Banking, Insurance and Life Insurance (prudential standards) determination No. 3 of 2011

EXPLANATORY STATEMENT

Prepared by the Australian Prudential Regulation Authority

Banking Act 1959, section 11AF

Insurance Act 1973, section 32

Life Insurance Act 1995, section 230A

APRA may, in writing, revoke a prudential standard that applies to an APRA-regulated institution under:

• subsection 11AF(3) of the Banking Act 1959 (Banking Act), in relation to authorised deposit-taking institutions (ADIs) and authorised non-operating holding companies (authorised banking NOHCs);
• subsection 32(4) of the Insurance Act 1973 (Insurance Act), in relation to general insurers and authorised non-operating holding companies (authorised insurance NOHCs); and
• subsection 230A(5) of the Life Insurance Act 1995 (Life Insurance Act), in relation to life companies (including friendly societies) and registered non-operating holding companies (registered life NOHCs).

APRA may, in writing, determine a prudential standard that applies to an APRA-regulated institution under:

• subsection 11AF(1) of the Banking Act, in relation to ADIs and authorised banking NOHCs;
• subsection 32(1) of the Insurance Act, in relation to general insurers and authorised insurance NOHCs; and
• subsection 230A(1) of the Life Insurance Act, in relation to life companies (including friendly societies) and registered life NOHCs.  

1.    Background

APRA has powers under the Banking Act, Insurance Act and Life Insurance Act to determine prudential standards that apply to ADIs and authorised banking NOHCs, general insurers and authorised insurance NOHCs, and life companies and registered life NOHCs.

APRA's policy is to issue prudential standards that apply across the banking, insurance and life insurance industries that are broadly consistent in their requirements. Specifically, APRA considers that the risks arising from outsourcing, the management of business continuity, governance and the fitness and propriety of responsible persons are similar regardless of the industry within which the regulated institution operates.

To date, APRA has issued three individual prudential standards covering governance requirements in relation to each APRA-regulated industry. The content of these standards is nearly identical and sets out minimum requirements for good governance of an APRA-regulated institution. The prudential standards are as follows:

• Prudential Standard APS 510 Governance (APS 510) applying to ADIs and authorised banking NOHCs;
• Prudential Standard GPS 510 Governance (GPS 510) applying to general insurers and authorised insurance NOHCs; and
• Prudential Standard LPS 510 Governance (LPS 510) applying to life companies and registered life NOHCs.

In line with its publicly stated desire to supervise regulated institutions operating in different industries in a consistent manner, APRA is consolidating the requirements contained in these three industry-specific prudential standards into a single prudential standard with cross-industry application. The requirements currently contained in APS 510, GPS 510 and LPS 510 are consolidated into a new prudential standard, Prudential Standard CPS 510 Governance (CPS 510).

2.      Purpose of the instrument

This instrument revokes APS 510, GPS 510 and LPS 510 and replaces them with a new prudential standard, CPS 510. CPS 510 must be complied with by ADIs and authorised banking NOHCs, general insurers and authorised insurance NOHCs, and life companies (including friendly societies) and registered life NOHCs.

CPS 510 sets out minimum requirements for good governance of a regulated institution. It aims to ensure that a regulated institution is managed soundly and prudently by a competent Board (or equivalent), which can make reasonable and impartial business judgements in the best interests of the institution, and which duly considers the impact of its decisions on depositors and policyholders (as applicable).

3.      Operation of the instrument

The key differences between CPS 510 and the industry-specific prudential standards it replaces include that CPS 510:

• applies to all APRA-regulated institutions in the banking, general insurance and life insurance industries, rather than operating via separate, although nearly identical, standards applying to different regulated institutions in individual industries;
• introduces the requirement for auditors of authorised or registered NOHCs to meet specific independence requirements, consistent with changes to the legislation that APRA administers; and
• contains a number of minor amendments to clarify or harmonise the existing obligations. These minor amendments do not alter the substance of those obligations.

4.      Consultation

In December 2010, APRA undertook public consultation on CPS 510 as part of a broader consultation package on its initiative to harmonise certain prudential standards across APRA-regulated industries. APRA received a small number of submissions that were generally supportive of the approach and APRA has implemented specific feedback received, where appropriate, in CPS 510.

5.      Regulation Impact Statement

A Regulation Impact Statement for the changes described in this Explanatory Statement was not required.