Banking (prudential standard) determination No. 2 of 2007
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 varied APS 510. Banking (prudential standard) determination No. 2 of 2007 varies APS 510.
- Background
One of the key principles in APS 510 is that of the independence of board directors. In assessing whether a director is independent, APS 510 previously required a Board to apply the definition of independence set out in the ASX Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations.
In August 2007, the ASX Corporate Governance Council released the 2nd edition of this document, titled Corporate Governance Principles and Recommendations (Principles). This document no longer provides a definition of independence but identifies a number of “relationships affecting independent status” that Boards should consider in determining a director’s independence.
In developing APS 510, APRA has, where possible, aligned its requirements and definitions with ASX Corporate Governance Council Principles. APRA intends to continue an alignment with these Principles, while maintaining its approach of providing clarity about its expectations for the independence of directors of APRA-regulated institutions, an approach which has worked well in practice. APRA intends APS 510 to reflect some of the recent revisions to the ASX Corporate Governance Council’s Principles by incorporating the wording of Box 2.1 of the Principles that sets out the ‘relationships affecting independent status’; in APRA’s governance standard, however, these relationships will be circumstances that preclude a director from being independent for the purpose of serving on the Board of an APRA-regulated institution.
APRA also intends to require that the Board’s formal policy on Board renewal incorporate the need to give consideration to the length of service of a director.
As well as the changes outlined above, a number of other minor amendments have been made to APS 510 to remove obsolete transition arrangements, ensure updated external documents are accurately referenced in the standard and to rectify minor drafting inconsistencies.
2. Purpose of the instrument
The instrument varies APS 510 to incorporate updated Principles from the ASX Corporate Governance Council and to make a number of minor clarifications to the standard.
3. Consultation
APRA consulted with industry in relation to the variation to APS 510.
Overview
The Banking (Prudential Standard) Determination No. 2 of 2007 was enacted by the Australian Prudential Regulation Authority (APRA) under the Banking Act 1959. This determination was introduced to update the Prudential Standard APS 510 Governance (APS 510) in alignment with the ASX Corporate Governance Council’s revised Corporate Governance Principles and Recommendations, particularly concerning the independence of board directors. The purpose of this determination is to incorporate the updated principles from the ASX and make minor clarifications to the standard, thereby ensuring that the governance requirements for authorised deposit-taking institutions remain consistent with best practice recommendations. This aligns with APRA's policy objective of maintaining clarity about its expectations for the independence of directors in regulated institutions.
Scope and Application
The Banking (prudential standard) determination No. 2 of 2007, issued by the Australian Prudential Regulation Authority (APRA) under the Banking Act 1959, applies to authorised deposit-taking institutions (ADIs) within the Commonwealth of Australia. These institutions are required to comply with prudential standards set forth by APRA to ensure their financial soundness and stability. The Act allows APRA to determine, vary, or revoke these prudential standards in writing. This particular determination revises Prudential Standard APS 510 Governance (APS 510), which was initially set by the Banking (prudential standard) determination No. 2 of 2006 and subsequently varied by the Banking (prudential standard) determination No. 15 of 2006. APS 510 specifically addresses the governance practices of ADIs, including the independence of board directors, and has been updated to incorporate the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations. The variation also includes minor amendments to remove outdated transition arrangements, update references, and correct minor drafting errors. The scope of the Act encompasses all authorised deposit-taking institutions regulated by APRA, ensuring they adhere to the specified governance standards.
Key Provisions
The Banking (Prudential Standard) Determination No. 2 of 2007, issued by the Australian Prudential Regulation Authority (APRA), primarily varies Prudential Standard APS 510 Governance (APS 510), which was initially determined in 2006. Section 11AF(3) of the Banking Act 1959 empowers APRA to set and modify prudential standards. This particular determination updates APS 510 to reflect the ASX Corporate Governance Council’s 2nd edition of the Corporate Governance Principles and Recommendations, which was released in August 2007. APS 510 now incorporates the relationships affecting independent status as outlined in Box 2.1 of the Principles, which APRA interprets as circumstances that would preclude a director from being considered independent in the context of an APRA-regulated institution.
The updated standard mandates that Boards of APRA-regulated institutions must consider these specified relationships when determining the independence of their directors. It also requires that the Board’s formal policy on board renewal includes consideration of the length of service of directors. Additionally, the determination incorporates minor amendments to remove obsolete transition arrangements, correct outdated document references, and rectify minor drafting inconsistencies.
Entities governed by APS 510 are required to adhere to the updated definitions and criteria for director independence. They must ensure that their Board policies reflect the relationships affecting independent status and consider the length of service when renewing board membership. Furthermore, Boards need to align their practices with the revised corporate governance principles and ensure that their policies and practices comply with the updated prudential standard.
Failure to comply with the requirements of APS 510 may result in regulatory action by APRA. While the explanatory statement does not explicitly detail specific penalties, non-compliance with prudential standards generally may lead to enforcement actions, which can include financial penalties, public reprimands, or more severe measures such as the imposition of operational restrictions or, in extreme cases, the revocation of the institution’s authorisation to operate. The precise consequences depend on the nature and severity of the breach, as well as any relevant provisions within the Banking Act 1959.