The next reform item on APRA's agenda - governance

By Zein El Hassan.

Key Points:
Proposed governance standards for for ADIs, general insurers, life insurers and authorised non-operating holding companies are based on the ASX Principles of Good Corporate Governance for listed companies.

The Australian Prudential Regulation Authority (APRA) has recently released a set of draft prudential standards and discussion paperoutlining its proposed governance arrangements for ADIs, general insurers, life insurers and authorised non-operating holding companies.

These proposals follow APRA's discussion paper in November 2003 on prudential supervision of general insurers and reflect the outcome of APRA's extensive public and industry consultation on its intention to develop similar governance arrangements for all APRA-regulated entities. The proposed standards are based on the ASX Principles of Good Corporate Governance for listed companies.

The proposed prudential standards require the boards of these regulated entities to:

• meet composition requirements regarding board size, independence of directors and shareholder representation;
• have a majority of independent non-executive directors, with exceptions for certain types of subsidiaries;
• have an independent non-executive director as chairperson of the board;
• establish a Board Audit Committee and a Board Risk Committee;
• have a policy on board renewal;
• ensure their institutions have a dedicated internal audit function; and
• apply independence provisions for external auditors, consistent with the CLERP 9 requirements in the Corporations Act.

Independence of the boards of these regulated entities is the key reason for the introduction of these draft prudential standards. APRA aims to ensure that the interests of beneficiaries (eg. depositors, policyowners) are not compromised by the actions of the board and management of these institutions, which is different to the objectives behind corporate governance requirements or principles developed by ASIC or ASX.

Nevertheless, APRA is looking at adopting the ASX Corporate Governance Council test of independence as part of the proposed prudential framework. This will need to be carefully thought through when the final prudential standards are released.

Although some of the proposed prudential standards also apply to the Australian operations of foreign-owned and incorporated entities, APRA will develop separate governance proposals for branches of general insurers during 2005.

The proposed prudential standards do not apply to superannuation trustees but they are indicative of a trend towards greater independence on the boards of regulated entities. Superannuation trustees should maintain a "watch this space" on further developments in this area.

Comments on these proposals must be submitted to APRA by 12 August 2005. Final prudential standards are expected to be released in 1 January 2006 and be effective from the end of an institution's then current financial year.