French Enlightenment writer Voltaire said that with great power comes great responsibility.

Following the release of far-reaching proposals granting the Australian Prudential Regulation Authority (APRA) intrusive new powers to investigate, prosecute and terminate troubled insurance companies, Voltaire’s musings on power should be kept in mind.

As the industry prepares for the implementation next July of Basel III and the imminent release of the regulator’s final prudential standards for insurers’ capital, attention has now turned from beefing-up capital and reporting standards to how APRA would respond in the event of a failing institution.

Few would argue against greater powers to prevent corporate collapses. Of the 100-odd Treasury proposals – ranging from the removal of the “show cause” provision, new powers to investigate authorised deposit-taking institutions and authorised non-operating holding companies, and powers to ban guilty parties from all industries under APRA supervision – most are seen as necessary to align and streamline the various sectors under the regulator’s expanding umbrella.

HIH may only be an historical footnote for those who entered the industry after 2001, but the memory of APRA’s role, or lack thereof, in Australia’s biggest corporate collapse has been hardwired into the regulator’s consciousness.

What has concerned industry experts, however, is the proposed expansion of APRA’s power without an equally robust increase in transparency.

Initial feedback on the proposals has been cautious. The industry has three months to respond, and with 184 pages of complex material to digest, most stakeholders contacted by insuranceNEWS.com.au were inclined to wait before wading into commentary.

A spokesman for the Insurance Council of Australia said it is reviewing the APRA paper and will discuss the proposals with its members and “will then consider making a submission”.

Suncorp spokesman Jamin Smith says the group recognises the “need to review our regulatory regime in the context of international developments”.

An Australian Institute of Company Directors spokesman told insuranceNEWS.com.au it also will withhold judgement until it has thoroughly reviewed the proposals.

While the devil may well be in the detail, some experts have been willing to speak off the record about the overall direction of the proposals.

A high-ranking industry source told insuranceNEWS.com.au the proposals grant APRA “excessive power to intervene without compelling evidence to support such an intervention”.

He notes that under the proposals, APRA could theoretically intervene to “save” an insurer that was still meeting minimum capital requirements and solvency margins. This raises an obvious question: how can APRA be sure a company is on the brink of insolvency before pre-emptively stepping in?

“The really unknown territory here is the discretionary element,” the source said. “It really all depends on APRA’s assessment, which is a subjective view and could change from day to day.

“This is unknown territory for everyone and could have big implications for all insurers.

“We have seen how regulators react during a global crisis, and they can over-react.”

The source says any new regulations would also bear compliance costs, which have to be passed onto customers. An argument could also be made for the redundancy of such proposals, given the safeguards already built into the system.

“The way that we run things here, and all insurers would be doing the same, is maintaining capital requirements,” he said. “We have a specific margin over and above the minimum requirement, and it would come as huge surprise if anything happened in the industry.

“These days APRA are all over it – there are so many warning bells.

“But having said that, Australia is part of a global market and we can’t afford not to [improve regulatory oversight].”

Kevin Davis, Research Director at the Australian Centre for Financial Studies, is generally supportive of the proposals but questions how APRA can be held accountable.

“I think what came of out the global financial crisis was a recognition around the world that regulators didn’t have the powers they needed, so increasing the powers and harmonising them makes sense,” Professor Davis told insuranceNEWS.com.au.

“But if you give people power, if they have discretion to use it, they need to be accountable.

“In the US, for example, they have prompt corrective action requirements, but we don’t have anything like that here. APRA has the discretion to decide and it could create chaos.”

Professor Davis says complex corporate arrangements can make the task of untangling a company’s true position difficult. “It’s bloody hard to work out what financial state they are in.”

Pat McConnell, an honorary fellow at Macquarie University’s Applied Finance Centre, has labelled some of the Treasury proposals as “draconian”.

Writing for independent news site The Conversation, he is particularly critical of the plan to suspend continuous disclosure requirements for up to 48 hours during an APRA investigation.

Treasury justifies the proposal as necessary to prevent exacerbating “the distress situation” before APRA and the Government have an opportunity to map out a strategy. But Mr McConnell doesn’t buy it.

“In what situation, other than regulatory incompetence, would such a distress come as a surprise to a regulator whose job is, after all, to anticipate and head off such an eventuality?”

Mr McConnell also questions APRA’s fixation on micro-prudential regulations when prudential bodies globally are moving towards a macro-based approach.

“Partly this is because APRA prides itself on taking a systems-wide view already, but also maybe it is because the approaches taken by other regulators pose a threat to its current structure?”

In this situation Voltaire would probably have had something profound to say about transparency being the ability to look both in and out, and that’s how it should be with APRA’s proposed new powers.

The regulator should be upfront in demonstrating how these powers, should they be passed in full, would be equally matched by responsibility.