Policy Update: Financial System Inquiry update

A monthly review of the Australian Institute of Company Directors’ policy and advocacy team’s key projects and issues.

In August, we lodged a submission with the federal Treasury in response to the Financial System Inquiry’s interim report. As per our first submission to the inquiry in March, our comments focused primarily on the corporate governance arrangements of financial institutions.

Generally speaking, we agree with the findings and observations on corporate governance as set out in the interim report. In particular, we agree with the inquiry’s preliminary assessment and observation that “sound corporate governance requires clarity of the responsibilities and authority of board and management” and also that “substantial regulator focus on boards has confused the delineation between the role of the board and that of management”.

We recommended that a full review be conducted of all current prudential requirements to ensure that boards are not drawn into operational matters unnecessarily.

We also noted that to the extent possible, all Australian Prudential Regulation Authority (APRA)-regulated entities (including superannuation funds) should be held to the same standard of governance practice. An “if not, why not?” approach should also be incorporated to allow required flexibility.
We also specifically addressed the area of insolvency reform.   Irrespective of any reform approaches that are considered to have merit, a critical element in addressing the problems created by the insolvent trading regime is for directors to have access to a broad-based defence, such as our proposed Honest and Reasonable Director Defence (HRDD).

Audit quality

In late August we wrote to members holding directorships in S&P/ASX 200 companies, providing links to our resources on the role of directors in ensuring audit quality.  

It followed a report released by the Australian Securities and Investments Commission (ASIC) on its observations and findings from its audit inspection program. ASIC also sent letters to the Audit Committee Chairs of the ASX 200 companies highlighting the important contribution directors can play in audit quality.

Interestingly, the report found that in “20 per cent of the 454 key audit areas reviewed across 107 audit files, at firms of different sizes, auditors did not obtain reasonable assurance that the overall financial report was free of material misstatement”.

Given the increasing focus from ASIC on the issue of audit quality, it is essential that all directors understand their responsibilities in this area. We will shortly be holding roundtables for members to discuss the issue in more detail.

Government engagement

We continue to engage with the federal and state governments on issues of importance to the director community.

Specifically, in August we met with representatives from the new Tasmanian government as well as the government and opposition in Victoria. Among the issues discussed were the HRDD proposal, the proposed abolition of the Corporations and Markets Advisory Committee (CAMAC), board diversity and state-based director liability.

We also recently met with relevant members of the federal government and opposition, as well as with representatives from the federal Attorney General’s department and Treasury, primarily to discuss the HRDD proposal and our views on the proposed abolition of the Australian Charities and Not-for-profits Commission (ACNC).

Litigation funding

The Productivity Commission has provided its final report to the federal government on its inquiry into access to justice arrangements. The government has yet to determine any subsequent public release of the report.

In its draft report, the commission recommended that litigation funders should be subject to a tailored licensing regime (enforced by ASIC), be subject to capital adequacy requirements and be required to meet appropriate ethical and professional standards.

This is a position we have advocated over a number of years and we are reasonably confident it will be maintained in the commission’s final report.

Given the continued growth of class actions in Australia and the impact this is having on companies, urgent reform is required in this area.