16 April 2003

Report of the HIH Royal Commission

I am today releasing the Report of the HIH Royal Commission in its entirety. The Royal Commission was established at the Government's instigation following the financial collapse of the HIH Insurance Group in March 2001. The collapse affected individuals, community groups, and the public generally. The Commission operated from September 2001 until the Report was delivered to the Governor-General on 4 April 2003. The Government wishes to thank the Commissioner, Mr Justice Owen, for all his efforts over the past 18 months.

The Commissioner concludes that the primary reason for the collapse of HIH was the failure to provide properly for future claims. This failure was essentially due to mismanagement and an inadequate response to pressures emerging in insurance markets internationally.

The Commissioner has identified a number of possible breaches of the Corporations Law and the Crimes Act (NSW). There are 56 matters that Mr Justice Owen has indicated should be referred either to the Australian Securities and Investments Commission (ASIC) or (in a small number of cases) to the NSW Director of Public Prosecutions. The Government is referring these possible breaches to those authorities immediately.

In respect of the Corporations Law referrals, a taskforce will be established immediately under the direction of ASIC to examine these issues and prepare briefs for possible proceedings. Additional funding will be provided in the budget for this task. The Government will give consideration to whether a Special Prosecutor will be appointed to prosecute criminal charges.

ASIC has already brought some proceedings arising from the failure of HIH. None of the Commissioner's findings that there might have been a breach of the law relates to or touches on those proceedings.

There were many individuals and companies who were the subject of adverse comment in counsel assisting's closing submissions. The Commissioner makes it clear at page lix of the first volume of his report that "where there is no finding in this report against [a] person or company, the reputation of that person or company emerges entirely free of any adverse implications".

The Commissioner also concludes that the Australian Prudential Regulation Authority (APRA) did not cause the collapse of HIH. He notes at page 442 of the third volume of his report that "APRA's failure to act did not contribute to the collapse of HIH. However, the manner in which APRA exercised its powers and discharged its responsibilities under the Insurance Act fell short of that which the community was entitled to expect from the prudential regulator of the insurance industry".

The Commissioner has made 61 policy recommendations. The recommendations cover corporate governance and financial reporting, APRA's governance arrangements, the regulation of general insurance and APRA's internal processes. Some recommendations seek action by the States and Territories.

The demise of HIH occurred under regulatory arrangements that have since been substantially strengthened. New legislation for general insurers was enacted in September 2001 and new prudential standards were issued in February 2002. This new framework, which commenced on 1 July 2002, means that general insurance companies are now subject to much more robust arrangements. The reforms ensure that companies establish appropriate systems of governance and internal controls, in addition to more transparent valuation of liabilities and risk-based capital adequacy.

There has also been a transition in supervisory practice from one based on oversighting individual `transactions' to a `systems' based approach, consistent with international regulatory standards and the direction of modern regulatory practice.

The Government will consider very carefully the Commissioner's recommendations. The recommendations propose continuing the broad architecture for the financial system introduced by the Government following the Wallis Report. Under this structure APRA is responsible for prudential regulation of all deposit-taking institutions, general and life insurance and superannuation, and ASIC is responsible for maintaining market integrity, consumer protection and the supervision of companies. The Commissioner notes the potential for improving the clarity of roles and coordination between the regulatory agencies.

The Government accepts in-principle the Commissioner's recommendation to replace APRA's non-executive board with an executive group (or commission). The executive group would carry the responsibility and be accountable for the operation and performance of APRA - this arrangement would further strengthen Australia's existing regulatory framework. As the Commissioner has suggested, the Government wishes to consider his recommendations on these matters in light of the Uhrig Report into Statutory Authorities and Office Holders, which is due to be delivered to the Government in mid-May. Soon after, I expect to be able to introduce legislation into the Parliament to give effect to any changes to the governance arrangements of APRA.

The Government released its proposals to enhance corporate disclosure under the CLERP 9 paper in September last year. At that time I indicated that the CLERP 9 proposals would also allow any further recommendations from the Royal Commission to be added to legislative proposals.

I am pleased to see that the Commissioner's recommendations are generally consistent with the CLERP 9 proposals. The Government will be considering the corporate governance and financial reporting recommendations from the Commissioner in preparing the legislation to enact the CLERP proposals.

I anticipate that draft legislation will be released for public comment in the next few months. I expect to introduce the legislation into the Parliament early in the Spring Sittings.

The Government will consider expeditiously the Report's other recommendations and announce further details of its response which will be designed to underpin the continuation of an efficient, competitive and flexible financial system while maintaining financial stability, prudence, and fairness.

Copies of the report will be available on the Royal Commission website at http://www.hihroyalcom.gov.au/.