royal commission pillars

The submissions – which focus on the policy questions that relate to broad governance issues - can be accessed here. Proactive enforcement of existing laws

A key theme of both submissions is the importance of strong, effective, and proactive enforcement of existing laws by all regulators.

We also support a clearer articulation of the roles of ASIC and APRA (particularly in relation to superannuation) to clarify respective mandates and eliminate any unnecessary overlap, periodic independent assessment of the performance of the regulators, and increased funds to allow for additional resourcing as required.

Superannuation hearings

It is important to acknowledge the strengths of our superannuation system, which is a pillar of our retirement income system and has contributed significantly to investment in the Australian economy. However, it is critical that robust governance practices are operating effectively across the sector.

The evidence of misconduct and governance failings that was presented during the superannuation hearings is concerning. While we acknowledge that the relevant matters would need to be litigated in court before liability is established, and that the parties have sought to rebut some or all of the allegations made against them, the AICD considers that there is a case for reform (recognising that previous reviews by APRA and the Productivity Commission also highlighted governance deficiencies in the sector).

In our submission on the superannuation hearings, the AICD supported a stronger focus on board composition, particularly in relation to directors’ knowledge, skills and experience. The fundamental criteria for director appointments should be the competency of the relevant director candidate and the extent to which they can contribute to the board and support robust decision-making in the best interests of members, including in light of the mix of skills and experiences already represented on the board.

The AICD also supported the application of civil liability to breaches of the duty to act in the best interests of members, as well as targeted measures to address conflicts of interest in the industry. However, we expressed reservations about Counsel Assisting’s proposed solution of extending the obligation to act in the best interests of members of a super fund to shareholders of corporate trustees and related bodies corporate for a number of reasons, including because it could undermine the role of the trustee board and ultimately dilute accountability.

We have instead suggested alternative options to address the underlying concerns, including increased transparency and reporting requirements, a more targeted role for the regulator in reviewing trustee decision-making processes, and guidelines around appropriate information flows to the trustee board.

Insurance hearings

While the majority of the questions raised in relation to the insurance hearings were specific to the insurance sector and relatively technical in nature, several extended beyond the sector to the financial services industry more broadly.

Our submission on the insurance issues was lodged at the same time as our submission on Commissioner Hayne’s interim report, and the two are intended to be read in conjunction with each other. For further detail on the AICD response to the interim report, click here.

Our insurance submission addressed the role of the regulators, including whether ASIC and APRA should ‘do more’ to ensure that financial services entities have adequate compliance systems. While we strongly agree that, ultimately, entities are responsible for their own compliance systems, we commented on the need for proactive enforcement of existing laws to achieve deterrence, and on the potential for regulatory reviews, combined with increased thematic disclosure of the outcomes of these reviews, to drive positive changes in culture and compliance systems.

We also commented on ASIC’s recent report on breach reporting, which highlighted major deficiencies in breach reporting and compliance systems within Australian financial services (AFS) licensees. This is concerning given the breach reporting regime is intended to facilitate effective regulation of the financial services sector by promoting timely detection of non-compliant behaviours. We also pointed to questions directors could be asking at a board-level, as well as legislative changes that can be made by parliament, to address this issue.

Our submission also focused on ‘what can be done’ in relation to cultural issues within organisations that do not appear to value compliance. We agreed with observations made by the Commissioner that good culture and proper governance cannot be implemented by passing a law. Rather, change must be driven internally, including from the board. From an entity perspective, identifying that a culture exists that does not adequately value compliance is the first step in remedying it.

We observed that, at an individual level, it is important that penalties are imposed for inappropriate, unethical or unlawful behaviour through disciplinary action and/or remuneration outcomes. At an organisational level, core components of corporate culture – including remuneration frameworks and general governance processes and frameworks should be closed reviewed and updated by senior management and boards.

In particular, the board should play an active and ongoing oversight role on cultural issues, including by requiring the CEO and other senior executives to report to the board on key aspects such as the insights gleaned from external and internal surveys, and what metrics will be used to track cultural change.