The Australian Prudential Regulation Authority (APRA) has released a discussion paper setting out eight proposals to change its prudential governance framework for banks, insurers and superannuation trustees.

The changes are to APRA’s core prudential standards and guidance on governance (currently set out in CPS 510 and SPS 510 Governance, CPS 520 and SPS 520 Fit and Proper, and SPS 521 Conflicts of Interest).

Some of the main areas of corporate governance where APRA currently sees weakness include the skills and capabilities of directors, narrow approaches to assessing and reviewing fitness and propriety, insufficient attention to board performance assessments, problems stemming from overly long tenure and inadequate management of conflicts of interest.

The changes would be applied proportionately with reduced expectations in some areas for smaller and less complex financial institutions.

Three of the eight proposals include exemptions for entities that are not significant financial institutions (non-SFIs).

The discussion paper uses the definition of Significant Financial Institutions (SFIs) for banks and insurers in Prudential standard CPS 001 Defined terms. For superannuation, an SFI is an RSE licensee that has total assets greater than $30 billion, or which APRA has otherwise determined to be an SFI, having regard to matters such as complexity in operations or group membership.

The Proposals are:

1. Skills and capabilities

Require regulated entities to:

• identify and document the skills and capabilities necessary for the board overall, and for each individual director;
• evaluate existing skills and capabilities of boards and individual directors;
• take active steps to address gaps through professional development, succession planning and appointments.

2. Fitness and propriety

• Require regulated entities to meet higher minimum requirements to ensure fitness and propriety of their responsible persons.

• Require Significant Financial Institutions (SFIs), and non-SFIs under heightened supervision, to engage proactively with APRA on potential appointments.

3. Conflicts management

Extend current RSE licensee conflict management requirements to banks and insurers so they are also required to:

• proactively identify actual and potential conflicts of interest and duty;
• avoid or prudently manage conflicts;
• take remedial action when conflicts are not disclosed or managed properly.

Require regulated entities to consider perceived conflicts, in addition to actual and potential conflicts.

4. Independence (banks and insurers only)
   Strengthen independence on regulated entity boards by:

• requiring that at least two of their independent directors (including the chair) are not members of any other board within the entity’s group;
• making minor amendments to the independence criteria, including extending the prohibition on directors who are substantial shareholders in a regulated entity or group from being considered independent, to include material holdings of any type of security;
• extending the current requirement for bank and insurer boards to have a majority of independent directors to include boards of entities with a parent that is regulated by APRA or an overseas equivalent.

5. Board performance review
   Require SFIs to commission a qualified independent third-party performance assessment at least every three years which covers the board, committees and individual directors.
   
6. Role clarity

• Define APRA’s core expectations of the board, the chair and senior management.

• Provide additional guidance on which APRA requirements may be delegated to board committees and senior management.

7. Board committees

• Extend the current requirement for bank and insurer boards to have separate risk and audit committees, to apply to SFI RSE licensees as well. Repeal this requirement for non-SFI banks and insurers, allowing flexibility for smaller entities.

• Mandate that only full board members can be voting members of APRA-required board committees.

8. Director tenure and board renewal
   Impose a lifetime default tenure limit of 10 years for non-executive directors at a regulated entity.

• Require regulated entities to establish a robust, forward-looking process for board renewal.

APRA can use existing supervisory and enforcement powers where entities have not dealt with persistent issues. This could include a higher supervisory risk rating, requirements to undertake a risk transformation process, adjusting capital requirements, or ultimately, directing an entity to remove a director or applying to the court for a director’s disqualification.

APRA is also seeking to develop a single set of prudential standards for all APRA-regulated industries.

APRA intends to release updated prudential standards and guidance for formal consultation in the first half of 2026.

APRA aims to publish the updated framework by the beginning of 2027 ahead of it commencing by 2028.

APRA says it has not made any proposals that would require legislative change.

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