AICD submission on APRA governance and fit and proper proposals

The AICD supported APRA modernising the governance and fit and proper prudential requirements. Further, our submission recognised that many of the proposals reflect good governance practices that the AICD itself advocates, such as strong succession planning with a focus on the board’s collective skills. 

However we expressed significant concerns that a number of the proposals were unduly prescriptive and risk creating a new regulatory burden and greater complexity. We encouraged APRA to the greatest extent possible to utilise existing regulatory tools and powers to target governance deficiencies rather than impose new sweeping obligations across all entities. 

Our key points on the most significant proposals were: 

• We did not support the proposed arbitrary tenure limit of 10 years with the option of a two-year extension subject to APRA’s explicit approval. This rigid proposal does not appropriately reflect the benefits that come from long-serving directors who have developed a deep understanding of an entity’s complex operations, and the flexibility needed for boards to appropriately manage renewal relevant to their individual circumstances. If a limit is deemed necessary, we proposed a tenure of 12 years with the option of an additional two-year extension at the entity’s discretion.
• We did not support enhanced independence requirements for entities with group structures. The problem statement for this proposal is weak and the proposal risks material unintended consequences. These include undermining consistent governance and risk oversight across group structures and significant additional compliance costs. APRA should continue utilising its existing regulatory and supervisory powers to address intra-group conflicts concerns on an entity-by-entity basis.
• We did not support the proposal that significant financial institutions (SFIs) be required to ‘engage proactively’ with APRA prior to appointment of all responsible persons. We are concerned that this risks creating a ‘de facto’ approval right as demonstrated by the threat of heightened supervision if an entity does not follow APRA’s advice. The proposal also raises legitimate concerns about the natural justice afforded to individuals in a non-transparent process.
• We supported, in principle, enhancing the baseline requirements for identifying and evaluating the collective skills of the board and this being documented in a skills matrix. However, we cautioned against setting prescriptive requirements on the assessment and evaluation of individual director skills. A narrow or segmented set of obligations on individual skills risks undermining the collective accountability and decision-making of the board.

The AICD submission was supported by legal advice prepared by Allens.