Superannuation industry bodies have warned the prudential regulator that some of the more rigid proposals in its governance review may actually undermine governance practices by super funds and create further risks.
In early March, the Australian Prudential Regulation Authority (APRA) announced eight proposals as part of its governance review aimed at improving governance practices among superannuation funds and other entities it regulates.
The proposals seek to address some of the current weaknesses in governance practices, including insufficient attention to board performance assessments, the skills and capabilities of directors and inadequate management of conflicts of interest.
The Association of Superannuation Funds of Australia (ASFA) has raised concerns about APRA’s proposals to impose a default tenure limit of 10 years for non-executive directors at a regulated entity and requirements for certain entities to engage with APRA on potential appointments.
In a recent submission, the industry body called for APRA to provide further clarity on its proposal regarding potential appointments which would apply to significant financial institutions (SFI) and non-SFIs under heightened supervision.
ASFA has urged APRA to confirm that it will only meet with potential appointees in cases “where someone manifestly does not appear to meet the fitness and propriety requirements”.
“Conversely, the approach should not be intended to give the regulator a quasi ‘right-of-veto’ outside that context,” it said.
The submission also warned that it was unreasonable to require regulated entities to notify APRA when concerns arise that may reasonably impact a person’s fitness and propriety, before a determination regarding that person’s appointment to the board has even been confirmed.
Requirements to keep APRA informed or succession plans and nominations prior to appointment or public announcement are also likely to be impractical or unreasonable, it said.
The Super Members Council (SMC) has also expressed strong concerns with these proposals, warning that the proposal for APRA to interview prospective director candidates for regulated entity boards was a “regulatory overreach”.
"We would hold serious concerns about APRA intervening in director appointment processes, with both proposals risking APRA becoming an adjudicator on director fitness,” the industry body said.
SMC said this proposal would risk transferring accountability for appointments from boards to regulators and undermine procedural fairness for individuals where APRA interferes with decisions on appointments.
“Requiring APRA pre-approval for director appointments could create moral hazard, with boards relying on regulator vetting rather than rigorous internal assessments,” it stated in its submission.
SMC also stressed that APRA must adopt a balanced approach to documenting individual director skills within matrices aligned to collective board competency.
“Rigidly prescribing individual competencies should be avoided to mitigate an overemphasis on individual directors’ capabilities,” it said.
ASFA is also opposed to APRA’s proposals relating to director tenure and board renewal.
“ASFA strongly recommends that the length of tenure serving on the board for individual directors should remain a matter for individual funds to decide under their own internal policies,” it said.
“The long-term nature of superannuation often benefits from continuity and depth of experience on trustee boards.”
Reforms that introduce new expectations around tenure limits, board assessments or independence should at least allow funds to adopt “fit-for-purpose approaches, aligned to their structure and size”, it said.
“Flexibility is important to enable the ongoing participation of capable directors, ensure board diversity and support effective transitions – particularly in a period of significant consolidation and change across the sector.”
The Super Members Council said it would support a slightly longer director tenure limit of 12 years with a positive obligation on trustees to demonstrate reasons for extending tenure for one additional term in exceptional circumstances.
