APRA has been able to maintain its staffing resources at around full strength, and little changed overall, since the global financial crisis began. It has needed to, given the intensity of its supervision, the substantial prudential policy agenda it has been pursuing and the additional responsibilities it has acquired over this period. A new four-year funding agreement put in place in 2012/13 is intended to ensure APRA's continued staffing strength and supervisory capacity, although subsequent 'efficiency dividends' have required staffing targets to be trimmed.
APRA's total permanent staffing at end-June 2013 was 588, and the addition of fixed-term employees brought total numbers to around 599 on a full-time equivalent basis. This was slightly lower than the total figure of 606 a year earlier. Staff turnover was above the historical low rate it had reached the previous year, but continued subdued conditions in the finance industry limited the increase.
Stability in APRA's workforce has ensured that supervisory and policy experience continues to mature. The average APRA experience of staff in operational divisions has increased to well over nine years and that is augmented by an average of around six years of relevant industry experience; around 65 per cent of APRA's staff have previous experience in financial institutions or in legal, accounting or other professional firms. Almost all of APRA's staff in its operational divisions hold tertiary qualifications and more than one-third hold additional postgraduate qualifications, many earned with APRA's study support. An annual graduate program with an intake of around 12 to 15 new graduates provides a valuable source of fresh skills to complement more experienced hires. As APRA has matured as an organisation, so too has its age structure; the median age of APRA staff has risen by over five years, to a little below 41 years, in the past decade.
Click on the above image to view the APRA staffing in a larger size.
Since prudential supervision talent rarely comes ready-made, APRA has always invested heavily in its training and development programs to build the skills and capabilities of its staff. In benchmark surveys, APRA consistently ranks around the 90th percentile of organisations in terms of training expenditures, with an average annual training expenditure per employee of around $3,300. Recent investment in training has been concentrated on enhancing the financial analytical skills of frontline supervisors to assist them to identify key risks early, assess the financial health of regulated institutions and determine whether supervisory action is required. APRA has partnered with a number of external providers to develop training curricula across each of its regulated industries, which involve formal training supplemented by on-the-job experience and embedding into practice. The training courses typically take an interactive approach, using examples and case studies designed to provide a framework for forward-looking and superior financial analysis and develop a sceptical and forensic mindset amongst supervisors. Further stages in these training programs are in preparation. In parallel, special training was provided in 2012/13 on the new Basel III capital regime and on APRA's life and general insurance capital reforms to ensure that supervisors had the requisite depth of knowledge to support the implementation of these reforms. Similar special training on the implementation of the Stronger Super reforms is being provided over the course of 2013/14.
In addition to this technical training, APRA invests in enhancing the ability of its staff to effectively communicate with and influence both internal and external audiences. As such, a wide range of interpersonal skills training is provided. This training is a key requirement for graduates and is offered to all staff as they develop in their roles.
APRA also attaches high priority to promoting a strong and effective leadership culture, one that will encourage the next generation of APRA leaders. Leadership development courses for both mid-level and senior managers have aimed to ensure that good people leadership and management practices are maintained throughout APRA by, amongst other things, fostering coaching skills and encouraging candour and openness in the way managers deal with their staff on performance and career development issues. The high priority given to leadership culture has been an important factor in the substantial improvement in APRA's staff engagement over recent years. Another important factor has been APRA's commitment to a supportive and flexible workplace that values and utilises the contribution of people of different backgrounds, experiences, perspectives and abilities.
|Internal technical training and seminars
|Employees undertaking formal post-graduate studies
|Training spend per employee
|Training spend as a per cent of base salary (%)
|Per cent of staff provided with training (%)
|Training sessions per employee
|Training days per employee
|Number of internal classroom courses offered
APRA's expenditure is devoted to implementing and enhancing the prudential framework in Australia and to APRA's ongoing supervisory and enforcement activities. APRA's income derives mostly from annual levies on its supervised entities.
APRA's total operating expenditure in 2012/13 was $116.5 million compared with the budget of $121.2 million. The underrun related mainly to the deferral of certain APRA activity to 2013/14 and the positive impact of a higher 10-year government bond rate on the valuation of employee liabilities.
Consistent with its relatively stable workforce during the global financial crisis, APRA's operating expenditure has changed little over the past four years. Further, relative to the value of assets supervised by APRA, costs have declined slowly to about 2.6 cents per $1,000 of assets supervised.
Click on the above image to view the APRA's costs in a larger size.
APRA's total income in 2012/13 was $121.6 million compared with the budget of $118.0 million. In addition to levies collected from supervised institutions, APRA's income includes interest earnings, fees for services and miscellaneous cost recoveries.
Levies are raised according to the Financial Institutions Supervisory Levies Collection Act 1998 and seven other Acts applying to the regulated industries. Prior to the beginning of each financial year, and after consultation with industry, the Minister determines the levy rates 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 and small APRA superannuation funds, which are levied at a flat rate. The levies collected by APRA also cover some costs of ASIC, the ATO and, following the transfer of responsibility for the early release of superannuation benefits in November 2011, the Department of Human Services. 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 data to it.
The total levies collected by APRA for all agencies in 2012/13 were $270.4 million compared with the budget of $266.6 million. The substantial increase in this collection over 2011/12 was attributable to the ATO's costs associated with the Government's SuperStream reforms. A $3.2 million over-collection of levies, mainly due to a difference between the estimated values of superannuation assets used for levy calculations and the actual values, will be returned to industry via the levy-setting process in 2013/14.
Over the year, Treasury has been consulting with industry on the design and operation of the levy framework, based on its discussion paper, Financial Industry Supervisory Levy Methodology, released for comment in April 2013. Submissions are currently being considered. In addition, the Australian National Audit Office has undertaken a performance audit of APRA's approach to the determination and collection of the levies collected from financial institutions. In view of its role in the annual levy consultation process, Treasury has also been included in the audit scope. The report of the performance audit is expected to be tabled in the Spring 2013 sitting of Parliament.
APRA had an operating surplus from ordinary activities of $51 million in 2012/13, which increased retained surpluses to $13.9 million. In addition, an equity contribution of $4.8 million in 2012/13 to support increased capital expenditure took the equity component of reserves to $12.3 million. As a consequence, total reserves increased to $38.7 million. Included in this amount is a $6.0 million Contingency Enforcement Fund, which is available to be used for large unexpected investigation and enforcement activities, and an Asset Revaluation Reserve of $6.5 million.
The global financial crisis has provided some high-profile examples where the performance of supervisory agencies fell well short of expectations and this, in turn, has prompted the search for useful ex ante indicators of supervisory intensity and effectiveness. This is not proving easy, particularly in separating out the contribution of supervisors from other external influences on the behaviour of financial institutions, such as credit rating agencies and shareholder discipline. That said, the search is gathering momentum in global standard-setting bodies.
For its part, APRA publishes information from two different sources to provide broad quantitative indicators of its supervisory performance. These sources are APRA's 'transition matrices' and data on financial failures and losses to beneficiaries. Stakeholder surveys have also provided valuable readings on APRA's effectiveness.
In APRA's view, a risk-based approach to supervision has considerably improved the efficiency and effectiveness of APRA's supervisory activities and helped to reinforce standards of risk management in regulated institutions. Nonetheless, particularly in continued economic good times, the discriminatory power of a risk assessment model may not be easy to discern. As one performance measure, 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.
Note: One institution in Restructure was recorded as a failure in 2009/10 and four institutions in Restructure were recorded as failures in 2010/11.
As an institution moves out of a Normal stance, routine supervision is likely to give way to more intrusive supervision, greater use of APRA's more specialised resources and, possibly, 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 closer attention by APRA. APRA's goal is that institutions in Oversight take appropriate action that would see them return to Normal in due course. However, some institutions may remain in Oversight indefinitely if their size and complexity, business plans or risk appetite make that appropriate; APRA's strategy with such institutions is close monitoring and communication. If an institution is downgraded to Mandated Improvement, APRA expects the institution to take immediate and appropriate action that would, in a short timeframe, see it returning to an improved supervision stance or moving to Restructure. 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.
The transition matrices show that almost half of the institutions in either Normal and Oversight as at end-June 2007 remained in that stance over the following six years. A significant percentage of the remainder of institutions in Oversight either improved or exited the industry in an orderly manner (e.g. by a run-off of liabilities or through merger). Around half of the institutions that began the period in Mandated Improvement have exited the industry while the others have moved to an improved supervision stance. Around half of the institutions that began the period in Restructure have remained in that stance, with all others exiting the industry.
Over the ten years to end-June 2013, a total of 225 institutions were in Mandated Improvement and/or Restructure (of which 10 institutions moved through both SOARS categories). Of that total, 56 institutions improved stance to Normal or Oversight, nine remained in their SOARS category, 154 exited without loss to beneficiaries and six institutions failed (four of which moved through both Mandated Improvement and Restructure during that period). While it is not possible to compare these outcomes with what would have happened had APRA not intervened, the overall direction of movement of institutions in these two supervisory stances is consistent with timely and effective intervention on APRA's part.
At end-June 2013, around 54 per cent of risk-rated institutions were in the Normal stance, 44 per cent in Oversight, less than one per cent in Mandated Improvement and one per cent in Restructure.
The second set of quantitative indicators of supervisory performance is linked to financial failures and losses to beneficiaries. These indicators are:
- the Performance Entity Ratio (PER), which is the number of APRA-regulated institutions that met their commitments to beneficiaries in a given year, divided by the total number of APRA-regulated institutions; and
- the Money Protection Ratio (MPR), which is the dollar value of liabilities to beneficiaries in Australia that remained safe in a given year, divided by the total dollar value of liabilities to beneficiaries in Australia in APRA-regulated institutions.
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 $4,526.7 billion at end-June 2013.
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 2004 case, the superannuation fund was not included in the PAIRS/SOARS database.
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 99.91 per cent and the annual MPR, which is dominated by the losses associated with HIH Insurance, has averaged 99.96 per cent.
During 2013, APRA conducted its third stakeholder survey, following earlier surveys in 2009 and 2011. These surveys of regulated institutions, industry bodies and other stakeholders, foreshadowed in its Service Charter, assist APRA's understanding of the impact of the prudential framework and the effectiveness of supervision. The 2013 survey, which was conducted by Australian Survey Research (ASR), 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 2013.
ASR noted that, when compared with the two previous surveys, stakeholders' perceptions of APRA have remained relatively constant. According to ASR, the findings were a positive result and ongoing validation of APRA's prudential framework, its staff and its approach to supervision'. 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 one item scored below 3.0 (neutral) on the five-point scale and 24 of the 45 items had 75 per cent or more positive responses.
As with the two earlier surveys, APRA will use the results of the 2013 survey as an important input into its strategic planning and supervisory priorities.
|APRA staff demonstrate the value of integrity*
|APRA staff demonstrate the value of professionalism*
|A single supervisory team responsible for all group companies is an appropriate way to supervise groups**
|APRA's guidance material is of value to your organisation
|APRA is effective in communicating the findings of supervisory visits to your organisation
|APRA's prudential framework is effective in achieving APRA's mission
|APRA staff demonstrate the value of collaboration
|APRA's enforcement of its prudential requirements has had an impact on your industry
|The APRA supervisory team responsible for your organisation has a good understanding of your organisation
|APRA meets its stated approach of being consistent in its supervision
|APRA's harmonisation of the prudential framework across its regulated industries is important for your organisation**
|APRA considers issues relevant to industry and other stakeholders when developing its prudential standards and guidance material
|The instructions to APRA's statistical forms are helpful
|The effort required of your organisation during APRA's prudential reviews is appropriate
|Prudential standards and guidance material clearly communicate requirements
|Direct to APRA (D2A) is easy to use when lodging data with APRA
|During supervisory visits to your organisation, APRA supervisors focus on principles rather than detailed prescription
|APRA has successfully harmonised its prudential framework across the industries it regulates**
|Changes to APRA's prudential framework consider the costs of regulation imposed on industry
* These items used a five point never-always scale
** These items were asked only of group entities
APRA is the central repository of statistical information on the Australian financial system and collects a broad range of financial and risk data that are essential input to its supervision of regulated institutions. In addition, APRA collects data from regulated and unregulated financial institutions to assist the RBA, the Australian Bureau of Statistics (ABS) and ASIC to fulfil their roles. Much of the data are shared between agencies to reduce unnecessary reporting burden on institutions.
Almost all of APRA's data collections are legal requirements of institutions under the Financial Sector (Collection of Data) Act 2001 and APRA's reporting standards. Accordingly, APRA closely monitors the timeliness and quality of submissions to ensure the data is available to APRA and other data users by the statutory due dates. For regulated institutions, APRA targets a rate of 95 per cent for submission of returns by the statutory due dates, and the remainder to be submitted within the following week. Over 2012/13, 95 per cent of submissions were received by the due dates and over 99 per cent were submitted within a week of the due date.
During the year, APRA updated its data collections in line with changes to prudential standards. As part of the implementation of the Basel III capital reforms, APRA released seven reporting forms, which came into effect from 1 January 2013. The first quarterly data collection under the revised capital framework for general and life insurers also came into effect from 1 January 2013. The revised data collections involved significant reporting changes for general insurers (35 new forms were introduced, 13 existing forms were amended and another 38 revoked) and for life insurers and friendly societies (14 new forms were introduced, 10 existing forms were amended and another six were revoked). APRA also overhauled its data collection for superannuation in the context of the Government's Stronger Super reforms (see page 54). The new superannuation reporting requirements came into effect, on a staggered timetable, from 1 July 2013.
APRA continues to seek improvements to its data collections. During 2012/13, APRA upgraded its electronic data collection system, Direct to APRA (D2A), to accept AUSkey as part of its commitment to the Government's Standard Business Reporting (SBR) initiative. AUSkey was introduced by SBR to streamline access for institutions reporting to government. Institutions are now able to use their AUSkey for APRA reporting as well as to access multiple government online services.
APRA also delivered several improvements to its regular statistical publications in response, particularly, to users' desire to receive the statistics earlier. It brought forward the regular release dates of two publications, so that all quarterly statistical publications are now released within two months of the end of each reference period. This has been facilitated by the use of new statistical software in the quality assurance and compilation of publications. The timeliness of APRA's statistics now well exceeds international standards. APRA also enhanced the usefulness of its statistical publications by ensuring that they now include revisions to previously published statistics if better source data becomes available or if compilation errors are uncovered.
In October 2012, APRA improved the aggregated international banking statistics published by the Bank for International Settlements and the RBA by removing the need to mask these statistics. Industry was consulted on this change. Users of these statistics are now able to conduct in-depth analysis on cross-border financial linkages in the global financial system. The improved access to the international banking statistics assists Australia to fulfil its responsibilities as a G20 member, in particular by addressing an International Monetary Fund finding that Australia's reporting of detailed international banking statistics was among the most restrictive.
Following consultations, APRA released a consolidated quarterly ADI publication, Quarterly Authorised Deposit-taking Institution (ADI) Performance, in May 2013. This publication contains aggregate statistics for banks, credit unions and building societies, previously published in Quarterly Bank Performance and Quarterly Credit Union and Building Society Performance, as well as, for the first time, data on mutual ADIs. The publication also includes statistics on ADI capital adequacy, asset quality and liquidity that were previously published in APRA's Insight publication. In August 2013, APRA introduced a new Quarterly Authorised Deposit-Taking Institution (ADI) Property Exposures publication, which includes statistics on residential and commercial property exposures and new housing loans approvals.
Also in May 2013 and following consultations, APRA released enhanced versions of its Quarterly Life Insurance Performance Statistics and Quarterly General Insurance Performance Statistics. The expanded quarterly life insurance publication includes statistics based on the revised capital reporting framework and statistics at the product level. For the first time, the publication contains time-series rather than point-in-time statistics, as requested by users. The expanded quarterly general insurance publication also includes statistics based on the revised capital reporting framework and statistics at the class of business level.
During the year, APRA consulted on its proposal to determine that all data submitted to it by general insurers and life insurers are non-confidential and therefore publicly accessible. APRA will decide which general and life insurance data are to be determined non-confidential in late 2013. In the meantime, it continues to apply confidentiality protection measures to ensure that confidential information relating to an individual institution cannot be derived from APRA's published statistics.
APRA also commenced a review of the ADI and Registered Financial Corporation (RFC) data collections. In the initial stage, data users (including APRA, the RBA and ABS) examined the current collections to confirm whether or not all the data are still required to meet their needs. They also identified additional needs and needs that had changed. An early dividend has been a reduction in reporting burden through the revocation of two out of the 10 ADI monthly reporting forms.
During 2012/13, APRA continued its upgrade of the National Claims and Policy Database (NCPD) to new hardware and current versions of software. As a result of the upgrade, and following consultations, APRA was able to release the most complete and detailed NCPD information to date, with the inclusion of an additional 700,000 data points; the accuracy and reliability of the NCPD have also improved. The detailed claims reports, which now cover 2003 to 2012, can for the first time be used by NCPD contributors and subscribers to analyse risk factors such as industry or occupation group, and variations to product or policy coverage.
In July 2013, APRA launched its 2013-16 Strategic Plan, moving in the process from fixed time period planning to a three-year rolling plan. This allows specific focus on APRA's immediate priorities, while providing flexibility to adjust the Plan each year for any emerging internal and external factors that will shape its operating environment.
The Plan acknowledges that APRA will be facing some shifting currents in its operating environment, with the global economy responding, albeit unevenly, to very accommodative monetary policy and the Australian economy adjusting to the unwinding of the mining investment boom. The Plan does not involve any major change in APRA's strategic direction but gives priority to successfully bedding down major initiatives on the prudential policy front and in APRA's supervisory and business infrastructure, whilst maintaining the intensity of its ongoing supervision. The Plan also acknowledges the importance of APRA's engagement with and influence on boards and senior management in order to achieve sound prudential outcomes.
The Plan articulates APRA's long-term strategy to achieve its mission and realise its vision. It also identifies four strategic objectives and the initiatives APRA will undertake to meet them. The objectives are to:
- have a prudential framework that is robust, empowers supervisors and sets expectations of prudential behaviour by regulated institutions and their boards;
- supervise institutions with timely, risk-based, considered action;
- have robust organisational processes and infrastructure to effectively support APRA's core functions; and
- have highly skilled and engaged people, guided and supported by strong leaders.
The Plan forms the basis for APRA's annual Operational Plan, which includes specific actions and targets to deliver each strategy, and for annual divisional business plans. 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.