Australian Prudential Regulation Authority

Chapter 5 - Cooperation and liaison
 
The global financial crisis demonstrated the critical importance of cooperation between regulatory agencies, domestically and internationally, and APRA's activities in this sphere showed no slowing in tempo during 2010/11 and the subsequent episodes of acute market volatility. Domestically, close and effective coordination between the key agencies has been the hallmark of Australia's financial regulatory arrangements over a number of years. Internationally, APRA maintained its active involvement in global reform initiatives during the year but pressure on its resourcing required it to be selective in participating in the plethora of working groups spawned by these initiatives, and to focus on those groups of greatest importance to Australia. APRA also took part in a number of supervisory colleges and crisis management groups for major complex cross-border financial institutions that have a significant Australian presence and, during 2010/11, hosted supervisory colleges for two APRA-regulated institutions with global reach.
 
Australia
 
Under Australia's financial regulatory arrangements, three specialist agencies — APRA, the Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia (RBA) — have separate functional responsibilities for oversight of the Australian financial system but shared responsibilities for the stability and integrity of the system. All three agencies are independent statutory authorities.
 
APRA has a close bilateral working relationship with each of ASIC and the RBA as well as with the Australian Treasury, which provides advice to the Government on policy and possible reforms that promote a sound financial system. The relationship with each of these agencies is based on a Memorandum of Understanding (MoU) and on a structured coordination process involving meetings between staff at different operational levels, from agency heads down; however, much of the regular contact occurs via informal as well as formal mechanisms. This frequent and constructive dialogue between the agencies, in place well before the crisis struck, has been a major reason for the effectiveness of Australia's arrangements.
 
Together, the four agencies make up the membership of the Council of Financial Regulators, a non-statutory body with objectives of contributing to the efficiency and effectiveness of regulation and promoting stability of the Australian financial system. The Council, chaired by the Governor of the RBA, operates as a forum for coordination and information exchange between its members on financial policy and regulatory issues. During the global financial crisis, which raised issues that touched all four agencies and required, at times, prompt and coordinated responses, the Council became the focal point for agency cooperation. It has continued to play a very active role since, in reviewing conditions in global funding markets, coordinating advice to the Government on various global reform initiatives and in enhancing Australia's crisis management arrangements.
 
Over 2010/11, the Council examined the design of the Financial Claims Scheme for ADIs, taking into account international developments and the impact of the global financial crisis on deposit insurance arrangements. That examination formed the basis of recommendations from the Council as input to the Government's review of the parameters of the Scheme. The Government announced a number of changes to the Scheme in September 2011. Agencies also shared views on funding of the Australian banking system, developments in the residential mortgage-backed securities (RMBS) market in Australia, and on the size and potential significance of the 'shadow' banking system in Australia. The Council continued to work closely with the New Zealand Treasury and the Reserve Bank of New Zealand (RBNZ) on trans-Tasman crisis management arrangements (see page 66).
 
APRA also participates in two Council working groups on financial market infrastructure. One is considering the question of central clearing of over-the-counter (OTC) derivatives transacted in Australian financial markets. This is in response to the substantial reforms in this area underway in many offshore jurisdictions and to the G-20 commitment to see all standardised OTC derivatives transactions centrally cleared by the end of 2012. The Council published a discussion paper on this topic in June 2011. The other working group is reviewing the appropriateness of current regulation of clearing and settlement facilities in Australia. This work will also culminate in a discussion paper intended for release later in 2011.
 
APRA's engagement with the other agencies under the aegis of the Council has not supplanted its bilateral relationships. Indeed, APRA's relationship with the RBA, through the formal channel of the RBA/APRA Coordination Committee and other regular contacts at individual officer level, has become even closer through shared membership of the Basel Committee on Banking Supervision (see page 66). In this latter context, a particular focus for joint effort has been the development of an alternative approach to the holding of liquid assets that will enable ADIs in Australia to meet the new global liquidity standard. Over 2010/11, the RBA/APRA Coordination Committee discussed a range of other policy, market, institutional and technical developments. The Basel III reforms featured prominently, along with capital requirements for life and general insurers and conglomerate supervision. Other matters included global and domestic liquidity conditions, the housing market and credit standards, securitisation markets, insurance claims experience given various natural disasters and global reinsurance issues, and OTC derivatives.
 
The relationship between APRA and ASIC is maintained through three primary contact points. Ad hoc high-level discussions are held between the APRA Members and the ASIC Commissioners on emerging issues of mutual concern. Regulatory liaison meetings focus on policy issues or operational supervision matters concerning industries and institutions regulated by both agencies. These meetings are also a forum for discussion on practical supervision outcomes due to changes to legislative and administrative procedures. Finally, deterrence liaison meetings discuss broad enforcement-related issues, to coordinate specific actions related to jointly regulated institutions and to discuss cases identified by one agency that may have relevance to the other. During 2010/11, issues under discussion between the two agencies, in addition to joint enforcement actions (see Chapter 2), included risk disclosure for superannuation investment returns, the Government's Stronger Super proposals, cross-border bank resolution and development of a covered bond framework.
 
As one of the main mechanisms for joint consultation with industry, the APRA Members and ASIC Commissioners meet annually with the Finance Industry Council of Australia (FICA), an umbrella body for a number of finance industry associations, to discuss significant regulatory and other issues facing the industry. Such liaison allows the two regulatory agencies to brief industry on their current priorities and to identify and test industry concerns. FICA comprises the Australian Bankers' Association, Abacus - Australian Mutuals, the Australian Finance Conference, the Australian Financial Markets Association, the Australian Securitisation Forum, the Financial Services Council and the Insurance Council of Australia.
 
APRA and the Treasury continued their close liaison on legislative initiatives, particularly those related to strengthening APRA's crisis management powers, and on policy initiatives, particularly those related to the Government's Stronger Super reforms. Since the announcement of these reforms in December 2010, APRA officials have participated actively in the Treasury's consultation with industry, the first stage of implementation of the reforms. Other areas of coordination included the Government's Competitive and Sustainable Banking System package, the natural disaster insurance review and the collection and publication of data from insurance brokers. Senior APRA and Treasury officials also held regular liaison meetings at which a major topic was global regulatory reform, including the work of the G-20, the Financial Stability Board and the Basel Committee.
 
APRA also interacts with a number of other Australian agencies. APRA and the Australian Transaction Reports and Analysis Centre (AUSTRAC) coordinate their activities through the AUSTRAC/APRA Coordination Committee, which meets to update each agency on relevant regulatory developments and to share findings from supervisory activities. Referrals on specific regulatory matters and exchanges of information between the agencies are conducted using protocols established to meet relevant legislative requirements. To avoid duplication and minimise burden, there is also regular communication at the working level on visit schedules to jointly regulated institutions. A senior APRA executive spoke at the 2011 AUSTRAC Supervision Conference.
 
The longstanding commitment to cooperation between APRA and the Australian Taxation Office (ATO) has been strengthened with the signing of a new MoU on superannuation matters in September 2010. This underpins regular consultation across a range of superannuation administration and policy issues, including ATO rulings, determinations, interpretative decisions and APRA prudential practice guides on the application of superannuation legislation, illegal early access to superannuation benefits, limited recourse borrowing arrangements, the development and application of longevity risk products and the public register of superannuation funds maintained by the ATO. The regular interaction (including data interchange on superannuation matters) between APRA and ATO staff is augmented by operational and technical liaison meetings as well as ad hoc meetings on specific issues as required. APRA continues to participate in the ATO's Superannuation Consultative Committee and the superannuation technical subcommittee of the National Tax Liaison Group.
 
APRA cooperates closely with the Private Health Insurance Administration Council (PHIAC), which has responsibility for supervising providers of health insurance. Over the year, APRA provided support to PHIAC in relation to its supervisory functions, covering a range of subject matters including prudential standards, group supervision and the development of PHIAC's crisis management plan. PHIAC accessed APRA's training and development programs during the year and was provided with assistance to develop its cost recovery function. The two agencies regularly exchange information on jointly supervised institutions and discuss common industry issues. A new MoU between the two agencies was signed in December 2010.
 
APRA liaises regularly with the Motor Accidents Authority of New South Wales (MAA) and the Motor Accident Insurance Commission of Queensland (MAIC). These State regulatory bodies administer compulsory third-party (CTP) motor vehicle insurance schemes in these states. The MAA and MAIC provide APRA with scheme information and consult with APRA on the financial condition of the CTP insurance providers; in turn, APRA provides both agencies with solvency data on these providers. APRA also keeps these agencies informed of policy developments in the prudential supervision of general insurers. APRA also liaises with WorkCover State authorities on prudential matters relevant to workers' compensation insurance.
 
APRA has continued its liaison with the Financial Reporting Council and the two Boards the Council oversees: the Australian Accounting Standards Board (AASB) and the Australian Auditing and Assurance Standards Board (AuASB). APRA Member Ian Laughlin is a member of the Council, having succeeded the former APRA Member John Trowbridge. APRA also contributed to the AASB's work on reporting by superannuation funds.
 
APRA is a permanent member of the Banking and Finance Sector Group (BFSG) and currently provides the Deputy Chair. Established under the Government's Trusted Information Sharing Network, the BFSG aims to strengthen the financial system's ability to respond to an industry-wide operational disruption by providing a framework for sharing security-related information that affects critical infrastructure. Membership comprises representatives from major financial institutions, financial markets participants, industry associations and State and Australian Government agencies. During 2010/11, the BFSG continued its focus on strengthening the resilience of the banking and finance sector and further streamlining business and government coordination in disasters. In early 2011, the BFSG played an active role supporting the banking and finance sector and various State and Federal Government agencies in their response to the spate of natural disasters. These activities included arranging for subject matter experts to provide specialist information to assist affected organisations manage their response and the recovery phase of these disasters. The BFSG also continued to support the Federal Government in electronic security initiatives through participation in the Cyber Storm III Exercise. This was a joint international cyber security exercise conducted in September 2010 between Australia, the United States, the United Kingdom, Canada and New Zealand.
 
In addition to its meetings with FICA, APRA liaises directly with a number of industry organisations including the Australian Bankers' Association, Abacus – Australian Mutuals, the Australian Finance Conference, the Financial Services Council, the Insurance Council of Australia, the Association of Superannuation Funds of Australia, the Corporate Superannuation Association and the Australian Institute of Superannuation Trustees. APRA also liaises with professional associations and institutes such as those for accountants, actuaries, administrators, auditors, company directors, compliance professionals, financial planners, risk managers and trustees. APRA's regional offices also have wide-ranging liaison programs with regional offices of ASIC, industry bodies and professional associations.
 
The actuarial profession plays an important role in financial management and prudent risk management in the general insurance, life insurance and superannuation industries, both through statutory Appointed Actuary roles and through providing advice on financial and risk management issues to boards and management of institutions. APRA has regular and extensive dialogue on matters of mutual interest with the Institute of Actuaries of Australia (IAAust) and the profession generally. During 2010/11, the principal topic of interest has been APRA's proposals to update its prudential capital requirements for life and general insurers. In addition to regular meetings with representatives of the relevant practice committees of the IAAust and with its Executive, APRA has more formal dialogue with life insurance Appointed Actuaries as a group. APRA's own actuarial staff are actively involved in various committees and taskforces of the IAAust.
 
International liaison
 
APRA's international liaison activities take two main forms. The first are its traditional direct links with overseas regulatory agencies associated with the supervision of specific financial institutions. The second, which has stepped up in intensity since APRA joined the Basel Committee on Banking Supervision, is its participation in international groups and fora that have carriage of global reform initiatives being pursued by the Leaders of the G-20.
 
Direct links with overseas regulatory agencies provide important input into APRA's risk assessment of regulated institutions that also operate in other jurisdictions and of foreign financial institutions for which APRA is 'host' supervisor. The need for effective two-way dialogue that can be 'dialled-up' readily at times of stress was emphasised during the global financial crisis when some sound APRA-regulated institutions were destabilised by problems emanating from their foreign parent. In the wake of the crisis, global efforts to reinforce regulatory cooperation have centred on the establishment of supervisory colleges of relevant supervisors and central banks for the largest cross-border banks and insurance companies, and APRA participates in several of these colleges. APRA also has established its own colleges for a number of large, internationally active financial institutions headquartered in Australia and it hosted two of these colleges during the year. APRA now has formal bilateral information-sharing arrangements with 20 overseas regulators and has several other arrangements under discussion, some of which will facilitate the activities of supervisory colleges. APRA is one of 17 signatories to the multilateral MoU put in place by the International Association of Insurance Supervisors (IAIS) and has provided staff resources to assist the IAIS in the validation of applications from other jurisdictions.
 
The traditional direct link of most importance to APRA is that with the RBNZ, the prudential supervisor of banks and, now, insurance companies in New Zealand. The importance flows from the high degree of interconnectedness between the Australian and New Zealand financial systems. The four major Australian banking groups have just below a 90 per cent share of New Zealand banking system assets and New Zealand banking assets comprise around 10 per cent of the groups' total assets. New Zealand also provides an important source of premium income for some of the larger Australian insurers.
 
In this context, APRA has a close and cooperative working relationship with the RBNZ on a range of supervisory issues. There is regular liaison on matters relating to the supervision of the major Australian banks, including regular information exchange and coordination of supervisory measures where appropriate. APRA staff often undertake prudential reviews of the New Zealand subsidiaries of the Australian banks and the RBNZ typically participates in these. During the year, APRA also provided advice and assistance to the RBNZ on matters relating to the supervision of insurance, as the RBNZ takes on its new role in this area; an APRA officer has been seconded to the RBNZ from January 2011 to help build its insurance supervision team.
 
Over recent years, APRA and the RBNZ have given high priority to the detection of emerging stress in trans-Tasman banks and ensuring a coordinated response that would maintain financial system stability in both countries. Considerable work has gone into the development of a structured approach to the handling of any episode of trans-Tasman financial distress, which will be tested in 2011/12 in a trans-Tasman crisis management exercise. This work is being coordinated under the auspices of the Trans-Tasman Council on Banking Supervision, which comprises APRA, the RBA, the RBNZ and the Treasuries of Australia and New Zealand. The Council met once in 2010/11 and several times at deputy and working group levels.
 
APRA's participation in global reform initiatives is mainly through its involvement in global standard-setting bodies and in other fora. These include:
APRA meets annually with integrated supervisory agencies from a range of countries to discuss matters of common interest. The main topics at the 13th such conference in June 2011 were the steps being taken to improve the quality and effectiveness of banking and insurance supervision, global regulatory reforms, the role of supervisors in macroprudential analysis, and media management during a financial crisis.
 
Together with the RBA, APRA is a member of the Working Group on Banking Supervision of the Executives' Meeting of East Asia-Pacific Central Banks (EMEAP), which brings together central banks, monetary authorities and banking supervisors within the region. The Working Group provides a forum to discuss regional financial and prudential developments. Its main focus in 2010/11 was the implications of the global capital and liquidity reforms for countries in the region. EMEAP also facilitates a number of training initiatives to which APRA provides speakers from time to time.
 
Technical assistance
 
APRA continues to support the deepening of institutional capacity among its Asian and Pacific regulatory counterparts through a series of tailored technical assistance programs, principally funded by AusAID. These programs seek to assist regulators to improve standards of prudential supervision, as part of a broader whole-of-government effort to strengthen public sector governance in the Asian and Pacific regions.
 
In the Pacific, APRA administers two distinct but complementary projects under the auspices of the Government's multilateral Pacific Sector Linkages Program. The Pacific On-Site Prudential Supervision Project provides for APRA supervisors to travel to Pacific countries for two weeks at a time to conduct training programs with on-site review teams comprised of local and other visiting Pacific prudential regulators. During 2010/11, APRA supervisors undertook two on-site training programs in each of Papua New Guinea, Fiji and the Solomon Islands ranging across banking and other credit providers, insurance and provident funds. The Pacific Prudential Regulator Internship Project places staff from Pacific prudential regulators within APRA's frontline supervisory divisions for a period of about three months to learn about prudential supervision techniques. The project, which had been placed on hold during the global financial crisis, resumed in 2010/11 with a participant from the Financial Supervisory Commission of the Cook Islands and from the Central Bank of the Solomon Islands hosted in APRA's office in Brisbane. Taken together, the two projects make a worthwhile contribution to deepening capacity and strengthening prudential supervision across the Pacific region.
 
In Asia, APRA's engagement is primarily focussed on, but not limited to, technical assistance activities with Indonesia. APRA has been engaged with BAPEPAM-LK, Indonesia's integrated regulator of securities markets and non-bank financial institutions, for the past six years. Building upon the successful introduction of a new risk-rating model (adapted from APRA's PAIRS framework) by BAPEPAM-LK's Pension Fund Bureau in 2008, APRA is continuing to assist the Bureau to refine procedures around the benchmarking of risk-rating scores; it is also assisting BAPEPAM-LK's Insurance Bureau to develop a risk-rating model. APRA's capacity-building engagement with Bank Indonesia continued in 2010/11, with two Bank Indonesia interns placed within APRA's frontline supervisory divisions for a period of around six months. This was the third instalment of a longer-term engagement between APRA and Bank Indonesia that began in 2006. Other visits from Bank Indonesia staff focussed on adapting regulatory tools. In total, APRA hosted 23 interns from Indonesia during the past year.
 
APRA's assistance to BAPEPAM-LK and Bank Indonesia is funded by a multi-year initiative, renewed in late 2010, under the auspices of the Government Partnership Fund II (GPF II) as part of the Australia-Indonesia Program for Reconstruction and Development. By improving economic governance and public sector management, the GPF program aims to contribute to a healthy financial sector, which is an essential prerequisite to economic development and the efficient flows of resources within and between economies. From time to time, APRA also undertakes training visits to other prudential regulators in the region and, in 2010/11, it provided two APRA experts to present on operational risk management to the Bank of Thailand.
 
The Association of Financial Supervisors of Pacific Countries facilitates cooperation between regulators in the region. APRA represents Australia as an observer at Association meetings and supports its training activities through sponsoring speakers on topical issues at the Association's annual meeting and training workshops. APRA is also a member of:
Given the importance of Australian banks within the South Pacific, APRA was invited to attend the 25th Meeting of South Pacific Central Bank Governors, held in New Zealand in December 2010.
 
APRA continues to support the international broadening of knowledge on prudential supervision by providing expert speakers to various institutes, including the Financial Stability Institute (of the Bank for International Settlements), the APEC Study Centre at RMIT University, the APEC Financial Regulatory Training Initiative and the ASEAN Insurance Training and Research Institute (AITRI). During 2010/11, APRA provided 11 speakers to conferences organised by the Financial Stability Institute, which are often co-hosted with other regional bodies, and one speaker to programs organised by each of the APEC Study Centre, AITRI and the International Federation of Pension Administrators. APRA hosted a workshop on liquidity management in Brisbane for the APEC Financial Regulatory Training Initiative and a workshop on risk-based supervision of pension funds in Sydney in conjunction with the Annual Meeting of IOPS. APRA also hosted an executive development program in Sydney for two groups of 25 senior staff from the China Banking Regulatory Commission and co-hosted, with the RBA, a meeting of the EMEAP Working Group on Banking Supervision. APRA values the opportunity to develop the skills of its staff, as both participants and speakers in such programs.
 
During the year, APRA hosted some 100 international delegations from regulatory agencies, central banks, multilateral organisations, industry bodies and private sector organisations. Around half of the delegations were from developing countries and just under one-fifth from China. Delegation visits from South Korea and Indonesia were also prominent. Areas of interest included APRA's functions and operations, prudential policy developments, risk-based supervision, Australia's handling of the global financial crisis, and prudential policy and supervisory practice in superannuation. In addition, there were a significant number of visits by individual financial institutions to discuss the requirements for establishing operations in Australia.