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APRA goes prescriptive on corporate governance

APRA goes prescriptive on corporate governance

THE AUSTRALIAN Prudential Regulation Authority (APRA) has brushed aside concerns from its regulated entities over prescriptive regulation with its proposals on governance.Observers said that…

THE AUSTRALIAN Prudential Regulation Authority (APRA) has brushed aside concerns from its regulated entities over prescriptive regulation with its proposals on governance.

Observers said that while the larger banks and insurers would have little to be concerned about from the proposals, they could flag issues for other APRA-regulated entities.

The regulator noted that the controversial new prudential framework for governance had raised the ire of some institutions, but insisted that minimum governance requirements are needed. As a result, under the proposals, banks, general insurers, life insurers and other financial services under APRA’s auspices will find themselves tackling compliance with principles based on the ASX Principles of Good Corporate Governance.

However, the difference is that there will be no “if not why not” approach, rather a “comply unless APRA grants and exemption” approach.

It had signalled its intentions previously. Speaking in April, APRA executive general manager, research and statistics, Charles Littrell warned that: “It is not sufficient to leave governance matters to companies or even the share market. There have been too many painful failures, both in Australia and offshore, to support such an approach”.

Anecdotal evidence suggests that some in the banking industry are concerned with what they see as increasing prescriptive regulation. “An increasing number of Australian bankers are concerned about the extent of prescriptive regulation,” said Rahoul Chowdry, Australian banking and capital markets leader at PricewaterhouseCoopers. “Many believe that the costs of regulation are at the point of outweighing the benefits and that it is beginning to stifle innovation and judgment across the industry.”

But some observers believe APRA is merely reflecting the direction of international financial services regulation.

“There could be a conflict, but it is really a reflection that in Australia many of the governance rules and frameworks do tend to be fairly broad in their perspective and often principle focused,” said Gary Anderson, managing director at Protiviti. “But financial services is definitely one of the more transparent international industries and because there are often specific rules in international jurisdictions that these firms need to comply with I’m not surprised that APRA feels the need to be more specific in an Australian context given the regulatory environment here at present.”

Anderson added that to ensure compliance can be adhered to, there must be a benchmark to measure against, hence the need for minimum standards. “You can only really take an active role if you’ve got something to measure against,” he said. “I think the international regulators have found that if you want to actively manage regulation you need harder, more detailed guidelines. In the financial arena the Basel II Accord is another example of very specific regulatory compliance that is going to be very standardised on an international basis. I don’t see that the APRA governance principles would be of much concern next to the Basel regulations.”

In reality, the compliance burden for larger players is expected to be minimal, but there could be issues for smaller insurers and the superannuation community.

The regulator also stood firm in the face of industry accusations that it is veering into Australian Securities and Investments Commission territory by becoming involved in governance matters. APRA has previously rejected this argument, and with good reason, observers said.

“APRA is an active regulator in an industry that they have acknowledged that deals with stakeholders financial interests, not just shareholder funds,” Anderson said.

However, APRA has raised the ire of the general insurance industry over its proposals to prevent CEOs of insurers becoming chairman of the board. While on one hand it is at pains to remind boards that they are responsible for risk management and governance matters, preventing the CEO from taking the chair position could present its own risks.

“The idea that it’s OK if the CEO becomes chairman if there is a three year disconnect does remove a lot of the benefit of experience,” said Richard Batten, partner at Minter Ellison Lawyers. “It’s very common for the CEO to transition into the chair role in other industries. It’s very difficult for a director to contribute successfully if they don’t have a very good understanding of the concepts and principles, particularly on the financial side, then there is a real risk if the chair does have too much of a disconnect from the company and that knowledge from being a CEO is not retained. It is somewhat contradictory.”

Stuart Fagg is the Editor of Risk Management magazine, Lawyers Weeklys sister publication

Internal audit profession boost

IN ADDITION to the headline making minimum requirements, APRA’s governance paper also cemented the increasing importance of internal audit functions in governance matters.

APRA has mandated all regulated institutions to have a dedicated and well resourced internal audit function, but it has also sought to protect the profession’s independence by insisting on a primary reporting line and unfettered access to the board audit committee. Some had lobbied for a reporting line to management, but APRA insisted that the independence of the audit function cannot be compromised by opaque reporting lines.

“APRA is reflecting thinking in the internal auditing profession that the primary reporting line is to the board audit committee,” said Anderson.

While the majority of the major banks have well funded and resourced internal audit functions, there may be recruiting issues for other APRA-regulated entities. Observers expect problems for smaller insurers and in the areas of broking and superannuation, where internal audit function growth may not have matched business growth in recent years.

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