16 December 2005

Discussion Paper on Regulation of Discretionary Mutual Funds and Direct Offshore Foreign Insurers

Assistant Treasurer Mal Brough today released a Treasury discussion paper on the regulation of discretionary mutual funds (DMFs) and direct offshore foreign insurers (DOFIs).

Mr Brough said the Howard Government wanted to examine regulating DMFs and DOFIs but only after consultation with industry.

"A discussion paper will allow the Government to explore the issues fully and carefully to ensure that any regulations are balanced and appropriate," Mr Brough said.

DMFs and DOFIs fill a small but important niche in the insurance market. Without them, insurance could be either harder or more expensive to obtain.

The discussion paper has been released in response to a review undertaken by Gary Potts. The Government commissioned the review of the insurance like products provided by institutions not regulated by the Australian Prudential Regulation Authority (APRA) following a recommendation of the HIH Royal Commission.

In conducting the review, Mr Potts examined the nature and extent of DMF and DOFI operations in Australia and their contribution to overall insurance capacity. He recommended APRA regulate DOFIs marketing insurance that are not based in a regime with prudential regulation comparable with that of Australia. He also recommended APRA regulate DMFs that retain a contingent risk. The Government accepted these recommendations.

DMFs represent less than half of 1 per cent of the Australian insurance market. The review found that DMFs do not pose a systemic risk to the financial sector as a whole but recommended prudential regulation.

"The Government, in implementing the recommendation, is aware of the potential implications for consumers who have found it difficult to obtain specialised insurance cover," Mr Brough said.

In relation to the possible regulation of DOFIs, Mr Brough noted that the recognition of regimes with a level of prudential regulation comparable with that of Australia would allow appropriately regulated foreign insurers to continue to market insurance in Australia.

The discussion paper is available on the Treasury website at www.treasury.gov.au. Public submissions in response to the paper close on 24 February 2006.