John Laker, Chair of APRA has strongly rebuffed critics of APRA’s draft governance standards in a speech to the Asian Bankers Association Symposium on “Promoting Good Corporate Governance”.

He posed three questions:
• Should corporate governance standards in regulated financial institutions be higher than those for non-financial firms?
• If so, how does a prudential regulator seek to promote those standards?
• Are governance requirements a burden on financial institutions?

He answered the questions as follows:

In its consultative document, Enhancing Corporate Governance for Banking Organisations, the Basel Committee set out the arguments why corporate governance for banking institutions is of greater importance than for other companies, given the crucial financial intermediation role of banks in an economy, the need to safeguard depositors’ funds and their high degree of sensitivity to potential difficulties arising from ineffective corporate governance. The Committee stated that effective corporate governance practices, on both a system-wide and individual bank basis, are essential to achieving and maintaining public trust and confidence in the banking system, which are critical to the proper functioning of the banking sector and economy as a whole.

The Committee concluded, without qualification, that “minimum standards of corporate governance for banks should therefore be more ambitious than for non-financial firms.” (p4). APRA strongly supports this conclusion. Indeed, we believe it also applies to all regulated institutions responsible for safeguarding the financial and physical assets of the community…

APRA’s recent governance proposals have prompted a response from some quarters in Australia that corporate governance is no place for a prudential regulator and should be left to business laws — in our case, the Corporations Act. This view is plainly wrong, and betrays a lack of understanding of the role and history of prudential regulation in this country. The Corporations Act establishes general obligations on board directors and other officers to act with care and diligence and in good faith; inter alia, it also sets out requirements for independence of external auditors. These obligations apply to all incorporated bodies, as much to a small manufacturing concern as to a major financial institution. However, the Corporations Act is silent on the interests of depositors and policyholders. It is silent on a board’s responsibilities for risk management. It is silent on board composition and skills. It is silent on the internal audit function. On its own, the Act provides a starting point for a robust prudential framework for governance of financial institutions, but additional requirements are needed in the interests of APRA’s beneficiaries…

Nor can it be left to the ASX, for one very obvious reason. Of the over 400 institutions APRA regulates in the deposit-taking and insurance industries, only 18 or four per cent are listed companies. Without APRA’s prudential framework, there would be no “ambitious” minimum governance standards, to use the Basel Committee’s words, for 96 per cent of regulated financial institutions in Australia…

A related claim is that APRA’s proposed requirements are an additional burden on that small number of regulated institutions that are listed on the ASX. How could this be if, at first blush, our requirements merely reproduce the “best practice” recommendations of the ASX Corporate Governance Council? The issue is that our requirements, as proposed, would bind on all regulated institutions whereas the Council’s recommendations apply only on an “if not, why not” basis. They are guidelines for listed companies and if a company considers that a recommendation is inappropriate to its particular circumstances, it has the flexibility not to adopt it, provided shareholders are given an explanation.

APRA’s final governance standards are due for release in early 2006.

John Laker is the Chairman of APRA: he is in charge of banks, building societies, credit unions, insurance companies, superannuation funds and friendly societies.

In this interview in the Company Director Journal he explains his approach to corporate governance:

"There were three main lessons to come out of the HIH episode and one
was the importance of having a regulatory framework that gave APRA the
power of intervention," says Laker.
"The second lesson was for us to have a more effective radar to pick up
early warning signals. This meant building up our ability to assess
risk.
"The third lesson was that APRA was just too thinly staffed on the
front line. We benchmarked ourselves against comparable regulators and
it showed we were at the light touch end and this is not where the
Government or the community expected us to be."

"Our approach starts out by looking at the deposit taking sector as a
whole," Laker says. "It doesn’t divide it into listed and unlisted. We
look at the principles of prudent management of the institutions in
that sector and the standards we believe should be in place.
"In developing new standards we look at what is in place including the
Corporations Act and the ASX Corporate Governance Principles. We
clearly have regard to what other regulators require but we are the
only regulator charged with promoting sound and prudent behaviour that
protects people’s money or their assets.
"The clear mandate we have been given by Parliament is that the
standards of prudent behaviour are to be higher than in other sectors.
We have full regard for the Corporations Law and the ASX guidelines but
in the APRA regulated sector we make no apologies for the fact that we
set our standards at the higher end.
"That’s what the prudential regulator’s mandate is and that’s what
Parliament expects us to do. But clearly how we go about implementing
those standards require us to be careful."

In respect of directors’ independence: "If a board believes that a director is not independent but there are
other reasons why that person should be treated as independent, we
simply want them to run the ‘if not, why not’ arguments past us and
persuade us.
"In the first instance a board relies on shareholders to provide
discipline. The difficulty for us is that the majority of our companies
are not listed and not subject to the ASX guidelines. Therefore the
depositor or policy holder doesn’t have the opportunity to vote.
"In almost all circumstances that I can envisage the ASX guidelines and
what we require will dovetail very straightforwardly. But there may
well be special cases and we will have to wait and see what arguments
are put to us."
"If an entity wishes to depart from the ASX guidelines and put up an
"if not, why not" reason they would have to have a pretty good argument
to win over shareholders. In the long term you would think the
interests of shareholders and depositors would coincide. But what may
well be very good for shareholders in the short term may not be good
for depositors and that’s where there are natural tensions."