- APRA supports all of the 19 recommendations in the report directed at APRA, with work already underway on many as part of APRA’s current Corporate Plan.
- APRA will continue to focus on its core mandate of safeguarding financial system stability as it expands capability in other areas.
- The Review recognises APRA’s remit has expanded, proposes an ambitious further extension and highlights the additional resourcing and Government support needed to achieve this.
The report recognises APRA as a high-quality prudential supervisor that has been successful in delivering on its core mandate – the financial safety of regulated entities and a sound and resilient financial system – over a long period of time. However, the report makes observations about the increasingly complex operating environment and the need therefore for APRA to expand its focus and capabilities to enable it to meet its mandate in the future.
APRA Chair Wayne Byres said the Panel’s report is comprehensive and ambitious in its views of APRA’s future remit and required capabilities, but also emphasises this should not be at the cost of APRA’s strong capabilities in financial safety and stability.
“The report highlights the increasingly complex industry dynamics in which APRA operates and that the expectations of its role and mandate have increased. Appropriately, the report notes APRA has not stood still in the face of these developments, but highlights the need to accelerate the necessary changes if APRA is to remain a successful prudential supervisor into the future,” Mr Byres added.
APRA had already identified and begun work on many of the changes needed to strengthen its capability in the areas identified in the review. Last August, APRA released a four-year strategic plan that identified many of these themes. In addition, APRA’s new enforcement approach came into effect in April 2019, and implementation has begun on actions to respond to the Hayne Royal Commission.
Mr Byres said: “APRA is committed to ensuring it is fit for the future and the Panel’s recommendations support this. APRA will continue to focus on its primary responsibility to protect the financial well-being of the Australian community as it implements the changes that have been recommended and those APRA already has underway.”
APRA’s response to the capability review report
Importantly, the report recognises APRA as a high quality prudential supervisor and acknowledges its success in delivering on its core mandate – the financial safety of regulated entities and a sound and resilient financial system – over a long period of time. However, the report also highlights that APRA’s operating environment is becoming increasingly complex, and expectations of APRA have increased. It acknowledges the steps APRA has already taken in response to these developments, but emphasises the need to accelerate change if APRA is to remain a successful prudential supervisor into the future.
There are 24 recommendations in the report. Of the 19 recommendations directed at APRA, APRA supports them all. Many of these provide a welcome endorsement of APRA’s current Corporate Plan, and as a result APRA already has actions in train to address them. APRA is including initiatives to address the remainder in its revised Corporate Plan, to be published in August 2019. The remaining five recommendations are directed to Government.
In line with the recommendations and APRA’s own plans for change, APRA is committed to:
- Maintaining and building financial system resilience: APRA will retain its unwavering focus on financial safety and stability, while expanding its capability in other important areas.
- Leadership and culture: APRA is continuing to strengthen its own leadership capabilities and culture, and will adjust its organisational structure to support flexible and effective modes of operating.
- Strengthening capability: APRA is strengthening both its resourcing and supervisory approach to make issues of governance, culture, remuneration and accountability a much more prominent and central part of its supervisory framework.
- A strong outcomes focus in superannuation: Building on the recent legislative reforms, APRA will continue to embed its strengthened focus on member outcomes as the centrepiece of its supervisory approach in superannuation.
- Enhanced communications: APRA will better utilise strategic communications to deliver stronger prudential outcomes and enhance its own accountability.
APRA’s response to the specific recommendations is set out below. In taking these recommendations forward, the report has rightly recognised the strong commitment of APRA staff to its mission and its values. Protecting the financial well-being of the Australian community will continue to drive APRA in implementing the changes that have been recommended.
Recommendation 2.1: Leadership and cultureBuilding upon APRA’s strategic initiative to enhance ‘leadership, people and culture’, APRA Members should address variation in leadership capability for all management levels. This should include a priority focus on leading change, effective execution and accountability. In addition, APRA should develop a cultural change program that fosters internal debate and contestability. |
APRA’s response
Recommendation 2.2: Delivery – decision-making and productivityAPRA should set transparent standards to hold staff and itself accountable for the timeliness of approvals and other commercially-important decisions for regulated institutions. APRA should publicly disclose adherence rates to these performance standards in its external accountability assessment. |
APRA’s response
Recommendation 2.3: Organisational design and governanceAPRA should revise its organisational structure to reinforce the imp act of the leadership and cultural changes recommended by the Review and APRA’s own strategic plans. APRA should: a. restructure supervision divisions along industry lines – banking, insurance and superannuation; b. revise management structures and levels, with a view to widening spans of control and enhancing efficiency, speed of decision-making and empowerment; c. shift internal configuration to better support industry-focused strategic activities and more agile ways of working; and d. create distinct people-leader and technical-specialist career pathways. |
APRA’s response
Recommendation 2.4: Organisational design and governanceAPRA’s Chair should relinquish his ADI-specific oversight role and adopt a broader organisation-wide role. The remaining Members should split their roles to include a mix of industry, policy and functional responsibilities. |
APRA’s response
Recommendation 2.5: Resourcing and operational flexibilityTo help facilitate a number of recommendations in the Review, the Government should remove APRA from the ap plication of the APS Workplace Bargaining Policy. APRA should engage with the Government to consider ways to enable greater variation in remuneration levels. |
APRA’s response
Recommendation 3.1: Financial resilience… strong foundations, critical capabilityWhile lifting organisational capability across the areas identified in this Review is import ant and necessary, APRA should retain its long-standing and core capability of financial safety and financial stability. |
APRA’s response
Recommendation 3.2: Non-retail credit risk capacityAPRA should build credit risk capacity to simultaneously maintain high supervisory intensity in both non-retail and retail credit risk. |
APRA’s response
Recommendation 3.3: Macro-prudential policy needs clearer articulationReflecting its role as an independent prudential regulator, APRA should take a more transparent and assertive role in articulating the objectives of its macro-prudential policies, the design of the instruments chosen and assessment of its impacts, including on the broader areas of its mandate. APRA should continue to develop its public communication around the extent of systemic risks, conditions required for macroprudential actions and assessments of any actions taken. |
APRA’s response
Recommendation 3.4: Crisis management and resolutionAPRA should advise the Government of the current state of its resolution capability and crisis preparedness as a basis for assessing whether additional resources are required to advance this work more quickly. This should be completed by the end of 2019. |
APRA’s response
Recommendation 3.5: Cyber – a collaborative solutionAPRA should seek to build strong allegiances with public and private sector experts, other regulators and financial firms to augment its internal capacity and to collaborate on ways to strengthen the cyber resilience of APRA’s regulated sectors. |
APRA’s response
Recommendation 3.6: Digital disruptionTo better prepare for and respond to the consequences of digital innovation and disruption, APRA should increase its IT risk capacity and capability, including though increased collaboration and partnerships. In doing so, APRA should consider the implications of new business models, management and transformation of legacy IT landscapes, greater reliance on third-party providers (for example, cloud providers), and technology-enabled competition. |
APRA’s response
Recommendation 3.7: Competition… balancing a multifaceted mandateTo support its consideration of competition, APRA should: a. create a competition champion within APRA, preferabl y at Member level. Their role should be to ensure that issues of competition are embedded effectively across all areas of APRA; b. ensure that there is sufficient tension in the internal debate and analysis of competition. It should test how policies are developed and applied by supervisors. This could be done in the Quality Assurance function and reported to the competition champion; and c. report regularly on competition developments in its external accountability document (see recommendation 6.4). |
APRA’s response
Recommendation 4.1: Strengthening APRA’s capability – GCA risksAs part of its work to revise and enhance its supervisory and policy frameworks, APRA should: a. ensure the policy framework is focussed on assessing appropriate outcomes around GCA risk in regulated entities, not just appropriate processes; b. further develop its toolkit for assessing GCA risks, including board and senior management performance, and ensure that it has an escalating suite of options for engaging with entities; c. embed the recent entity self-assessment process into its more intense supervision of GCA risks by making it a biennial requirement. The self-assessments should be more prescriptive than APRA’s recent program, including coverage of questions set out in Appendix 2. The self-assessments, APRA’s assessment of each of them, APRA’s thematic reviews, and any rectification requirements imposed by APRA in response to a self-assessment should be published; d. establish an external panel of experts to assist it in undertaking more in-depth assessments of individual entities; e. explore ways to collaborate with regtech specialists and other experts to develop more efficient and effective tools to identify GCA risks. |
APRA’s response
Recommendation 4.2: Strengthening APRA’s capability – GCA risksAPRA should build on the CBA Prudential Inquiry and entity self-assessments by embedding CBA-style prudential inquiries as an ongoing part of its supervisory toolkit. The Panel would expect to see several prudential inquiries in the first few years to reinforce the need for rigorous self-assessments. In time, the inquiries should involve retail and industry superannuation, insurance and ADI entities. |
APRA’s response
Recommendation 4.3: Strengthening APRA’s capability – GCA risksThe Government should consider providing APRA with a non-objections power to veto the appointment or reappointment of directors and senior executives of regulated entities. This would bring it into line with international regulators and strengthen its capacity to pre-emptively regulate GCA risks. The power should be available to APRA only where the risks associated with the entity, including but not limited to member outcomes for superannuation funds, warrant it. |
APRA’s response
Recommendation 5.1: Assessment of APRA’s regulation of superannuationAPRA should create a new Superannuation Division, headed by an Executive General Manager. A key focus of the Division should be the overall performance of the superannuation system for members. |
APRA’s response
Recommendation 5.2: Assessment of APRA’s regulation of superannuationAPRA should embed and reinforce its increasing focus on member outcomes, and continue to ensure that trustees prudently manage member funds. Consistent with this change of approach, APRA should: a. publish objective benchmarks on product performance and publicly take action to demonstrate its expectations for member outcomes; b. update its superannuation reporting standards and collect product level data that facilitates accurate assessments of outcomes and comparability across funds; c. develop a superannuation performance tool that replaces PAIRS by the end of 2019. The tool should be focussed on member outcomes; and d. increase the resourcing dedicated to the superannuation industry. |
APRA’s response
APRA’s work on performance benchmarking and data collection will be a priority, and should be aligned with other initiatives that require legislation (such as choice product dashboards).
APRA’s program of work to review its supervisory model, initiated under APRA’s 2018- 22 Corporate Plan, includes a revised PAIRS model by mid-2020.
APRA will consult with Government on the additional resources needed.
Recommendation 5.3: Assessment of APRA’s regulation of superannuationIn accordance with Recommendation 23 of the Productivity Commission’s Superannuation Inquiry, the Government should legislate to make APRA’s member outcomes mandate more explicit. The Government should clearly outline its expectations for APRA on superannuation in its next Statement of Expectations. |
APRA’s response
Recommendation 6.1: A more forceful supervision and enforcement approach is neededThe Panel supports the direction of APRA Enforcement Strategy Review. To effectively embed the Enforcement Approach, APRA should change its existing internal norms that create a low appetite for transparent supervisory challenge and enforcement by: a. departing from its behind closed doors approach with regulated entities; b. adopting a stronger approach towards recalcitrant institutions; c. building organisational confidence and improving management support; and d. increasing its risk appetite and use of the escalation toolkit. |
APRA’s response
Recommendation 6.2: A more forceful supervision and enforcement approach is neededWhile APRA’s regulatory tools are generally fit-for-purpose, the Government should consider: a. reviewing the adequacy of penalties across APRA’s legislative framework; b. providing APRA with the power to appoint a skilled person to undertake a review of a regulated entity; and c. enhancing its private health insurance licensing powers. |
APRA’s response
Recommendation 6.3: Working effectively with other regulatorsAPRA should reinvigorate its approach to collaboration and information sharing with regulators, experts and its international peers including clear protocols for staff. |
APRA’s response
Recommendation 6.4: Parliament and public – an opportunity to refresh external accountabilityAPRA should use its existing external accountability framework more effectively, including a more assertive use of the Statement of Intent and it should publish a regular external accountability assessment. |
APRA’s response
Recommendation 6.5: Parliament and public – an opportunity to refresh external accountabilityThe Government should consider streamlining and improving the effectiveness of existing accountability arrangements when establishing the financial regulator oversight authority. |
APRA’s response
Recommendation 6.6: Improving strategic communicationsAPRA should take a more strategic, active and forceful approach in its public communications. As an independent regulator, it should use public communications to shape community and government expectations of it. In relation to specific areas, APRA should: a. publish an interpretation of its mandate; b. clearly articulate its role and approach to macro-prudential policy (see recommendation 3.3); c. advise the Government of the current state of its resolution capability and crisis preparedness (see recommendation 3.4). Taking account of the impact on the market, part of this advice could be published; and d. be more transparent in relation to superannuation, including by publishing objective benchmarks for superannuation performance on member outcomes and a strategy to promote long-term industry performance. |
APRA’s response
APRA will publish its updated Corporate Plan by end August 2019, and publish other material relevant to this recommendation as part of its enhanced strategic communication plan.
