Key points

• The Treasury Laws Amendment (Reserve Bank Reforms) Bill 2023 (the Bill) amends the Reserve Bank Act 1959 to improve the governance of the Reserve Bank of Australia (RBA) by establishing a new Governance Board and a new Monetary Policy Board. The amendments are part of the Government’s response to the recommendations of the Review of the Reserve Bank entitled: An RBA fit for the future.
• The functions of the Governance Board are, amongst other things:
  • to oversee, and determine policies for, the management and organisational affairs of the RBA
  • to determine the policies of the RBA for the performance of the RBA’s functions in relation to delivering banking services to the Commonwealth and the issuing, re-issuing and cancelling Australian notes
  • to determine the policies of the RBA in relation to any matter not covered by the functions of the Monetary Policy Board or the Payments System Board.
• The role of the Monetary Policy Board is to determine the monetary policy of the RBA in a way that, in the Board’s opinion, best contributes to price stability and the maintenance of full employment in Australia.
• The functions of the existing Payments System Board are updated so that they are expressed in similar terms to those of the Governance Board and the Monetary Policy Board.
• The Bill has been referred to the Senate Economics Legislation Committee for inquiry and report by 21 March 2024.

Introductory Info

Date introduced: 29 November 2023
House: House of Representatives
Portfolio: Treasury
Commencement: The later of 1 July 2024 and the first day of the next calendar month occurring three months after Royal Assent

Purpose of the Bill

The purpose of the Treasury Laws Amendment (Reserve Bank Reforms) Bill 2023 (the Bill) is to amend the Reserve Bank Act 1959 (RB Act) to strengthen the Reserve Bank of Australia’s (RBA) governance framework. The Bill establishes within the RBA a new Monetary Policy Board which is separate from the Governance Board and the Payments System Board.

Structure of the Bill

The Bill comprises 9 Parts:

• Parts 1 and 3–8 amend the RB Act to implement recommendations 1, 5, 8 and 12 of the Review of the Reserve Bank of Australia
• Part 2 amends the Banking Act 1959 to remove the RBA’s power to determine the lending policy of banks (this is being one element recommendation 1) and
• Part 9 contains relevant application and transitional provisions.

Background

Current role of the RBA

The Reserve Bank of Australia is Australia's central bank. It currently conducts monetary policy, works to maintain a strong financial system and issues the nation's currency. In addition, the RBA provides selected banking and registry services to a range of Australian government agencies and to a number of overseas central banks and official institutions. It also manages Australia's gold and foreign exchange reserves.[1]

Under the RB Act, it is the duty of the Reserve Bank Board (RB Board) to ensure that the monetary and banking policy of the RBA is directed to the greatest advantage of the people of Australia.[2]

About monetary policy

Monetary policy involves setting the interest rate on overnight loans in the money market (‘the cash rate’). The cash rate influences other interest rates in the economy, affecting the behaviour of borrowers and lenders, economic activity and ultimately the rate of inflation.[3]

In determining monetary policy, the RBA has a duty to contribute to the stability of the currency, the maintenance of full employment, and the economic prosperity and welfare of the Australian people.[4] To achieve these statutory objectives, the Bank has an ‘inflation target’ and seeks to keep consumer price inflation in the economy to 2–3 per cent. Controlling inflation preserves the value of money and encourages strong and sustainable growth in the economy over the longer term.

The RBA has issued a Statement on the Conduct of Monetary Policy which records the common understanding of the Governor, as Chair of the RB Board, and the Government on key aspects of Australia's monetary and central banking policy framework.

Rising interest rates in Australia

It is the setting of the cash rate, said to be a curb on inflation, which has caused significant concern among Australians since mid-2022.

In November 2020—approximately 6 months into the COVID-19 pandemic, the RB Board announced that the cash rate would be reduced to 0.10 percent. This was an historical low. The statement by RBA Governor, Philip Lowe, noted that given the outlook for both employment and inflation, monetary and fiscal support will be required for some time. In addition, he stated that ‘the Board is not expecting to increase the cash rate for at least three years’.[5]

Whilst the official cash rate remained at 0.10 for some months, in May 2022 it was increased by 25 basis points to 0.35 percent.[6] A formal statement by Mr Lowe at that time indicated that the rise came about largely because of ‘global factors’. In addition, ‘domestic capacity constraints are increasingly playing a role and inflation pressures have broadened, with firms more prepared to pass through cost increases to consumer prices’.

There followed another nine consecutive months of rate increases which did not pause until April 2023 when the cash rate was steady at 3.60 percent. Other increases followed so that in December 2023 the cash rate was 4.35 percent.[7]

Interest rates and house prices

As Alan Kohler explains in his essay entitled: The Great Divide: Australia’s housing mess and how to fix it:

Six per cent compound annual growth in the value of houses over the past twenty-three years versus 3 per cent annual growth in average incomes has meant that household debt has had to increase from half to twice average disposable income, and from 40 per cent of GDP to 120 per cent. This is the most important single fact about the Australian economy. The large amount of housing debt Australians carry means that interest rates have a much greater impact on their lives, and this in turn affects inflation, wages, employment and economic growth (p. 2) [emphasis added]

And further:

In recent years, interest rates have been the main thing determining house prices, although they are not controlled by federal politicians but rather by the independent Reserve Bank of Australia. It is a federal body, appointed by the Treasurer, and it manages the economy mainly through housing. That is, interest rates regulate the cost of housing and therefore the demand for it, and to a lesser extent the supply. By reducing or increasing the cost of shelter, the RBA controls our spending on everything else, which in turn governs the level of employment and inflation (pp. 6-7) [emphasis added]

Cost of living crisis

It was reported in March 2022 that Australian consumer prices were ‘rising at 3.5% annually with increases expected to accelerate’. It was suggested that ‘financial distress for over-stretched borrowers risks a new financial crisis’.

What eventuated was a ‘cost of living’ crisis. Throughout 2022 it was reported that ‘charities … all say they are receiving increasing demands for assistance’. Many of those seeking help have never before had to take such a step. A common theme is also that many of those looking for basics such as food and a hot meal are employed.[8]

Reserve Bank Review

The escalation of financial difficulty in the community led to considerable criticism of the RBA[9] and questions as to whether it was able to fulfil its primary functions including the maintenance of full employment in Australia and the economic prosperity and welfare of the people of Australia.[10]

On 20 July 2022, the Treasurer, Dr Jim Chalmers, announced the Review of the Reserve Bank (the Review) noting that it was ‘an important opportunity to ensure that our monetary policy framework is the best it can be, to make the right calls in the interests of the Australian people and their economy’. The purpose of the Review was to consider the RBA’s objectives, mandate, the interaction between monetary, fiscal and macroprudential policy, its governance, culture, operations, and more.

In order to assist the Review, an issues paper was circulated for comment during the period 15 September 2022 to 7 November 2022. One hundred and fourteen submissions were received, 78 of which were published.

The final report of the Review entitled: An RBA fit for the future (Review) was presented to the Treasurer on 31 March 2023. The Review acknowledges some shortcomings with regard to the RBA’s performance (p. 3):

The decisions to implement additional monetary policy tools during COVID-19 would have benefitted from a Reserve Bank Board with more specialist expertise, support and time to fully test the proposed policies. The RBA’s decisive actions at the start of the COVID-19 pandemic were critical in supporting Australia through the crisis. At the same time, stronger decision-making arrangements may have helped mitigate eventual shortcomings in the RBA’s forward guidance, yield target, term funding facility, and bond purchase program.

The RBA was initially slow to respond to rising inflation in 2022, along with many other central banks. An overemphasis on wages as a driver of persistent inflation, reliance on forecasting and modelling tools that offered limited insights on the supply side of the economy, and the way forward guidance and the yield target had been designed and used all contributed. Deeper consideration of monetary policy strategy, risks and opposing views, and use of a richer suite of models and data, may have reduced the risk of misjudging inflation. [emphasis added]

Relevant to the Bill, the Review recommended, amongst other things, that the RBA’s independence be affirmed and that its statutory monetary policy objectives be clarified as (p. 3):

It is critical that Australia retains the operational independence of the RBA to set monetary policy. Monetary policy decision making must be insulated from short-run political considerations.

Committee consideration

Senate Economics Legislation Committee

The Bill has been referred to the Senate Economics Legislation Committee for inquiry and report by 21 March 2024.[11] At the time of writing this Bills Digest the Committee had received 4 submissions.

Senate Standing Committee for the Scrutiny of Bills

In its Scrutiny Digest, 1, of 2024 the Standing Committee for the Scrutiny of Bills stated that it had no comments about the Bill (p. 30).

Policy position of non-government parties/independents

The submissions to the Review were a response to its issues paper, rather than the Bill. Where relevant these are canvassed in the body of this Bills Digest.

At the time of writing none of the non-government parties or independents have specifically commented on the Bill, although the Australian Greens welcomed the Review stating that it ‘must be prepared to confront the limitations of independent central banking as currently perceived. Independence must not equal freedom from accountability’.

Position of major interest groups

RBA objectives

The Australia Institute welcomed the Review (p. 6), noting that the objectives of the RB Board—that is, the stability of the currency of Australia, the maintenance of full employment and the economic prosperity and welfare of the people of Australia—'may need updating and expanding’. Importantly the Australia Institute opined that ‘the RBA has drifted a long way from these objectives’.

The ACTU concurred (p. 1) with that view on the grounds that ‘in practice, [the RBA] has long preferenced price stability, and in particular inflation control, ahead of its other goals, including full employment’.

The Australian Banking Association (ABA) (p. 2) noted the interdependence between the three objectives and the need for the RBA to clearly communicate when it is making trade-offs between the objectives. However, it does ‘not support legislation as a mechanism for determining how the RBA manages the trade-offs between the objectives’.

Composition of the Board

Other submitters to the Review were concerned about the composition of the RB Board and the terms of appointment. One submitter noted the Reserve Bank’s board ‘has faced questioning and criticism over its viewpoints, skillset, and possible agendas’.

Another suggested that ‘the board, the governor, staff – should include a mix of new people and existing people from inside and outside the organisation. They should be given very short terms.’

The submission from Vantage Point (p. 4) opined that ‘the six non-RBA/Treasury Board appointments should be made in an open and transparent way, not by the current ‘shortlist’.’

Financial implications

According to the Explanatory Memorandum, ‘the changes will have a financial cost for the RBA, which it will manage through its internal budget. This includes the remuneration of additional statutory appointees’.[12]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[13]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights had no comment on the Bill (p. 7).

Key issues and provisions

RBA independence

Table 1:     Reserve Bank Review—Recommendation 1

Affirm the RBA’s independence and clarify its statutory monetary policy objectives.

The RBA should continue to have operational independence for monetary policy. The Government should remove the power of the Treasurer to overrule the RBA’s decisions. The Government should amend the Reserve Bank Act 1959 such that: The RBA has dual monetary policy objectives of price stability and full employment. The ‘economic prosperity and welfare of the people of Australia now and in the future’ is an overarching purpose for the RBA rather than a separate objective for monetary policy. The Government should remove the RBA’s power (in the Banking Act 1959) to determine the lending policy of banks.

Australian Government, An RBA Fit for the Future, March 2023, p. 17.

Resolving differences of opinion

Currently section 11(1) of the RB Act requires the Reserve Bank Board and the Payments System Board to inform the Government of the policies which they have a statutory obligation to make.

In the event of a difference of opinion between the Government and one or other of the Boards about whether a policy is directed to the greatest advantage of the people of Australia, the Treasurer and the relevant Board must endeavour to reach agreement: subsection 11(2). In the event no agreement is reached, subsections 11(3)–11(7) of the RB Act set out the process to be followed by the Treasurer to overrule the policy made by the Board and to determine the policy to be adopted by the Bank. According to the Explanatory Memorandum (p. 7) ‘no Australian Government has used this power’ … but … ‘the continued existence of such a power risks the independent operation of monetary policy’.

What the Bill does

Item 1 of the Bill inserts proposed section 11A into the RB Act requiring the Monetary Policy Board and the Payments System Board to inform the Government from time to time about the performance of functions and the making of policies.

Items 2 to 6 of the Bill amend section 11 of the RB Act so that the mechanism for the Treasurer to overrule a policy remains only with respect to the Payments System Board.

Lending policy of banks

Division 5 in Part II of the Banking Act 1959 deals with the lending policies of Approved Deposit-taking Institutions (ADI). Specifically, subsection 36 of the Banking Act provides that where the Reserve Bank is satisfied that it is necessary or expedient to do so in the public interest, the Reserve Bank may determine the policy in relation to advances to be followed by ADIs.

The legislative history of the provisions indicates this power was intended to (p. 13):

ensure that at all times the credit resources of the nation are put to the best use, and that the making of advances by banks does not lead to an unbalanced expansion of credit in any particular field.

The provision allows the RBA to, for example, create policies applicable to the lending practices of ADIs in relation to business lending, credit cards or certain classes of mortgages over residential property if, in the RBA’s view the measure is necessary. According to the Review (p. 89):

This power was created when the RBA had responsibility for the supervision of the banking sector, a responsibility that was transferred to APRA in 1998. In line with its mandate, APRA now has powers that allow it to influence the behaviour of financial institutions, including setting rules regarding banks’ lending activities for purposes of financial safety and financial stability. In recent years, APRA has introduced limits on higher-risk residential mortgage lending to reduce financial stability risks.

The ABA (p. 3) provides an example of where the RBA, whilst not exercising its power under section 36 of the Banking Act, worked with APRA to implement macroprudential tools of the type captured by the provision in relation to certain types of loans (see also APRA pp. 3–4):

In the decade prior to COVID, the RBA, as chair of the Council of Financial Regulators (‘CFR’), worked to respond to risks of financial instability though the implementation of macroprudential tools by the Australian Prudential Regulation Authority (‘APRA’). This included the 10 per cent cap on the growth rate for investor lending and the limitation to 30 per cent of interest-only loans in new lending. [emphasis added]

The Australia Institute (p. 33) also noted the issues posed by distorted lending practices:

the big banks are increasingly specialising in housing loans from which they derive enormous profits. In that context it may be desirable to encourage banks to increase their lending for business purposes… Likewise concerns that the banks are more concerned with what they are lending against rather than what they are lending for. Security as represented by housing assets may also contribute to the bias against business. [emphasis added]

APRA (pp. 3–5) noted examples of where it had deployed various measures to support business lending and control ‘the composition and quality of banks’ lending’, whilst noting such measures ‘may have had limited impact on overall credit growth’ (p. 3).

The Council of Financial Regulators (CFR) plays a key role as a discussion and information-sharing forum for its members (APRA, ASIC, the RBA and Treasury), and acts as a non-statutory coordinating forum to discuss developments in the financial system and to coordinate responses to any areas of concerns. However, currently both APRA and the RBA (by virtue of section 36 of the Banking Act), are able to intervene in bank lending practices under their respective legislation.

The CFR has operated collaboratively in the past, with the APRA interventions and changes to macroprudential policy settings noted above appearing to have been formed by consultations with the RBA (via the CFR). However, under current legislation, should the RBA disagree with APRA regarding lending policies of ADIs, it would be open to the RBA to intervene, for example, to limit growth in mortgage lending, or encourage lending to business if it was satisfied it was necessary or expedient to do so in the public interest.

What the Bill does

Item 8 of the Bill repeals Division 5 in Part II of the Banking Act so that the RBA does not have the power to determine the lending policy of private banks, resulting in those powers resting solely with APRA.[14]

Stakeholder comment

The submission by the Australian Prudential Regulation Authority (APRA) to the Review states (p. 4):

Recent reviews by the RBA and APRA have noted that APRA’s policy measures were effective in controlling the composition and quality of banks’ lending, but may have had limited impact on overall credit growth. It is challenging to assess the indirect impacts of macroprudential measures on, for example, housing prices; housing prices are influenced by many factors beyond bank capital requirements or lending standards, including monetary policy and fiscal policy. [emphasis added]

The Australia Institute (p. 33) noted ‘it may be desirable to encourage banks to increase their lending for business purposes’, without specifying if APRA or the RBA should be responsible for such actions.

Stephen Halmarick, Chief Economist of Vantage Point (part of the Commonwealth Bank) recommended ‘no changes’ to the RB Act (p. 3).

Overall objectives

In its current form the RB Act sets out the general powers of the RBA (section 8) and the specific functions of each of its existing Boards (sections 10 and 10B). The RB Board is to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the RBA are exercised in a way that will best contribute to the stability of the currency of Australia; the maintenance of full employment in Australia; and the economic prosperity and welfare of the people of Australia.

With the establishment of the Monetary Policy Board, this mandate is no longer suitable for just the RB Board.

According to the Review (p. 85):

The Review recommends clarifying the legislative objectives for the RBA’s monetary policy as a dual mandate to contribute to price stability and full employment… In practice a dual mandate is not a substantial departure from the status quo. RBA executives have indicated, at times, that they already consider the objectives of monetary policy in these terms. A dual mandate would make it clearer that these objectives are the central focus of monetary policy and that the RBA Monetary Policy Board is accountable for delivering both.

What the Bill does

Item 10 of the Bill inserts proposed section 8AA into the RB Act to state that the overarching objective of the RBA is to promote the economic prosperity and welfare of the people of Australia both now and into the future. The RBA must perform its functions and exercise its powers in a way that achieves that overarching objective.

Financial stability

Table 2:     Reserve Bank Review—Recommendation 5

Legislate the RBA’s financial stability role
The Government should specify in the Reserve Bank Act that the RBA has a responsibility to contribute to financial system stability, in cooperation with other government agencies, especially the APRA.

Australian Government, An RBA Fit for the Future, March 2023, p. 19.

APRA has an explicit legislative mandate to promote financial system stability and powers that enable it to directly alter the behaviour of financial institutions.[15] Examples of the recent use of such powers by APRA, in consultation with the RBA via the CFR, were noted elsewhere in this Digest. 

However, although there is no explicit legislative mandate to support such an objective, outside of its Payments System Board’s responsibilities,[16] the RBA, according to the Review, (p. 77) ‘is widely accepted to have financial stability responsibilities’.

What the Bill does

Item 59 of the Bill inserts proposed Part VI—Financial system stability into the RB Act. Within new Part VI, proposed section 45 makes clear that the Reserve Bank’s functions include contributing to the stability of Australia’s financial system.

This is consistent with the terms of Recommendation 5 of the Review.

RBA’s Boards

Currently the RB Act provides that the RBA has two Boards—the Reserve Bank Board and the Payments System Board[17]—and that the RB Board is responsible for the Bank’s monetary and banking policy, and the RBA’s policy on all other matters, except for its payments system policy.[18]

Item 17 in Part 4 of the Bill repeals sections 8A–10 of the RB Act and inserts into existing Part II of the RB Act, proposed Division 3—The Boards of the Bank. The effect of the amendment is to create a discreet Monetary Policy Board and a Governance Board. In addition, the Bill updates the functions of the Payments System Board.

Establishing the Monetary Policy Board

Table 3:     Reserve Bank Review—recommendation 8

Constitute an expert Monetary Policy Board with diverse perspectives and knowledge

The Government should constitute a Monetary Policy Board with responsibility for monetary policy decisions and oversight of the RBA’s contribution to financial system stability (except payments system policy), but not broader corporate governance. The Monetary Policy Board should comprise the Governor, Deputy Governor, Treasury Secretary and 6 external members, with the Governor as chair. The Government should clarify in the Reserve Bank Act 1959 that the Treasury Secretary acts on the Monetary Policy Board in their individual capacity not at the direction of the Treasurer. The Statement on the Conduct of Monetary Policy should state that the Treasury Secretary has a responsibility to provide insight on the outlook for the economy and for fiscal policy. The Monetary Policy Board’s external members should be able to make a significant contribution to monetary policy setting through expertise in areas such as open-economy macroeconomics, the financial system, labour markets, or the supply side of the economy, and in the context of decision making under uncertainty.

Australian Government, An RBA Fit for the Future, March 2023, p. 20.

Within proposed Division 3, proposed Subdivision B establishes the Monetary Policy Board. Proposed subsection 9B(1) of the RB Act provides that the Monetary Policy Board is responsible for:

• determining the monetary policy of the Bank in a way that best contributes to price stability in Australia and the maintenance of full employment in Australia and
• determining the policy (other than the payments system policy) for contributing to the stability of Australia’s financial system.

The Monetary Policy Board must promote the proper, efficient and effective implementation by the RBA of those policies and undertake any other functions conferred upon it under the RB Act.

Importantly, the Monetary Policy Board must perform its functions and exercise its powers having regard to the fact that it is the Governance Board which is the accountable authority under the Public Governance, Performance and Accountability Act 2013 (PGPA Act): proposed subsection 9B(3).

Other features

Membership of the Board 

Item 56 of the Bill inserts proposed Part IIIA—The Monetary Policy Board into the RB Act. Within it, proposed section 25AA provides that the membership of the Monetary Policy Board consists of the Governor, the Deputy Governor, the Secretary (of Treasury) and six other members (called the external Monetary Policy Board members). The Governor is the Chair of the Monetary Policy Board: proposed subsection 25AC(1).

Terms of appointment

The external Monetary Policy Board members are appointed on the following basis:

• the appointment is part-time, by way of written instrument by the Treasurer: proposed subsection 25AB(1)
• the term of appointment is specified in the Treasurer’s instrument of appointment and must not exceed five years: proposed subsection 25AD(1)
• a person may be reappointed[19] for a longer term provided that the sum of periods during which the person is an external Monetary Policy Board member does not exceed seven years: proposed subsection 25AD(2). This means that once a person has served the maximum term of seven years on, say the Monetary Policy Board, there is nothing to prevent the person from then being appointed as an external member of one of the other Boards.
• the appointee must not be a staff member of the Reserve Bank Service, appointed or engaged under the Public Service Act 1999 or a director, officer or employee of an Approved Deposit‑taking Institution (ADI).

It should be noted that the drafting of the Bill in its current form does not prevent a person from being an external member of more than one Board at the same time: proposed subsection 25AJ(4).

Termination of external Board members

The Treasurer may terminate the appointment of an external Monetary Policy Board member either for misbehaviour or if the member is unable to perform their duties because of physical or mental incapacity: proposed subsection 25AM(1).[20]

The Treasurer must terminate the appointment of an external Monetary Policy Board member if, amongst other things, the member:

• becomes bankrupt or applies to take the benefit of any law for the relief of bankrupt or insolvent debtors
• is absent, except on leave of absence, from two consecutive meetings of the Monetary Policy Board or three meetings of the Monetary Policy Board in any period of 12 months: proposed subsection 25AM(2).[21]

Independence of Board members

Under proposed section 25AK of the RB Act a member of the Monetary Policy Board has complete discretion in performing their functions and duties and in exercising their powers. The person must act independently and impartially and is not subject to direction from anyone. This requirement of independence is in equivalent terms as those for members of the Governance Board and the Payments System Board.[22]

Importantly, proposed subsection 25AK(2) of the RB Act specifies that the Secretary of the Treasury is a member of the Board in their individual capacity, which the Explanatory Memorandum notes (para 1.25) ‘codifies the convention that the Secretary of the Treasury acts independently of the Government in their role on the Monetary Policy Board, and cannot be directed by the Treasurer’.

Stakeholder comments

Former RBA Governor, Ian MacFarlane, has criticised the move to establish a separate body within the Reserve Bank to make interest rates decisions as ‘very bad policy’ and ‘a leap of faith’ which would undermine the authority of the governor.

In particular, he has expressed concern that the new model would give ‘the part-time members of the board the majority of the votes in monetary policy decisions’. These criticisms are based on proposed section 25AR of the RB Act which provides that:

• questions arising at Monetary Policy Board meetings are to be determined by a majority of the votes of the members who are present and voting and
• the presiding member has a deliberative vote and, if the votes are equal, a casting vote.

The Governor is the Chair of the Monetary Policy Board and the Chair must preside at all meetings at which he or she is present: subsection 25AP(1). In addition, proposed subsection 25AC(3) sets out the mechanism by which the Deputy Chair—that is, the Deputy Governor of the RBA—is to act as Chair.

However, given the terms of proposed section 25AR, Mr MacFarlane’s concern that part-time members of the board would have the majority of the votes in monetary policy decisions appears to be valid.

Establishing the Governance Board

Table 4:     Reserve Bank Review—recommendation 12

Update RBA oversight and accountability by establishing a Governance Board

The Government should establish a Governance Board with responsibility for overseeing the management of the organisation, including organisational strategy, performance, finances, large projects, resourcing, remuneration, succession planning, risk (such as cyber risk), and delivery of banking and banknote services. The Governance Board should be the accountable authority in respect of the PGPA Act and expand the Audit Committee to be an Audit and Risk Committee. The Governance Board’s membership should comprise the Governor, Chief Operating Officer and 5 external members. An external member should be chair. External Governance Board members should be appointed through a transparent process. Positions should be advertised for expressions of interest drawing on a matrix of required skills and experience. The process should be managed by the Secretary to the Treasury, the Governor and a third party. External members of the Governance Board should be appointed for a term of 5 years, with the possibility of reappointment for up to one year, if flexibility is needed. End dates should be staggered. The RBA Boards should establish charters setting out their responsibilities and those of the RBA executive. A memorandum of understanding should be established between the 3 RBA Boards.

Australian Government, An RBA Fit for the Future, March 2023, p. 24.

Item 20 establishes the Governance Board within Subdivision D of proposed Division 3 in Part II of the RB Act. Its functions are:

• overseeing, and determining policies for, the management and organisational affairs of the RBA
• determining the policies of the RBA in relation to delivering banking services to the Commonwealth and issuing, re-issuing and cancelling Australian notes
• determining the policies of the RBA for any matter that is not to be covered by the Monetary Policy Board or the Payments System Board and
• any other functions conferred on the Governance Board by Commonwealth statute: proposed subsection 10D(1).

The Governance Board must not:

• take an action that would limit the performance of the Monetary Policy Board with respect to its functions or its powers in ways that would affect the RBA’s balance sheet
• perform any of the functions of the Monetary Policy Board or the Payments System Board—including in relation to the policy-making functions of those Boards
• determine the RBA’s approach to implementing those policies: proposed subsection 10D(3).

In addition, the Governance Board must consult with the other boards before doing anything that would ‘materially affect that Board’s performance of its functions or exercise of its powers’: proposed subsection 10D(4).

Other features

Item 58 of the Bill inserts proposed Part IIIB—The Governance Board. Within proposed Part IIIB, proposed section 25NA states that the Governance Board consists of the Governor, the Deputy Governor, the staff member of the Reserve Bank Service who is primarily responsible for assisting the Governor to manage the Bank (called the senior RBS member) and six other members (called the external Governance Board members).

The Treasurer appoints one member of the Governance Board to be Chair and another to be Deputy Chair. One of those appointees must be an external Governance Board member: proposed subsections 25NC(1) and (2).

As with the Monetary Policy Board, the external Governance Board members are appointed on a part-time basis for a period specified in the Treasurer’s instrument of appointment, which must not exceed five years: proposed subsections 25NB(1) and 25ND(2).

The member may be reappointed for a longer term provided that the sum of periods as a member of that Board does not exceed seven years: proposed subsection 25ND(2). Certain persons must not be appointed as a member of the Board: proposed subsection 25NB(2).

The Treasurer has the same powers to terminate the appointment of an external Governance Board member as those given in relation to a member of the Monetary Policy Board: proposed subsections 25NM(1) and 25NM(2).

Under proposed section 25NK of the RB Act a member of the Governance Board has complete discretion in performing their functions and duties and in exercising their powers. The person must act independently and impartially and is not subject to direction from anyone.

Application of the PGPA Act

According to the Review (p. 204):

The specific governance arrangements of the RBA are set out in 2 pieces of legislation – the RBA Act and the PGPA Act. The RBA Act sets out the responsibilities of the Governor, the Reserve Bank Board, and the Payments System Board. The PGPA Act sets out the duties that apply to the RBA’s accountable authority and officials. It deals with planning by, performance and accountability of, the RBA (including a corporate plan, annual report, financial statements, and performance statements) and the proper use and management of public resources by the RBA…

And further (p. 206):

The Governor’s role as the sole accountable authority is unusual among Corporate Commonwealth Entities. Of the current 72 Corporate Commonwealth Entities, only 7 have single-person accountable authorities, including the RBA. A board is the accountable authority for most Corporate Commonwealth Entities. Some comparable Australian policy-making entities, most notably APRA and the Australian Securities and Investments Commission, are Non-Corporate Commonwealth Entities and have individuals as their accountable authority.

What the Bill does

Item 15 of the Bill repeals existing sections 7A–7C of the RB Act and inserts proposed Subdivision B—Application of the Public Governance, Performance and Accountability Act 2013 into Division 1 of Part II of the RB Act.

The effect of the changes is that it is the Governance Board—rather than the Governor—is the accountable authority of the RBA for the purposes of the PGPA Act. It is responsible for the making of RBA policy with respect to matters relevant to the functions of the RBA but not within the remit of the Monetary Policy Board or the Payments System Board.

In this regard, item 15 reflects a corporate-style system of accountability where it is the board of directors that have ultimate authority and accountability for management and control of the RBA.

Clarifying the role of the Payments System Board

According to the Review (p. 14):

There must be a clear division of responsibilities within the RBA between the Governance Board, Monetary Policy Board and Payments System Board. The RBA’s 3 Boards should establish charters setting out their responsibilities and those of the executive… The RBA’s Boards should establish a memorandum of understanding with each other recording the common understanding of their legislative responsibilities and their expectations for information exchange and consultation on matters of mutual interest. [emphasis added]

Also in proposed Division 3, proposed Subdivision C contains updated functions of the Payments System Board. Item 19 repeals and replaces existing section 10B. Proposed subsection 10B(1) recasts the functions of that Board as, amongst other things:

• determining the payments system policy of the Bank so that it is directed to the greatest advantage of the people of Australia and promoting the proper, efficient and effective implementation of that policy: proposed paragraphs 10B(1)(a) and (b)
• ensuring the Bank’s functions and powers under the Payment Systems (Regulation) Act 1998 and the Payment Systems and Netting Act 1998 are performed and exercised in order to control risk in the financial system, to promote the efficiency of the payments system as well as competition in the market for payment services, consistent with the overall stability of the financial system: proposed paragraph 10B(1)(c).

Like the Monetary Policy Board, the Payments System Board must perform its functions and exercise its powers having regard to the fact that it is the Governance Board which is the accountable authority under the PGPA Act: proposed subsection 10B(3).

Other features

Currently Part IIIA of the RB Act provides for the membership and activities of the Payments System Board.

Under existing section 25A of the RB Act the Payments System Board consists of the Governor, one representative of the Bank, one representative of APRA and up to 5 other members. Items 29 and 30 of the Bill amend section 25A so that the reference to ‘the Bank’ becomes a reference to the Bank’s PSB member and the reference to ‘other members’ becomes a reference to the external Payments System Board members. This is consistent with the terminology used in proposed section 25AA in relation to the Monetary Policy Board. It should be noted that this Board, unlike the other Boards has only 5 external members rather than 6.

The terms of appointment for members of the Payments System Board are unchanged by the Bill and are consistent with those for the new Monetary Policy Board and Governance Board.

Item 38 of the Bill inserts proposed section 25EA into the RB Act to make clear that a member of the Payments System Board has complete discretion in performing their functions and duties and in exercising their powers. The person must act independently and impartially and is not subject to direction from anyone.

Key issue: board appointments

The Review recommended that external members of both the Monetary Policy Board (recommendation 8.5) and the Governance Board (recommendation 12.4):

…should be appointed through a transparent process. Positions should be advertised for expressions of interest, drawing on a matrix of required skills and experience. A panel comprising the Treasury Secretary, the Governor and a third party should [manage the process].

In the case of the Monetary policy Board the panel ‘should recommend options for suitable candidates to the Treasurer’.

The Bill is silent on the manner of the selection process and the qualifications of potential external members. However, according to the Explanatory Memorandum (pp. 15, 30) the Review recommended (p. 130) that future appointments should be supported by a skills matrix, which would set out the skills, experience and capabilities considered essential for the effectiveness of the Monetary Policy Board. The skills matrix will be implemented outside the RB Act, so it is flexible to evolving needs.

Stakeholder comments

The Business Council of Australia commented (p. 6) that appointments to the RBA Board by the Treasurer are currently made from a list of candidates maintained by Treasury and the RBA and expressed concern that ‘it is not clear why Treasury and the RBA should enjoy an effective veto over appointments to the Board’.