AUSTRALIAN FINANCIAL SYSTEM’S SLOPPY BOOKKEEPING FIXED
AUSTRALIA’S INSURANCE POLICIES STOPPED PAYING OUT
OK let’s not linger for too much longer on the collapse of HIH in 2001 and when it handed itself to the liquidators to manage out a debt of a lazy $4.5 Billion ear-marking itself as Australia’s worst corporation failure of the books in history and hopefully the last of it’s kind. Come on though, our modern society is too smart to think that’s the last, we know it can happen again and it did, with the GFC exemplifying another largely unpredicted and catastrophic collapse.
At the least can we hope it’s the last of its kind, whereby it’s bookkeeping is ineffectively managed? Is the timely payout of our insurance policy depositors too much to ask for? As opposed to a 10 year “run-off plan” which was the proposed maximum estimate at the time of the liquidator’s summary of the HIH situation.
Overall, a disastrous event that only the individual insurance policyholders caught in it could realistically describe as to the financial, physical & emotional damages to their lives, the long term drawn out affects and the level of satisfaction in the end-result of compensations. For many 10’s of thousands it was too little too late, the money wasn’t there when it was needed the most due to this lack of regulated bookkeeping, to support necessary medicines, surgeries and on-going support payments; resulting in truly immeasurable suffering.
But before we move on to a lighter note and tone towards a more promising bookkeeping future in Australia let’s compare a couple of figures here so we get an idea of the magnitude of this mismanagement and under performing bookkeeper watchdog forecasting, that shouldn’t be oversighted.
HIH debt upon foreclosure
And in comparison here’s the Suncorp profit reported for 2019
(Suncorp incorporates AAMI, GIO, APIA, Just Car, Bingle, Vero, InsureMyRide, Shannons, CIL, and Terri Scheer)
How could this happen? And if you’re curious and aren’t up to speed on this historic event, yes, a number of people were imprisoned over internal corrupt book cooking practices, mostly on personal levels, and imprisoned for significant periods.
So, what has Australia done to become accountable and ensure a similar such occurrence is managed more appropriately.
THE CHANGE REQUIRED TO PROTECT ALL OF AUSTRALIAS INSURANCE BOOKKEEPING
At the time of the HIH collapse Australia was toying with, what was in hind-sight, a nerve-racking game where we were drawing a blind eye to the potential consequences of such a corporate bookkeeping collapse and didn’t want to front a costly guarantee to the public which other countries had adopted, so it came back to bite the public.
It came down to the Council of Financial Regulators to make some assessments and ultimately some adjustments to ensure that this unacceptable pressure of the Australian Government and its people were deflated moving forward. The Council of Financial Regulators is a common law body, a non-statutory body of the governments executive action. This council is no slouch! We see members such as:
- The Governor of the Reserve Bank of Australia
- The Secretary to The Treasurer
- The CEO of The Australian Prudential Regulation Authority (APRA)
- The Chairman of The Australian Securities & Invetments Commision
The role of this organisation, to contribute to the effectiveness of financial bookkeeping in Australia and promote stability within the AU financial system and its bookkeeper practices.
Now, not that the Council suggested that The Australian Prudential Regulation Authority APRA caused or contributed to the collapse of HIH, however some points relating to the infectivity of its supervisory (bookkeeping) practices were raised as well as inter-agency connectivity keeping somewhat weak in parts. So under pressure for APRA to be more decisive and proactive in their tact they implemented a model, which explored a higher propensity for engagement with corporations on site and by inclusiveness at a boardroom level.
Also of note and another glaring issue highlighted by the Council was a complete lack of time line implementation for payouts to policyholders or depositors of these institutions should the institution encounter financial distress.
HERE’S WHAT HAS NOW BEEN IMPLEMENTED UNDER THE AUDIT
Now more recently council reviewed “Australia’s Failure & Crisis Management Arrangements”. The first review of its type, which was setup in regret of the HIH collapse and in light of the anticipated Financial Sector Assessment Program FSAP of the international monetary fund. The job of the event was to review and reform current bookkeeping arrangements in place for handling financial institutions under duress.
Engaging APRA simply made regulations settling a faster and more flexible process, which allowed APRA to more easily mould to market changes and meant that a new supervisory bookkeeping agency didn’t need to be established to support the movement.
So the council explored the option to protect the policyholders by way of insurance guarantee scheme as we’d seen internationally and were recommending a minimalist version of a similar nature. That version was proposed to look something like this:
- APRA would head up the operations so no additional bookkeeping agencies would be required.
- The change would apply to retail deposits in authorised deposit-taking institutions and the policyholder claims of life/general insurers.
- 90% of funds accessible with an upper limit of approximately $50,000.00
- In special circumstances a follow up claim could be made.
- It would only apply to liabilities in AU.
- Monies of a failed institution would be captured from the sale of its assets and further steps taken only if necessary in the case of a shortfall of funds to support the 90% payout.
- There would be no requirement for any industry participants to carry any share in these industry risks and burdens
It seems pretty black and white. The new bookkeeping regulations were definitely required to protect Australians and were 100% lacking before this event occurred. This change has now been comprehensively applied to protect individuals and small to medium business owners in Australia and is more than welcome, it’s now current today in 2020. It means that Australia is finally safer from livelihoods being placed in jeopardy for months and if not years while we ordinary Australians wait for resolution to complex financial institutional collapse should the unfortunate circumstance reoccur.
After all, the collapse of HIH wasn’t a predictable event, not when the corporation was filled with greed and corrupt tactics for no more than personal gain of some internally powerful corporate figures and immersed in a market, which saw an inflation of claims in some sectors, such as personal injury, of a circa 5000% PA. Who’s to say we won’t see similar shifts in these critical markets in the future?
Even if a little slow at it, this current regulatory bookkeeping framework we now have in Australia is largely in thanks to these reforms and the over-arching competency of our regulatory bodies to build quality frameworks to implement impactful change.