Banking (prudential standard) determination No. 3, 4 and 5 of 2008
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority (APRA)
Banking Act 1959, section 11AF
Under subsection 11AF(1) 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) and authorised non-operating holding companies (authorised NOHCs). Under subsection 11AF(3) of the Act, APRA may, in writing, vary or revoke a prudential standard.
Banking (prudential standard) determination No.3 of 2008 determines Prudential Standard APS 222 Associations with Related Entities to take effect on 1 January 2009.
Banking (prudential standard) determination No.4 of 2008 determines Prudential Standard APS 310 Audit and Related Matters (APS 310) to take effect on 1 January 2009.
Banking (prudential standard) determination No.5 of 2008 determines Prudential Standard APS 330 Capital Adequacy: Public Disclosure of Prudential Information to take effect on 1 January 2009.
- Background
The Corporations Act 2001 imposes requirements for auditors in relation to the statutory audit of financial statements and associated matters. In addition, APRA under the existing Prudential Standard APS 310 Audit & Related Arrangements for Prudential Reporting, has imposed specific audit requirements in relation to prudential matters. These requirements are for the purposes of assisting APRA to assess the reliability of information supplied to it by an ADI. The auditor provides a mechanism for APRA to access independent advice concerning the operations, internal controls and information provided to APRA by an ADI as well as for a Level 2 group of which the ADI may be a part.
ADIs are required to engage an auditor to undertake work of a prudential nature, including checking compliance with APRA’s prudential and reporting requirements. APRA is proposing to make a number of changes to the existing standard in order to provide greater clarity for both ADIs and their auditors as to APRA’s requirements with respect to audit engagements of a prudential nature. The revisions take account of changes in ADI group structures, new legislative provisions and, importantly, changes in reporting requirements flowing from the implementation of the Basel II Capital Framework in Australia.
While the proposed changes will formally extend audit requirements to Level 2 groups in addition to ADIs on a Level 1 basis, groups most affected by this change have typically been producing reports covering the Level 2 group already. The extension of the prudential standard to Level 2 groups means that where the parent entity in the Level 2 group is an authorised NOHC, the standard will apply to that NOHC.
2. Purpose of the instruments
Banking (prudential standard) determination No. 3 of 2008, determining Prudential Standard APS 222 Associations with Related Entities
This revokes the existing Prudential Standard APS 222 Associations with Related Entities and replaces it with a new standard, with only minor changes.
The changes are in paragraphs 10 and 11. Paragraph 10 of the existing APS 222 sets out requirements for a board declaration attesting that the board and management of the ADI have identified the key risks facing the group and have established policies and systems in relation to those risks. This requirement has been moved into the new APS 310 to centralise risk management requirements with those applied to ADIs on a Level 1 basis. As a result, paragraph 10 of the new APS 222 has been modified to refer to the requirement in the new APS 310, and a similar change has been made in paragraph 11 of the new APS 222.
Banking (prudential standard) determination No. 4 of 2008, determining Prudential Standard APS 310 Audit and Related Matters
This revokes the existing APS 310 and replaces it with a new APS 310.
The new APS 310 aims to ensure that APRA has access to independent advice from an auditor relating to the operations, internal controls and information in respect of stand-alone ADIs and the Level 2 banking group of which an ADI may be a part. It will also ensure that audit work undertaken for prudential purposes is adequate and appropriate for the purpose.
The key differences between the existing APS 310 and the new APS 310 are as follows:
- under the new standard, ADIs will be required to formally appoint an auditor (the appointed auditor) for the purposes of undertaking work of a prudential nature. This change will help to clarify obligations and responsibilities with respect to both an ADI and its appointed auditor;
- the new standard will provide greater clarity as to the auditor’s reporting requirements through setting out the level of audit assurance required of the appointed auditor in relation to:
- the review of and reporting on APRA data collections;
- internal controls relating to prudential requirements; and
- compliance with prudential requirements;
- the new standard affirms that the appointed auditor must be fit and proper and satisfy independence requirements as set out in other APRA prudential standards;
- the new standard provides details of declarations relating to risk management systems that the Board of directors and chief executive officer are required to make to APRA on a Level 1 and Level 2 basis; and
- the new standard provides details of arrangements for meetings between APRA, an ADI and its appointed auditor.
The new standard applies to an ADI for its first financial year beginning on or after 1 January 2009.
Banking (prudential standard) determination No. 5 of 2008, determining Prudential Standard APS 330 Capital Adequacy: Public Disclosure of Prudential Information
This instrument revokes the existing APS 330 and replaces it with a new APS 330, with only a minor change.
The change is in relation to paragraph 26. Paragraph 26 of the existing APS 330 makes reference to a publication on the APRA website entitled ‘Materiality Guide’. This guide is now out of date and will be removed, necessitating the removal of the reference to it in APS 330.
3. Operation of the Instrument
The purpose of Banking (prudential standard) determination No.3 of 2008 is to make the Prudential Standard APS 222 Associations with Related Entities.
The purpose of Banking (prudential standard) determination No.4 of 2008 is to make the Prudential Standard APS 310 Audit and Related Matters.
The purpose of Banking (prudential standard) determination No.5 of 2008 is to make the Prudential Standard APS 330 Capital Adequacy: Public Disclosure of Prudential Information.
4. Consultation
APRA consulted with industry on these changes prior to finalising the proposed new arrangements.
Regulation Impact Statement
A Regulation Impact Statement is not required.