APRA’s resources and risk management
APRA’s income is sourced primarily from annual levies on supervised institutions. APRA’s expenditure is directed towards APRA’s ongoing supervisory and enforcement activities, as well as implementing and enhancing Australia’s prudential regulatory framework.
APRA’s total operating expenditure for the 12 months to 30 June 2016 was $135.4 million, against an updated budget of $131.1 million. The over-expenditure related mainly to additional property costs associated with the relocation of APRA’s Sydney office to No.1 Martin Place, employee separation and redundancy costs, as well as employee leave provisions as a result of a one per cent fall in the 10-year bond rate. These additional costs were partly offset by operational underspends from a lower than budgeted average staffing level (ASL) during the year.
Due to additional responsibilities for the prudential supervision of private health insurance, APRA’s costs relative to the value of assets supervised have increased in 2015/16 by 0.2 cents from the previous year, to approximately 2.3 cents per $1,000 of assets supervised. This still remains well below the 3.1 cents per $1,000 of assets supervised in 2010.
APRA’s total income in 2015/16 was $131.2 million, as against an updated budget of $131.1 million. The income surplus was driven by marginally higher than budgeted industry levies collected.
Industry levies are raised according to the Financial Institutions Supervisory Levies Collection Act 1998 and the Supervisory Levy Imposition Acts 1998 relevant to each of APRA’s regulated industries. In addition, the Private Health Insurance Supervisory Levy Imposition Act 2015 applies to private health insurers following the passage of the Private Health Insurance (Prudential Supervision) Act 2015. Following consultation with industry, the Minister determines the levy rates for each regulated industry prior to the beginning of each financial year. Industry levies are based on the costs incurred in APRA discharging its duties with respect to each sector. The levy rate is applied on the appropriate institution’s asset value, subject to a minimum and maximum amount per institution. Exceptions to this are non-operating holding companies and small APRA-regulated superannuation funds, which are levied at a flat rate. Levies are also collected to cover the costs of the National Claims and Policies Database (NCPD); in this case a rate is applied to the gross earned premiums of general insurers that contribute to this database. The amount raised for NCPD purposes was $0.4 million.
The total levies collected by APRA also cover certain costs attributable to ASIC, the ATO, the Department of Human Services and the Government’s SuperStream initiative. Total levies collected by APRA, including on behalf of these agencies, in 2015/16 were $237.7 million.
APRA also administers the Risk Equalisation Special Account whereby revenue collected by APRA for the purposes of Risk Equalisation across the private insurance industry is treated by the Government as revenue and expenses. Total Risk Equalisation collections and payments in 2015/16 were $440.9 million.
On an annual basis, APRA releases a Cost Recovery Implementation Statement in order to provide further transparency on the APRA component of the levies collected from industry.
The components of APRA’s reserves were subject to the following changes during the year:
- APRA’s retained surpluses fell by $1.7 million to $19.0 million as at year-end. APRA had an operating deficit from ordinary activities of $4.3 million in 2015/16, which was partly offset by a Machinery of Government change associated with the prudential supervision of private health insurers which increased retained surpluses by $2.6 million;
- the contributed equity component of reserves remained unchanged at $16.7 million; and
- a revaluation of the make-good provision and Machinery of Government change for private health insurance resulted in a $0.3 million increment to the Asset Revaluation Reserve to $7.4 million.
With these items, total reserves decreased to $49.0 million as at year-end, including a $6.0 million Contingency Enforcement Fund to support large unexpected investigation and enforcement activities.
APRA’s total permanent staffing, which was 565 on a full-time equivalent (FTE) basis at 30 June 2015, increased to 607.7 FTEs by 30 June 2016. This increase was largely attributable to an increase of 20 FTE due to the transfer to APRA of responsibility for the supervision of private health insurance from 1 July 2015, and the addition of 18 new graduates recruited as part of APRA’s graduate recruitment program.
APRA continues to work towards a highly skilled workforce that comprises a strong blend of supervisory and industry expertise. This is essential for a supervision-led regulator such as APRA, which relies heavily on the judgement and experience of its staff to achieve sound prudential outcomes. During 2015/16, APRA experienced ongoing challenges in competing for high quality staff in the financial sector. APRA’s turnover was 8.5 per cent during 2015/16, down from 12.5 per cent the previous financial year. While APRA has been reasonably successful in building and retaining supervisory experience within its staff, raising the level of industry experience remains a challenge.
Enhancing APRA’s employee value proposition to attract and retain highly skilled and engaged staff has been a priority for APRA during 2015/16. This includes continuing to develop the capabilities of APRA’s staff. Learning and development activities included a wide range of internal and external programs focused on both building technical skills and assisting staff to apply them effectively. APRA also maintained its strong focus on providing learning and development opportunities to enhance the leadership and management capabilities of current and future APRA leaders.
Support for staff undertaking postgraduate study continued in 2015/16, with 43 staff members participating in the studies support program.
As noted above, APRA also maintained its well-regarded graduate program, employing 18 graduates in 2015/16 as a supplement to general recruitment. As in previous years, the 2016 graduate cadre undertook five weeks of dedicated training on commencement, and these employees will continue to receive targeted development opportunities throughout their first two years of employment with APRA.
Table 1 - Training activities
|Training by type (%)||2015||2016|
|Internal technical training and seminars||63||55|
|Key training metrics||2015||2016|
|Training spend per employee||$3283||$4088|
|Per cent of staff provided with training (%)*||100||100|
|Training sessions per employee||8.1||11.8|
|Training days per employee||4.0||5.5|
|Number of internal classroom courses offered||370||440|
|Employees undertaking formal post-graduate studies||39||43|
* This figure is for all training, including mandatory annual compliance training such as online Fraud and Security Awareness training for all staff.
Risk management, internal audit and compliance
APRA has specialist independent functions which provide support and assurance to the APRA Members, including a risk management function. In July 2015, APRA appointed a dedicated Chief Risk Officer to develop a strengthened and centralised team focused on enhancing the effectiveness of APRA’s internal risk management and related activities.
The risk management team is the custodian of APRA’s Enterprise Risk Management (ERM) framework. This framework includes a clear statement of APRA’s risk appetite and covers material risks to APRA’s mandate and strategic objectives, each captured in a defined category. APRA’s executives have responsibility for the ownership of key risks as well as ongoing review, management and reporting of them. Key risks are reassessed periodically and reported to APRA’s Executive Board and the Risk Management Committee.
During 2015/16, APRA continued to enhance its ERM framework by considering developments in peer regulators and within APRA-regulated industry sectors, in order to incorporate good practice where appropriate. This included implementation of risk management software to support review and management of key risks, as well as improved risk identification and reporting practices.
Internal Audit conducts a broad-ranging and robust program of internal audits each year. The program is developed following consultation with APRA’s senior executive and Audit Committee, and an assessment of APRA’s strategies and key risks. The risk-based program covers specific aspects of APRA’s supervisory and operational processes and its financial systems. Audit reviews identify and rate risks, and make recommendations aimed at improving APRA’s internal control environment and processes. An external quality assessment, conducted by the Institute of Internal Auditors in February 2016, found that APRA’s Internal Audit function had achieved ‘general conformance’ with auditing standards, which is the highest possible rating level.
APRA has an ongoing focus on fraud risk management, and has in place a fraud control framework that is consistent with Government requirements. All relevant internal audits assess whether potential fraud exposures are appropriately addressed by APRA’s processes and controls. Online fraud awareness training is required to be completed by all staff annually and APRA management provides formal attestations in relation to reporting of any identified fraud on a six-monthly basis. There were no incidents of internal fraud reported for the year 2015/16.
APRA has a range of external accountabilities and, to ensure compliance, applies a comprehensive APRA-wide compliance framework based upon the relevant International Standard - AS/ISO 19600:2015 Compliance Management Systems. This framework includes a broad range of compliance attestations by senior management. Monitoring and ongoing development of this framework is the responsibility of the Executive General Manager, Corporate Services Division.