THE AUSTRALIAN Prudential Regulation Authority’s (APRA’s) new prudential standards for banks and insurers will place heads of HR who report to their CEO directly in the regulatory firing line
THE AUSTRALIAN Prudential Regulation Authority’s (APRA’s) new prudential standards for banks and insurers will place heads of HR who report to their CEO directly in the regulatory firing line.
The standards are designed to establish a minimum benchmark for acceptable practice in the appointment of Board directors, senior management, and certain auditors and actuaries.
The community expects such executives to have the appropriate skills, experience and knowledge for their roles, and act with honesty and integrity, according to APRA chairman, John Laker.
APRA defined responsible persons as “those persons whose conduct is most likely to have a significant impact on its sound and prudent management”.
“Under the standards it is up to the regulated institution to determine who they deem to be key ‘responsible persons’ that manage and oversee their institution,” an APRA spokesperson said.
“Ordinarily that would include the directors, CEO, CEO’s direct reports, auditors, actuaries and those responsible for key aspects of risk management.”
APRA said the onus is on regulated institutions to ensure that their boards, senior management and other responsible persons are fit and proper.
“APRA will not be vetting appointments and we see our powers as reserve powers – to be used when an institution is unable or unwilling to take action itself,”Laker said.
From 1 October this year, regulated institutions must have their own policies to ensure that responsible persons are fit and proper. This must be assessed ahead of the initial appointment and reassessed annually.
Furthermore, additional criteria must be met for the appointment of certain auditors and actuaries. The standards involve only minimal reporting requirements, according to APRA.
“In terms of fit and proper, the board has to now establish a fit and proper test for responsible persons,” said Fred Hawke, and insurance specialist at Clayton Utz.
“No one expects a lot of people to suddenly be disqualified from working in the insurance industry, but they recognise it as an additional level of HR in assessing fitness and propriety.
“What they’re looking for is detail in the guidance notes about how far they have to drill down into assessments and what will be a good policy,” he said.
If a bad apple got through, Hawke said, a company would not have necessarily breached the rules. In such cases, APRA will look to ensure an appropriate policy was in place and whether that policy was pursued.
Hawke said there was a good basis for APRA’s guidelines, citing cases in the past where people have achieved significant positions in insurance companies.
“In the early 90s a director of a life insurance company nearly bought the company with it’s own statutory funds and nearly got away with it,” he said.
“A few years earlier a fellow got control of a local subsidiary of an overseas company. He was the managing director and chairman and walked out of the door with the investment portfolio under his arm in a leather satchel one afternoon. That kind of thing just can’t happen.”
Laker said APRA’s new prudential standards will strengthen protection for depositors and policyholders against the risks of incompetence, mismanagement and fraud and will, more generally, “help to underpin public confidence in regulated institutions”.
