APRA's expenditure is incurred in implementing and enhancing the prudential framework in Australia and in its ongoing supervisory and enforcement activities. APRA's income derives mostly from annual levies on its supervised entities.
APRA's total operating expenditure in 2011/12 was $121.1 million compared with the (adjusted) budget of $116.9 million. The overrun reflected the impact of the lower 10-year government bond rate on the valuation of employee liabilities, as well as higher expenditure on enforcement related matters. Following the transfer of the early release of benefits function to the Department of Human Services in November 2011, APRA's expenditure and income budgets for 2011/12 were reduced by $2.7 million.
Following a build-up in supervisory numbers and capacity in the early stages of the global financial crisis, APRA's operating expenditure has remained fairly stable over the past three years. Further, relative to the value of assets supervised by APRA, costs have remained at about three cents per $1,000 of assets supervised.
APRA's total income in 2011/12 was $118.6 million compared with the (adjusted) budget of $113.1 million.
In addition to levies collected from supervised institutions, APRA's income includes interest earnings, fees for services and miscellaneous cost recoveries. Also included in 2011/12 revenue was the final $9.0 million instalment of a Special Appropriation from the Government to deal with the global financial crisis. In total, an additional $45.5 million was provided between 2008/09 and 2011/12 for this purpose.
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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 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 and small APRA superannuation funds that are levied at a flat rate. The levies collected by APRA also cover some costs of ASIC, the ATO and, following the transfer of the early release of superannuation benefits function, 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 to it.
The total levies collected by APRA for all agencies in 2011/12 were $131.0 million compared with the budget of $127.8 million. The $3.2 million over-collection of levies will be refunded to industry in 2012/13.
APRA had an operating deficit from ordinary activities of $2.5 million in 2011/12, which was funded out of retained surpluses. As a consequence, total reserves decreased to $28.7 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.
In August 2012, APRA launched its 2012-15 Strategic Plan, which consolidated progress under its previous strategic plan in an environment of continued uncertainties about global economic prospects and persistent bouts of turbulence in global financial markets. The Plan does not involve any major change in APRA's strategic direction but gives priority to successfully implementing major prudential policy reforms across the ADI, insurance and superannuation industries and to the continued development of APRA's supervisory capabilities. The Plan places strong emphasis on the importance of active supervision built on a solid base of understanding and knowledge of APRA-regulated institutions and industries.
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:
- ensure APRA's prudential framework is robust, empower supervisors and sets expectations of prudent behaviour by regulated institutions and their boards;
- supervise institutions with timely, risk-based, considered action;
- develop 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 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. The Plan itself will be reviewed each year in light of developments in APRA's operating environment.
Notwithstanding the increasing focus globally on the performance of supervisory agencies, useful objective indicators of supervisory intensity and effectiveness are proving elusive. 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.
Transition matrices 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'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 business plans or risk appetite makes that appropriate; APRA's strategy with such institutions is close monitoring and communication. APRA's expectation is that an institution in Mandated Improvement will take immediate and appropriate action that would, in a short timeframe, see it returning to an improved supervision stance or moving to Restructure. 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 five years, almost half of the institutions in Normal and Oversight remained in that stance. A significant percentage of the remainder of Oversight institutions either improved or exited the industry in an orderly manner. Around half of the institutions in Mandated Improvement have exited the industry while the others remained where they were or have moved towards an improved supervision stance. The majority of institutions in Restructure have remained in that stance, with all others exiting the industry.
Over the past nine years, a total of 222 institutions have been in Mandated Improvement and/or Restructure (of which 10 institutions moved through both SOARS categories). Of that total, 54 institutions have improved stance to Normal or Oversight, 20 have remained in their SOARS category , 142 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 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 2012, 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. This distribution has shown little change over the year
The second set of quantitative indicators of supervisory performance is linked to financial failures and losses to beneficiaries. APRA publishes two headline performance indicators:
- the Performing 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.
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.
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 $4,234.2 billion at end-June 2012.
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.