Banking (prudential standard) determination No. 15 of 2006
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority (APRA)
Banking Act 1959, subsection 11AF(3)
Under paragraphs 11AF(1)(a) and (b) of the Banking Act 1959 (the Act), APRA has the power to determine standards (prudential standards), in writing, in relation to prudential matters to be complied with by authorised deposit-taking institutions (ADIs). Under subsection 11AF(3) of the Act, APRA may, in writing, vary or revoke a prudential standard.
Banking (prudential standard) determination No. 2 of 2006 determined Prudential Standard APS 510 Governance (APS 510) to take effect on 1 October 2006. Banking (prudential standard) determination No.15 of 2006 (the instrument) varies APS 510.
- Background
APRA has identified that paragraph 33 of APS 510 will, for some ADIs, produce an unintended consequence with respect to the need for the Board Audit Committee to provide an objective non-executive review of the effectiveness of the risk management framework. This requirement was intended to ensure that there is a Board Committee which has responsibility for review of an ADI’s risk management function. Some ADIs already have a Board Committee, other than the Board Audit Committee, with this responsibility. This is acceptable to APRA. However, the wording of paragraph 33 means that these ADIs will be in breach of the prudential standard if they do not make review of the risk management framework an explicit responsibility of the Board Audit Committee. APRA therefore seeks to vary APS 510 to address this matter.
2. Purpose of the instrument
The instrument varies APS 510 to allow a Board Committee, whether the Board Audit Committee or another Board Committee, to have responsibility for the objective non-executive review of the ADI’s risk management framework.
3. Consultation
APRA consulted extensively with industry in relation to APS 510, which is varied by the instrument. This change will be favourable to ADIs as it provides greater scope for them to meet the requirement for a Board Committee which has responsibility for the objective non-executive review of the risk management framework (by removing the current requirement that this review be performed by the Board Audit Committee).
Overview
The Banking (Prudential Standard) Determination No. 15 of 2006 was enacted to amend Prudential Standard APS 510 Governance (APS 510), which was initially established under the Banking (Prudential Standard) Determination No. 2 of 2006. This amendment was introduced to address an unintended consequence identified by the Australian Prudential Regulation Authority (APRA) regarding the prudential requirements for authorised deposit-taking institutions (ADIs). Specifically, the original wording of APS 510 mandated that the Board Audit Committee must provide an objective non-executive review of the effectiveness of the risk management framework, which was not practical for some ADIs that already had other Board Committees fulfilling this responsibility. The purpose of this determination is to allow flexibility in meeting the prudential requirement by permitting any Board Committee, not just the Board Audit Committee, to have the responsibility for reviewing the risk management framework. This change aims to ensure compliance with the prudential standards while accommodating the existing governance structures of the ADIs.
Scope and Application
The Banking (prudential standard) determination No. 15 of 2006 applies to authorised deposit-taking institutions (ADIs) in Australia, ensuring they comply with prudential standards set by the Australian Prudential Regulation Authority (APRA) under the Banking Act 1959. Specifically, it varies the Prudential Standard APS 510 Governance (APS 510) to address an unintended consequence identified by APRA regarding the need for a Board Audit Committee to provide an objective non-executive review of the effectiveness of the risk management framework. This determination allows a Board Committee, other than the Board Audit Committee, to have responsibility for this review, provided the committee is suitably constituted and independent. The instrument aims to provide flexibility to ADIs while maintaining the intended oversight of risk management frameworks, ensuring compliance with the prudential standards without unnecessary rigidity.
Key Provisions
The primary sections of the Banking (Prudential Standard) Determination No. 15 of 2006 (the instrument) concern the variation of Prudential Standard APS 510 Governance (APS 510) to address an unintended consequence identified by the Australian Prudential Regulation Authority (APRA). Specifically, section 2 of the instrument alters the original requirement in paragraph 33 of APS 510, which mandated that the Board Audit Committee must provide an objective non-executive review of the effectiveness of the risk management framework. Instead, the instrument permits any Board Committee, whether the Board Audit Committee or another designated committee, to assume this responsibility, thereby accommodating the diverse governance structures of authorised deposit-taking institutions (ADIs) (section 3).
Under the revised APS 510, ADIs now have the flexibility to assign the objective non-executive review of their risk management framework to a Board Committee of their choice, as long as it remains a non-executive committee tasked with overseeing the effectiveness of the risk management practices within the institution (section 2). This change ensures compliance with the intended purpose of having a dedicated committee responsible for the review, without strictly enforcing the Board Audit Committee as the sole entity for this purpose.
The instrument imposes obligations on ADIs to ensure that a Board Committee is established and tasked with the objective non-executive review of the risk management framework. ADIs must clearly document the specific committee assigned to this responsibility and ensure that this committee meets regularly to review the institution's risk management practices, report findings to the Board, and implement any necessary changes (section 2). Additionally, the committee must be comprised of non-executive members to maintain independence and objectivity in its reviews.
Breaches of the prudential standards set out in the instrument can result in significant consequences for ADIs. While the instrument itself does not detail specific penalties, failure to comply with the revised APS 510 could lead to regulatory action by APRA. Such actions may include enforcement measures, corrective orders, or, in severe cases, the imposition of fines or other sanctions under the Banking Act 1959. The severity of these consequences underscores the importance of adherence to the prudential standards for maintaining the stability and integrity of the Australian banking system.