It’s confirmed – the Australian Prudential Regulation Authority (APRA) thinks the Federal Treasury’s plan to regulate direct offshore foreign insurers (DOFIs) and discretionary mutual funds (DMFs) is unworkable.

The APRA submission, dated March 2, responds to a Treasury discussion paper calling for the regulator to decide which countries have fit and proper rules to control insurers planning to do business in Australia. The submission disappeared from the Treasury website list of submissions shortly after it was posted.

APRA believes it may be exposed to moral hazard if it is perceived to be able to regulate the foreigners.

“APRA should have no direct involvement in the regulation of DMFs and DOFIs,” says APRA Executive Member Steve Somogyi in his blunt appraisal of the Treasury plan. He favours using ratings agencies, and says APRA is “uncomfortable” with being involved.

Not only would some American states not have good enough prudential regulations to comply, neither would Bermuda – and as Australian insurers reinsure up to 15% of our catastrophe reinsurance through Bermuda, that could be embarrassing.

Mr Somogyi says bad insurers could base themselves in countries with sound regulatory regimes, anyway.

He says Australian-based insurers shouldn’t be levied to pay for whatever solution to the DOFIs problem the Government eventually comes up with. But he even-handedly adds that a levy on DOFIs and DMFs “could be a significant burden” too.

(Our thanks to the reader who emailed us a copy of the submission, uploaded in the brief time it existed as a public document.)