The Federal Government and APRA have recently released further proposed amendments to and guidance on the proposed changes to the governance arrangements for APRA-regulated RSE licensees (Trustees). This includes the proposed requirement that one-third of a Trustee's Board (Board) be made up of independent directors.
The key milestones for the new governance arrangements may be summarised as follows:
Governance transition requirement
Date of registration
New governance requirements under SPS 510 and SPS 512 commence
1 July 2016
Trustees to complete preliminary assessment under SPS and SPG 512
1 January 2017
Transition or exit plan (as applicable) to be submitted to APRA in accordance with SPS and SPG 512
Royal Assent + 3 years
All Trustees must comply with the new governance requirements in Schedule 1 of the Superannuation Legislation Amendment (Trustee Governance) Bill 2015 (Cth) (Bill) and SPS and SPG 510, or have exited the industry
Changes to the draft legislation
On 16 September 2015, the Superannuation Legislation Amendment (Trustee Governance) Bill 2015 (Cth) (Bill) and Explanatory Memorandum to the Bill were presented to the House of Representatives. Schedule 1 of the Bill sets out several proposed amendments to the Superannuation Industry (Supervision) Act 1993 (SIS Act) announced on 19 August 2015 and provides further clarity regarding other proposed amendments to that Act. These include:
- the requirement for a Trustee to have a minimum of one-third independent directors and an independent chair on their boards;
- providing APRA with power to make prudential standards relating to the appointment and removal of independent directors;
- providing further clarity regarding the concept of 'independent';
- providing APRA with the capacity to determine whether a person is, or is not, independent;
- providing a Trustee with 120 days, instead of 90 days, to replace a vacancy in the membership of its Trustee group or Board;
- allowing APRA to set out details in prudential standards on how existing Trustees are required to transition to the new governance regime; and
- stating that the draft legislation (once approved) will override a superannuation fund trust deed and/or constitution.
In addition, the Explanatory Memorandum (at paragraphs 1.32 to 1.34) explains the 'if not, why not' reporting requirement, whereby a Trustee will need to identify in its annual report whether it has a majority of independent directors or not. This will be implemented through changes to the reporting requirements in the Corporations Regulations 2001 (Cth) to take effect for financial years from 1 July 2019 onwards.
Meaning of 'independent'
The Bill provides two sets of conditions that if present would result in a person not being considered to be 'independent'. These relate to:
- ownership or structural arrangements relating to the Trustee; and
- relationships that a Trustee might have.
Ownership or structural arrangements
A person will not be 'independent' if they:
- have a shareholding interest in 5% or more of the share capital of the Trustee or of a related body corporate of the Trustee, except where the shareholding interest does not confer (or give rise to an expectation of) a right to profit from the interest and the person has the interest as a result of holding office as a director of the Trustee; or
- if the Trustee is a body corporate – is, or has been at any time during the preceding 3 years:
- an executive officer (other than a director) or an employee of the Trustee; or
- a director or executive officer of a related body corporate of the Trustee.
A person will not be 'independent' if they:
- have, or have had at any time during the preceding 3 years, a business relationship with the Trustee (or any of the individual trustees) that is, or was at the time, material to the person or to the Trustee;
- are, or have been at any time during the preceding 3 years:
- a director or executive officer of a corporate entity that has, or has in the preceding 3 years, a business relationship that was material to either the Trustee or the other person; or
- an employee of that corporate entity who is, or was, involved in that business relationship; or
- are, or have been during the preceding 3 years, a director or executive officer of:
- an employer-sponsor who employees 500 or more members of the fund; or
- an organisation representing the interests of one or more employer-sponsors of the fund, or the members of the fund, that has the right to appoint, or nominate for appointment, directors or trustees of the Trustee.
The Bill also allows for the regulations to describe other circumstances in which a person will not be 'independent'.
Some of the above conditions depend on whether or not a 'material' business relationship exists. The Explanatory Memorandum (at paragraph 1.62) explains that:
- whether a business relationship is 'material' or not will depend on the circumstances of each case; and
- the types of business activities that the Trustee may consider form the basis of a material relationship include administration, investment management functions under a formal agreement, internal audit, insurance, business continuity planning arrangements and arrangements with financial planners, particularly where the advice relates only to a member's interest in the Trustee.
APRA's Prudential Standards and Practice Guides – what's changed?
In August 2015, APRA released a consultation package on the new governance arrangements. As part of this consultation package, APRA released:
- a discussion paper regarding the new governance arrangements;
- an amended draft Prudential Standard SPS 510 – Governance (SPS 510) and Prudential Practice Guide SPG 510 – Governance (SPG 510); and
- a new draft Prudential Standard SPS 512 – Governance Transition (SPS 512) and Prudential Practice Guide SPG 512 – Governance Transition (SPG 512).
SPS and SPG 510: Governance
The amendments to SPS 510 and SPG 510 made as a result of the new governance arrangements include:
- detailed guidance on the requirements of a formal governance framework for Trustees which, amongst other things, must include the Board's policy on the size and composition of the Board, and a review process regarding the governance framework;
- a set of comprehensive criteria regarding the Board's policies and processes on the nomination, appointment and removal of directors;
- requiring the chair of the Board's Remuneration Committee and Audit Committee to be an independent director;
- prohibiting the chair of the Board from being the chair of the Board's Audit Committee, even though he/she must be an independent director under the new governance arrangements; and
- requiring one-third of the Board's Remuneration Committee and Audit Committee to be independent.
SPS and SPG 512: Governance Transition
SPS and SPG 512, as the name suggests, are aimed at assisting Trustees with the implementation of the new governance arrangements over the three year transition period.
SPS and SPG 512 requires all Trustees to conduct a preliminary assessment of their own governance arrangements and business operations by 1 July 2016, to determine if they comply with the new governance requirements. Trustees must notify APRA if they already comply with the new governance arrangements (Complying Trustee), intend to comply by the end of the transition period (Transitioning Trustee), or intend to cease operating prior to the end of the transition period (Ceasing Trustee).
Under SPS and SPG 512, a Transitioning Trustee must also develop a transition plan which describes the actions and the timeframes that it will need to adhere to in order to comply with the new governance requirements by the end of the transition period. Similarly, a Ceasing Trustee will need to prepare an exit plan which details the actions and timeframes that it will be abiding by in order to cease operating by the end of the transition period. A Transitioning and Ceasing Trustee must submit its Board-approved plan within 10 business days of it receiving Board approval and, in any event, prior to 1 January 2017.
However, it is important to note that SPS and SPG 512 will not apply to a Trustee that receives its RSE licence after the date on which the draft legislation receives Royal Assent, as such Trustees must already be complying with the new governance requirements by then.
Currently, APRA is looking to release the final prudential standards and prudential practice guides concerning Governance and Governance Transition by the end of 2015, subject to APRA's consideration of the feedback received in response to the consultation package and the draft legislation being passed.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.