APRA proposes big changes to finance sector governance rules

The Australian Prudential Regulation Authority (APRA) recently proposed substantial revisions to governance requirements for banks, insurers and superannuation trustees. These changes aim to enhance existing governance practices with a focus on director skills, board composition, tenure and board effectiveness.

Context for the proposed changes

APRA’s core governance and fit and proper prudential requirements are contained within its standards CPS/SPS 510 Governance and CPS/SPS 520 Fit and Proper. At a high level, these standards establish requirements for board composition, independence, performance and the appointment of directors and senior executives.

On 6 March 2025, APRA commenced a three-month consultation on proposed updates to these standards. These would be the first material changes since 2012 and follow the Hayne Royal Commission, CBA prudential inquiry and APRA enforcement activity of governance issues in the superannuation industry.

The APRA Discussion Paper recognises that governance practices have improved across regulated industries in recent years, particularly at listed entities. However, APRA is concerned that substandard governance practices remain in some areas and within some entities. It has observed deficiencies in skills and capabilities of directors, narrow approaches to assessing fitness and propriety, insufficient attention to board performance assessments and governance problems stemming from’ overly long’ tenure.

APRA is seeking to enhance governance practices through a broadly consistent set of obligations and expectations applying to all APRA regulated entities.

As APRA requirements can set governance norms beyond financial services, how this consultation progresses and the ultimate final requirements are developments which must be monitored by all those involved in the governance of Australian organisations.  

Summary of proposals and early reactions

APRA’s proposals are in eight categories, with the full detail available in the Discussion Paper. The key proposals, which have been the subject of preliminary feedback from AICD members, are summarised below. Some concerns have been raised by directors that in totality the changes represent regulatory overreach and will undermine the role of the board.

Tenure

APRA proposes to set a lifetime tenure limit of 10 years for directors at an entity with the ability to request a two-year extension from APRA. Concerns have been raised that this requirement could arbitrarily deprive a board of valuable experience and deep knowledge of complex industries or a specific entity. For instance, it is common for a long serving director to be elevated to the role of chair. An experienced chair, familiar with the complexities of the entity and its industry, brings governance benefits. This proposal may unnecessarily curtail the length of such appointments. Our preliminary view is that more flexibility should be built into this proposal.

Fit and proper

APRA proposes higher minimum requirements for assessing the fitness and propriety of senior executives and directors. This includes being more specific about what constitutes ‘fit and proper’ and under what circumstances an entity will be required to undertake a reassessment of an appointed executive or director. Significant financial institutions (SFIs) – essentially large and complex entities – will be required to consult with APRA prior to making an appointment.

Director feedback has focused on the uncertainty of what will be required by an SFI in consulting with APRA prior to an appointment, including the degree to which this process will provide APRA with a de facto approval right over appointments, potentially undermining the role of the board. In the case of listed entities, directors are already subject to election by shareholders at the company AGM.

Skills

APRA proposes that entities identify and document skills necessary for the board overall and for each individual director and separately evaluate existing skills and capabilities of current board and individual directors.

A preliminary issue is that this proposal may undermine the collective accountability of the board, with all directors responsible for decisions of the board. A focus on individual skills may promote or incentivise individual directors as responsible for matters that relate to their nominated skills/capabilities, for example digital skills, which could ultimately undermine the role of the board.

APRA has not proposed that there would be public disclosure of those skills assessments.

 Independent directors on bank and insurer subsidiary boards

APRA proposes to require banks and insurers have at least two independent directors (including the chair) on regulated subsidiary boards, with these directors not being part of any other board within the group structure. Group structures are a feature of banking and insurance entities, and it is common for the board of the parent to also be the board of a regulated subsidiary (e.g. the bank).  

APRA is proposing this change to mitigate its concern with intra-group conflicts where independent directors could fail to prioritise the best interests of an entity over other group entities.

We hold concerns that this proposal fails to recognise that directors of a subsidiary owe their duty to that entity, will disrupt current governance models, weaken strategic alignment and risk oversight across the group, drive unnecessary director turnover and impose material compliance costs. In the absence of clear evidence suggesting a problem to be solved, we would caution against such an interventionist approach from APRA.

Board workload

APRA is proposing to clarify in guidance where a board can delegate existing board level requirements in the prudential standards to board committees or management. This is seen as a mechanism to reduce the workload of entity boards.

While welcome our view is that this proposal should be implemented via changes to the specific prudential standards. Additionally, it should be a first step before the specific governance proposals are finalised and commence.

Proportionality

A small number of proposals have proportionality built-in, with smaller entities (i.e. non-SFIs) not having to meet a certain requirement, for example commissioning an external board performance review every three years.

However, in general, the proposals will apply in a uniform way regardless of entity size and industry.

Some directors consider the proposals will disproportionately impact smaller entities and could weaken competition. With increasing regulation contributing to the broader trend of consolidation and mergers, there is a risk that customers have a more limited range of options available to them.

In respect of director tenure and board composition, it has been noted that small and regional based community owned banks face challenges in recruiting and retaining skilled directors, making hard limits particularly problematic.

Next steps and timeline

APRA is seeking submissions on its proposals until 6 June 2025.

Following this consultation, APRA intends to release draft standards for consultation in 2026 with finalised standards released in 2027 and commencement of the obligations in 2028.

The AICD is participating in this consultation and welcomes any member feedback on the proposals at policy@aicd.com.au.