Banking (prudential standard) determination No. 11 of 2006: Variation to Prudential Standard APS 520 Fit and Proper
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority
Banking Act 1959, paragraphs 11AF(1)(a) and (b), and subsection (3)
Under paragraphs 11AF(1)(a) and (b) of the Banking Act 1959 (the Act), APRA has the power to determine (in writing) standards in relation to prudential matters to be complied with by authorised deposit-taking institutions (ADIs) and authorised non-operating holding companies (NOHCs).
Under subsection 11AF(3) of the Act, APRA has the power to, in writing, vary or revoke a standard.
Banking (prudential standard) determination No. 11 of 2006 varies Prudential Standard APS 520 Fit and Proper (APS 520). APS 520 was made by Banking (prudential standard) determination No. 1 of 2006, and will come into effect on 1 October 2006.
1. Background
APS 520 is intended to ensure that ADIs and authorised NOHCs (regulated institutions) prudently manage the risk that persons acting in positions of responsibility for their institution may not be fit and proper. Much international and Australian experience has demonstrated that institutions can become financially unstable and, in extreme cases, collapse as a result of incompetence or impropriety on the part of responsible persons.
Together with Prudential Standards GPS 520 Fit and Proper and LPS 520 Fit and Proper for general insurers and life companies, respectively, APS 520 forms part of a harmonised approach to fitness and propriety which is consistent across APRA-regulated institutions (with the exception of superannuation, which is subject to separate fit and proper requirements in regulation 4.14 of the Superannuation Industry (Supervision) Regulations 1994[1]).
2. Anomaly in the operation of Prudential Standard APS 520 Fit and Proper
It has come to the attention of APRA that a drafting anomaly, which defeats the intended operation of the standard in relation to the senior officer outside Australia with delegated authority from the Board (senior officer outside Australia), is present in APS 520. This anomaly was introduced into the standard subsequent to the final consultation undertaken on the draft standard from June 2005.
The senior officer outside Australia is defined in Prudential Standard APS 510 Governance. The senior officer outside Australia plays an important role in the prudential regime applicable to foreign ADIs (as defined in the Act) under both Prudential Standard APS 510 Governance and APS 520. APRA’s policy intention was that the senior officer outside Australia would be captured by the definition of ‘senior manager’ in paragraph 15 of APS 520 and would therefore be subject to assessment under the fit and proper policy of a foreign ADI.
The current drafting of paragraph 9 of APS 520 provides that a senior manager is only a responsible person for the purposes of that standard if they are ordinarily resident in Australia. In the case of the senior officer outside Australia, the person would not be ordinarily resident in Australia and would therefore not be included in the definition.
Accordingly, this determination varies APS 520 to clarify that the senior officer outside Australia is included in the definition of responsible person regardless of whether they are ordinarily resident in Australia. This variation restores APRA’s policy intent as embodied in the draft standard released for second round public consultation.
As APS 520 had not come into effect at the time of this variation, no foreign ADI was impacted by the omission.
3. Consultation
APRA undertook two rounds of public consultation on the proposed APS 520 (and the fitness and propriety standards for general insurers) and redrafted the standard to take account of industry concerns as appropriate. Thirty-nine submissions were received from regulated entities in the first round consultation (commencing March 2004) and thirty-five in the second round of consultations (commencing June 2005). APRA conducted information sessions for regulated institutions following the second round consultations. During these sessions APRA briefed industry on the amendments it had made to the proposals in response to industry concerns.
The versions released for the second round consultation did not contain the anomaly referred to in this Explanatory Statement. As such, APRA believes that adequate consultation has taken place on the proposed operation of the standard. APRA has not, therefore, undertaken further consultation on this variation.
[1] In addition, Part 15 of the Superannuation Industry (Supervision) Act 1993 contains provisions relating to disqualified persons.