Life Insurance (prudential standard) determination No. 2 of 2006 - Prudential Standard LPS 510 - Governance
(a) the person was, or is, a director of(a) the person was, or is, a director of the audit company or a member of the audit firm that was, or is, responsible for the audit of the life company in relation to the Life Insurance Act, the Prudential Standards or the Reporting Standards; and
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This Prudential Standard, made under s230A of the Life Insurance Act 1995 (Life Insurance Act), applies to all life companies authorised under the Life Insurance Act.
Application
All life companies (except eligible foreign life insurance companies[1]) have to comply with this Prudential Standard in its entirety.
Eligible foreign life insurance companies (EFLICs) have to comply with only those provisions of this Prudential Standard which specifically indicate that they apply to EFLICs. The obligations imposed by this Prudential Standard, on or in relation to an EFLIC, only apply in relation to its Australian business. Attachment B to this Prudential Standard applies specifically to EFLICs.
The Board and senior management
The Board of directors (the Board) of a life company is ultimately responsible for the sound and prudent management of the life company. This Prudential Standard sets out the minimum requirements that a life company must meet in the interests of promoting strong and effective governance.
The Board of a life company must have a formal charter that sets out the roles and responsibilities of the Board.
The Board, in fulfilling its functions, may delegate authority to management to act on behalf of the Board with respect to certain matters, as decided by the Board. This delegation of authority must be clearly set out and documented. The Board must have mechanisms in place for monitoring the exercise of delegated authority. The Board cannot abrogate its responsibility for functions delegated to management.
The Board must ensure that directors and senior management of the life company, collectively, have the full range of skills needed for the effective and prudent operation of the life company, and that each director has skills that allow them to make an effective contribution to Board deliberations and processes. This includes the requirement for directors, collectively, to have the necessary skills, knowledge and experience to understand the risks of the life company, including its legal and prudential obligations, and to ensure that the life company is managed in an appropriate way taking into account these risks. This does not preclude the Board from supplementing its skills and knowledge through the use of external consultants and experts.
Senior management of the life company (and senior management of an EFLIC), with responsibilities relating to the business in Australia, must be ordinarily resident in Australia.
Section (a) the person was, or is, a director of - Life Insurance (prudential standard) determination No. 2 of 2006 - Prudential Standard LPS 510 - Governance - (a) the person was, or is, a director of the audit company or a member of the audit firm that was, or is, responsible for the audit of the life company in relation to the Life Insurance Act, the Prudential Standards or the Reporting Standards; and | Zoe
Members of the Board and senior management (and senior management of the EFLIC) must be available to meet with APRA on request.
The Board must provide the external auditor[2] and the Appointed Actuary of the life company with the opportunity to raise matters directly with the Board (the Compliance Committee for an EFLIC[3]).
Independence
For the purposes of this Prudential Standard, an independent director is a non-executive director who is free from any business or other association – including those arising out of a substantial shareholding, involvement in past management or as a supplier, customer or adviser – that could materially interfere with the exercise of their independent judgement. In assessing whether a director is independent, the Board must apply the definition set out in the ASX Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations (Attachment A).
If the Board of a life company is in doubt regarding a director’s independence, the life company may refer the matter to APRA for guidance.
Definition of non-executive director
For the purposes of this Prudential Standard a reference to “non-executive” director is to be interpreted as meaning a director who is not a member of management.
Board composition
The Board of a life company must have a minimum of five directors at all times.
The Board must have a majority of independent directors at all times. For life companies that are subsidiaries[4] of other APRA-regulated institutions or overseas equivalents,[5] exceptions may apply as set out at paragraphs 24 to 26. For life companies that are subsidiaries of a parent company that is not prudentially regulated exceptions may apply as set out at paragraph 27.
The chairperson of the Board must be an independent director of the life company.
A majority of directors present and eligible to vote at all Board meetings must be non-executives.
The chairperson of the Board cannot have been the Chief Executive Officer (CEO) of the life company at any time during the previous three years. If the position of the CEO is unexpectedly vacated, the chairperson may serve as an interim CEO. After a period of 90 days, approval must be sought from APRA to allow this arrangement to continue.
The chairperson must be available to meet with APRA on request.
For locally-owned and incorporated life companies, a majority of directors must be ordinarily resident in Australia.
For foreign-owned locally incorporated life companies at least two of the directors of the life company must be ordinarily resident in Australia, at least one of whom must also be independent.
Board representation must be consistent with a life company’s shareholding. Where a shareholding constitutes not more than 15% of a life company’s voting shares there should not be more than one Board member who is an associate of the shareholder where the Board has up to six directors, and not more than two Board members who are associates of the shareholder where the Board has seven or more directors. A director is taken to be an associate of a shareholder for the purposes of this clause, if the director is an “associate” of the shareholder, or the shareholder is an “associate” of the director, according to the definition of “associate” in clause 4 of Schedule 1 of the Financial Sector (Shareholdings) Act 1998. That definition is to be applied for the purposes of this clause as if subparagraph (1)(l) of that definition were omitted.
Where an individual shareholding is greater than 15%, as approved under the Financial Sector (Shareholdings) Act 1998, the Board representation of that shareholding can be greater than allowed in paragraph 22, although it must still be broadly proportionate to the shareholding concerned.[6]
Life companies that are subsidiaries of other APRA-regulated institutions or overseas equivalents
For a life company that is a subsidiary of another APRA-regulated institution or an overseas equivalent, the Board of the life company must have a majority of non-executive directors, but these non-executive directors need not all be independent. They can include Board members or senior management of the parent company or its subsidiaries, but not executives of the life company or its subsidiaries.
A life company to which paragraph 24 applies will be required to have, at a minimum, two independent directors, in addition to an independent chairperson, where the Board has up to seven members. Where the Board has more than seven members, the life company will be required to have at least three independent directors, in addition to an independent chairperson.
For the purposes of meeting the requirements in paragraph 25, the independent directors on the Board of the parent company or its other subsidiaries can also sit as independent directors on the Board of the life company.
Subsidiaries with a parent that is not prudentially regulated
For a life company that is a subsidiary of another entity, not covered by the arrangements in paragraphs 24 to 26 of this Prudential Standard, the Board must have a majority of independent directors. However, independent directors on the Board of the parent company or its other subsidiaries can also sit as independent directors on the Board of the life company.
Life companies that are part of a corporate group
Where a life company is part of a corporate group[7] (group), and the life company utilises group policies or functions, the Board of the life company must ensure that these policies and functions give appropriate regard to the life company’s business and its specific requirements.
Joint ventures
For the purposes of this Prudential Standard, a life company that operates as a joint venture can be considered as part of the group of each parent entity. Independent directors of a parent can sit as independent directors on the Board of the joint venture entity. However, the general concessions available to subsidiaries in paragraphs 24 to 26 will not be available to joint ventures.
Audit Committee
A life company must have an Audit Committee.[8] A life company (including an EFLIC) will need to comply with the requirements with respect to Audit Committees as set out in the Life Insurance Act.[9] Other Board Committees may have risk management responsibilities provided the Audit Committee retains the functions prescribed by section 92 of the Act.
The Audit Committee must have sufficient powers to enable it to obtain all information necessary for the performance of its functions.
The Audit Committee must have at least three members. A majority of members of the Committee must be persons who are not executive officers of the life company.[10] A majority of the members of the Committee must be independent.
The chairperson of the Audit Committee must be an independent director of the life company.
The chairperson of the Board can sit on the Audit Committee, but cannot chair the Committee.[11]
The Audit Committee must have a charter that includes a reference to the fact that the Committee is responsible for the oversight of APRA statutory reporting requirements as well as other financial reporting requirements, professional accounting requirements, internal and external audit, the appointment of the life company’s external auditor,[12] and ensuring that the life company has a sound system of management and financial controls.[13]
The Audit Committee should also be responsible for formulating the risk strategy of the life company, for determining policies that ensure the strategy is adhered to, and for monitoring adherence to those policies.
The Audit Committee must review the external auditor’s engagement at least annually, including making an assessment of whether the auditor meets the Audit Independence tests set out in Professional Statement F1 Professional Independence,[14] as well as the additional auditor independence requirements set out in this Prudential Standard. For an EFLIC, it will be the responsibility of the Compliance Committee to undertake this assessment.
The Audit Committee must regularly review the internal and external audit plans, ensuring that they cover all material risks and financial reporting requirements of the life company. It must regularly review the findings of audits, and ensure that issues are being managed and rectified in an appropriate and timely manner.
The Audit Committee must ensure the adequacy and independence of both the internal and external audit functions.
The members of the Audit Committee must, at all times, have free and unfettered access to senior management, the internal auditor, the heads of all risk management functions, the life company’s external auditor, and the Appointed Actuary and vice-versa.
The Audit Committee must establish and maintain policies and procedures for employees of the life company to submit, confidentially, information about accounting, internal control, compliance, audit, and other matters about which the employee has concerns. The Committee should also have a process for ensuring employees are aware of these policies and for dealing with matters raised by employees under these policies.
Members of the Audit Committee must be available to meet with APRA on request.
The Audit Committee must invite the life company’s external auditor and Appointed Actuary to meetings of the Committee where reasonable and necessary to enable the auditor and actuary to perform their functions in accordance with the Life Insurance Act.[15]
The internal auditor must have a reporting line and unfettered access to the Audit Committee. For EFLICs, the auditor of the local operation must have direct access to the Head Office audit function.
Internal audit
A life company (including an EFLIC in relation to its Australian business) must have an independent and adequately resourced internal audit function. If a life company does not believe it is necessary to have a dedicated internal audit function, it must apply to APRA, in writing, seeking an exemption from this requirement, and set out reasons why it should be exempt. APRA may approve alternative arrangements for a life company where APRA is satisfied that they will achieve the same objectives.
The objectives of the internal audit function must include evaluation of the adequacy and effectiveness of the financial and risk management framework of the life company (including an EFLIC). To fulfil its functions, the internal auditor must, at all times, have unfettered access to all the life company’s business lines and support functions.
Auditor independence
The Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 introduced a number of new requirements into the Corporations Act 2001 (Corporations Act) in relation to auditor independence. The auditor independence requirements in this Prudential Standard are substantially consistent with those requirements, and are intended to help ensure the independence of an auditor engaged to perform work of a prudential nature in relation to the Life Insurance Act, the Prudential Standards and the Reporting Standards.[16]
The Board of a life company (and the Compliance Committee in the case of an EFLIC) must, to the extent practical, undertake steps to satisfy itself that the auditor, who undertakes work for the life company (or EFLIC) in relation to the Life Insurance Act, the Prudential Standards, or the Reporting Standards, is independent of the life company (or EFLIC),[17] and that there is no conflict of interest situation that could compromise, or be seen to compromise, the independence of the auditor.
As part of the process of ascertaining the independence of the auditor, a life company (including an EFLIC) must obtain a declaration from the auditor to the effect that the auditor is independent, both in appearance and in fact, and has no conflict of interest situation, and that there is nothing to the auditor’s knowledge (either in relation to the individual auditor or any audit firm or audit company of which the auditor is a member or director) that could compromise that independence.
For the purposes of this Prudential Standard, a conflict of interest situation exists in relation to a life company (or EFLIC) at a particular time, if because of circumstances that exist at that time:
(a) the auditor is not capable of exercising objective and impartial judgement in relation to the conduct of the work that is undertaken for the life company (or EFLIC) in relation to the Life Insurance Act, the Prudential Standards or the Reporting Standards; or
(b) a reasonable person, with full knowledge of all relevant facts and circumstances, would conclude that the auditor is not capable of exercising objective and impartial judgement in relation to undertaking the work for the life company (or EFLIC) for the purposes of the Life Insurance Act, the Prudential Standards, or the Reporting Standards.[18]
51. A person, who was a member of an audit firm or a director of an audit company, and who served in a professional capacity in the audit of a life company (including an EFLIC) in relation to the Life Insurance Act, the Prudential Standards or the Reporting Standards, cannot be appointed to the role of director or senior manager of that life company until at least two years have passed since they served in that capacity.
A person, who was an employee of an audit company, other than a director of that company, and who acted as the lead auditor[19] or review auditor[20] in the audit of a life company (including an EFLIC) in relation to the Life Insurance Act, the Prudential Standards or the Reporting Standards, cannot be appointed to the role of director or senior manager of that life company until at least two years have passed since they acted as the lead auditor or review auditor.
53. A person cannot be appointed as a director or senior manager of a life company (or a senior manager in the case of an EFLIC) if:
(a) the person was, or is, a director of the audit company or a member of the audit firm that was, or is, responsible for the audit of the life company in relation to the Life Insurance Act, the Prudential Standards or the Reporting Standards; and
(b) there is already another person employed as a director or senior manager of the life company who was a director of the audit company or a member of the audit firm, at a time when the audit company or audit firm undertook an audit of the life company at any time during the previous two years.
An individual who plays a significant role[21] in the audit of a life company (including an EFLIC) in relation to the Life Insurance Act, the Prudential Standards or the Reporting Standards, for five successive years, or for more than five years out of seven successive years, cannot continue to play a significant role in the audit until at least a further two years have passed, except with an exemption from APRA. APRA may grant an exemption from this requirement if the individual provides specialist services that are otherwise not readily available or there are no other registered company auditors available to provide satisfactory services for the life company.
For the purposes of maintaining their independence and objectivity, the Approved Auditor[22] and Appointed Actuary[23] of a life company (including an EFLIC), cannot both be employed by the same body corporate or related bodies corporate, or by the same firm or related firms.[24]
Board performance assessment
The Board of a life company must have procedures for assessing, at least annually, the Board’s performance relative to its objectives. It must also have in place a procedure for assessing, at least annually, the performance of individual directors.
Board renewal
The Board of a life company must have in place a formal policy on Board renewal. This policy must provide details of how the Board intends to renew itself in order to ensure it remains open to new ideas and independent thinking, while retaining adequate expertise.
Persons not to be constrained from providing information to APRA
No prospective, current, or former officer,[25] employee or contractor (including professional service provider) of a life company (including an EFLIC), may be constrained or impeded, whether by confidentiality clauses or other means, from disclosing information to APRA, from discussing issues with APRA of relevance to the management and prudential supervision of the life company, or from providing documents under their control to APRA, that may be relevant in the context of the management or prudential supervision of the life company. Such persons are not to be constrained or impeded from providing information to auditors, the Appointed Actuary and others, who have statutory responsibilities in relation to the life company.
Life companies (including EFLICs) must ensure that their internal policy and contractual arrangements do not explicitly or implicitly restrict or discourage auditors or other parties from communicating with APRA.
Commencement and transitional arrangements
This Prudential Standard commences on 1 October 2006.
Upon commencement of this Prudential Standard, existing requirements applying to Friendly Societies under Prudential Standard PS 6.3C Audit will be varied to remove matters from that Prudential Standard that are covered by this Prudential Standard.
A life company may be unable to comply immediately with particular requirements in this Prudential Standard upon commencement, due to the need to seek the approval of members to give effect to changes required by this Prudential Standard. If the life company has notified APRA of this matter, in writing, prior to the commencement of this Prudential Standard, providing details of the next scheduled meeting of members that will allow the necessary approval to be sought, those particular requirements do not apply to that life company on commencement of this Prudential Standard. In any event, those requirements will apply to the life company not later than 31 March 2007.
Upon commencement of this Prudential Standard, the auditor rotation and independence requirements required by paragraph 54 will apply. However the auditor of a life company (including an EFLIC) not previously subject to the auditor rotation provisions in the Corporations Act can continue in this role even if they have already been the auditor for five successive years, or more than five out of seven successive years upon commencement of this Prudential Standard for a further period of not more than two years from the date of commencement of this Prudential Standard.