APRA spells out its expectations of boards of financial institutions
In response to feedback over recent years that some areas of the Australian Prudential Regulatory Authority’s (APRA’s) prudential framework require board involvement in matters that are more appropriately reserved for management, APRA has released a letter to all directors of financial institutions, accompanied by a guide aimed specifically at them.
APRA undertook a stocktake of its requirements of boards and the guide is intended to ensure that its boards are clear as to the regulator’s requirements, which it states ‘properly recognise the respective roles of the board and management’.
The APRA Aid for Directors states that ‘The basic role of a board in meeting APRA’s prudential requirements is no different to that of a board in meeting other legal obligations that are placed upon it and the institution for which the board is responsible’. It continues to note that:
The prudential standards will sometimes set down quite particular responsibilities for the board. For example, the board may be assigned specific responsibility for a matter. This means that the board is expected to be ultimately and finally accountable, and to remain in a position so as to be able to justify the actions and decisions of the institution in relation to that matter. In other cases, the standards may require the board to ensure that a particular matter is addressed or action taken. This means that the board should take all reasonable steps and make all appropriate enquiries so that the board can determine, to the best of its knowledge, that the stated matter has been properly addressed. At other times, the standards may provide for the board to set, approve or review a policy or oversee particular work undertaken by management.
The Aid for Directors clarifies that APRA sees the board as ultimately responsible for the establishment and maintenance of an effective risk management framework, including setting a clearly articulated risk appetite for the organisation. APRA also holds the board responsible for ‘overseeing the implementation and ongoing operation of a robust and effective risk management strategy that seeks to ensure the institution remains within that appetite’.
Turning to culture, APRA notes that ‘The board … needs to form a view of the risk culture in the institution, and the extent to which that culture supports the ability of the institution to operate consistently within its risk appetite, identify any desirable changes to the risk culture and ensure the institution takes steps to address those changes’.
The Aid for Directors can be found on the APRA website.