Compulsory onsite inspections: scope of Reserve Bank’s power remains unclear

The proposal is part of the bank’s review of the Insurance (Prudential Supervision) Act 2010. It has a consultation paper in the market on penalties and enforcement and is seeking feedback. But there are concerns that some of the detail and proposed safeguards are too sketchy and, in some cases, raise more questions than they answer.

Cabinet has already agreed that the bank should be given the power to do the inspections: the issue up for debate is what that power should look like.

Compulsory onsite inspections are a major departure from the present light-handed approach where inspections can be done only with the consent of a licensed insurer. The bank has no power to required information from unlicensed entities that might be operating as insurers.

Sam Hiebendaal, a senior associate at law firm Bell Gully, says the most important issue with compulsory onsite inspections is to define the legal scope of the power.

A crucial question is whether it will enable the regulator to question employees and directors under oath – an issue which remains unclear.

“Will they be under a legal obligation to answer when the bank is onsite?” he says. “When you have that sort of compulsory power, there really do have to be safeguards put in place.”

This power is included in the AML/CFT legislation, but Hiebendaal notes that anyone being questioned under anti money-laundering law can invoke the privilege against self-incrimination (the right to silence) and is not required to hand over privileged information.

In responding to the consultation paper, Hiebendaal suggests insurers should think hard about how things could go wrong.

For example, the bank says onsite inspections can be done only for the purposes of supervision and not as part of an investigation and must be done at a reasonable time.

“But how will this play out in practice, particularly where an onsite inspection is done as part of a supervisory process and then the bank discovers something it wants to investigate or, worst case, something that it's already investigating? There’s going to be a real question as to how that information can be used and whether it has been gathered within the scope of the power.”

Insurers should be aware that while the bank has suggested that notice will generally be given, inspections without notice are also possible, Hiebendaal says. Giving notice “makes good sense”, especially when many staff are still working remotely.

The bank says in other comparable jurisdictions, onsite inspection powers usually mean the ability to enter without notice “so inspections can be carried out when there is no obvious cause for concern”.

The paper third of five consultations the bank is issuing as part of its IPSA review.