Financial system inquiry

Sunday, 30 March 2014

Company Directors has argued in a submission to the Financial System Inquiry that a more flexible system of governance regulation is required for entities regulated by the Australian Prudential Regulation Authority (APRA). 

The submission, lodged on 31 March, suggested this flexibility could be achieved if there was greater alignment of APRA’s regulation with the Australian Securities Exchange (ASX) Corporate Governance Council’s Corporate Governance Principles and Recommendations (the Principles), including the “if not, why not” approach to governance.

Our submission acknowledged that APRA has, over time, taken steps to ensure the governance standards it sets for financial institutions are in line with the Principles. However, in certain instances, the standard set by APRA is higher given the standards that the Principles that apply to listed companies generally.

The primary reason for this discrepancy is that APRA regulates a wide range of institutions and those at the smaller end of the spectrum do not necessarily have well-developed governance and reporting practices in place. So APRA’s approach to governance attempts to promote stability among institutions such credit unions, friendly societies and unlisted general insurance companies by demanding that all entities meets the governance standards it sets.

We argued that a greater alignment with the Principles would allow APRA-regulated entities to adopt an “if not, why not” approach to governance which would recognise that companies and boards are best placed to decide what arrangements suit them.

If APRA does chose to extend the governance standards it applies further than the Principles or the Corporations Act, it should first conduct a full cost-benefit analysis.

The Financial System Inquiry is chaired by former Commonwealth Bank of Australia and Future Fund chief David Murray. Federal Treasurer Joe Hockey announced the inquiry on December 20 last year and its brief is to lay out a blueprint for the financial system over the next decade, taking into account the tremendous change to the industry since the last inquiry was completed by Stan Wallis in 1997.

The inquiry will publish an interim report in mid-2014 and a final report is scheduled to be provided to the Treasurer by November 2014.

Our submission also pointed out that superannuation funds are not subject to the same APRA standards as other entities – for example, in respect to board composition – and that such anomalies should be rectified.

We also argued that one of the biggest issues for business is red tape and that for companies in the financial sector, APRA’s requirements are most demanding on their time. We put the case that APRA appears to believe that boards are more involved in the day-to-day operation of a business than actually occurs and that this expectation should be addressed by the inquiry.

Lastly, we took the opportunity to reiterate our concerns about the onerous director liability laws that apply in Australia, given that directors of financial institutions are particularly exposed to the risk posed by these laws.

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