Australia | Publication | March 2025
The Australian Prudential Regulation Authority (APRA) is seeking industry feedback and written submissions (due by 6 June 2025) on proposed enhancements to governance standards and practices among APRA-regulated insurers, banks and RSE licensees (APRA regulated entities): discussion paper. APRA has put forward 8 key proposals designed to address perceived weaknesses in governance and align APRA's approach to contemporary and internationally adopted governance practices.
The proposals affect APRA's core prudential standards and guidance on governance, set out in Prudential Standards CPS 510 and SPS 510 (Governance), CPS 520 and SPS 520 (Fit and Proper) and SPS 521 (Conflict of Interest), for APRA regulated entities.
APRA intends to release updated prudential standards and guidance for formal consultation in the first half of 2026 with the new framework to commence in 2028.
Our key takeaway is that APRA regulated entities should carefully consider and map the impact of the proposals on their organisations to assess what submissions/representations they wish to make to APRA. The impact will vary across sectors and the extent to which an APRA regulated entity forms part of a large corporate group. Regulated entities will also need to overlay the proposals against governance standards applying to their international operations.
Overall the proposals reflect APRA’s endeavours to simplify and streamline regulation across the industries it regulates without lowering standards. In his recent speech at the AFR Banking Summit APRA Chair John Lonsdale reflected on APRA’s continuing commitment to appropriate and proportionate regulation particularly in the face of growing trends of global deregulation.
APRA has stated its principles are informed by the approach of overseas prudential regulators and developments in relevant international standards. It has called out three main international trends:
APRA considers the proposals will help bring Australia's prudential framework for governance more closely in line with relevant international standards and overseas practice.
| Snapshot of the Proposals from the APRA Governance Review Discussion Paper | |
| Proposal 1 | Impose more explicit requirements for entities to: identify and document the skills and capabilities required of the board and individual directors; evaluate the board’s and directors’ existing skills and capabilities; and take active steps to address any gaps through professional development, succession planning and appointment. |
| Proposal 2 | Impose higher minimum requirements of fitness and propriety for responsible persons and require significant financial institutions (SFIs), as well as non-SFIs under heightened supervision, to engage proactively with APRA on potential responsible person appointments. |
| Proposal 3 | Extend the current RSE licensee conflict management requirements to banks and insurers, requiring them to: proactively identify actual and potential conflicts of interest and duty; avoid or prudential manage conflicts; and take remedial action when conflicts aren’t disclosed or managed properly. Perceived conflicts must also be considered. |
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Proposal 4 Banks and insurers only |
New definition and criteria for independence, including requirement that at least two independent directors (including the chair) are not members of any other board within the entity’s group. |
| Proposal 5 | Require independent board performance reviews at least triennially of board, committees and individual directors and make the chair accountable for addressing recommendations. |
| Proposal 6 | Define more clearly APRA’s expectations of the board, the chair and senior management and clarify what can be delegated to board committees and senior management. |
| Proposal 7 | Require SFI Registrable Superannuation Entity licensees to have separate Risk and Audit Committees and remove the same requirement for non-SFI banks and insurers, as well as mandate that only full board members can be voting members of APRA-required board committees. |
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Proposal 8 |
Impose a lifetime default 10-year tenure limit for non-executive directors, with a two-year extension available on request to APRA only in limited and exceptional circumstances only. |
The proposed 10-year tenure limit for non-executive directors (Proposal 8) has already generated some debate. This is understandable and appears to be more prescriptive than overseas regimes. It is proposed the tenure limit will be applied as a ‘hard limit’, without consideration of other factors such as board composition or whether the APRA regulated entity is an ASX-listed company and the director has been elected by the shareholders. In our view, the need for the board to retain corporate knowledge and ensure it has the necessary mix of skills and capabilities to discharge its functions also need to be weighed up. APRA has recognised this proposal may increase turnover of existing directors and has specifically sought feedback (from entities and directors) on the costs and benefits of the proposal.
The new definition of ‘independence’ for banks and insurers may have important ramifications for the industry given banks and insurers often operate in large corporate groups. The proposal is intended to resolve concerns APRA has about poor conflict management where entities do not fully consider potential or actual intra-group conflicts. The proposed new definition requires at least two independent directors (including the chair) to not be directors on any other board within the relevant group. Furthermore, substantial holders of any security issued by the regulated entity or group cannot be considered independent. Interestingly, subsidiaries of a regulated entity will also need to have a majority of independent directors; bringing these entities more closely within APRA’s purview. This would seemingly capture wholly-owned cover holders of insurers. APRA has made clear that it is open to receive industry feedback about the challenges that this change would present, and alternatives for how else APRA’s aims can be achieved.
The proposals will require a significant uplift in management of governance related frameworks and documentation. The Skills and Capabilities Proposal (Proposal 1) will require APRA regulated entities to identify and document skills, capabilities and behavioural attributes that the board requires on an ongoing basis. These attributes will need to be set out in a skills matrix and include specific expectations for the chair, chairs of board committees and other individual directors.
Similarly, the Fitness and Propriety Proposal (Proposal 2) requires APRA regulated entities to clarify triggers for a fit and proper reassessment, for example, where there are grounds to believe that an individual is not meeting their obligations under the Financial Accountability Regime (FAR). This seems to be an attempt to attach some additional personal repercussions on an accountable person, noting that Parliament ultimately did not agree to impose personal liability on an accountable person when implementing FAR.
Interestingly, while Proposals 1 and 2 require uplift for APRA regulated entities, APRA is proposing to simplify existing arrangements through Proposals 6 and 7. Proposal 6 will enable boards to delegate more responsibilities to board committees and senior management. Under Proposal 7, APRA regulated entities that are not SFIs will no longer need to have separate risk and audit committees. This should reduce cost and potential duplication of effort.
Given the nature of the proposals, those with maturing governance practices may incur substantially more costs to meet the new requirements compared to those larger APRA regulated entities with more mature governance practices. Furthermore, new and existing APRA regulated entities may need to adjust their board composition to comply with the new independence and tenure requirements.
Our teams are sector specialists with a deep understanding of governance and prudential practices in Australia and in key foreign markets. We regularly support clients in formulating responses to legislative and regulatory reform proposals.
We look forward to sharing further thought leadership in this area in conjunction with our colleagues both locally and overseas- stay tuned.
Publication
The Australian Prudential Regulation Authority (APRA) is seeking industry feedback and written submissions on proposed enhancements to governance standards and practices among APRA-regulated insurers.
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