The ASIC report into death benefit claims revealing the devastating impact of poor industry practices on grieving Australians has again highlighted the pressing need for change. While some funds have taken up the cudgels, others are still playing hardball on improving their service offering.
A Retirement Income Covenant obligation notwithstanding, there is still a paucity of these complex products on offer. The Advice Through Superannuation draft legislation might offer a way forward.
APRA’s governance move could trigger wholesale change
It could be the biggest changing of the guard since the Red Army took up duty from the Czar Nicholas 11’s Cossack Convoy at the Winter Palace in the wake of the November 1917 Bolshevik coup d’état.
That’s how profound the impact of the Australian Prudential Regulation Authority’s (APRA) proposed regulation to limit non-executive board tenures to 10 years for the nearly 1,800 entities it oversees could be.
It was a critical element of a reform package (see below) that APRA introduced on Thursday to improve financial sector governance in the wake several scandals, most notably allegations of market manipulation at ANZ and undue union influence at the industry fund Cbus laid bare in the Deloitte report published late last year.
But it was the proposal to limit tenure that has grabbed the headlines, with a glance of those non-executive directors would be in the firing line reading like a “Who’s Who” – particularly among the industry funds.
It includes such industry notables as deputy chair of AustralianSuper, Innes Willox, First Super co-chairs Michael O’Connor and Mike Radda, HESTA’s Gary Humphrys and Catherine Smith and Hostplus’ David Gibson. Outside of the industry fund ranks it would impact, among others, National Australia Bank chairman Phil Chronican.
No doubt the industry will push back – there will be a three-month consultation period – with accusations that the regulator is overstepping the mark, needlessly forcing out directors who bring a wealth of experience and knowledge to the table.
But the regulator is unlikely to be moved by such arguments with chair John Lonsdale saying effective governance is fundamental to financial stability and sound risk management. Quite clearly APRA believes many in the industry have not moved the governance dial far enough since the Hayne Royal Commission handed down its withering condemnation of many industry practices in early 2019.
“The boards of Australia’s banks, insurers and superannuation trustees have enormous responsibilities when it comes to protecting the financial interests of households and businesses,” Lonsdale says.
“Well-governed institutions are likely to be more resilient in times of stress, while poor governance can create weakness that leads to misconduct, losses and failures. It is no coincidence that almost 80 per cent of entities subject to heightened risk-based APRA supervision have underlying governance problems.”
He says that although overall standards of governance have improved over recent years, there are areas of weakness, including entities treating compliance with some requirements as a box-ticking exercise.
“By articulating our expectations more clearly and strengthening our capacity to ensure compliance with them, we aim to lift governance standards among entities that are lagging best practices and bring them into line with contemporary expectations.”
For many in the industry, these proposals won’t raise a sweat. Their governance standards are what APRA wants applied across the financial services sector.
What is more problematic is when it comes to the standards APRA wants adopted on the issue of whether individuals fit its guidelines of what’s required to be a director – particularly for industry funds where many directors hail from union or employer bodies. What has been long-time criticism of these funds is about to intensify.
Lonsdale says in developing these proposals, which are expected to take effect by 2028, the regulator aims to lift higher governance standards without adding undue costs.
“Most proposals will involve little change for entities with mature governance practices. Clarifying the role of the board should help to ease the workload for directors and enable them to focus on the most important strategic issues.”
But for those whose governance practices are failing to cut the mustard, it will seem like a metaphorical changing of the guard.
APRA’s proposed changes include:
• Lifting requirements for boards to ensure they have the right mix of skills and experience to deliver the entity’s strategy.
• Raising minimum standards around the fitness and propriety of responsible persons and requiring significant financial institutions to engage with APRA on succession planning and potential appointments.
• Extending existing requirements for superannuation trustees in relation to managing conflicts of interest to banking and insurance.
• Strengthening board independence, especially in relation to entities that are part of a group.
• Clarifying APRA’s expectations around the roles of boards, the chair and senior management.
• Introducing a lifetime tenure limit of 10 years for non-executive directors at an APRA-regulated entity.
