Financial System Inquiry Interim Report

The Financial System Inquiry, chaired by Mr David Murray, released its interim report on 15 July 2014. It included observations regarding corporate governance and remuneration.

The Inquiry has taken a realistic view of the role of remuneration in corporate governance –


·         To date, APRA has taken a principles-based approach to remuneration, requiring financial institutions to align incentives with long-term performance.  The Inquiry observed that “This appears to be appropriate in the Australian context, where there have been fewer financial failures and where remuneration packages are more contained than in some other countries.”


·         “The more prescriptive approach to remuneration policy taken in some other jurisdictions, such as the regulator approving senior management bonuses, is unlikely to be appropriate for Australia.  It presupposes that the regulator is better placed to assess the performance of individuals than the institution itself or that the regulator has specific capacity in this regard.  It also has challenges, such as the possibility the regulator will be overly risk-averse due to public scrutiny and popular political pressure to lower bonuses.  This could lower risk taking below an efficient level.”


The interim report did identify potential issues associated with APRA regulated entities governance:


·         The Inquiry is inviting stakeholders to provide details of where they believe APRA’s corporate governance requirements place undue managerial responsibilities on boards.


·         APRA’s position is that its standards do not require boards to micro-manage their organisation.  Instead, they aim to ensure that boards implement appropriate policies and frameworks, particularly relating to risk, and are satisfied that these policies are effective.  In addition, APRA often addresses correspondence to boards with the intention of ensuring that they are aware of its concerns and that they ensure that management addresses them, rather than for the board’s direct action. 


·         The Inquiry commented that if this is the case, APRA should dispel misconceptions by clarifying its expectations of boards, noting that actions to assist with such concerns are already under way.


·         The Inquiry suggests that regulators should also review their corporate governance frameworks, potentially with input from independent advisers.  A review would aim to determine whether the requirements imposed on boards are consistent with the fundamental obligations of company directors, to identify areas where such obligations could more appropriately be undertaken by management.


The Inquiry is seeking feedback on these observations and options to inform the recommendations in its final report in November.  The closing date for second round submissions is 26 August 2014. Public forums are also being held in Sydney, Melbourne, Brisbane and Perth, at which members of the public will be able to present their views to the Inquiry.


The Press Release and a link to the interim report can be found on the Financial System Inquiry website HERE.

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