insurance Act] 5.14 The new term ‘conversion and write-off provisions’ refers to the provisions in APRA’s prudential standards that require certain capital instruments to be converted into ordinary shares or mutual equity interests, or to be written off, in certain circumstances described in the prudential standards. [Schedule 1, item 31, section 11CAA of the Banking Act; Schedule 2, item 17, section 36A of the Insurance Act; Schedule 3, item 64, section 230AAB of the Life Insurance Act] 5.15 The provisions in the prudential standards that set these requirements are currently referred to as the ‘loss absorption requirements’ and requirements for ‘loss absorption at the point of non-viability’. The term ‘conversion and write-off provisions’ is intended to refer to these provisions. However, the amendments leave room for future changes to APRA’s prudential standards, including changes that might refer to instruments that are not currently considered capital under the prudential standards. 5.16 The new term ‘conversion entity’ is relevant in circumstances where an instrument includes terms that provide for the instrument, or rights under the instrument, to convert into ordinary shares or mutual equity interests of a different entity. Where such a conversion takes place, the instrument converts, or rights convert, into ordinary shares or mutual equity interests of the conversion entity. [Schedule 1, item 31, section 11CAA of the Banking Act; Schedule 2, item 17, section 36A of the Insurance Act; Schedule 3, item 64, section 230AAB of the Life Insurance Act] 5.17 The new term ‘converts’ describes any process by which instruments, or rights under instruments, may be converted into ordinary shares or mutual equity interests. This term is broadly defined in order to accommodate current and future contractual approaches to how instruments are converted into ordinary shares or mutual equity interests. [Schedule 1, item 31, section 11CAA of the Banking Act; Schedule 2, item 17, section 36A of the Insurance Act; Schedule 3, item 64 , section 230AAB of the Life Insurance Act] 5.18 The new term ‘mutual equity interests’ is only incorporated into the Banking Act conversion and write-off provisions, and refers to such interests as defined in APRA’s prudential standards. This term is relevant to circumstances where a capital instrument has been issued by a mutually-owned ADI, or by an entity described in existing subsection 11CAB(1) with respect to a mutually-owned ADI. [Schedule 1, item 31, section 11CAA of the Banking Act] 5.19 The new term 'operating rules’ refers to operating rules as defined by section 761A of the Corporations Act. The provisions of the Bill use this definition to refer to the operating rules of a financial market or a clearing and settlement facility. [Schedule 1, item 31, section 11CAA of the Banking Act; Schedule 2, item 17, section 36A of the Insurance Act; Schedule 3, item 64, section 230AAB of the Life Insurance Act] 5.20 The term ‘related subsidiary’ refers to a subsidiary of a holding company of a regulated entity. Note that ‘holding company’ is now defined in the Industry Acts (see Chapter 10). This term is used to provide for circumstances where a related subsidiary issues capital instruments that count as regulatory capital for a conversion entity. The amendments provide certainty that those instruments will absorb losses despite potential legal impediments. [Schedule 1, item 31, section 11CAA of the Banking Act; Schedule 2, item 17, section 36A of the Insurance Act; Schedule 3, item 64, section 230AAB of the Life Insurance Act] 5.21 The amendments provide that conversion of regulatory capital instruments is effective despite any law except certain specified laws. The term ‘specified law’ refers to the following : â¢ the Financial Sector (Shareholdings) Act 1998; â¢ the Foreign Acquisitions and Takeovers Act 1975; â¢ Chapter 6 of the Corporations Act 2001 (takeovers). â¢ any law prescribed in the regulations for the purposes of this paragraph. [Schedule 1, item 31, section 11CAA of the Banking Act; Schedule 2, item 17, section 36A of the Insurance Act; Schedule 3, item 64, section 230AAB of the Life Insurance Act] 5.22 The Bill also amends the Industry Acts to define the terms ‘financial market’ and ‘listing rules’ according to their definition in section 761A of the Corporations Act. [Schedule 1, item 7, subsection 5(1) of the Banking Act; Schedule 2, item 4, subsection 3(1) of the Insurance Act; Schedule 3, item 113, Schedule Dictionary of the Life Insurance Act] Scope of instruments to which these amendments apply 5.23 The Bill amends the Industry Acts to describe the scope of instruments to which the amendments apply. 5.24 The amendments apply to instruments that include terms for the purposes of the conversion or write-off provisions in the prudential standards. [Schedule 1, item 31, subsection 11CAB(1) of the Banking Act; Schedule 2, item 17, subsection 36B(1) of the Insurance Act; Schedule 3, item 64, subsection 230AAC(1) of the Life Insurance Act] 5.25 The amendments apply to instruments issued by any of the following, or to which any of the following is a party: â¢ a regulated entity; â¢ a holding company of a regulated entity; â¢ a subsidiary or a related subsidiary of a regulated entity (see 5.20 for the definition of a related subsidiary); or â¢ an entity prescribed by the regulations for the purposes of these amendments. [Schedule 1, item 31, subsection 11CAB(1) of the Banking Act; Schedule 2, item 17, subsection 36B(1) of the Insurance Act; Schedule 3, item 64, subsection 230AAC(1) of the Life Insurance Act] 5.26 The amendments include a regulation-making power to prescribe other kinds of entities that might issue capital instruments that include terms for conversion or write-off. This is intended to allow flexibility to accommodate potential future capital raising structures. 5.27 Where a regulated entity is a subsidiary of one or more holding companies, the amendments are intended to cover any instrument issued to the market by a holding company of that regulated entity, and any corresponding intra-group instruments or arrangements between the regulated entity, the holding company and any intermediate holding company in order to meet the regulatory capital requirements of the regulated entity. In this case, conversion will occur in accordance with the terms of those instruments or arrangements despite the potential legal impediments listed at 5.28. Conversion despite other laws etc. 5.28 The Bill amends the Industry Acts to ensure that instruments that are within the scope of these amendments can be converted according to their terms despite any impediments there may be in: â¢ any domestic or foreign laws, except for those specified in the amendments and any regulations made for this purpose; â¢ the constitution of the entity that has issued the instrument, any entity that is a party to the instrument, or any conversion entity for the instrument; â¢ any contract or arrangement to which the issuing entity, any entity that is a party to the instrument, or any conversion entity for the instrument, is a party; â¢ any listing rules or operating rules of a financial market in whose official list the issuing entity, any entity that is a party to the instrument, or any conversion entity for the instrument, is included; and â¢ any operating rules of a clearing and settlement facility through which the instrument is traded. [Schedule 1, item 31, subsection 11CAB(2) of the Banking Act; Schedule 2, item 17, subsection 36B(2) of the Insurance Act; Schedule 3, item 64, subsection 230AAC(2) of the Life Insurance Act] Write off despite other laws etc. 5.29 The Bill amends the Industry Acts to ensure that instruments that are within the scope of these amendments can be written off according to their terms despite any impediments there may be in: â¢ any domestic or foreign law; â¢ the constitution of the entity that has issued the instrument, or any entity that is a party to the instrument; â¢ any contract or arrangement to which the issuing entity, or any entity that is a party to the instrument, is a party; and â¢ any listing rules or operating rules of a financial market in whose official list the issuing entity, or any entity that is a party to the instrument, is included; and â¢ any operating rules of a clearing and settlement facility through which the instrument is traded. [Schedule 1, item 31, subsection 11CAB(3) of the Banking Act; Schedule 2, item 17, subsection 36B(3) of the Insurance Act; Schedule 3, item 64, , subsection 230AAC(3) of the Life Insurance Act] 5.30 The above provisions allow for an instrument to be converted or written off despite the laws of a foreign country or part of a foreign country. This is intended to include laws that are in force in a country or in part of a country despite that law not having been made or otherwise implemented in the foreign country. An example of this would be the self-executing laws of the European Union. 5.31 It should be noted that operating rules of financial markets and clearing and settlement facilities will generally constitute a contract or arrangement to which the entity is party. They have been expressly referred to in these provisions for the avoidance of doubt, including to capture issues that might arise where an instrument converts in the course of a trading and settlement process conducted through a clearing and settlement facility. The explicit inclusion of operating rules of financial markets and clearing and settlement facilities in these provisions is not intended to narrow the meaning of references to contracts and other arrangements in these provisions or similar override provisions elsewhere in the Industry Acts. Consequential amendments Definitions of ‘financial market’ and ‘listing rules’ 5.32 As the terms ‘financial market’ and ‘listing rules’ are now defined terms in the Industry Acts (see 5.22), consequential amendments have been made to the following, to remove duplicate references. [Schedule 1, items 99, 125 and 139, paragraphs 13G(3)(d), 14A(5B)(d), and 14AA(4)(d) of the Banking Act, Schedule 2, items 48, 54 and 107, paragraphs 62Z(4)(d)62ZJ(3)(b)(iv), and 103D(3)(d) of the Insurance Act and Schedule 3, items 43, 49 and 77, paragraphs 168A(4)(d) 176(3)(b)(iv) and 230AD(3)(d) of the Life Insurance Act] New notes in the Corporations Act 5.33 The Bill amends certain sections of the Corporations Act to include a new note in each of the sections confirming the effect of the amendments. [Schedule 7, items 1 to 3, subsections 256B(1), 437F(8), and 468A(8) of the Corporations Act] 5.34 The note explains that reductions in share capital (in existing subsection 256B of the Corporations Act), or alterations in the status of members of a company made during either the administration of the company or after the commencement of winding up by the Court (in existing subsections 437F(8) and 468A(8) of the Corporations Act, respectively), are effective despite these sections if they result from an instrument being converted or written off for the purposes of the conversion and write-off provisions. 5.35 The inclusion of these notes in certain sections of the Corporations Act is only for the purpose of explaining the effect of conversion and write-off of non-equity capital instruments and is not intended to limit the application of the amendments more widely. Application and transitional provisions 5.36 The amendments made by the Bill in relation to the conversion and write-off of capital instruments apply in relation to the conversion or writing-off of any instrument on or after the Bill receives Royal Assent, whether the instrument was issued before, at or after that time. [Schedule 1, items 253 and 262; Schedule 2, items 139 and 144; Schedule 3, items 118 and 128]





Chapter 6

Stay s Outline of chapter 6.1 Schedules 1 to 5 to this Bill enhance the stay provisions in the Industry Acts and Transfer Act, and make consequential amendments to the PSN Act. Context of amendments 6.2 An important aspect of Australia’s resolution regime for ADIs and insurers is the operation of the stay provisions located in the various Industry Acts and the Transfer Act. In general, the existing provisions prevent counterparties from: â¢ denying an obligation; â¢ accelerating a debt; â¢ closing-out any transaction; or â¢ enforcing a security, under a contract with a regulated entity, where the basis for taking such action is that APRA has exercised a specified regulatory power in relation to that entity (e.g. a general directions power, a direction to recapitalise an ADI or insurer, appointment of statutory or judicial manager or a compulsory transfer of business power). The stay provisions are important in ensuring that pre-emptive actions by counterparties do not impede the ability for APRA to implement an orderly resolution of a regulated entity. 6.3 The existing stay provisions only apply where the entity against which the regulatory action is taken is also the party to the contract. This omission gives rise to the possibility that the exercise of a regulatory power against one entity may trigger the exercise of rights under a contract with another entity in the same group. 6.4 The triggering of termination rights under contracts of other group entities could have material, adverse effect on a financial group and on APRA’s ability to implement an orderly resolution of the regulated entity. This may particularly be the case where the related company in question provides essential services to an ADI, insurer or group, and relies on contractual arrangements with third parties to perform those services. More broadly, the exercise of termination rights in any contract entered into by a member of a financial group could significantly undermine confidence in APRA’s efforts to stabilise a distressed regulated entity. 6.5 Extending the relevant stay provisions to address the issues above is consistent with the expanded scope of APRA’s powers pursuant to the other amendments in the Bill. 6.6 A further important element of the resolution regime is the interaction of the stay provisions with the PSN Act. The PSN Act overrides a range of laws in order to ensure the validity of certain provisions relating to netting and the payments systems covered by the PSN Act. Consequential amendments are made to the PSN Act to take into account the enhancements to the stay provisions, the moratorium provisions for statutory and judicial management, and the extension of certain powers to group entities. This is intended to ensure that current protections under the PSN Act are retained and the rights of counterparties to close-out netting contracts are clear. Summary of new law 1.61 Schedules 1 to 5 to this Bill amend the Industry Acts and Transfer Act to enhance the stay provisions, and make consequential amendments to the PSN Act, including amendments to: â¢ ensure that an exercise of a power in relation to an entity does not give rise to termination rights or other rights (that is, denying an obligation, accelerating a debt, closing-out on a transaction, or enforcing a security) in contracts of entities within the same relevant group of bodies corporate (that is, any group comprising the ADI or insurer and its subsidiaries or an authorised NOHC and its subsidiaries); â¢ ensure that the current protections afforded to counterparties to certain close-out netting contracts under the PSN Act are retained (with appropriate amendments to take into account stays applying to cross-default rights); â¢ set out the relationship between the enhanced moratorium provisions for statutory and judicial management and the PSN Act, as appropriate. Comparison of key features of new law and current law New law Current law The existing stay provisions in the Industry Acts and the Transfer Act have been enhanced so that an exercise of power made in respect of: â¢ a body corporate (which might be an ADI/insurer, or an authorised NOHC of an ADI/insurer, or a subsidiary of an authorised NOHC or ADI/insurer), cannot be grounds for: â¢ a counterparty to that body corporate; or â¢ a counterparty to a body corporate that is in the same relevant group of bodies corporate as the entity against which the power was exercised, to deny an obligation, accelerate a debt, close-out on a transaction, or enforce a security. The existing stay provisions in the Industry Acts and the Transfer Act operate so that an exercise of power made in respect of an entity cannot be used as a basis for a counterparty to a contract with that entity to deny an obligation, accelerate a debt, close-out on a transaction, or enforce a security. The PSN Act includes express provisions dealing with the application of resolution actions to authorised NOHCs or subsidiaries of an authorised NOHC or ADI/insurer. It also caters for stays on actions under cross-default clauses and incorporates into its terms and definitions the amended and new stay and moratorium provisions provided for in the Bill. The PSN Act deals with the interaction of certain provisions relating to netting and the payments system with the existing stay provisions in the Industry Acts and the Transfer Acts. However, it does not expressly deal with the application of relevant resolution actions to authorised NOHCs or subsidiaries of the authorised NOHC or ADI/insurers, or cater for stays on actions under cross-default clauses, or for the application of the amended and new stay and moratorium provisions provided for in the Bill. Detailed explanation of new law Extend stay provisions to contracts entered into by a related body corporate within the same ‘relevant group of bodies corporate’ Enhance existing stay provisions in the Industry Acts and the Transfer Act 6.7 The Bill amends the existing stay provisions in the Industry Acts and the Transfer Act to ensure that the exercise of a power in relation to an entity does not give rise to termination rights or other rights in the contracts of entities within the same relevant group of bodies corporate as the entity against which the regulatory action was taken. An ADI/insurer and its subsidiaries, or an authorised NOHC and its subsidiaries, will constitute a relevant group of bodies corporate. 6.8 The relevant stay provisions are: â¢ direction under the Banking Act is not grounds for denial of obligations etc; [Schedule 1, item 43, subsections 11CD(1) to 11CD(2) of the Banking Act] â¢ recapitalisation direction under the Banking Act is not grounds for denial of obligations etc; [Schedule 1, item 102, sections 13N of the Banking Act] â¢ a recapitalisation facilitated by a statutory manager under the Industry Acts is not grounds for denial of obligations etc; [Schedule 1, item 143, section 14AC of the Banking Act; Schedule 2, item 58, section 62ZOH of the Insurance Act; Schedule 3, item 52, section 179AFof the Life Insurance Act] â¢ a statutory manager being in control under the Industry Acts is not grounds for denial of obligations etc; [Schedule 1, item 191, section 15C of the Banking Act; Schedule 2, item 58, section 62ZOX of the Insurance Act; Schedule 3, item 52, section 179AX of the Life Insurance Act] â¢ a compulsory transfer under the Transfer Act is not grounds for denial of obligations etc - note that this will apply not only to compulsory business transfers but also to compulsory share transfers ; [Schedule 4, item 78, sections 36AA of the Transfer Act] â¢ a judicial manager being in control under the Insurance Act is not grounds for denial of obligations etc; [Schedule 2, item 43, section 62V of the Insurance Act] â¢ a recapitalisation facilitated by a judicial manager under the Insurance Act is not grounds for denial of obligations etc; [Schedule 2, item 49, section 62ZB of the Insurance Act] â¢ a recapitalisation direction under the Insurance Act is not grounds for denial of obligations etc; [Schedule 2, item 110, section 103K of the Insurance Act] â¢ a direction under the Insurance Act is not grounds for denial of obligations etc; [Schedule 2, item 120, subsections 105(1) to 105(2) of Insurance Act] â¢ a judicial manager being in control under the Life Insurance Act is not grounds for denial of obligations etc; [Schedule 3, item 36, section 165B of the Life Insurance Act] â¢ a recapitalisation facilitated by a judicial manager under the Life Insurance Act is not grounds for denial of obligations etc; [Schedule 3, item 44, section 168C of the Life Insurance Act] â¢ a recapitalisation direction under the Life Insurance Act is not grounds for denial of obligations etc; [Schedule 3, item 80, sections 230AJ of the Life Insurance Act] and â¢ a direction under the Life Insurance Act is not grounds for denial of obligations etc. [Schedule 3, item 89,sections 230C(1) to 230C(2) of the Life Insurance Act] 6.9 In summary, the enhanced stay provisions now provide that where a body corporate is a party to a contract (whether the proper law of the contract is Australia law or law of a foreign country), a counterparty to that contract cannot: â¢ deny an obligation; â¢ accelerate a debt; â¢ close-out any transaction; or â¢ enforce a security, on the ground that an exercise of power (as specified under the relevant stay provision in that case e.g. directions power, power to recapitalise an ADI or insurer, appointment of a statutory or judicial manager and compulsory business transfer power) occurred against either the contracting body corporate or, if the body corporate is a member of a relevant group of bodies corporate, another member of that group. (A group comprising an ADI/insurer and subsidiaries will be a relevant group of bodies corporate. A group comprising an authorised NOHC and subsidiaries will also be a relevant group of bodies corporate.) 6.10 Under these provisions, the body corporate against which the relevant regulatory action is taken could be an ADI or insurer, an authorised NOHC of the ADI/insurer, or a subsidiary of the ADI/insurer or authorised NOHC. In order for the stay to apply, either that body corporate, or a related body corporate that is a member of the same relevant group of bodies corporate, must be party to the relevant contract. 6.11 For example, if an ADI is party to a contract with a third party entity, and the contract includes a provision that purports to give the third party a right to terminate the contract with the ADI, if APRA gives a direction to a related body corporate of the ADI (that is in the same relevant group of bodies corporate), the relevant stay provision will operate to prevent action being taken under the contract on the basis of the direction. 6.12 The Bill makes consequential amendments to the existing protections afforded to counterparties affected by an exercise of a directions power. Under the current law, if a counterparty is prevented from fulfilling its obligations under a contract with a body corporate (for example, an ADI), because of the giving of a direction to that body corporate, the counterparty is relieved from all obligations owed to the body corporate under the contract, subject to any Court order (see subsections 11CD(2) of the Banking Act, 105(2) of the Insurance Act, and 230C(2) of the Life Insurance Act). The Bill extends this protection so that the counterparty is relieved of their obligations to the contracting body corporate (subject to any Court order) if they are prevented from fulfilling their obligations under the contract because of a direction regardless of whether the direction is given to the contracting body corporate itself or to a related body corporate of the contracting body corporate. [Schedule 1, item 43, subsection 11CD(2) of the Banking Act; Schedule 2, item 120, subsection 105(2) of the Insurance Act; Schedule 3, item 89, subsection 230C(2) of the Life Insurance Act] New stay provisions - Conversion or write-off etc. not grounds for denial of obligations 6.13 Chapter 5 sets out the new provisions in the Industry Acts that provide certainty that capital instruments can be converted or written down as required by APRA’s prudential standards. As a consequence of these new provisions corresponding stay provisions are added to the Industry Acts. [Schedule 1, items 31, sections 11CAA, to 11CAC of the Banking Act; Schedule 2, item 17, sections 36A to 36C of the Insurance Act; Schedule 3, item 64, sections 230AAB to 230AAD of the Life Insurance Act] 6.14 In summary, the Bill ensures that counterparties of a contracting entity (the ‘first entity’) cannot: â¢ deny an obligation; â¢ accelerate a debt; â¢ close-out any transaction; or â¢ enforce a security, under a contract with the first entity on certain grounds. Specifically, the first entity cannot do so on the ground that a ‘relevant instrument’ is being or has been converted or written-off in accordance with the terms of that instrument or on the ground of the making of a determination (however described) by APRA that results in the relevant instrument being required to be converted or written off in accordance with the terms of the instrument. For the avoidance of doubt, these provisions are not intended to impede close-out of a contract on other grounds (for example, relating to an event that may have led to APRA making such a determination) or to impede the conversion or write off of instruments issued for the purposes of the conversion and write-off provisions themselves. [Schedule 1, item 31, section 11CAC of the Banking Act; Schedule 2, item 17, section 36C of the Insurance Act; Schedule 3, item 64, section 230AAD of the Life Insurance Act] 6.15 A ‘relevant instrument’ is defined as an instrument: â¢ that contains terms that are for the purpose of conversion and write-off provisions and is issued by a regulated entity, a holding company of a regulated entity, a subsidiary or related subsidiary of a regulated entity or an entity of a kind prescribed by the regulations); and â¢ either: - the instrument was issued by the first entity (as noted above, the ‘first entity’ for these purposes is the party to the contract to which the stay provision applies); or - the first entity is a party to the instrument; or - the first entity is a conversion entity in relation to the instrument (that is, the instrument converts into ordinary shares of the first entity); or â¢ or, if the first entity is a body corporate that is a member of a ‘relevant group of bodies corporate’(that is, a group comprising a regulated entity and its subsidiaries or an authorised NOHC of a regulated entity and the NOHC’s subsidiaries): - the instrument was issued by another member of that group; or - another member of that group is a party to the instrument; or â¢ another member of that group is a conversion entity in relation to the instrument. [Schedule 1, item 31, subsection 11CAC(4) of the Banking Act; Schedule 2, item 179, subsection 36C(4) of the Insurance Act; Schedule 3, item 64, subsection 230AAD(4) of the Life Insurance Act] 6.16 In summary, consistent with the other amendments to enhance the existing stay provisions in the Industry Acts and Transfer Act, the new stay provisions in the Industry Acts also extend to where the issuing entity, or a party to the instrument, or the conversion entity is a member of the same relevant group of bodies corporate as the first entity (the entity that is party to the stayed contract). [Schedule 1, items 31, section 11CAC of the Banking Act; Schedule 2, item 17, section 36C of the Insurance Act; Schedule 3, item 64, section 230AAD of the Life Insurance Act] Consequential amendments to the PSN Act to encompass ‘related bodies corporate’ Background 6.17 Amendments are made to the PSN Act to take into account, first, the enhancements to the stay provisions and, secondly, the extension of certain regulatory powers to related bodies of ADIs and insurers. This is because these amendments mean that the stay provisions will apply where regulatory action, including the appointment of a statutory manager, is taken against an entity that is not an ADI or insurer (that is, it may be an authorised NOHC or a subsidiary of an ADI, insurer or authorised NOHC). Secondly, the extension of the stay provisions so that they apply where the contracting party is not the party against which regulatory action was taken (where they are a member of same “relevant group of bodies corporate”) means that amendments are required. 6.18 In broad terms, the PSN Act overrides a range of laws in order to ensure the validity of certain provisions relating to netting and the payments system covered by the PSN Act. For present purposes the protection afforded by existing section 14 (‘Effectiveness of close-out netting contracts’) to close-out netting contracts, which include over the counter (OTC) derivatives and securities lending contracts, is particularly relevant. 6.19 The PSN Act differentiates between ‘specified provisions’, ‘specified stay provisions’ and ‘direction stay provisions’. Section 14 (‘Effectiveness of close-out netting contracts’), and provisions in the PSN Act relating to other netting and payment systems arrangements, support the effectiveness of close out, netting of obligations, and payments despite any other law, including a ‘specified provision’. 6.20 However, subsection 14(3) of the PSN Act provides an exception by stating that the protections in relation to close-out netting contracts have effect ‘subject to a specified stay provision that applies to the contract’. Accordingly, if a stay provision falls within this definition, then the rights to close out and rights in relation to relevant securities in section 14 cannot be exercised if the specified stay provision applies. 6.21 The PSN Act further distinguishes between specified stay provisions that are ‘direction stay provisions’ and those that are not direction stay provisions. If a specified stay provision is a ‘direction stay provision’ then it operates on a permanent and continuing basis; in other words, the action (giving of a direction) that gave rise to the ostensible close-out right cannot itself be relied on as a basis for close-out at any time. If the specified stay provision is not a direction stay provision, and the contract in question is a derivative or securities lending contract of a kind covered by section 15A of the PSN Act, the stay will operate temporarily, under Division 2 of Part 4 of the PSN Act (‘Ceasing non-direction stays for derivatives contracts’), although it may be made permanent if the relevant body corporate (e.g. an ADI or insurer) is resolved during the ‘resolution period’ as defined in the PSN Act. 6.22 Having regard to the above, the Bill amends the PSN Act to: â¢ apply in an appropriate way where resolution actions and directions, to which stay provisions apply, are taken against not only ADIs and insurers, but also authorised NOHCs and subsidiaries of ADIs/insurers and authorised NOHCs. This has implications for Division 2 of Part 4 of the PSN Act (‘Ceasing non-direction stays for derivatives contracts’) where a ‘specified stay provision’ that is not a ‘direction stay provision’ applies in relation to a group entity; â¢ address the implications of the stay provisions applying on a cross-default basis. This also has implications for Division 2 of Part 4; â¢ provide for appropriate treatment of the new stay provisions relating to actions under conversion and write-off provisions. As discussed below, these will be defined as both ‘specified stay provisions’ and ‘direction stay provisions’, with the result that they will not be subject to Division 2 of Part 4; and â¢ ensure that the new moratorium provisions for statutory and judicial management are treated appropriately under the PSN Act. In general terms they will be treated as ‘specified provisions’, with the result that the provisions of the PSN Act in relation to netting arrangements and payment systems will apply despite the moratorium provisions. Amendments 6.23 A new definition of ‘related body corporate’ is inserted into the PSN Act. For the purposes of the PSN Act, the question of whether a body corporate is related to another body corporate is to be determined in the same way as that question is determined for the purposes of the Corporations Act. The inclusion of this definition is necessary for the purposes of amendments to Part 4 of the PSN Act (‘Close-out netting contracts’) relating to the interaction between stay provisions and the protections given to close-out netting contracts. [Schedule 5, items 10 and 17, sections 5 and 5AA of the PSN Act] 6.24 The expansion of the statutory management regime and directions powers to group entities (that is, related bodies corporate of ADIs and insurers - see Chapter 2 and Chapter 3 ) means that the definition of ‘regulated body’ in the PSN Act had to be expanded beyond ADIs, general insurers, life companies and private health insurers, to include: â¢ an authorised NOHC of an ADI/insurer; and â¢ a subsidiary of an authorised NOHC or an ADI/insurer. â¢ For this purpose it is also necessary to include a definition of ‘subsidiary’ in the PSN Act: [Schedule 5, items 8 and 17, sections 5 and 5AB of the PSN Act] 6.25 The existing stay provisions in the Industry Act and the Transfer Act are all listed as ‘specified stay provisions’ under the PSN Act. Since the Bill applies the statutory management regime to the Insurance Act and Life Insurance Act, the following new stay provisions are added to the definition of ‘specified stay provision’ in the PSN Act: â¢ a recapitalisation facilitated by a statutory manager is not grounds for denial of obligations etc; [Schedule 2, item 58, subsection 62ZOH(2) of the Insurance Act; Schedule 5, item 14, section 5 of the PSN Act] â¢ a statutory manager being in control is not grounds for denial of obligations etc; [Schedule 2, item 58, subsection 62ZOX(2) of the Insurance Act; Schedule 5, item 14, section 5 of the PSN Act] â¢ a recapitalisation facilitated by a statutory manager is not grounds for denial of obligations etc; [Schedule 3, item 52, subsection 179AH(2) of the Life Insurance Act; Schedule 5, item 15, section 5 of the PSN Act] and â¢ a statutory manager being in control is not grounds for denial of obligations etc. [Schedule 3, item 52, subsection 179AX(2) of the Life Insurance Act; Schedule 5, item 15, section 5 of the PSN Act] 6.26 The insertion of the following new conversion and write-off stay provisions into the Industry Acts required relevant changes to the definition of ‘specified stay provision’ and ‘direction stay provision’ in the PSN Act : â¢ the Banking Act conversion and write-off stay provision (conversion or write-off etc. not grounds for denial of obligations); [Schedule 1, item 31, subsection 11CAC(2) of the Banking Act;Schedule 5, items 3 and 12, section 5 of the PSN Act] â¢ the Insurance Act conversion and write-off stay provision (conversion or write-off etc. not grounds for denial of obligations); [ Schedule 2, item 19, subsection 36C(2) of the Insurance Act; Schedule 5, items 4 and 13, section 5 of the PSN Act] â¢ the Life Insurance Act conversion and write-off stay provision (conversion or write-off etc. not grounds for denial of obligations). [Schedule 3, item 64, section 230AAD(2) of the Life Insurance Act; Schedule 5, items 5and 15, section 5 of the PSN Act] 6.27 As explained above this will mean that section 14 of the PSN Act (‘Effectiveness of close-out netting contracts’) applies subject to the stay provisions listed at 6.25 and 6.26. However, those two sets of stay provisions will be treated differently under Division 2 of Part 4 of the PSN Act. The resolution stays regime in Division 2 of Part 4 (‘Ceasing non-direction stays for derivatives contracts’) will apply to the ‘specified stay provisions’ listed at 6.25 as they are not ‘direction stay provisions’ (broadly speaking, they relate to resolution in the context of statutory management, and therefore fall within Division 2 of Part 4, like the corresponding stay provisions in the Banking Act). However, Division 2 of Part 4 will not apply to the ‘specified stay provisions’ relating to conversion and write off listed at 6.26 because they will be defined to be ‘direction stay provisions’ (so they will apply permanently in relation to a given trigger for action under a contract). 6.28 The existing sections 15A (‘Ceasing non-direction stays for derivatives contracts’) and 15B (‘When APRA may declare that non-direction stays cease’) in Division 2 of Part 4 of the PSN Act are amended by expanding their application to not only close-out netting contracts to which an ADI or insurer is a party, but to close-out netting contracts to which other group entities are party, and to cater for cross default situations. [Schedule 5, items 18 to 24, sections 15A and 15B of the PSN Act] 6.29 The current position is that section 15A of the PSN Act provides for a specified (non-direction) stay provision to apply on a temporary basis to a derivatives or securities lending contract of a kind covered by section 15A of the PSN Act while action is taken to resolve the regulated entity in question. Section 15A and the other provisions in Division 2 of Part 4 are only relevant where the stay provision relates to the appointment of a statutory or judicial manager, or recapitalisation under a statutory or judicial manager, or a compulsory transfer of business (sometimes referred to as ‘resolution stay provisions’). This will continue to be the case. 6.30 The amendments under the Bill will mean that section 15A of the PSN Act applies to keep a stay on foot for at least the resolution period even where the relevant resolution action (for example, the appointment of a statutory manager) was taken against an authorised NOHC or subsidiary for example, rather than (or as well as) an ADI or insurer. [Schedule 5, items 18 to 21, section 15A of the PSN Act] 6.31 Secondly the amendments will ensure that section 15A applies where the contracting party and the trigger body are both members of the same relevant group of bodies corporate (a group comprising an ADI/insurer and its subsidiaries or authorised NOHC and its subsidiaries). As noted above, if the contracting party and the entity against which regulatory action has been taken are related but not both members of the same relevant group of bodies corporate, the stay provisions will not apply. [Schedule 5, items 18 to 21, section 15A of the PSN Act] 6.32 Section 15B of the PSN Act currently gives APRA power to declare, before the end of the resolution period, that the stay is to come to an end, and consequential amendments are made to ensure the section reflects the new application of the stay provisions to related bodies corporate. [Schedule 5, items 22 to 24, section 15B of the PSN Act] 6.33 Section 15C of the PSN Act currently sets out what must be done to resolve an ADI or insurer in order for APRA to make the stay provision permanent. The broad policy objectives of this section are unchanged by the Bill but amendments have been made, including by the addition of new provisions, to cater for group resolution, the operation of cross default clauses and the interaction of such clauses with the amended stay provisions. [Schedule 5, items 25 to 29, sections 15C, 15D and 15E of the PSN Act] 6.34 In relation to the existing section 15C of the PSN Act (‘When APRA may declare that non-direction stays continue’), the expansion of the statutory management regime to group entities (see Chapters 1 and 2 ) means the entity to which a trigger event occurs (the ‘trigger body’) may not always be the party to the close-out netting contract (the ‘trigger contract’). For example, APRA could appoint a statutory manager (trigger event) to an ADI (trigger body) where the party to the relevant close-out netting contract is a subsidiary of the ADI. 6.35 To address this issue, section 15C of the PSN Act will continue to cover the simple case where the entity subject to the regulatory action giving rise to the stayed trigger event is party to the contract in question. There will be two new provisions dealing with where the entity subject to the regulatory action is not the same as the contracting entity. [Schedule 5, items 25 to 29, sections 15C, 15D and 15E of the PSN Act] 6.36 Accordingly, section 15C of the PSN Act is amended to make it clear that it specifically covers where the regulated body is also the contracting body, which is the simplest scenario and similar to the way section 15C currently works. A number of amendments are required to section 15C to reflect the fact that the regulated body will not necessarily be an ADI or insurer, such as where the trigger is appointment of a statutory manager to a group entity under the new powers discussed in Chapter 2. This is relevant because the test for whether the stay can be made permanent, which broadly requires APRA to make a determination as to whether the body has been resolved, will differ depending on whether it is an ADI or insurer, on the one hand, or a related body corporate that does not have depositors or policyholders. If the regulated body is an ADI or insurer, and it is resolved without a transfer of business, then the resolution test will require APRA to consider (among other things) whether the body has the each material authorisation for its regulated business. If the body is not an ADI or insurer, this requirement will not apply. Further amendments clarify that it will only be necessary to consider whether minimum capital requirements are met if they actually apply to the party. The amendments also address where the resolution action giving rise to the contractual trigger and stay may be the appointment of a statutory manager to an insurer. [Schedule 5, items 25 to 28, section 15C of the PSN Act] 6.37 To address the position where the trigger body and the contracting body are not the same (that is, where they are related bodies corporate), a new provision (‘When APRA may declare that non-direction stays continue - related body corporate of regulated body is party to trigger contract’) is inserted. Before APRA can make a determination that the stay be made permanent, it will be necessary to apply certain tests set out in subsection 15D(5) to: â¢ the trigger body (the entity in relation to which the triggering regulatory action has been taken), where resolution occurs without a transfer of business; or â¢ the receiving body, where resolution occurs through a total transfer of business; or â¢ either or both of those bodies, where resolution involves a partial transfer of business. 6.38 In each case, APRA will be required to assess whether the matters in subsection 15D(5), which broadly set out a ‘resolution test’ in similar terms to the one in subsection 15C(3), are satisfied in relation to the trigger body or any receiving body to which relevant business has been transferred. [Schedule 5, item 29, section 15D of the PSN Act] 6.39 Other amendments deal with the position where there has been a transfer of business from the trigger entity to a receiving body. If there has been a partial transfer, APRA will have a discretion to apply the ‘resolution test’ to either or both of the trigger body or the receiving body. In addition, , whether the transfer is total or partial, APRA will only be able to make the stay permanent if APRA is satisfied there will be no detrimental effect on any counterparty to a close out netting contract to which the declaration would apply. [Schedule 5, item 29, sections 15D and 15E of the PSN Act] 6.40 Further detail on these amendments, is set out below. Amended section 15C of the PSN Act: extending the section to authorised NOHCs and subsidiaries, when the trigger body and the contracting body are the same 6.41 To protect the legitimate interests of counterparties to relevant close-out netting contracts, the amendments provide that a specified stay provision may only be declared to continue if the circumstances set out below exist. It should be noted that in these amendments the amended term ‘regulated body’ has the broad meaning discussed at 6.24, namely it includes not only ADIs, insurers and PHIs (as is currently the case), but also authorised NOHCs of ADIs and insurers, and subsidiaries of an ADI/insurer or authorised NOHC. The specified circumstances are: â¢ a trigger event to which a specified stay provision (other than a direction stay provision) applies is an event that involves a regulated body and the trigger event happens in relation to a close-out netting contract (the ‘trigger contract’) to which that same regulated body is a party; â¢ APRA is satisfied that all matters set out at 6.44 will be satisfied in relation to the party in respect of which the declaration may be made (which will be either or both of the regulated body or a receiving body if there has been a transfer of business) at the following time: - if a certificate of transfer will come into force under the Transfer Act, just after that coming into force; or - in all other cases, at the time the declaration will be made; â¢ the party in respect of which the declaration may be made is not in external administration (as defined in the PSN Act) (other than statutory management or judicial management); and â¢ APRA has not already made a declaration under section 15B that the specified stay provision ceases to apply in relation to the trigger event. This is to provide certainty, so that APRA cannot make a declaration extending the application of the relevant stay if it has previously made a declaration that the stay ceases to apply. [Schedule 5, items 25 to 28, heading and subsections 15C(1), 15C(3)and 15C(5) of the PSN Act] 6.42 If these conditions are satisfied, APRA may declare that the specified stay provision is to continue to apply to: â¢ if a certificate of transfer for a total transfer will come into force under the Transfer Act, all close out netting contracts to which the regulated body is a party (and to which the receiving body, within the meaning of the Transfer Act, will become a party immediately after the transfer), and all securities given over financial property in respect of obligations under those close-out netting contracts; â¢ if a certificate of transfer for a partial transfer will come into force under the Transfer Act, either or both of the following: - all close out netting contracts to which the regulated body is a party (and to which the regulated body will remain a party immediately after the transfer), and all securities given over financial property in respect of obligations under those close-out netting contracts; - all close out netting contracts to which the regulated body is a party (and to which the receiving body, within the meaning of the Transfer Act, will become a party immediately after the transfer), and all securities given over financial property in respect of obligations under those close-out netting contracts; or â¢ in all other cases, all close out netting contracts to which the regulated body is a party and all securities given over financial property in respect of obligations under those close-out netting contracts. [ Schedule 5, item 26, subsection 15C(2) of the PSN Act] 6.43 In order for a specified stay provision to continue to apply, APRA must be satisfied that the matters set out at 6.44 will be satisfied in relation to the party (the regulated body and/or receiving body) in respect of which the declaration may be made at the time the declaration will be made or just after the coming into force of a certificate of transfer, if applicable. 6.44 The conditions of which APRA must be satisfied are as follows â¢ that the party is able to meet all its liabilities under: - close out netting contracts to which it is a party as and when they become due and payable (including all payment and delivery obligations); and - all securities given over financial property in respect of obligations under those close-out netting contracts; â¢ that the party is solvent (within the meaning of the Corporations Act) (this is a current requirement); and â¢ if the party is an ADI, general insurer or life company, that they have the material authorisation (however described) necessary for their regulated business. The term ‘regulated business’ in section 5 of the PSN Act is repealed and replaced with: - in relation to an ADI—means the ADI’s banking business (within the meaning of the Banking Act); and - in relation to a general insurer—means the general insurer’s insurance business (within the meaning of the Insurance Act); and - in relation to a life company—means the life company’s life insurance business (within the meaning of the Life Insurance Act). â¢ (If the party is not an ADI, general insurer or life company, then the material authorisation requirement will not need to be satisfied.) [Schedule 5, item 27, paragraph 15C(3)(c) of the PSN Act] â¢ if minimum capital requirements under the Banking Act, the Insurance Act or the Life Insurance Act apply to the party, that either of the following is satisfied: - the party’s level of capital complies with the minimum capital requirements that apply to it under the Banking Act, the Insurance Act or the Life Insurance Act (as the case requires) and the applicable prudential standards made under the relevant Act; or [Schedule 5, item 27, paragraph 15C(3)(d) of the PSN Act] - arrangements are in place to ensure that the party performs all its obligations under (i) close out netting contracts to which it is a party and (ii) all securities given over financial property in respect of obligations under those close-out netting contracts as and when they are due to be performed. Those arrangements must remain in place until at least the earliest day on which: â¢ the party’s level of capital complies with the applicable minimum capital requirements; â¢ if a Banking Act statutory manager is in control of the party’s business—APRA makes an ultimate termination of control under existing subsection 13C(3) of the Banking Act; â¢ if an Insurance Act statutory manager is in control of the party’s busi