Contrary to popular legend, the Australian Prudential Regulation Authority (APRA) wasn’t found to have been a party to the collapse of HIH in March 2001. While the royal commission that followed found APRA didn’t recognise the seriousness of the situation or question the reliability of HIH’s information until it was too late, it was careful not to find APRA responsible.

Some oversight problems at the regulator were rectified and APRA has since become a model of prudent prudential regulation. Its diligence has been recognised as a major reason for Australian banks’ solvency when their counterparts around the world were taking in poisonous business.

The regulator is swift to act and a stickler for procedure when things go wrong. However, a Federal Court judgement last week suggests it still has some way to go before it’s perfect.

As we reported in August, a judicial manager was appointed by the Federal Court following the collapse earlier this year of Transpacific Insurance Corporation. The company went to the wall leaving unpaid an estimated $2.5 million in run-off claims it was dealing with for another insurer. It’s understood 18 claimants are involved.

In 2000 Australian Family Assurance (Austfam) decided to go into run-off and exited the market. In 2001 Transpacific accepted a portfolio transfer from Austfam.

The Chairman of Austfam was Ross Porter, who continues in the industry running accident and health underwriting agency AFA Insurance, which is trading profitably.

No one has suggested that Mr Porter has done anything wrong, and he told insuranceNEWS.com.au in August that the run-off had been going “smoothly and profitably” until Transpacific director Ian Douglas put his company into liquidation. He said that as soon as he was made aware of the situation, he contacted APRA.

Mr Porter has nevertheless been at the centre of a court skirmish with APRA that ended last week in a Federal Court judge finding against the regulator and admonishing it for what he found to be very unreasonable behaviour.

Early on August 3, a few hours before insuranceNEWS.com.au reported on the Transpacific collapse and the possibility of a run-off fund shortfall, Mr Porter’s solicitor, Fiona Shand, was issued with a notice by APRA to produce a hard drive belonging to him. Failure to produce the hard drive at APRA’s Sydney office by 4pm that day could see her charged with a criminal offence. Originally the notice had allowed for two days to comply, but when it was served only six hours and 10 minutes remained.

Shortly before the deadline on August 3, Ms Shand applied to the Federal Court for urgent relief, but the clock ticked over to 4pm and the court could do nothing as there was no apparent power to prevent the relevant legislation taking its course once the notice expired. Although the decision to issue the notice might be stayed on an interim basis, that would still leave the notice itself in existence, and leave Ms Shand open to prosecution.

On the following Friday, Ms Shand and Mr Porter returned to the court, and Justice Nye Perram restrained APRA from taking any steps to enforce the notice. On August 17, APRA – in the judge’s words – “purported to revoke the notice”, an action that would still not remove Ms Shand from exposure to a criminal charge.

Finally, on September 3, after what were obviously protracted negotiations – the judge described APRA’s approach in that period as “indicative of an ethical obtuseness” – the regulator consented to orders setting the notice aside with effect from the day of its issue.

Why did APRA want the hard drive in the first place? In his decision last week, Justice Perram said there was “no evidence before me of any of the circumstances surrounding [APRA’s] decision to issue the notice, nor of why it was thought two days might be an appropriate time for compliance”.

Noting that APRA also hadn’t provided any evidence surrounding the circumstances of the notice’s issue, he said it was “one of those cases where the failure by the decision-maker to give any reasons for the decision permits the inference to be drawn that he had no good reason for it”.

He also described as “reprehensible” APRA’s lack of any evidence for serving the notice with only six hours and 10 minutes of its original two-day period remaining, and its decision to revoke the notice unilaterally as a “failure… to understand the seriousness of [Ms Shand’s] position”.

Unusually, the judge issued an indemnity costs order against APRA, under which Mr Porter will be fully recompensed by the regulator for the costs of the court action, rather than having it watered down by reference to a court scale.

Late last week came the denouement to the whole affair, when Financial Services Minister Chris Bowen announced the activation of the Financial Claims Scheme Policyholder Compensation Facility – the first time it has been used.

APRA will fund payments under the facility to pay the 18 outstanding claimants, which include minors, small businesses and non-profit organisations. The costs will be recovered as far as possible through the Austfam liquidation. 

The policyholder compensation facility came about on the recommendation of the HIH Royal Commission, and was finally set up last year. The Federal Government can seek recovery through the liquidator, unless the liquidated assets aren’t enough – and Mr Bowen says the remaining Austfam assets are estimated to be worth $603,000.

The remaining costs can be recovered though a levy of up to 5% of the gross premiums of general insurers. Hmmm – it’s obviously a scheme set up with a shortfall of billions of dollars – rather than a couple of million – in mind.

In the meantime, some questions remain unanswered. Clearly, last week wasn’t APRA’s best.