Draft prudential standards and practice guides released by APRA for consultation provide considerable detail on APRA's plan to supplant new legislation mandating minimum numbers of independent directors. As we previously reported, all boards of RSE licensees, including employer-sponsored superannuation funds, will be required to have a minimum one-third independent directors and an independent chair on the board under draft legislation proposed by the Federal Government.

Release of the consultation materials by APRA follow the conclusion the Government's own consultation earlier this year. Significantly, as a result of that consultation, the independence requirements in the draft legislation will no longer apply from 1 July 2016 – they will commence (with a transitional period) when the Act receives royal assent. In a similar vein, APRA expects its prudential standards and prudential practice guides to commence immediately upon their registration.

Accordingly, understanding the changes proposed in draft prudential standard SPS 510 Governance and SPS 512 Governance Transition is crucial for industry. We have extracted the key components of each instrument below.

Instrument

Significant items

SPS 510 Governance
  • SPS 510 will be aligned with equivalent provisions applying to authorised deposit taking institutions and insurers under Prudential Standard CPS 510 Governance.
  • APRA will require RSE licensees to put in place a formal governance framework, which must include a formal policy regarding board size and composition and nomination, appointment and removal processes. 
  • At least one third of the members of both the Board Audit Committee and Board Remuneration Committee must be independent directors.
  • The chair of both the Board Audit Committee and Board Remuneration Committee must be an independent director.  The chair of the Board cannot also act as the chair of the Audit Committee. 
  • The Board's independence is to be assessed annually.

SPG 510 Governance
  • Expands on existing guidance relating to board renewal, and provides guidance related to the nomination, appointment and removal of directors.
  • Considerations for RSE licensees seeking to appoint new directors, including their independence and fit and proper policies.

SPS 512 Governance Transition
  • That all RSE licensees undertake a preliminary assessment of the extent to which their governance arrangements comply with the new governance requirements.
  • To notify APRA whether the RSE licensee complies, intends to comply or intends to cease operating by the end of the transition period.
  • To develop a transition plan to address the key changes required to the RSE licensee's governance and risk management frameworks to ensure compliance by the end of the transition period.

SPG 512 Governance Transition
  • SPG 512 expands on the types of actions that a transitioning RSE licensee may need to undertake in order to comply with the new governance requirements by the end of the transition period, including some examples of the types of impediments that an RSE licensee may face.

The timing for compliance with SPS 510 Governance is explained in SPS 512 Governance Transition as follows:

  • Date of registration: New governance requirements commence in SPS 510 and SPS 512.
  • 1 July 2016: RSE licensees to complete preliminary assessment.
  • 1 January 2017: Transition or exit plan (as applicable) to be submitted to APRA.
  • Royal Assent + 3 years: All RSE licensee boards must comply with the new governance requirements or have exited the industry.

Subject to passage of the draft legislation and consideration of any submissions received, APRA intends to finalise the prudential standards and prudential practice guides before the end of 2015. Consultation closes on 23 October 2015, with APRA's consultation package comprising the following documents:

If you have any questions as to how these standards will impact your business, or would like to make a submission to the consultation, please contact a member of our team.