In March this year, APRA commenced consultation on eight proposed changes to the governance arrangements for prudentially-regulated entities as part of its review of CPS 510.
Following its consideration of responses to the consultation, APRA has amended six of the eight proposals. It is good to see an instance of true consultation in action, and a consultation process that commenced in March and was completed in October, rather than commencing in mid-December and completing in the first week of February.
That said, the final outcome for some of the proposals remains unclear.
What’s changed?
Material changes were made to three of the proposals:
- The proposed default tenure limit of 10 years for NEDs has been extended to a hard limit of 12 years with the possibility of a further short extension in limited circumstances – yet to be determined.
- The proposal that at least two independent NEDs (including the Chair) of a regulated bank or insurer could not be members of any other board in the corporate group has been dropped. However, APRA will remove the presumption in paragraph 39 of CPS 510 that an independent NED sitting on a parent company board or the board of another group company will be regarded as independent when sitting on a regulated subsidiary board. Paragraph 38 of CPS 510 requires that the chair and at least two NEDs of a regulated subsidiary must be independent.
- The result of the revised proposal is that it is unclear whether, for example, APRA will regard the independent chair of a NOHC as being ineligible to sit as the independent chair of a regulated subsidiary bank or insurer. We hope not: that would simply be achieving via the back door what APRA has announced it will not require at the front door.
- APRA has also dropped the proposed requirement for SFIs (and non-SFIs under supervision) to engage with APRA early in relation to proposed appointments to positions that require a “fit and proper” assessment, although APRA would still appreciate early engagement on “critical” appointments.
Three other proposals have been modified:
- APRA will not require regulated entities to identify the skills and capabilities of each individual director, only for the board collectively.
- APRA will not require regulated entities to consider “perceived” conflicts (in addition to actual and potential conflicts) but will still propose guidance that it expects consideration of perceived conflicts
- APRA will require banks and insurers to maintain a register of relevant interests and duties of directors, but (unlike RSEs) it will not require the register to be published.
We think that subject to clarifying those areas that remain unclear, noted above, the outcome of this consultation process is practicable and sets a good balance between conventional governance principles and prudential regulatory requirements.
