Australian Prudential Regulation Authority

Chapter 6 - APRA's costs and performance
 
Financial performance
 
APRA's expenditure is devoted to implementing and enhancing the prudential framework in Australia and to its ongoing supervisory and enforcement activities. APRA's income derives mostly from annual levies on its supervised entities.
 
APRA's expenditure
 
APRA's total operating expenditure in 2010/11 was $118.3 million compared with the budget of $119.7 million. Expenditure included an amount of $1.9 million in relation to the Government's Standard Business Reporting program.
 
APRA's operating expenditure has risen over the past four years as a consequence of the build-up in supervisory numbers and capacity during the global financial crisis. However, relative to the value of assets supervised by APRA, costs have remained at about three cents per $1,000 of assets supervised.
 
APRA's income
 
In addition to levies collected from supervised institutions, APRA's income includes interest earnings, fees for services and miscellaneous cost recoveries. Included in revenue in 2010/11 was $9.0 million of a Special Appropriation from the Government to deal with the global financial crisis. This was part of a total appropriation for this purpose of $45.5 million over four years, provided in the 2008/09 Additional Estimates.
 
APRA's costs
This bar chart shows APRA's costs from 2005 to 2011, showing both net operating expenditure (in millions of $) and cost per $1,000 of assets supervised (in cents). There has been an overall increase in net operating expenditure over the period, and an overall decrease in cost per $1,000 of assets supervised.
Levies are raised according to the Financial Institutions Supervisory Levies Collection Act 1998 and six other Acts applying to the regulated industries. Prior to the beginning of each financial year, and after consultation with the main industry representative groups, the Minister announces the levy determinations for each industry. The levy rate is applied on assets, subject to a minimum and maximum amount per institution, except for non-operating holding companies that are levied at a flat rate. The levies collected by APRA also cover some costs of ASIC and the ATO. Levies are based on the costs incurred for each industry. In addition, levies are collected to cover the costs of the National Claims and Policies Database, with a rate applied to the gross earned premiums of general insurance entities that contribute to it. The total levies collected by APRA for all three agencies in 2010/11 were $116.4 million compared with the plan of $117.6 million.
 
APRA's total income in 2010/11 was $107.3 million compared with the budget of $108.2 million.
 
Reserves
 
APRA had an operating deficit from ordinary activities of $11.1 million in 2010/11, which was funded largely out of the operating surplus of $10.7 million in 2009/10. As a consequence, total reserves decreased to $31.3 million. Included in this amount is a $6.0 million Contingency Enforcement Fund that is available to be used for large unexpected investigation and enforcement activities, and an Asset Revaluation Reserve of $6.6 million that has increased following the triennial revaluation of assets. A part of APRA's total reserves will also be used to fund APRA's expenditures in 2011/12.
 
Business planning
 
In July 2009, APRA launched its 2009-12 Strategic Plan, which aimed to consolidate progress under its first strategic plan (2006-09) and look beyond the challenging environment created by the crisis. The Plan did not involve any major change in APRA's strategic direction but gave priority to taking on board the lessons from the unprecedented period of stress in global financial markets. The Plan is reviewed each year in light of developments in APRA's operating environment.
 
The Plan identifies six strategic objectives and the initiatives APRA will undertake to meet them. The objectives are to:
The Strategic Plan forms the basis for annual divisional business plans and relevant objectives are also incorporated into individual performance plans. Overall performance against the Plan is reviewed on a quarterly and annual basis by the Executive Group.
 
Supervisory performance
 
Although the global financial crisis shone a strong and, in a number of cases, unflattering spotlight on the effectiveness of supervisory agencies, the development of useful objective indicators of supervisory intensity and effectiveness is still in its embryonic stages around the globe. That said, APRA publishes information from two different sources to provide broad quantitative indicators of its supervisory performance.
 
Firstly, APRA has developed 'transition matrices' to track the migration of institutions between the four supervision stances in APRA's Supervisory Oversight and Response System (SOARS), which guides supervisors in responding to identified risks. As an institution moves out of a Normal stance, routine supervision is likely to give way to greater use of APRA's more specialised intervention and enforcement powers. Institutions in Oversight are not expected to fail but there are aspects of their risk position that may create vulnerabilities in extremely adverse circumstances and that require more extensive examination by APRA. APRA does not expect institutions to be permanently classified as Mandated Improvement. Institutions in Restructure are those in which APRA has lost confidence that financial promises to beneficiaries will be met in the absence of vigorous intervention, or which have long ceased to be viable operating businesses and are being assisted to exit the industry in an orderly fashion.
 
Over the past four years, around half of the institutions in Normal remained in that stance. Institutions in Oversight mostly remained where they were, though a significant percentage either improved or exited the industry in an orderly manner. Around half of the institutions in Mandated Improvement have exited the industry while a number have moved towards an improved supervision stance, confirming APRA's 'behind the scenes' work to improve the risk position of institutions. The majority of institutions in Restructure have remained in that stance, with all others exiting the industry.
 
SOARS matrix (2007/11) (%)
From/to Normal Oversight Mandated
Improvement
Restructure Exit
Normal 50 21 0 0 28
Oversight 25 49 1 1 23
Mandated Improvement 0 29 24 0 47
Restructure 0 0 0 60 40
 
Over the past eight years, a total of 218 institutions have been in Mandated Improvement and/or Restructure (of which 10 institutions moved through both SOARS categories). Of that total, 50 have improved stance to Normal or Oversight, 24 remain in their SOARS category, 138 have exited without loss to beneficiaries and six institutions have failed (four of which moved through both Mandated Improvement and Restructure during that time). While it is not possible to compare these outcomes with what would have happened had APRA not intervened, the direction of movement of institutions in these two supervisory stances is consistent with timely and effective intervention on APRA's part.
 
Entities in Mandated Improvement (2003/11)
Current stance Total
Normal 20
Oversight 27
Mandated Improvement 13
Restructure 3
Exit 105
Failure 5
Total 173
 
Entities in Restructure (2003/11)
Current stance Total
Normal 0
Oversight 3
Mandated Improvement 0
Restructure 11
Exit 36
Failure 5
Total 55
 
At end-June 2011, around 56 per cent of institutions were in the Normal stance, 41 per cent in Oversight, one per cent in Mandated Improvement and two per cent in Restructure. Over the past four years, the proportion of institutions in Oversight has risen significantly and the proportion in Normal has fallen as the global financial crisis exposed various weaknesses in a number of institutions.
 
The second set of quantitative indicators of supervisory performance is linked to financial failures and losses to beneficiaries. APRA publishes two headline performance indicators:
These indicators are, however, silent about target outcomes against which APRA's performance can be assessed. The Government's Statement of Expectations of APRA (2007) confirmed that prudential regulation should not pursue a 'zero failure' objective. Rather, the objective is to maintain a low incidence of failure of supervised institutions while not impeding continued improvements in efficiency or hindering competition. APRA fully supports this objective. APRA's aim is to identify likely failures early enough so that corrective action can be initiated to prevent the failure, or at the least to set in train appropriate wind-up or other exit strategies to minimise losses to beneficiaries. Since APRA's inception in 1998, the annual PER has averaged 99.90 per cent and the annual MPR, which is dominated by the losses associated with HIH Insurance, has averaged 99.96 per cent.
 
Performing Entity Ratio (PER) and Money Protection Ratio (MPR)
Financial year Number of
failures1
Losses
($million)
Number of
institutions2
Protected
Accounts3
($million)
Annual
PER
%
Annual
MPR
%
1999 4 11 4,473 887,172 99.91 100.00
2000 3 308 4,407 993,369 99.93 99.97
2001 8 5,3284 4,350 1,043,111 99.82 99.49
2002 6 140 3,803 1,009,373 99.84 99.99
2003 5 19 3,252 1,068,081 99.85 100.00
2004 1 05 2,745 1,207,119 99.96 100.00
2005 0 0 2,099 1,346,253 100.00 100.00
2006 0 0 1,596 1,548,454 100.00 100.00
2007 1 05 1,244 1,837,363 99.92 100.00
2008 0 0 1,129 1,943,376 100.00 100.00
2009 0 0 1,028 2,049,612 100.00 100.00
2010 1 1 965 2,232,254 99.90 100.00
2011 4 55 898 2,461,557 99.55 100.00
1. In the case of superannuation, failures refer to the number of funds affected and include failures due to employer sponsors.
2. The number of institutions excludes Small APRA Funds, representative offices of foreign banks and non-operating holding companies.
3. Protected Accounts is an estimate of the funds protected by APRA as defined by relevant legislation and is less than the total assets held by APRA-regulated institutions, which were $3,972.1 billion at end-June 2011.
4. Includes HIH Group's estimated $5.3 billion loss incurred by creditors and policyholders, based on liquidator's advice to creditors in April 2002.
5. Losses incurred, due to the failure of an employer sponsor in a superannuation fund, were less than $0.5 million. In the first case, the superannuation fund was not included in the PAIRS/SOARS database.
 
Stakeholder survey
 
During 2011, APRA conducted its second stakeholder survey, following an earlier survey in 2009. Such surveys are foreshadowed in APRA's Service Charter, which states that APRA will undertake surveys of regulated institutions, industry bodies and other stakeholders to assist its understanding of the impact of APRA's prudential framework and the effectiveness of its supervision. Conducted by Australian Survey Research (ASR), the 2011 survey collected responses from two groups of stakeholders using a similar questionnaire: one of regulated institutions and a shorter one of industry representatives and other knowledgeable observers. APRA published the results of the ASR survey in July 2011.
 
ASR noted that, overall, the results were very similar to those of the 2009 survey. According to ASR, the results were '... an excellent result and further endorsement of APRA's prudential framework and approach to supervision. Regulated entities agree that APRA has had a positive impact on their industry'. Within the questionnaire there were 45 rated items that used a five-point rating scale, from 1 (strongly disagree) through to 5 (strongly agree). Only two items scored below 3.0 (neutral) on the five-point scale and 23 of the 45 items had 75 per cent or more positive responses.
 
As with the 2009 survey, APRA will use the results of the 2011 Stakeholder Survey as an important performance tool.
 
Stakeholder survey — highest scoring items Mean
A single supervisory team responsible for all group companies is an appropriate way to supervise groups 4.6
APRA staff's demonstration of integrity 4.5
APRA staff's demonstration of professionalism 4.4
APRA's enforcement of its prudential requirements has had an impact on your industry 4.2
APRA's framework is effective in achieving its mission 4.2
APRA's guidance material is of value to your organisation 4.2
APRA's harmonisation of the prudential framework is important 4.2
APRA staff's demonstration of collaboration 4.1
APRA is effective in communicating the findings of supervisory visits to your organisation 4.1
The APRA supervisory team responsible for your organisation has a good understanding of your organisation 4.1
 
Stakeholder survey — lowest scoring items Mean
APRA's PAIRS rating reflects your organisation's view of its risk profile 3.6
Standards and guidance material clearly communicate requirements 3.6
APRA meets its stated approach of being consultative in its supervision 3.6
APRA meets its stated approach of being consistent in its supervision 3.6
The instructions to APRA's statistical forms are helpful 3.6
D2A is easy to use when lodging data with APRA 3.5
The effort required of your organisation during APRA's prudential reviews is appropriate 3.5
During supervisory visits to your organisation, APRA supervisors focus on principles rather than detailed prescription 3.5
Changes to APRA's prudential framework consider the costs of regulation 2.8
APRA has successfully harmonised its prudential framework 2.8