The Australian Banking and Financial System - Essay Example

Name: Paper Name: Institution: Date: Introduction APRA was established as a recommendation by the Willis report. The APRA was established in 1998 under the Prudential Act of 1998, it was one of the Commonwealth statutory authorities in Australia (Corporations Act 2001, 2013). The APRA was to possess the role of prudential supervision of Australian depositing taking institutions (ADI), non-holding that carry out business in insurance, underwriting, companies carrying out life assurance, retirement fund holding companies and superannuation funds (Tyree, 2005). The roles were earlier carried out by the Reserve Bank of Australia (RBA). These roles were provided by the 1959 Banking Act (BA) which works to regulate banking, provide protection to currency and public credit as it is provided by the commonwealth (Tyree & Weaver, 2006). These roles are accomplished by various ways the first one is to restricted entry into the field of banking. The second way is to ensure that there supervision and monitoring of all banks in Australia by the APRA (Corporations Act 2001, 2013). The APRA is also responsible for offering the protection to the people who give deposits to the institutions. The RBA is charged with the responsibility of controlling the interest rates in the country as long there is approval by the treasurer. The institution is responsible for maintaining financial stability in the country (Corporations Act 2001, 2013). The other body Australian Security and investment (ASIC) is responsible for maintaining integrity in how the businesses are conducted, disclosure and consumer protection in the financial institutions (Tyree & Weaver, 2006). The RBA is responsible for introducing monetary policy in the country to ensure all financial activities runs in a proper way in the country. The three bodies work closely to ensure that there is economic and financial stability in the country (Tyree, 2005). Legal issues To I greater extent I do not agree with the argument that the alleged failings can be attributed to the APRA regulatory framework that divides the regulation responsibility between the AISC and APRA. The reason behind my argument is that there is a clear division of roles of these two bodies and there is no way their roles can collide (Corporations Act 2001, 2013). APRA has its roles laid down and the only thing we can say is that they are partners in ensuring a better financial environment. To support my argument there is need to present the APRA roles and responsibilities (Baxt, Black & Hanrahan, 2003). There is also need to look at the pre-HIH APRA and the post-HIH roles so as to identify if the counsel argument could be at any extent be true (Corporations Act 2001, 2013). The failing of the APRA can be high be attributed to the structure it inherited from its predecessors (Tyree, 2005). The formation of the APRA through the use of the existing Insurance and Superannuation Commission (ISC) left the APRA with a few number of staff members (Baxt, Black & Hanrahan, 2003). The reason behind this is that most of the existing employees opted not to apply for new contracts under the new body. The majority of the employees who were left with APRA left within the following two and a half years. This meant that there were only inexperienced employees in the body that was entrusted with monitoring financial institutions (Tyree & Weaver, 2006). There were also complaints that the remuneration offered by the APRA was below the level of the organisations of its calibre (Corporations Act 2001, 2013). This meant that it could attract any experienced employees to work with the APRA. This was a long term problem because the organisation could not recruit employees with the expertise required in handling the organisation responsibilities and roles (Tyree, 2005). The roles of the organisation require staff members who have skills in the financial sector so as to identify the indicators of a failing institution (Tyree & Weaver, 2006). The employees who came into the institution were overworked and they did not have time to carry out analysis of the institution as it was required by the law (Corporations Act 2001, 2013). This meant that HIH was not reviewed by the APRA and the institution earned losses till it collapsed. The APRA could have reviewed the HIH and could have identified that there was danger of collapse. This could have helped safe the institution by using the prescribed channels or even suspend deposit taking from the general public (Corporations Act 2001, 2013). This could have saved the HIH customers their hard earned money which they lost when the institution collapsed. The APRA could have identified the dangers that led to the collapse and could have notified the relevant authority so as to help safe the situation (Tyree, 2005). The employees including the chief executive officer did not have any knowledge about the insurance industry (Baxt, Black & Hanrahan, 2003). They took their duties to be office work and yet they were supposed to be doing actual analysis of all ADI so as to ensure they are running on the right track and to ensure that depositors’ funds are well protected (Tyree & Weaver, 2006). The other challenge that can be attributed to the collapse of HIH is that the APRA was using Insurance Act of 1973 this act was too shallow to help solve the problems that were facing financial institutions (Tyree & Weaver, 2006). This meant that the act was unsuitable for the challenges the APRA was facing in monitoring the financial institutions and establishing the risks and dangers of collapsing (Tyree, 2005). The act also did not provide intervention powers to the APRA so this made it difficult for the APRA to take any action on any institution that was suspected to be collapsing (Corporations Act 2001, 2013). The act was out-dated and could not provide solutions to the challenges of the APRA being a new establishment that was charged with a lot of responsibility. The act had weaknesses because it could not allow the APRA to intervene in any way because the act allowed the institutions to operate in non-interventionist manner (Tyree & Weaver, 2006). Therefore, APRA could be going against the act that was guiding it. This meant that the hands of the APRA were tied and could not help solve the problems that were faced by HIH (Baxt, Black & Hanrahan, 2003). This weakness was captured in various reports and the most notable one being the Canadian Prudential Regulator Palmer. The act did not establish any powers for the APRA that could allow it to interfere with the way the ADI were operating their business. The powers provided were only to supervise the financial institutions and there was no clear further action for the APRA (Tyree, 2005). The APRA was also responsible for the collapse of HIH because it trusted the institution to maintain the set assumptions. This was also attributed to the regulatory framework provided by the Insurance Act of 1973 because it only provided a supervisory framework (Corporations Act 2001, 2013). The authority assumed that the financial institutions will have a way to access further capital and solvency support which will comply with the set standards of internal systems (Tyree, 2005). The APRA ensured that the financial institutions were responsible and complied with the minimum legal requirements to maintain a given level of solvency (Baxt, Black & Hanrahan, 2003). The authority assumed that the financial institutions were responsible for detecting any risks that would lead to collapsing. The HIH did not detect these risks and assumed that APRA would come to warn them of any risks facing the institution (Tyree & Weaver, 2006). The HIH royal commission stated that the HIH failed the assumptions and, therefore, was responsible for its collapse. The APRA also failed because it did not carry out the guidance on risk management that will lead to collapse. The APRA lacked the will to provide this guidance because this was one of its functions. Case Law Thus in Davis v Radcliffe [1990] 1 WLR 821 in this case the plaintiff claimed that the defendant that was responsible for the loss the plaintiff incurred (Tyree, 2005). The facts in the case were that the defendant had an overseeing role in the field that the plaintiff was operating. Davis claimed that the defendant should have warned them of a possible collapse and this could have helped them not to incur any losses. To Davis the Radcliffe should have inspected the situation and could have identified the warnings about a possible collapse (Corporations Act 2001, 2013). The defendant said that they did not have any duty of care to the plaintiff. It was held that the Privy Council had struck negligence claims against selected organs of Isle of Man Government. The reason behind this decision is that such organs did not own any duty of care to the organs they monitor. The duty of care was owned to the general public and not to an individual. Therefore, the defendant did not owe any duty of care to Davis. Conclusion In conclusion, in referring to the above case the APRA did not have any duty of care to HIH and therefore, could not be held responsible for any losses incurred by the company. The APRA had the responsibility of monitoring the financial institutions but could not be held responsible for the HIH collapse because the pre-HIH APRA did not have a clear laid down operation framework. If the post-APRA was put in place before the collapse it would have helped solve the APRA situation. Therefore, HIH collapse cannot be attributed to roles of APRA and AISC because the authorities could have only provided a monitoring role. The HIH could have identified the risk of its collapse and could have honored the assumption of the APRA. Bibliography Books Baxt, R, Black, A and Hanrahan, P, 2003, Securities and Financial Services Law, 6th ed. Butterworths: LexisNexis. Tyree, A & Weaver, P, 2006, Banking Law and the Financial System in Australia, 6th ed. Butterworths: LexisNexis. Tyree, A, 2005, Banking Law in Australia, 7th ed. Butterworths: LexisNexis. Cases Davis v Radcliffe [1990] 1 WLR 821 Legislations Corporations Act 2001, 2013. Butterworths: Sydney. 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