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.
Overview
The Banking (prudential standard) determination No. 11 of 2006 was enacted to address a drafting anomaly in Prudential Standard APS 520 Fit and Proper, which was introduced in Banking (prudential standard) determination No. 1 of 2006. The Banking Act 1959 empowers the Australian Prudential Regulation Authority (APRA) to set prudential standards for authorised deposit-taking institutions (ADIs) and authorised non-operating holding companies (NOHCs). The policy objective of this determination is to ensure that these regulated institutions prudently manage the risk associated with persons in positions of responsibility who may not be fit and proper. This determination was made under paragraphs 11AF(1)(a) and (b) of the Banking Act 1959, which grant APRA the power to set and vary prudential standards. The variation aims to rectify an oversight that inadvertently excluded certain senior officers outside Australia from the scope of the standard, thereby restoring APRA’s original policy intent.
Scope and Application
The Banking (Prudential Standard) Determination No. 11 of 2006 pertains to variations made to Prudential Standard APS 520 Fit and Proper, established under the Banking Act 1959. This determination applies specifically to authorised deposit-taking institutions (ADIs) and authorised non-operating holding companies (NOHCs), which are regulated entities within the banking sector. The primary aim of this standard is to ensure that individuals in positions of responsibility within these institutions are fit and proper, thereby mitigating the risk of financial instability or collapse due to incompetence or impropriety. The Prudential Standard APS 520, along with GPS 520 and LPS 520 for general insurers and life companies respectively, represents a harmonised approach to the management of fitness and propriety across APRA-regulated institutions. Notably, this standard does not apply to superannuation entities, which are governed by separate fit and proper requirements. This variation rectifies a drafting anomaly in APS 520 that inadvertently excluded senior officers outside Australia from the definition of responsible persons, thus ensuring the senior officer outside Australia is captured by the fit and proper assessment regardless of residency status.
Key Provisions
The main operative sections of Banking (prudential standard) determination No. 11 of 2006 relate to the variation of Prudential Standard APS 520 Fit and Proper (APS 520) (sections 1 and 2). This variation is necessitated by a drafting anomaly identified in the original standard, which inadvertently excluded the senior officer outside Australia with delegated authority from the Board (senior officer outside Australia) from being subject to the fit and proper assessment policy. The anomaly arises from the definition of 'senior manager' in paragraph 15 of APS 520, which only includes those ordinarily resident in Australia. Consequently, the variation clarifies that the senior officer outside Australia is included in the definition of 'responsible person' regardless of their residency status. This ensures that the intended scope of APS 520 is maintained and that all senior officers with significant responsibilities are subject to the fit and proper assessment.
The obligations imposed by the Act on the regulated institutions, namely authorised deposit-taking institutions (ADIs) and authorised non-operating holding companies (NOHCs), include ensuring that persons in positions of responsibility are fit and proper. This requirement is critical for maintaining the financial stability and integrity of the institutions. Under the revised APS 520, institutions must now ensure that the senior officer outside Australia, who has delegated authority from the Board, is assessed for their fitness and propriety. This involves conducting thorough checks and assessments to verify that these individuals meet the required standards and are capable of fulfilling their roles without posing a risk to the institution or the broader financial system.
Failure to comply with the requirements of APS 520, including the new provisions regarding the senior officer outside Australia, can result in significant consequences. While the legislation does not specify particular offences or penalties in the explanatory statement, non-compliance with prudential standards set by APRA can generally lead to regulatory action. This may include enforcement actions, financial penalties, or more severe measures such as revocation of authorisation or licensing. The seriousness of these consequences underscores the importance of adhering to the prudential standards and ensuring that all responsible persons within the institution are fit and proper.