From the Chairman
The Australian financial system remained in a sound financial position throughout 2015/16. That should not be surprising given a domestic economy, notwithstanding the transition away from the mining boom, that has gone two-and-a-half decades without a serious recession. It also reflects a prudential framework that has continually evolved and been strengthened in a number of important areas, particularly in response to the lessons of the global financial crisis.
Although the general picture is one of a broadly healthy Australian financial system, there remain some areas of vulnerability. These include risks in the housing market, the funding profile of the banking system, poor experience in some segments of the insurance market, and the need to continue to strengthen governance and transparency in the superannuation industry. There is also a need to consider, across the financial sector as a whole, how best to promote a sound risk culture. Looking beyond Australian shores, it is likely that international fragility – driven in part by political and financial strains in Europe, and by concerns about the nature of the ongoing slowdown in China - will remain a source of risk for some time.
In short, the current environment is one which reinforces the need to avoid complacency, and to continue to improve the resilience of the Australian financial system – and APRA itself – in an orderly manner while it remains in relatively good shape. Doing so will help reduce the potential for, and impact of, adverse events in the future. This imperative has been at the heart of APRA’s work throughout the financial year.
In 2015/16, APRA established six Strategic Objectives that underpin APRA’s ability to protect the interests of the ultimate beneficiaries of its work – that is, Australian depositors, policyholders and superannuation fund members, and the Australian community more generally:
- To protect the interests of APRA’s beneficiaries by responding in a timely and effective manner to significant risks at both institution and industry levels.
- To maintain a robust prudential framework that sets requirements for prudent behaviour at regulated institutions, founded on relevant international standards where appropriate.
- To materially strengthen our readiness for financial failure or crisis.
- To attract and retain highly skilled and engaged people, supported by strong leaders within a values-aligned culture.
- To have robust and efficient organisational processes and infrastructure supporting our core functions.
- To be accountable for our performance by being transparent in our communication and effective in our engagement with stakeholders.
More detail on performance against these objectives can be found in Chapter 6.
Regulatory and supervisory priorities
The continually evolving nature of the financial system, and the risks to which it is exposed, mean that APRA is regularly adapting its supervisory and regulatory priorities to areas of greatest need.
- In the case of authorised deposit-taking institutions (ADIs), supervisory attention was again focussed on risks in the property market – both residential and, more recently, commercial. Considerable time in 2015/16 was devoted to monitoring the commitments given by ADIs to improve their residential underwriting standards in a range of areas and, in some cases, slow their growth in lending to residential property investors. APRA also announced an increase in risk weights on residential mortgages for those banks accredited to use internal models for capital adequacy purposes.
- The life industry is well capitalised and has improved its resilience to market volatility. Profitability across the industry has improved, although the experience from group insurance is mixed and disability income insurance remains loss-making for many insurers. These two lines of business have been particular areas of supervisory attention for some years. APRA also conducted a significant stress test of the larger industry participants during the year, which was designed to lift the bar of industry capability to deal with the unexpected. General insurance faced a number of challenges in the past year: lower growth, lower investment yields, an increase in working claims, challenges with CTP insurance (particularly in NSW) and a very competitive commercial insurance market. Despite these challenges, the sector continues to be relatively well managed and well capitalised. APRA’s focus has been monitoring the extent to which participants have been disciplined in responding to the various challenges.
- APRA’s ongoing focus on strengthening governance and risk management practices in the superannuation industry continued in 2015/16. This was informed by thematic reviews focused on insurance, investments and conflicts management. Common themes to emerge from all reviews was the need for appropriate strategic and business planning with an eye on future sustainability, and the importance of data quality and integrity to support enhanced transparency.
- As set out further below, APRA’s first year of responsibility for the prudential supervision of private health insurance was focussed on a smooth and successful transition of staff and systems.
A few cross-industry issues were also an important part of APRA’s agenda, consistent with the broad theme of improving the financial system’s resilience.
- APRA conducted a survey on cyber security, which provided important insights into the incidence of, and preparedness for, cyber-related risks;
- APRA also continued its efforts to improve recovery planning by financial institutions, alongside its own resolution planning; and
- APRA continued to promote the development of sound risk cultures within financial institutions, consistent with the long-held philosophy that the responsibility for the sound management of financial institutions rests first and foremost with the boards and managements of those institutions.
The 2014 Federal Budget included an announcement that the responsibility for the prudential supervision of health insurance funds would be transferred from the Private Health Insurance AdministrationCouncil (PHIAC) to APRA, and PHIAC would be closed down (with non-prudential functions transferred to the Department of Health).
This change took effect from 1 July 2015, and most of the PHIAC staff who had been involved in prudential supervision transferred to APRA at that date. For the private health insurance industry, APRA adopted a ‘minimal change’ approach to the transfer by, to the extent possible, replicating the existing PHIAC regulatory framework within new APRA standards, and thereby minimising the disruption to the private health insurance industry from the change. APRA’s primary focus for the past year was therefore on the internal integration of its new responsibilities. This integration has largely been bedded down, and day-to-day supervisory responsibilities have been transitioned from Canberra to APRA’s various state offices, with a view to ensuring supervisory staff are closer to the institutions they are responsible for supervising. The staff who joined APRA from PHIAC on the transfer of responsibilities have, in particular, played a critical role in making the transition a success – they have been determined to deliver a smooth handover of responsibilities and systems, even though many have chosen not to continue with APRA over the longer term.
New working environment
During 2015/16, APRA completed the move of its head office to new premises in 1 Martin Place, Sydney. The move provided an opportunity to establish a modern and flexible physical working environment for APRA’s staff, as well as a complete upgrade in the technology suite that was available to them. Behind the scenes, the move and technology upgrade also provided the opportunity to substantially upgrade APRA’s physical and IT security, and will be followed by similar moves in APRA’s other state offices in the year ahead. The Sydney move and technology upgrade were completed slightly ahead of both time and budget, and provide APRA with a very solid platform on which to build in future years.
APRA continues to make careful and efficient use of the budget provided to it. Total expenditure and staffing has been little changed in recent years. Indeed, since the height of the global financial crisis, APRA’s total staffing has been reduced and, at the end of the 2015/16 financial year, stood at 588 FTE on a like-for-like basis (i.e. excluding around 20 additional FTE transferred as part of the transfer of PHIAC responsibilities to APRA from 1 July 2015, which brought total APRA staffing to 608 FTE).
Similarly, APRA’s operating costs – after adjusting for the PHIAC transfer - have grown only modestly over that same period, and have declined in real terms. Given the growth in the financial sector, APRA’s costs relative to the value of assets supervised have declined from around 3 cents at the start of the decade to approximately 2.3 cents per $1000 of assets supervised in 2015/16.
In the 2016 Commonwealth Budget, APRA received approval for a new initiative: ‘Modernising APRA’s data capabilities’. This will provide APRA with an additional $11.2 million of funding over the forward estimates to modernise and enhance its digital data-collection platforms, modernise and refine its data collection suite, enhance its in-house analytic and publication capabilities and increase the openness and accessibility of data to the public for transparency and analysis purposes.
In late 2015, the Treasurer announced Mr Geoff Summerhayes would be appointed as an APRA Member for a five-year term, commencing 1 January 2016. Geoff’s appointment was very much welcomed by APRA given the extensive commercial and executive experience that he brings to APRA’s governing group. At the same time, it was announced that Mrs Helen Rowell would be appointed Deputy Chairman for the remainder of her term until 30 June 2018.
APRA’s modus operandi relies heavily on supervision to achieve sound prudential outcomes at relatively low cost. This, in turn, relies on the quality and experience of APRA’s people. The APRA Members are fortunate that, in a challenging environment, the organisation has a dedicated and high calibre workforce with a strong blend of regulatory knowledge and commercial acumen, who bring passion and commitment to APRA’s role in serving the Australian community. We thank them for their sterling efforts across the full gamut of APRA’s activities in 2015/16.Click for larger view