The APRA Act tasks APRA with administering legislation that provides for prudential regulation of financial institutions. Those laws are the industry-based Acts — the Banking Act 1959, the Insurance Act 1973, the Life Insurance Act 1995, the Private Health Insurance (Prudential Supervision) Act 2015 and the Superannuation Industry (Supervision) Act 1993 — which charge APRA to protect the interests of depositors, policyholders and superannuation fund members.
The Public Governance, Performance and Accountability Act 2013 (PGPA Act) establishes uniform governance and accountability requirements and a performance framework for all Commonwealth Government entities, including APRA. Under the PGPA Act, APRA publishes accountability requirements each year in its annual report, including the Annual Performance Statement which is included at the end of this chapter. APRA is also required to publish a Corporate Plan setting out information on APRA’s key strategies and activities over a rolling four-year period. APRA’s Corporate Plan 2016-2020 was published in August 2016 and is available on the APRA website.
APRA’s role as a prudential regulator
In performing and exercising its functions and powers, APRA must balance the objectives of financial safety and efficiency, competition, contestability and competitive neutrality and, in doing so, promote financial stability. As set out in APRA’s 2014 Statement of Intent, APRA does not seek to establish a regulatory regime that targets a zero rate of failure amongst the institutions it supervises. As such, APRA’s policy development work is largely directed towards achieving an appropriate balance between financial safety and other considerations, including regulatory costs. APRA’s supervisors enforce the prudential policy framework in a risk-based manner, targeting supervisory attention on areas of greater risk and seeking to apply a proportionate approach that considers the scale, complexity and nature of each regulated institution.
Given APRA’s role to protect the interests of depositors, policyholders and superannuation fund members (which APRA refers to collectively as its beneficiaries), two important indicators of APRA’s performance are:
- The Performing Entity Ratio (PER) — the PER is an indicator of the incidence of failure amongst regulated institutions. It is determined as the number of regulated institutions that met their commitments to beneficiaries in a given year divided by the total number of regulated institutions. The higher the percentage, the lower the incidence of failure.
- The Money Protection Ratio (MPR) — the MPR is an indicator of the incidence of loss in the financial sector. It is determined as the dollar value of liabilities to beneficiaries held in Australia in regulated institutions less any prudential losses to beneficiaries in a given year, divided by the total dollar value of liabilities to beneficiaries in Australia in regulated institutions. Again, the higher the percentage, the lower the incidence of loss.
Since APRA’s inception in 1998, the annual PER has averaged 99.92 per cent and the annual MPR, has averaged 99.96 per cent.
Table 1 - 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 %|
- In the case of superannuation, failures refer to the number of funds affected and include failures due to employer sponsors.
- The number of institutions excludes small APRA Funds, representative offices of foreign banks and non-operating holding companies. 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 $5,908.1 billion at end-June 2016.
- Includes HIH Group’s estimated $5.3 billion loss incurred by creditors and policyholders, based on liquidator’s advice to creditors in April 2002.
- Losses incurred due to the failure of an employer sponsor in a superannuation fund were less than $0.5 million.
- Number of institutions has been revised from APRA’s 2014 Annual Report where better source data has become available.
- Protected accounts has been revised from APRA’s 2014 Annual Report in line with resubmissions received during the year.
APRA continues to develop its performance assessment and accountability framework in coordination with Federal Government initiatives to promote improvements in regulator accountability more generally. There has also been an international effort by prudential regulators to improve the way in which they assess their supervisory performance since the global financial crisis, and APRA is exploring practices that can be drawn from this work.
Indicators of risk identification and rectification
APRA’s objective is to maintain a low (but not zero) incidence of failure of supervised institutions while not impeding continued improvements in efficiency or hindering competition within the broader industry. APRA therefore aims to identify likely failures early enough so that corrective action can be initiated to prevent the failure or appropriate wind-up, or other exit strategies can be undertaken to minimise losses to beneficiaries.
APRA’s risk assessment and response systems — the Probability and Impact Rating System (PAIRS) and the Supervisory Oversight and Response System (SOARS) — are critical tools for identifying institutions that may be at a higher risk of failure. Monitoring outcomes for these institutions is an important indicator of the extent to which APRA identifies material risks and achieves rectification of problem issues or, where appropriate, facilitates orderly exit from the industry.
Of the 15 institutions that began the financial year in APRA’s two highest categories (Mandated Improvement and Restructure), seven institutions exited the industry and two institutions moved to an improved supervision stance. As a result of two new institutions being added to the Mandated Improvement population during the year, eight remained in those categories at year end. The PAIRS/SOARS framework was introduced in 2003. Over the 13 years since, a total of 238 institutions have been in Mandated Improvement and/or Restructure at the same time. Of that total, 47 institutions have returned to Normal or Oversight supervision stance, 177 have exited without loss to beneficiaries and 6 institutions have failed (4 of which moved through both Mandated Improvement and Restructure during that period). The remaining 8 have remained in either the Mandated Improvement or Restructure SOARS category.
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, and the relatively low proportion of failures, is consistent with timely and effective intervention on APRA’s part.
Figure 1 - Outcome for institutions in Mandated Improvement/Restructure, 2003–2016
Office of Best Practice Regulation
The Office of Best Practice Regulation (OBPR) has established a rigorous cost-benefit framework for analysing the impact of any proposed new regulation (as well as potential alternatives) on different groups in the Australian community and on the community as a whole. Adhering to OBPR processes provides an important foundation on which APRA can assess whether it has achieved an appropriate balance across the objectives of its mandate, and provides for open and transparent consideration of stakeholder views, including the publication of stakeholder submissions and APRA response papers. During 2015/16, APRA continued to meet the OBPR requirements in its policy development activities.
Regulatory cost savings
In August 2016, APRA released an update on its regulatory cost savings project. This indicated that, since the previous update on the project in February 20156, APRA had modified the regulatory framework to achieve approximately $5 million in cost savings for the regulated industry.
This project, which commenced in 2014, involved consultation with industry and other stakeholders, and soughteeks to identify specific, quantifiable opportunities for regulatory cost savings. In undertaking this project APRA sought to first identify specific, quantifiable options for potential cost savings, and APRA then proceeded with those options that could be implemented without compromising the soundness of the prudential framework. The project is consistent with the Government’s broader agenda for reducing compliance costs for business and the community.
Regulator Performance Framework
The Regulator Performance Framework (RPF) assesses regulators’ performance when interacting with business, the community and individuals while carrying out their respective functions. The RPF principally relates to regulatory burden arising from the administration of regulation, rather than the process for and outcomes of regulatory policy-making. In accordance with the timetable required by the Government, APRA will publish its self-assessment for 2015/16 by the end of 2016.
APRA’s role as a national statistical agency
APRA is the central repository of statistical information on the Australian financial system. It collects and publishes data from prudentially regulated and other financial institutions to support its core mission, and also its ancillary mission as a national statistical agency for the Australian financial sector.
Data collections for APRA’s primary mission
APRA collects a broad range of financial and risk data that are an essential input to its core mission of the prudential supervision of regulated 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.
For regulated institutions, APRA targets a rate of 95 per cent of returns submitted by the statutory due date, with the remainder to be submitted within the following week. In 2015/16, 98 per cent of submissions were received by the due dates and 100 per cent were submitted within a week of the due dates.
Statistical publications to assist APRA’s ancillary mission
Subject to confidentiality obligations, APRA publishes as much of the data it collects that are useful in industry-level and individual institution-level publications. This fulfils APRA’s ancillary mission as a national statistical agency for the Australian financial sector.
By publishing these statistics, APRA promotes understanding of the industries it regulates and assists research, public discussion and well-informed decision-making by regulated institutions, policy-makers, other regulators, market analysts and researchers.
APRA observes international statistical standards in developing, producing and managing its statistics (except in the few cases where doing so would conflict with APRA’s primary role as a prudential regulator). By acting consistently with these standards, APRA helps protect commercially sensitive information provided by institutions, whilst providing statistics that are useful and trustworthy and meet the needs of users.
Table 2 - Statistics key performance indicators
|Target||Year endJune 2015||Year end June 2016|
|Number of forms expected per quarter||—||16,605||17,948|
|Proportion of (quarterly) forms submitted and validated by due date||≥ 95%||96%||98%|
|Proportion of (quarterly) forms submitted and validated within 1 week of due date||≥ 99%||99%||100%|
|Number of statistical publications released||—||44||731|
|&Proportion of statistics publications released according to pre-disclosed timetable||100%||100%||100%|
|Number of requests for customised statistics||—||189||243|
|Proportion of requests for custom statistics fulfilled as agreed||≥ 95%||97%||100%|
|Number of requests for reporting advice||—||954||5122|
- Increase primarily due to APRA commencing the publication of private health insurance statistics from 1 July 2015.
- Decrease primarily due to the revised superannuation reporting requirements as the collection becomes more established
APRA’s engagement with stakeholders
Mechanisms for engagement
APRA engages with a variety of stakeholders including regulated institutions, industry bodies, government departments, other regulatory agencies, media and the general public. APRA uses a diverse range of channels to communicate various policy, statistical and other announcements with stakeholders groups, as shown in the table below.
For further information on APRA’s engagement with government, other regulatory agencies and industry associations, see Domestic Liaison in Chapter 4.
Financial Claims Scheme website
In June 2016 APRA launched a new website with information on the Financial Claims Scheme (FCS) for depositors and general insurance policyholders. APRA launched the new website as part of its role as administrator of the Scheme, in the event it is declared by the Commonwealth Government.
The FCS website provides information on key aspects of the banking and general insurance Financial Claims Schemes, and expands on information already available on APRA’s website. Aimed at consumers, the website contains easy to understand information, including frequently asked questions that explain the Financial Claims Schemes, how they may be activated and how people may be protected under the Schemes. The website is www.fcs.gov.au.
|Policy consultations conducted||16||26|
|Policy papers issued (for above consultations)||30||30|
|Information letters issued to industry||36||26|
|Presentations at formal speaking engagements||87||89|
|Media releases issued||35||42|
|Statistical publications released||44||73|
|Enquiries received by the Statistics Unit||617||578|
|Enquiries received through the APRAinfo call centre||12,635||11,550|
|Parliamentary hearings attended||6||9|
|Submissions to formal inquiries||4||2|
Annual Performance Statement
I, Wayne Byres, as the accountable authority of the Australian Prudential Regulation Authority (APRA), present the annual performance statement of APRA for 2015/16, as required under paragraph 39(1)(a) of the Public Governance, Performance and Accountability Act 2013 (PGPA Act). This annual performance statement accurately reflects the performance of APRA in accordance with subsection 39(2) of the PGPA Act.
APRA is an independent statutory authority established for the purposes of prudential supervision of financial institutions and for promoting financial stability in Australia.
Outcome 1 Portfolio budget statement. Enhanced public confidence in Australia’s financial institutions through a framework of prudential regulation which balances financial safety and efficiency, competition, contestability and competitive neutrality.
Performance criteria: APRA has the following key performance indicators:
- Timely issuance of prudential standards and guidance that address risk management exposures of regulated institutions;
- Identification of emerging prudential risks within regulated institutions through programs of on-site visits and off-site surveillance and the supervision of remedial actions to effectively manage such risks;
- Exercise of APRA’s formal enforcement powers where necessary to protect the interests of depositors, policyholders, superannuation fund members or the public interest generally; and
- Transparent engagement with stakeholders including timely briefings to government on financial system developments and on major items of policy interest emerging from APRA’s participation in international fora.
Criteria source: 2015/16 Portfolio Budget Statement
Results against performance criteria:
APRA formally reviews its policy priorities for development of the prudential framework on a biannual basis. This review includes considering the need to address existing and emerging risks, looking at both individual regulated institutions as well as the financial system as a whole. In 2015/16, APRA released a number of prudential standards and guidance documents, either for consultation or in final form, including:
- across a range of industry sectors, requirements and guidance on APRA’s expectations of boards, governance and risk management and outsourcing of shared computing services (e.g. cloud computing);
- for the banking sector, requirements and guidance in relation to capital, liquidity and securitisation;
- for the insurance sector, requirements and guidance in relation to the role of external experts; and
- for the superannuation sector, governance arrangements and reporting.
In 2015/16, APRA continued its proactive on-site and off-site supervision activities which sought to identify and evaluate material risks in regulated institutions at an early stage, and ensure that these are appropriately mitigated before they could pose a threat to the viability of the regulated institution or the stability of the financial system.
As a prudential regulator, APRA uses its formal enforcement powers less than traditional law enforcement agencies, preferring instead to focus on risk management practice and prevention measures. However, should an institution be unwilling or unable to take necessary corrective action, APRA uses its enforcement powers to protect the interests of depositors, policyholders and superannuation fund members. During 2015/16, APRA’s enforcement resources continued to support frontline supervision in the early identification of emerging risks, so as to minimise the need for more intrusive intervention at a later stage.
APRA also released a report on its investigation into the failure of Trio Capital Limited (Trio). As a result of APRA’s investigation into Trio, APRA removed 13 former Trio directors from the superannuation industry for specified periods of time.
Throughout the year APRA’s website remained up-to-date with consultation packages, speeches and information on other engagement with external stakeholders. APRA maintains regular and ongoing engagement with the Commonwealth Government, including through the Council of Financial Regulators, as discussed in the Annual Report.
Within APRA’s Corporate Plan, APRA has set out six strategic objectives designed to promote the achievement of its purpose. Results against these objectives are set out below.
Objective 1: Supervision
To protect beneficiary interests by responding in a timely and effective manner to significant risks at both institution and industry levels.
Performance criteria: Key indicators of APRA’s performance as an effective prudential supervisor are the extent to which APRA’s supervisory approach responds to changes in the risk profile of regulated institutions, and the extent to which the Australian community is exposed to loss through the failure of an APRA-regulated institution. These areas can be monitored through APRA’s risk rating system (PAIRS) and two key ratios: the Performing Entity Ratio (PER) and the Money Protection Ratio (MPR).
Criteria source: Corporate Plan
Results against performance criteria: PAIRS is used to rate, and 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. APRA monitors, benchmarks, and reviews the ratings assigned by its supervisors to ensure these remain consistent with underlying risks. All regulated institutions have a current PAIRS and associated SOARS stance, and these are regularly reviewed consistent with established targets based on risk and impact in accordance with APRA’s PAIRS/SOARS framework.
The PER is an indicator of the incidence of failure amongst regulated institutions. It is determined as the number of regulated institutions that met their commitments to beneficiaries in a given year, divided by the total number of regulated institutions. The higher the percentage, the lower the incidence of failure. For the 2015/16 year, the PER was 100 per cent.
The MPR is an indicator of the incidence of loss in the financial sector. It is determined as the dollar value of liabilities to beneficiaries in Australia in a given year, less any losses due to prudential failures, divided by the total dollar value of liabilities to beneficiaries in Australia in APRA-regulated institutions. The higher the percentage, the lower the incidence of loss. For the 2015/16 year, the MPR was 100 per cent.
Objective 2: Prudential Framework
To maintain a robust prudential framework that sets requirements for prudent behaviour at regulated institutions, founded on relevant international standards where appropriate.
Performance criteria: APRA is subject to the Government’s best practice regulation process administered by the Office of Best Practice Regulation (OBPR). This process involves a rigorous cost-benefit analysis of the impact of any proposed new regulation (and its alternatives) on different groups in the Australian community and on the community as a whole, including the publishing of Regulation Impact Statements. Adhering to OBPR processes provides an important foundation on which APRA can assess its performance in relation to this objective.
APRA’s prudential framework is also subject to a range of independent external assessments. The most comprehensive is the Financial Sector Assessment Program (FSAP) undertaken by the International Monetary Fund (IMF) every five years. There are also peer and thematic reviews undertaken periodically by international organisations such as the Financial Stability Board, the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors, which focus on particular aspects of the prudential regime or supervisory approach. These reviews provide objective and independent assessments against internationally-accepted benchmarks of APRA’s performance relative to international standards and overseas peers.
Criteria source: Corporate Plan
Results against performance criteria: APRA formally reviews its policy priorities for development of the prudential framework on a biannual basis. This review includes considering the need to respond to developments in international standards. During 2015/16, APRA fully met the OBPR requirements in its policy development activities. APRA consults with regulated entities, industry bodies and other interested parties prior to formulating or amending prudential policies or finalising prudential standards or reporting standards. An FSAP assessment is expected to be conducted by the IMF in 2017/18.
Objective 3: Failure and Crisis Preparedness
To materially strengthen our readiness for financial failure and crisis.
Performance criteria: Performance against this objective can be assessed through the progress that APRA, working with other arms of Government, has achieved in enhancing APRA’s statutory and prudential framework for managing failures and crises over the reporting period, and the extent to which APRA is assessed as having a framework for managing failures in a manner that meets its statutory objectives. This assessment is likely to be supported by FSAPs and similar peer review assessments of APRA’s compliance with international standards and practices over the four year period of the plan.
Criteria source: Corporate Plan
Results against performance criteria: Throughout the year, APRA undertook significant work on the Financial System Inquiry recommendations in relation to failure and crisis management in conjunction with the other Council of Financial Regulators agencies. Progress was also made on operational readiness by improving and testing APRA’s internal procedures, and working with the financial industry on contingency planning. APRA also continued work with Treasury to progress crisis-related legislative reform, in particular the Financial System Legislation Amendment (Resilience and Collateral Protection) Act 2016. An FSAP assessment is expected to be conducted by the IMF in 2017/18.
Strengthening failure and crisis preparedness requires commitment from both the public and private sector. APRA has given greater emphasis to, and expanded its resourcing in, this area of activity over the past year by diverting resources from other areas of activity. Investment in planning and contingency arrangements will also be required by industry and further significant progress on this objective is also contingent on the progression of legislative reforms.
Objective 4: People
To attract and retain highly skilled and engaged people, supported by strong leaders within a values-aligned culture.
Performance criteria: APRA monitors a wide range of measures in relation to the quality and capability of its staff. Particular indicators that are regularly monitored as part of APRA’s assessment of its performance against this objective include: total staffing numbers relative to budgeted levels, remuneration and turnover rates relative to long term benchmarks and comparable sectors, and the proportion of budget allocated to learning and development activities each year.
Criteria source: Corporate Plan
Results against performance criteria: In 2015/16, APRA’s Average Service Level (ASL) was 598.8 compared to the ASL updated budget for the year of 617.2.
APRA’s voluntary turnover rate in its operational divisions spiked in 2014/15 and remained somewhat elevated in 2015/16. APRA primarily recruits staff from, and loses staff to, the financial services sector. Relative remuneration levels and recruitment activity within the financial sector therefore significantly impact APRA’s ability to attract and retain staff. In recent years, declines in APRA’s relative remuneration positioning vis-à-vis the financial sector have created increasing challenges for APRA in maintaining the quality of its workforce and building new capabilities.
APRA has a range of targets for key result areas pertaining to leadership (these include staff retention rates, performance against desired characteristics and behaviours, staff management and development, and progress against diversity targets). While these targets were largely met, further investment will be undertaken in coming years. In 2015/16, expenditure on external training for APRA staff was $1.7 million, in line with the budgeted level of training expenditure. This equated to approximately $4,088 per FTE. In addition, significant in-house training continued to be provided to APRA staff, with particular focus on enhancing leadership and management capability as well as upgrading technical and specialist skills.
Objective 5: Organisational management
To have robust and efficient organisational processes and infrastructure supporting our core functions.
Performance criteria: Progress on APRA’s move to new Sydney premises to occur in 2016/17, a replacement of its primary data systems (D2A) and APRA’s internal Data Transformation program and Information Management processes, will be of particular relevance to APRA’s continued capability to deliver on its mission and objectives.
Criteria source: Corporate Plan
Results against performance criteria: APRA successfully transitioned to secure managed data centre facilities in early 2016. Following this, APRA moved to its new Sydney premises in June 2016. This move was complemented by an upgrade to APRA’s desktop technology to support enhanced collaboration and workplace efficiencies. The information management project was also significantly progressed during the year, although it was not completed during 2015/16 as planned (rollout of the first phase of the project is expected from late 2016). Finally, a multi-year data transformation program has been initiated which includes a replacement of APRA’s current data collection system (D2A), and enhanced public access to the data collected by APRA.
Objective 6: Transparency and accountability.
To be accountable for our performance by being transparent in our communication and effective in our engagement with stakeholders.
Performance criteria: APRA will assess its performance in relation to this objective based on its compliance with relevant requirements over the reporting period and stakeholder views articulated in APRA’s biennial stakeholder survey report.
Criteria source: Corporate Plan
Results against performance criteria: APRA undertakes extensive stakeholder engagement, including consultation in relation to developments of the prudential framework and as part of supervision. Further details on APRA’s engagement with stakeholders throughout the year are provided in Chapter 6 of APRA’s 2015/16 Annual Report. APRA’s compliance with relevant requirements over the reporting period, including the PGPA Act, have been met. The most recent stakeholder survey results were published on APRA’s website in 2015; the next survey will be undertaken and published in 2017.
Analysis of performance against purpose
APRA’s corporate plan is set each year with a view to effective delivery of its purpose, with a four year planning horizon. In this context, the 2015/16 Corporate Plan set six key objectives. Performance against each of these objectives has been analysed in this Statement.
Beyond the specific objectives noted in the Corporate Plan, APRA’s broader mandate establishes APRA’s purpose. In performing and exercising its functions and powers, APRA is to balance the objectives of financial safety and efficiency, competition, contestability and competitive neutrality and, in balancing these objectives, is to promote financial system stability in Australia.
APRA does not pursue a ‘zero failure’ target. 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’s performance throughout 2015/16 has continued to support the protection of the interests of depositors, policyholders and superannuation fund members as evidenced by the PER and MPR.
The Australian financial system is in broadly good health. This reflects the long-running strength of the domestic economy. However it also reflects a prudential framework that has continually evolved and been strengthened in a number of important areas, particularly in response to lessons from the global financial crisis. A great deal of APRA’s policy development work is directed towards establishing an appropriate balance between financial safety and other considerations, including regulatory costs. Chapter 3 of APRA’s 2015/16 Annual Report provides further discussion on the financial stability, efficiency and competitiveness of the prudentially regulated sectors.