In its discussion paper released on 6 March 2025, APRA proposes an overhaul of prudential standards for governance. Although not yet finalised, and with a relatively long lead time – there is an expectation that a new prudential standard will commence in 2028 – it is worthwhile for financial institutions to expeditiously consider both the implications of the changes, and also the impetus for the changes.
This discussion paper and the planned updates to the prudential standards invite entities to reimagine their governance. Much attention so far has been on the question of tenure for directors, which although controversial in principle, in practice will be relatively simple to implement. Other aspects of the proposals, however, require more time and more planning.
Although it might not be necessary to start tapping long-serving directors on the shoulder, being deliberate about succession planning and having clarity around the skills, competencies and performance of each director and the board as a whole should be a priority. Measuring board effectiveness must go beyond self-assessment. Fitness and propriety standards and assessments should be shifted from cursory to considered. Conflicts considerations need to be proactive and go both deep and broad. The strategic role of the board should be clarified.
As such, we recommend getting ahead of the rules, not to be the goody-two-shoes student, but to take the experience, insight and cross industry perspective that APRA has provided to really up the governance standards within your organisation, to realise the benefits that APRA identifies – increased resilience (particularly important in this period of global volatility) and reduced risk of misconduct, losses and failures.
What is driving this?
Two quotes from the APRA Chair, John Lonsdale sum up the impetus for the proposals well:
“Well-governed institutions are likely to be more resilient in times of stress, while poor governance can create weakness that leads to misconduct, losses and failures.”
“While overall standards of governance have improved over recent years, we still see areas of weakness, including entities treating compliance with some requirements as a box-ticking exercise.”
The word ‘cursory’ appears three times in the discussion paper and there is a clear theme that APRA is not satisfied with all entities’ attendance to governance requirements. In many cases the proposals outline more detailed, more clear expectations, leaving less up to entity discretion. APRA also cites the changing international expectations regarding financial sector governance and the desire to align expectations across super, insurance and banking as drivers for the proposed changes.
What are the implications?
These governance proposals go hand in hand with FAR to nudge entities toward improved governance and accountability. For example, the proposal on fit and proper would make a failure to meet FAR obligations a trigger for a fit and proper reassessment. APRA also proposes to use the FAR obligation to deal with APRA in an open honest and reasonable manner as a hook to require fit and proper reassessment, keep APRA informed about succession plans and request an interview with a candidate. More generally, accountability and governance are interdependent – in order to meet accountability requirements, both board and senior management need to have appropriate governance structures in place, while taking reasonable steps to ensure the entity’s business is properly conducted under FAR and having specifically accountable individuals will support good governance. For super and insurers, who are just beginning to embed the FAR requirements, it may be useful to integrate governance improvements with the practical implementation of FAR.
Although the proposals seek to be proportionate, and some proposals would only apply to significant financial institutions, it is nevertheless likely that more change will be necessary for those smaller banks, insurers and superannuation providers that have not previously been subject to similar standards in listing rules. In fact, throughout the discussion, APRA explicitly mentions smaller banks, mutuals and superannuation funds as exhibiting many of the gaps it is seeking to address.
However, this is an area where regulatory and strategic goals align – surely no director ever said that board packs should be longer, one should have conflicts of interest, or that it would be preferable to have less competent board members. While involving an inevitable compliance cost, updating and reinvigorating governance offers dividends well beyond the initial investment – in improved decision-making, in less risk, in greater resilience.
What are the proposals?
Skills and capabilities
By explicitly providing that entities should identify and document the necessary skills and capabilities for both the board overall and individual directors as well as evaluating overall boards and individual directors, APRA’s proposals give more structure and clarity to the current requirement that the board has necessary skills, knowledge and experience. There is a clear thematic running through these proposals that simply evaluating the board overall has not been as effective, outcomes-wise as APRA would like.
The term APRA uses is “cursory” – and notes that while industry wide, the gaps are predominantly in small banks and the superannuation sector. APRA notes in the discussion paper that in a recent review, for mutuals, some 50% of boards had one or zero directors with contemporary industry experience.
With respect to identifying, documenting and evaluating skills and capabilities, the proposals reflect a broader regulatory movement towards more quantifiable, specific and measurable outcomes.
The new proposal would also require entities to take steps to address shortcomings – a much clearer obligation than in the existing standard.
Fitness and propriety
APRA’s proposal would increase minimum requirements for fitness and propriety of responsible persons (i.e. board, senior executive and key office holders). The proposal would see a change from an entity-determined set of criteria and process to a more detailed, outcome-focused process that takes into account specific considerations including conflicts, criminal and conduct records, performance in other roles, time to perform the role and reputational risk. There would also be clearer triggers for a reassessment.
For SFIs, and those entities under heightened APRA supervision, the proposal would require them to engage with APRA on appointments.
Conflicts
This proposal would extend the conflicts requirements that apply to super boards to banks and insurers – creating a more consistent and structured process for eliminating conflicts, comprising proactive identification, avoiding or managing conflicts and taking action where conflicts are not disclosed or appropriately managed. The proposal would specifically require perceived and potential conflicts to be addressed, including those which go to reputational risk.
Independence
APRA proposes updating its definition of independence, and mandating two independent directors on each board, primarily to address the risk of intra-group conflict and the financial conflict when directors hold substantial interests (be that debt, equity or other financial interest) in the company.
Board performance review
Again, providing a more specific obligation – in this case only for SFIs – rather than merely requiring assessing board and director performance annually, the proposal would add a requirement for an independent third-party assessment every three years, for which the chair must be accountable. APRA indicates that this should enable annual assessment requirements to be reduced. For non-SFIs, APRA indicates that it would still expect improved rigour and quality in annual reviews.
Role clarity
APRA intends to give more specific guidance on the role of senior management, the board and the chair – consistent with international standards and listing requirements. This is intended to sharpen the board’s focus on strategic matters, including setting risk appetite, articulating the entity’s purpose, values and expected culture, holding management to account, and overseeing governance and risk management frameworks. It is also intended to clarify the role of senior management in ensuring the entity performs consistently with those areas articulated by the board and that the board is briefed effectively to support decision-making.
Under this proposal, APRA will also seek to provide more examples of what can be delegated to committees and senior management.
Board committees
APRA’s proposal would align super boards with bank and insurance boards, which are required to have separate risk and audit committees, while removing this requirement for all non-SFI entities. The proposal would also require only full board members to have committee voting rights, noting that some committees were currently using external advisors.
Tenure and renewal
The headline grabbing proposal for a default tenure limit of 10 years for directors, and a strengthening of the board renewal process would be a shift from current soft guidance around a 12 year tenure, to a hard limit, unless APRA agrees otherwise. APRA notes that this is a step beyond international norms, which do not generally set hard limits, but in doing this, APRA is really positioning itself as the ‘higher power’, allowing directors and board members to defer to APRA when it is challenging for the board itself to encourage the director to move on.
In many ways, the pushback in the media since this proposal was released is exactly the problem that APRA refers to in its discussion paper – in some cases it can be difficult for chairs and directors to challenge their colleagues on tenure, even while acknowledging the tendency for long tenure to erode independence.
The proposal also seeks to strengthen processes to clearly incorporate the full cycle of board renewal; detailed requirements on nominations, process and terms; and the incorporation of performance assessment.
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