The Australian Prudential Regulation Authority has flagged a potential clear-out of superannuation trustee director ranks along with a shake-up of competence, propriety and skills monitoring and enforcement, under proposals released yesterday designed to give the regulator more teeth in improving governance standards.
APRA on Thursday released a discussion paper canvassing eight proposals that will apply broadly across the 1500 or so entities it regulates. Seven apply to super funds, and watered-down versions of three of the proposals will apply to so-called “non-significant financial institutions” (non-SFIs), which in a superannuation context is funds with less than $30 billion of assets.
APRA is proposing a lifetime tenure of 10 years for non-executive trustee directors, with longer tenure by exception only and with the explicit approval of the regulator. The proposal means that if it is enacted by 2028, as APRA anticipates, directors appointed to trustee boards in or before 2018 will likely be required to move on.
The discussion paper says the regulator “recognises that the proposals on independence and tenure may temporarily increase turnover of existing directors”.
APRA chairman John Lonsdale told a media briefing on Thursday morning that a 10-year tenure limit strikes a balance between “having a good set of skills on a board, but actually, after a period of time, having that independence eroded”.
In some cases a tenure of more than 10 years might be acceptable, but “it’s very much an exception”, he said.
“Say there was a merger of an entity two entities that was happening, it might make sense to maintain stability on a board for a bit longer at the director level,” he said.
“But that’s something that we’re consulting on.”
Not an attack on equal representation
Lonsdale the package of proposals was aimed at improving and making consistent the governance of the broad sweep of entities it regulates. He said the proprosals were not explicitly designed to attack the equal-representation model of profit-to-member trustees, and nor was APRA directly seeking to change that model or rewrite any other primary legislation.
“The law is what the law is,” Lonsdale. “There’s nothing that we are doing that impacts on that. But what we’re saying is, however you get on a board, when you’re on a board we have specific requirements, and they go to skills and capability, propriety, managing conflicts, and a whole range of issues that we outline in the paper.”
Lonsdale said if the effect of APRA’s proposals were to make it more difficult or even impossible for employee-representative trustees to be appointed to boards under current laws, “that is an issue for government”.
“What we are [asking] here is, within that constraint, how can we ensure that we have the best and most capable boards leading the institutions that we regulate?” Lonsdale said.
Lonsdale said APRA’s proposals were also not specifically directed at the issue of profit-to-member funds versus retail funds.
“In short, it’s not about retail and industry funds’ difference,” he said.
“It’s about a baseline set of governance standards that we require, whether you’re talking about super, insurance or banking, and that is what we’re trying to do.
“If we’re successful in that, what we’ll get is better-run organisations. And when you’re looking at super that’s holding trillions of dollars of members’ assets and investing that, it is incredibly important.”
‘Strongly sector-neutral’
Superannuation Members Council chief executive Mish Schubert said APRA’s proposals are “strongly sector-neutral applying uniformly across banks, insurance and super”, but said that “one notable omission that we’d urge APRA to highlight is the role of strong governance culture, values and board diversity, which are key ingredients in good governance and delivering for super fund members”.
“Strong governance practice is central to profit-to-member super – which exists solely to serve its members,” Schubert said.
“The paper identifies some further improvements to existing rules and practices across all sectors – many of which are already in place at super funds.”
APRAs proposals focus on:
- Skills and capabilities
- Fitness and propriety (lesser requirements for non-SFIs)
- Conflicts management
- Independence (superannuation exempted; “independence” requirements are already enshrined in the Superannuation Industry (Supervision) Act)
- Board performance reviews (lesser requirements for non-SFIs)
- Role clarity
- Board committees (lesser requirements for non-SFIs)
- Director tenure and board renewal
Association of Superannuation Funds of Australia chief executive Mary Delahunty said the superannuation sector was “well aware of its responsibilities” in relation to governance standards. She said managing $4.2 trillion of savings is “a huge responsibility and one trustees take very seriously”.
Lonsdale said the regulator would be more active in challenging board appointments in situations where it believed an individual was not up to standard. However, he said the calibre of directors was primarily a matter for boards and that APRA would only step in where it believed an individual appointed to a board should not be there.
“We have made it very clear in the paper, because not in all cases are we happy with how that’s being undertaken, as to what we’re actually requiring,” he said.
“We talk about the need to really face into actual, potential [and] perceived conflicts. We talk about the need to examine criminal conduct, character, the ability to commit time to the role, and any reputational issues.
“So there’s a whole range of issues that we’re now setting out as part of the standard, and we’re also setting out the triggers where we would take action if we were not happy.”
Reassessment triggers
Lonsdale said SFIs will be required to “engage APRA at the outset on succession planning before key appointments are made; we will be able to trigger reassessments of an individual’s fitness and proprietary if we have concerns; and we will get better insights into board effectiveness via training or performance reviews by providing. Greater clarity around what’s expected”.
APRA’s discussion paper said potential triggers for it reassessing appointments include:
- An individual not meeting their obligations under FAR, or otherwise,
- An individual director not meeting minimum fitness or performance expectations,
- Material misconduct or behaviour inconsistent with an entity’s code of conduct,
- Adverse findings in criminal, civil or professional proceedings, and
- Changes in personal circumstances posing potential reputational risk.
The APRA discussion paper noted that just over two-thirds of the entities it regulates exhibit minimal or acceptable levels of governance risk, while the remaining roughly one-third exhibit moderate, material or significant levels of risk. APRA was unable to provide Investment Magaziner with a breakdown of the sectors of the entities in the latter group. None of the entities it regulates exhibit that it as “critical” risks.
While Lonsdale declined to mention any super funds by name as being a catalyst for APRA’s assertive new stance, in August last year the regulator imposed additional licence conditions on the $94 billion Cbus Super and the Queensland-based BUSSQ Super (both affiliated with the CFMEU) over concerns including propriety of board appointments and director skills assessments, among other things; and in February this year, it secured a court-enforceable undertaking from Cbus addressing ongoing governance, operational and risk-management concerns.
But he said that apart from that example “we have issues where there is substandard performance on governance”.
“When people think about APRA’s mandates in relation to financial safety and stability, typically they’ll go to capital, they’ll think about liquidity,” Lonsdale said.
“They might think about some of the risk settings around credit risk, interest rate risk. We’ve got some cyber risk and operational risk. There’s a whole range of risks that we kind of worry about as well. But while all of these are important, what sits above it is good governance, because sound decision making underpins the management of all these risks.”
Lonsdale said that in about 80 per cent of the cases that APRA-regulated entities are “under intensified supervision [and] under enforcement action”, poor governance is a root cause.
Lonsdale noted that “international best practice on governance has progressed, and we want to ensure that our framework reflects that evolution”.
