The Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, today released the Report of the Review of Financial System Levies.

The Review examines the framework for collecting levies from the financial services sector to fund the prudential regulation undertaken by APRA, ASIC and the ATO.

After reviewing the report, the Government has accepted the recommendations of the review subject to the changes in the framework not resulting in increases in the amounts paid by the smallest financial institutions.

“The Government accepts the Review’s conclusion that system risk and vertical equity considerations, as well as cost, should be taken into account in the determination of levies,” Senator Coonan said.

“The Government also recognises that small financial institutions play an important role in terms of alternate service provision. Competition and choice for consumers and should not be disadvantaged by significant increases in their levies.”

A full list of measures agreed by the Government in response to the Review’s recommendations is attached.

“These measures ensure that the burden of funding regulation is shared in a fair and efficient way and allows for increased flexibility in the way levies are collected,” Senator Coonan said.

“The Review found that levies should continue to be imposed on a sector by sector basis.

“The most substantial change to existing arrangements will be the separation of the levies into two components, the first of which would continue to be based on cost of supervision and the second on system impact and vertical equity.

“These arrangements recognise the particular importance of regulating the largest institutions in our financial system.”

The Government intends the new levy arrangements to take effect in time to be implemented for the 2005-06 financial sector levies after appropriate further consultation with industry on the detail of these new arrangements. This consultation will commence following the determination of the 2004-05 financial sector levies, which will be set under the existing legislative framework for the levies.

The next review of the levy-setting arrangements is scheduled to take place during 2008.

A copy of the Report of the Review of Financial Sector Levies is on the website www.fslevies.treasury.gov.au.

New Financial Sector Levies Framework

The Government has agreed that:

(1) the sectoral basis for imposing the financial sector levies be retained;

(2) subject to Recommendations3,4 and5, the existing sectoral distinctions be retained;

(3) the levies imposed on retirement savings account (RSA) providers be merged with the levies imposed on the authorised deposit-taking institution (ADI) and life insurance sectors according to the sector of the RSA provider, but that the Retirement Savings Account Supervisory Levies Imposition Act 1998 not be repealed;

(4) authorised non-operating holding companies that are outside the ADI sector be subject to the financial sector levies;

(5) the levy arrangements for small APRA superannuation funds (SAFs) be separated from those for other superannuation funds and, in particular, that SAFs be levied at lower minimum rates than other superannuation funds;

(6) changes to the levy determination arrangements will not lead to increases in the amounts paid by the smallest financial institutions;

in part, this reflects the Government’s acceptance of the Review’s conclusion that system risk and vertical equity considerations, as well as cost, should be taken into account in the determination of levies. In addition, the Government considers that small financial institutions fill an important niche in terms of alternate service provision, competition and choice for consumers.

(7) there be two distinct elements to the financial sector levies:

one component to relate to the cost of supervision and involve a single levy rate on assets subject to a maximum (as well as a minimum) levy amount along the lines of the existing levy arrangements; and

the other component to relate to potential system impact and vertical equity considerations and be a low rate levy on assets, without any maximum levy amount.

(8) the portion of the total levy based in system impact and vertical equity considerations be set such that it is raises between 10and 30per cent of APRA’s levy funding requirement in any one year;

(9) a statutory upper limit on the maximum levy amount payable by any regulated institution in each sector apply only to the cost-based component of the recommended new levy structure;

(10) the statutory upper limit for the cost-based component of the levy on an entity for all financial industry sectors be $1.5million in 2004-05 and be increased by an indexation factor for each subsequent year.

(11) the indexation factor applied to the statutory upper limits for each year be based on the movements in the Consumer Price Index specified under existing arrangements PLUS three percentage points.

(12) total assets remain the base for the financial sector levies;

(13) sectoral levy rates continue to be revisited- and, if appropriate, adjusted- each year;

(14) levies for each industry sector be determined on the basis of a four-year moving average of estimated expenditure for that sector;

(15) for the first two years of the new arrangements, the determination of the levies take into account the magnitude of changes in the actual levies from the previous year. Where changes in the levies from the application of the principles recommended by the Review might be particularly substantial, that application should be able to be modified to reduce the extent of change in a particular year;

(16) the activities for which financial sector levy funds are raised be continued and that APRA, ASIC and the ATO ensure that their reporting of the use of the levy funds satisfies the requirements of the Government’s cost recovery policy; and

(17) the next review of the levy-setting arrangements take place during 2008.