The Treasurer has announced the release of draft legislation: Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017 for consultation. A media release issued by the Treasurer states that the purpose of the draft legislation is 'to overhaul the powers of the Australian Prudential Regulation Authority (APRA) during times of financial crisis.'
The draft Bill includes 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 and Financial Sector (Business Transfer and Group Restructure) Act 1999.
The amendments are intended to 'enhance' APRA's powers in time of financial crisis by providing APRA with:

• powers that enable APRA to set requirements on resolution planning and ensure banks and insurers are better prepared for a crisis; and

• an expanded set of crisis resolution powers that equip APRA to act decisively to facilitate the orderly resolution of a distressed bank or insurer.
  
  Overview
  The explanatory memorandum accompanying the draft Bill states that the Bill will provide APRA with an 'enhanced suite of crisis resolution powers' applicable to prudentially regulated authorised deposit-taking institutions (ADIs), general insurers and life insurance companies (insurers), and certain group entities.
  Chapters 2 to 9 of the Bill deal with amendments to APRA's powers relevant to the resolution of a regulated entity in distress in relation to: statutory and judicial management; directions powers; transfer powers; conversion and write-off of capital instruments; stay provisions; foreign branches; Financial Claims Schemes and wind-up and other matters.
  Chapter 10 of the Bill deals with amendments that relate to crisis resolution planning, to provide APRA with clear powers to ensure that regulated entities are better prepared for a resolution prior to such an event arising.
  
  Crisis Management: The Bill proposes to enhance APRA’s capacity to take control of a distressed Authorised Deposit Institution (ADI) or insurer and/or relevant parts of its group, subject to certain pre-conditions and safeguards, including amendments to: 

• enhance APRA’s statutory management powers in respect of ADIs, including new statutory management powers in relation to foreign ADIs;

• provide APRA with new statutory management powers in respect of insurers;

• provide APRA with new statutory management powers in respect of authorised non-operating holding companies (NOHCs) of regulated entities, and subsidiaries of authorised NOHCs or regulated entities;

• enhance the moratorium provisions with respect to the statutory and judicial management provisions of the Banking Act 1959, Insurance Act 1973 and Life Insurance Act 1995 (Industry Acts); and

• enhance the statutory immunity provisions applying to statutory and judicial managers.

Directions powers: The Bill proposes to enhance the scope and efficacy of APRA’s existing directions powers, including amendments to:

• extend APRA’s ability to issue directions to subsidiaries of authorised NOHCs and subsidiaries of regulated entities;

• clarify the scope of APRA’s ‘catch-all’ directions power;

• clarify that APRA may issue directions requiring entities to take specified actions to facilitate resolution, whether in normal times or during a crisis;

• clarify that APRA may give directions despite external support being in place;

• extend APRA’s ability to issue a recapitalisation direction to a regulated entity’s authorised NOHC and certain other holding companies;

• harmonise recapitalisation directions powers with general directions powers;

• ensure that causing an entity to comply with an APRA direction will not be grounds for directors or management to be held liable under any other law (subject to a good faith and reasonableness test);

• harmonise the protection from liability provisions in the Industry Acts; and

• provide for APRA to determine that the giving of a direction should be confidential in certain circumstances.
  

Transfer powers: The Bill is intended to improve APRA’s ability to implement a transfer under the Financial Sector (Business Transfer and Group Restructure Act) 1999 (note: the Bill proposes to amend the title of this Act to the Financial Sector (Transfer and Restructure Act) 1999)) (The Transfer Act), including amendments to:

• enable APRA to compulsorily transfer the shares in a failing regulated entity to another body corporate;

• widen the scope of the compulsory transfer powers to apply to related entities of insurers; and

• remove the requirement for complementary State or Territory legislation to be in place in relation to transfers of business.

Conversion and write-off of capital instruments: The Bill proposes to amend the Industry Acts to provide increased certainty in relation to the conversion and write-off of capital instruments, including amendments to provide that conversion or write-off can happen despite any impediment there may be in:

• 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;

• the constitution of the entity that has issued the instrument and, for conversion, the constitution of the entity into whose shares the instrument converts (if different);

• any contract or arrangement to which the issuing entity is a party and, for conversion, to which the entity into whose shares the instrument converts (if different) is a party;

• any listing rules of a financial market in whose official list the issuing entity and, for conversion, the entity into whose shares the instrument converts (if different), is included; and

• 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 occurrence of an event (such as the making of a determination by APRA) that results in a requirement for the conversion or write-off of a capital instrument.

Stay provisions: The Bill proposes to enhance the stay provisions, and makes consequential amendments to the Payment Systems and Netting Act 1998 (PSN Act), including amendments to:

• 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 group;

• 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); and

• set out the relationship between the enhanced moratorium provisions for statutory and judicial management and the PSN Act, as appropriate.

Foreign branches: The Bill is proposes to enhance APRA’s ability to respond when a foreign branch may be in distress, including amendments to:

• provide APRA with powers to appoint a statutory manager to the Australian branch of a foreign regulated entity;

• clarify APRA’s powers to apply to wind up the Australian branch of a foreign regulated entity;

• harmonise the power to direct a foreign regulated entity not to transfer assets out of Australia across the Industry Acts;

• clarify APRA’s powers to implement a voluntary or compulsory transfer of business of the Australian branch of a foreign regulated entity; and

• provide APRA with an explicit power to revoke the authorisation of a foreign regulated entity in Australia if the entity’s authorisation is revoked by its home jurisdiction. 
  
  Financial Claims Scheme: The Bill proposes certain enhancements to the Financial Claims Scheme (FCS) framework, including amendments to:

• establish an additional payment mechanism to enable FCS entitlements to be satisfied when there has been a transfer of deposits to another ADI or policyholder claims to another general insurer;

• enable APRA to obtain information from third parties in relation to the FCS;

• ensure the effective payout of FCS entitlements to third party claimants of a policyholder of a failed general insurer where the policyholder is in liquidation;

• enable APRA to make interim payments to claimants under the FCS applicable to general insurers;

• grant the Treasurer the discretion to declare the FCS at an earlier time, upon appointment of a statutory manager; and

• reduce the reporting burden regarding withholding tax in relation to interest on amounts paid under the FCS.

Wind-up and other matters: The Bill makes certain enhancements to APRA’s winding up powers and powers to impose conditions on, or revoke, authorisations, including amendments to:

• harmonise the Industry Acts with regard to APRA’s involvement in external administration of regulated entities;

• ensure that APRA’s existing powers in the winding up of a regulated entity extend to where a provisional liquidator is appointed;

• enable APRA to apply for the winding up of an ADI without the ADI having first been placed in statutory management;

• provide APRA with notice of proposed applications for external administration of regulated entities;

• ensure that the institution of offence proceedings is no bar to judicial management or winding up of a regulated entity;

• enhance APRA’s ability to impose, vary and revoke conditions of authorisation in certain circumstances; and

• enable APRA to revoke authorisations on certain additional grounds under the Industry Acts.

Resolution planning: The Bill makes amendments to strengthen the legislative framework for resolution planning, including amendments to:

• refine and harmonise the definition of ‘prudential matters’ in the Industry Acts (which includes inserting a definition of this term in the Life Insurance Act for the first time);

• specify which entities must comply with prudential standards; and

enable APRA to require a holding company to ensure a regulated entity has an authorised NOHC, where appropriate.

[Sources: Treasury media release: APRA's Crisis Management Powers 18/08/2017; Explanatory Memorandum; Exposure Draft legislation; Scott Morrison Treasurer of the Commonwealth of Australia Media Release 18/08/2017]