It’s been a successful month for Company Directors’ policy and advocacy team, with our views on litigation funders recognised by the Productivity Commission.
Litigation funders could be required to get a special licence from the Australian Securities and Investments Commission (ASIC) and be subject to capital adequacy requirements if recommendations in a draft Productivity Commission (PC) report for a strict regulatory regime for this fast-growing sector come to fruition.
The draft report, Access to Justice Arrangements, is the result of a Productivity Commission inquiry into Australia’s system of civil dispute resolution and the ways in which the cost of legal action could be constrained.
Company Directors has long advocated for litigation funders to be subject to an appropriate regulatory regime set out in the Corporations Act 2001 and enforceable by ASIC. In fact, we have been virtually alone in arguing that a tailored licensing regime should be developed for these operators, so the draft report is most welcome.
To date, there has been little or no regulation for litigation funders in Australia. The draft report was released on 8 April and covered a broad sweep of issues.
Of interest to boards was draft recommendation 18.2: “Third party litigation funding companies should be required to hold a financial services licence, be subject to capital adequacy requirements and be required to meet appropriate ethical and professional standards. Their financial conduct should be regulated by ASIC, while their ethical conduct should be overseen by the courts. Treasury and ASIC should work to identify the appropriate licence (either an Australian financial services licence or a separate licence category under the Corporations Act) within six months of the acceptance of this recommendation by the Commonwealth government after consultation with relevant stakeholders.”
In our submission to the PC, we emphasised that access to justice must be appropriately balanced against the economic and productivity consequences which flow from allowing third party funders to be involved in extensive, time consuming and costly litigation against corporations and directors for the purpose of obtaining a profit. We further argued that the government should undertake a detailed analysis as to whether a regulatory regime which encourages the proliferation of funded class actions against corporations is in the best interests of the Australian economy.
Written submissions to the draft recommendations can be made by 21 May. The PC expects to make its final recommendations to the government by September this year.
Financial system inquiry
Company Directors has argued in a submission to the Financial System Inquiry that a more flexible system of governance regulation is required for entities that are regulated by the Australian Prudential Regulation Authority (APRA).
The submission, lodged on 31 March, said 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 than the standards the Principles 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 as 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 choose 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 20 December 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 the 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 what 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.
Prudential risk management
We have voiced our concern that a risk management measure proposed by APRA goes well beyond its intention of providing guidance to relevant entities.
APRA’s draft Prudential Practice Guide, CPG 220 — Risk Management (CPG 220) is intended to provide guidance on how to meet the requirements under the new Prudential Standard CPS 220 – Risk Management (CPS 220). Company Directors’ submission to the draft guide, lodged on 28 March, argues that CPG 220 imposes an even greater regulatory burden than is provided for under CPS 220, particularly with respect to the expectations that it sets for the boards of APRA-regulated entities. It will have the effect of further increasing the standards of risk management governance for APRA-regulated entities and significantly extend the expectations of what a board should be responsible for with respect to risk management.
In our view, it should be limited to providing much needed guidance as to how institutions can meet their obligations under the new CPS 220 without adding greater obligations and expectations, particularly on their boards (and possibly their individual directors).
One of the most significant ways CPS 220 has increased risk governance standards is through the requirement that boards “ensure” the entity’s risk management framework is in place and operating effectively. Rather than clarifying what APRA’s intent was for these requirements for the board to “ensure” it fulfils its duties under CPS 220, draft CPG 220 blurs the roles and responsibilities of the board and senior management further. The confusion in the draft between what the roles and responsibilities of the board versus the roles and responsibilities of management suggests that APRA’s understanding and concept of board oversight is misconceived.
The increased regulatory burden of APRA-regulated entities under CPS 220 and draft CPG 220 is also contrary to the federal government’s current deregulation agenda, which seeks to identify and remove unnecessary and excessive regulation to ease the compliance burden of Australian businesses and improve productivity growth.
ASX listing rules
Company Directors has given its broad support to proposed changes to governance-related listing rules that were designed to complement the third edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations released last month.
Our submission to the Proposed Governance-Related Listing Rule Amendments – Supplementary Consultation was lodged on 28 March and noted that we strongly support the move away from requiring the disclosure of on-market purchases under an employee incentive scheme on an ongoing basis to only requiring this disclosure to be made as a one-off annual disclosure in a company’s annual report.
We also supported the proposed removal of the requirement to include a “chairman’s box” in proxy forms. This change will allow the counting of shareholder votes that would have been otherwise disregarded simple because a shareholder appointing the chairman as a proxy forgot to tick the box.
However, we did indicate a few concerns with the proposed changes that we would like addressed. The types of payments and other benefits that need to be disclosed in the notice of meeting under the redrafted Listing Rule 10.17 should be clarified. As it stands, it is drafted in such broad terms that it could capture unintended payments. It should instead be limited to the disclosure securities that have been issued with shareholder approval under Listing Rule 10.11 or 10.14 to non-executive directors over and above their directors’ fees.
Further, payments made to a non-executive director to participate in committees that are set up on an ad hoc basis to deal with a specific issue should be properly categorised as “special exertion” fees and excluded from the directors’ fee cap approved under Listing Rule 10.17.
We also do not believe it is appropriate for the definition of “associate” under Listing Rule 19.12 to “deem” a related party of a director or officer to be their associate. While our preference would be for this to be removed from the definition, the proposed approach under the Supplementary Consultation to allow a director or officer to establish that a particular related party is in fact not an associate by providing a statutory declaration to that effect provides a practical solution for directors.
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