Life insurance (prudential standard) determination No.14 of 2007
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority
Life Insurance Act 1995, paragraph 230A(1)(a) and subsection 230A(5)
Under paragraph 230A(1)(a) of the Life Insurance Act 1995 (Life Act), APRA has the power to determine (in writing) standards in relation to prudential matters to be complied with by all life companies, including friendly societies. Subsection 230A(5) of the Life Act empowers APRA to vary or revoke a standard in writing.
Life Insurance (prudential standard) determination No.2 of 2006 determined Prudential Standard LPS 510 Governance (LPS 510) to take effect from 1 October 2006. Life insurance (prudential standard) determination No.14 of 2007 revokes LPS 510 from 1 January 2008 and determines a new LPS 510 to take effect from 1 January 2008.
1. Background
As part of the Government’s response to Rethinking Regulation: the Report of the Taskforce on Reducing Regulatory Burdens on Business (Rethinking Regulation), the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007 (SRR Act) removes a number of provisions from the Life Act. In particular, the amendments reflect Recommendation 5.4 of Rethinking Regulation, which states that the Government should ensure that APRA has sufficient flexibility to tailor requirements to accommodate differing circumstances.
The SRR amendments necessitate a number of minor changes to LPS 510 to update references to the Life Act.
APRA is also amending LPS 510 to maintain its consistency with the ASX Corporate Governance Council’s recommendations for the independence of board directors. In assessing whether a director is independent, LPS 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
(ASX 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 LPS 510, APRA has, where possible, aligned its requirements and definitions with the ASX Principles. APRA intends to continue an alignment with these principles, while maintaining APRA’s approach of providing certainty about its expectations for the independence of directors of APRA-regulated institutions, an approach which has worked well in practice. APRA intends LPS 510 to reflect some of the revisions to the ASX Principles with respect to incorporating the wording of Box 2.1 of the ASX Principles that sets out the ‘relationships affecting independent status’ but in APRA’s governance standard these relationships will be circumstances that exclude 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 has a formal policy on Board renewal incorporating the need for explicit consideration of the length of service of a director as part of this policy.
2. Outline of the Determination
The substantive changes are:
- revised paragraph 11 to remove direct reference to the ASX Principles. Also, reference is made to the revised Attachment A regarding the specific circumstances that will not satisfy the principle of independence as defined under paragraph 11;
- revised paragraph 57 (now paragraph 56) to explicitly require the Board renewal policy to give consideration to the length of service of directors and whether this could interfere with a director’s ability to act in the best interests of the institution;
- removal of transition provisions (paragraphs 61 and 62), which no longer have effect; and
- alignment of Attachment A with the ASX Principles’ wording on ‘relationships affecting independent status’.
3. Consultation
APRA consulted with industry participants from 2 August to 31 August 2007 by means of the discussion paper: Transition to the Revised Life Insurance Act. APRA also consulted with industry participants from 10 September to 28 September 2007 on the changes relating to the ASX Principles.
Overview
The Life Insurance (prudential standard) determination No.14 of 2007 was enacted in 2007 under the Life Insurance Act 1995, reflecting the Government's response to the Taskforce on Reducing Regulatory Burdens on Business. This legislation was introduced to address the need for APRA to have flexibility in tailoring requirements for life insurance companies to accommodate varying circumstances, as per Recommendation 5.4 of Rethinking Regulation. The 2007 amendments to the Life Insurance Act 1995 necessitated updates to Prudential Standard LPS 510, particularly in light of the removal of specific provisions and the release of the ASX Corporate Governance Council's 2nd edition titled Corporate Governance Principles and Recommendations. APRA, exercising its powers under the Life Insurance Act 1995, revoked the previous LPS 510 and introduced a revised version to ensure consistency with the new ASX principles and to maintain clarity regarding APRA's expectations for director independence in regulated institutions. The policy objective is to ensure that APRA-regulated life insurance companies have governance structures that align with best practices in corporate governance, while allowing APRA the flexibility to tailor requirements to specific circumstances.
Scope and Application
The Life Insurance (Prudential Standard) Determination No.14 of 2007 applies to all life insurance companies, including friendly societies, operating within Australia. This determination is issued under the Life Insurance Act 1995 and is enforced by the Australian Prudential Regulation Authority (APRA). The scope of the Act encompasses prudential standards related to the governance of these entities, with a specific focus on the independence of directors serving on the boards of APRA-regulated institutions. The revised Prudential Standard LPS 510, which takes effect from 1 January 2008, reflects changes necessitated by the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007 and updates references to the Life Insurance Act. APRA has also aligned its requirements with the ASX Corporate Governance Council’s recommendations, while maintaining its own approach to defining director independence. The determination revokes the previous LPS 510 from 1 January 2008 and introduces new provisions that address the revised circumstances affecting independent status and board renewal policies, removing previous transition provisions and aligning with the ASX Principles on relationships affecting independent status.
Key Provisions
The Life Insurance (prudential standard) determination No.14 of 2007 primarily serves to update the Prudential Standard LPS 510, which pertains to governance within life insurance companies, including friendly societies, regulated by the Australian Prudential Regulation Authority (APRA) (section 1). This determination revokes the previous version of LPS 510 and introduces a new standard effective from 1 January 2008. It incorporates changes necessitated by the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007 and aligns the standard with the Australian Securities Exchange (ASX) Corporate Governance Council’s recommendations. This includes updating references to the Life Insurance Act 1995 (Life Act) and modifying the definition of director independence to reflect the ASX's Corporate Governance Principles and Recommendations (section 2).
Entities governed by the Life Act, such as life insurance companies and friendly societies, must ensure their governance practices comply with the revised LPS 510. This includes maintaining a formal board renewal policy that explicitly considers the length of service of directors and potential conflicts of interest (section 2, paragraphs 56 and 11). Boards must also establish and adhere to a policy that identifies relationships and circumstances that affect a director's independence. These requirements are designed to enhance corporate governance and ensure that boards can act in the best interests of their institutions (section 2, paragraphs 56 and 11).
Failure to comply with the provisions of the revised LPS 510 can result in regulatory action by APRA. While the determination does not explicitly state penalties, non-compliance with APRA's prudential standards can lead to enforcement actions under the Life Act, which may include fines, public reprimands, or more severe measures such as the revocation of an institution's licence. Additionally, directors found to be non-compliant with the independence requirements may face personal liability under the Life Act (section 2, paragraphs 56 and 11).