Further submission on Financial Systems Inquiry

Monday, 01 September 2014

Following its initial consultation, the Financial Systems Inquiry released its Interim Report on 15 July 2014. Company Directors made a submission as part of the initial consultation in March 2014, a copy of which can be located here. Pleasingly, the observations made by the Inquiry with respect to the corporate governance and regulation aspects of its terms of reference are broadly in line with the comments made in our submission. 


We have now made a further submission in response to the Interim Report on 26 August 2014.

In relation to the aspects of the Interim Report that related to issues of corporate governance for financial institutions, our submission noted that, generally speaking, we agree with the findings and observations set out in Report. In particular, we agree with the Inquiry’s preliminary assessment and observation that “sound corporate governance requires clarity of the responsibilities and authority of board and management”. We recommended that a full review be conducted of all current prudential requirements on boards to ensure there can be no argument that they require boards to be drawn into operational matters (even if this is not the intended effect of the requirements). This review should cover not only APRA’s relevant prudential standards, but also its practice guides and how these standards and practice guides are interpreted by APRA in practice. As suggested in the Interim Report, the aim of the review should be “to determine whether requirements imposed on boards are consistent with the fundamental obligations of a company director”.

Other comments made in our submission include:

  • As noted in our original submission, it is our recommendation that APRA’s governance regulation be revised so that there is greater alignment with the ASX Corporate Governance Council’s Principles, including the “if not, why not” approach taken under those Principles. Standards of corporate governance should not be mandated, as is currently the case under APRA’s prudential standards relating to corporate governance.
  • Where additional governance regulation beyond these principles is considered, it should only be introduced after a full Regulatory Impact Assessment (RIA) has been undertaken.
  • To the extent possible, all APRA-regulated entities (including superannuation funds) should be held to the same standards of governance practices, allowing for the fact that the standards could still incorporate an “if not, why not?” approach.
  • Once regulation is in place, its effectiveness should be subject to an ex post review. This should follow a similar process to the RIA process, proportionate to the nature and significance of the regulation and broad enough to assess the performance of the regulation.
  • Regulator practices and their impact on the compliance burden of financial institutions should also be reviewed. Cultural change will be needed to promote a more balanced approach, and improve the way regulators interact and consult with business in relation to the regulations that they administer.
  • In relation to the need for insolvency reform, irrespective of any reform approaches that are considered to have merit, we consider that a critical element to addressing the problems created by the insolvent trading regime is for directors to have access to a broad-based defence, such as the Honest and Reasonable Director Defence set out in our recent proposal for reform, that extends to the insolvent trading provisions under the Corporations Act.

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