Thank you for the opportunity to speak to this Conference. I would like to summarise APRA’s activities and current priorities, touch in very general terms on proposals that could have us seeing see more of TCA members and; finally, some general observations on prudential supervision.
APRA was established in 1 July 1998, following a recommendation of the Government’s Financial System Inquiry, to be the single prudential supervisor of financial institutions in Australia. On that date we absorbed the supervision functions of the Insurance & Superannuation Commission and the Bank Supervision Department of the Reserve Bank - covering life and general insurers, superannuation funds and banks.
On 1 July 1999 we took over the supervisory responsibilities of the Australian Financial Institutions Commission and 8 state authorities for credit unions, building societies and friendly societies.
In all, we now oversee some 50 banks, 15 or so building societies, 210 credit unions, 150 general insurers, 40 life insurers, 45 friendly societies and 12,000 superannuation funds - including 8,000 so-called ‘Small APRA Funds’ that have fewer than 5 members. [One of the responsibilities we were happy to shed in the past year was the regulation of some 186,000 superannuation funds with fewer than 5 members and where each member was a trustee of the fund; this has been transferred to the Tax Office.]
In all, the prudential supervisory responsibilities of eleven separate agencies were brought together in APRA.
Not surprisingly, this has meant a lot of work on internal management and organisational issues in our short life, while continuing to supervise the great bulk of Australia’s financial system - about 85 per cent of the system’s assets.
While we inevitably lost some experienced people from predecessor agencies in setting up and restructuring APRA we’ve kept a strong core of experienced and talented people covering all the industries we supervise. We are also getting major benefits from mixing the skills and experience of staff from different professional backgrounds. And we are getting a big boost from the fresh ideas and energy of our new recruits.
In designing our organisation structure, work programs and supervisory processes, and in developing our culture, we aim to achieve the advantages that the Wallis Committee envisaged over the old system with separate industry regulators.
In brief, these advantages are:
- more flexibility in dealing with the structural evolution of the financial system;
- a more consistent approach to supervising similar risks and activities across the financial system;
- more effective supervision of conglomerate groups;
- clearer focus on prudential supervision; and
- lower supervisory costs for industry through both administrative economies and a risk-based allocation of resources.
We’ve made a substantial start on achieving these outcomes - but there remains much to do.
In relation to conglomerate groups, for instance, these now deal with a single "relationship manager" in APRA, and last year we issued for the first time a policy statement on the licensing and supervision of conglomerate groups that include a bank or other deposit-taker. A key innovation here is a set of criteria for accepting non-financial or commercial activities in such groups.
As an example of more consistency in supervisory requirements in September last year we issued a single set of harmonised prudential standards for all deposit-takers - from small credit unions through to the major banks.
The operating costs of prudential supervision for Australia’s financial institutions have fallen in both nominal and real terms with APRA’s formation. Around 550 people were engaged directly or indirectly in prudential supervision under pre-Wallis arrangements. Through administrative economies and more efficient methods APRA is operating with around 420. The aggregate running costs of prudential supervision have fallen from over $56 million in 1997/98 to $51 million this year.
Of course, it’s not easy to measure how successful we have been in achieving some of those other objectives I listed, and this will continue to be the case. It’s unfortunately, but unavoidably, in the nature of prudential supervision that our problems and failures - few as they might be - will get much more public attention than our achievements and overall success.
Much of APRA’s efforts is devoted to day to day prudential supervision of financial institutions. Half of our people are engaged in this.
We’ve completed a thorough review of the supervisory methods inherited from predecessor agencies and we are now introducing revised methods for rating and monitoring institutions that, as far as practicable, will be harmonised across industry groups and around the country.
For the institutions that came to us from the Financial Institutions Scheme, this has meant some adjustment - in particular getting used to some new regulatory faces and, in some respects, to a more rigorous and consistent supervisory approach. Basic prudential requirements have not been changed, but some compromises have been struck between the old FI Scheme and Reserve Bank requirements.
We are aiming to concentrate our resources on institutions and activities where the risks are greatest. Our risk-based approach to supervision means making the most effective use of scarce resources and minimising overall regulatory burden for industry.
We are also responsible for developing the policies and standards that underpin our front-line supervision work. I’ve already mentioned our comprehensive framework for supervising conglomerate groups that include banks and our single set of prudential standards for all deposit-takers.
We are well advanced on a major project that commenced in 1999 to review and modernise prudential supervision of general insurers. This has been a neglected area and it is long overdue for overhaul. Recent serious problems in the industry have only confirmed the high priority we attach to this project, and tomorrow we issue a revised package of reform proposals that take on board extensive industry consultation and road testing over recent months.
We’ve also established a group to investigate the various operational risks incurred by financial institutions - we are one of the first supervisors around the world to have a team dedicated to this area which covers risks arising from poor governance, electronic finance, outsourcing, inadequate business continuity planning and so on.
Finally, we’ve begun a reassessment of our approach to the superannuation industry - the number of participants, their diversity in size and sophistication and the "fuzziness" of our objectives sets this sector apart from the others.
In superannuation, of course, we have an important relationship with trustee companies.
The Superannuation Industry (Supervision) Act places prime responsibility for the prudent management of superannuation investments on the trustees of funds, while laying out various requirements and standards that are the basis of APRA’s supervision of the industry.
I noted earlier that, after the transfer of most DIY funds to the Tax Office we retain responsibility for about 8,000 Small APRA Funds (SAFs). Some members of the TCA are prominent among the Approved Trustees of SAFs and while these funds hold only around $2 billion of the total $500 billion in super, they account for a high proportion of the number of funds. We rely on their ATs for efficient management of SAFs, including the processing of annual returns and payment of supervisory levies that fund APRA.
As you know, there is a proposal that could have APRA becoming more involved with TCA members.
The Wallis Committee’s recommendation 90 in 1997 said that: "The States and territories should give urgent priority to establishing a modern, uniform national regime for trustee companies. The corporate trustee and fundraising business of trustee companies should continue to be regulated under the Corporations Law and Superannuation Industry (Supervision) Act 1993 regimes." The recommendation for a national regime referred to the functions of "estate management subject to State and Territory trustee law".
Accordingly, the Commonwealth/State agreement on the transfer of FI Scheme activities from the States to APRA in 1999 also contemplated that APRA might play a role in this national supervision of trustee companies.
The APRA Act was amended to provide that we may take on functions additional to those prescribed in Commonwealth legislation as a result of an agreement with a state or territory. This enables APRA to be contracted to provide "prudential regulation or advisory services" on a fee for service basis subject to approval by the minister.
An agreement of this kind may make provision in relation to the circumstances in which, and the extent to which, APRA is liable to the other party in respect of matters arising under or out of the agreement.
We have such an agreement with the relevant State governments for surveillance and reporting on housing cooperatives in Victoria and Tasmania - this doesn’t include advice on prudential standards. From our point of view, the arrangement is working smoothly and we manage it with a modest commitment of resources for which we are reimbursed.
The States have been considering a more uniform system for regulation of trustee companies for some years, and continue to do so. A number of models have been canvassed - one of which would introduce that role for APRA provided for in our legislation.
As I understand this model, each State would enter into a contract with APRA (or another prudential adviser) to:
- provide advice on licensing requirements and on prudential standards (which would still be set by Ministers); and
- to monitor compliance with standards and report on that. This monitoring would involve the analysis of regular reports from trustee companies; it could also include routine consultative meetings and on-site visits or inspections.
In this model, while APRA would have separate arrangements with each Minister, the aim would be uniform licensing and prudential requirements across the States.
I can say that we would have no problems in principle with such an arrangement. We certainly support a national approach to supervision in the financial sector.
In practice, we would be interested in the following issues:
- establishing clarity in the allocation of responsibilities to the various parties - Ministers, State administrators, other regulators who presently have an interest in certain parts of trustee companies’ business, eg ASIC in relation to managed funds offered to the public;
- at the same time, no matter how clearly responsibilities are defined, it would be important that we were able to work cooperatively and efficiently with the other key players;
- we’d seek opportunities to leverage off information already gathered in our role as supervisor of Approved Trustees of superannuation funds - and opportunities to enhance our oversight of these trustees with information collected in the new role;
- limitation on potential APRA/Commonwealth liability in performing services under the contracts; and
- agreement on a fair cost recovery formula for our services.
One of the clear messages from APRA’s brief history is the need for close co-operation with ASIC. This was recognised at the outset with the appointment of the Chairman of ASIC to the APRA Board. We also have two Board members from a the Reserve Bank. The benefit of having these agencies on the APRA Board shows through in giving us a perspective on the whole financial system and in dealing with operational matters. ASIC has responsibilities for ensuring that consumers are adequately informed about the financial decisions they need to make and are treated fairly by the financial entities with which they deal. APRA supervises the financial condition of most of these financial entities.
The need for close co-operation between ASIC and APRA is clearest, unfortunately, when something goes wrong. Financial entities which get themselves into a position where they are unable to honour the promises they have made to customers are fairly obviously going to require the attention of both of us.
So, at an operational level we have a range of co-ordination points with ASIC. Our regional staff and our enforcement staff regularly share matters of common interest and our senior officers get together every few months with a policy agenda. Matters involving APRA-supervised entities that are likely to finish up in court seem invariably to require joint work by our two organisations.
Superannuation is the area where the respective roles of APRA and ASIC need the most careful explanation. Many of the investments chosen by superannuation funds are equally available to the general public for their non-superannuation investments. And then there are issues relating to the disclosure by trustees to the members of their funds which are the responsibility of ASIC even though APRA is the prudential supervisor.
I say all this since it would be fairly obvious to you that a bigger role for APRA in the supervision of trustee companies would sharpen your interest (and ours) in where the line is drawn between APRA and ASIC’s responsibilities. This line is not always going to be painted in "brilliant white", but be assured that we work very hard with our ASIC colleagues to avoid both overlaps and underlaps.
As to the sorts of prudential standards that might emerge under a revised quasi-national system on which APRA advised, I expect they would cover things like gearing ratios, liquidity, intra-group transactions, the nature of investment strategies and the quality of risk management systems generally.
Licensing criteria would presumably involve "fit and proper" tests for owners and managers, availability of sufficient capital and possibly restrictions on concentration of ownership.
No doubt consideration would be given to "grandfathering", at least on a transitional basis, where existing and proposed features were out of line.
There could well be a trade-off between stringency of entry criteria and the intensity of supervision that was deemed necessary for participants.
But I’m getting well ahead of myself here. I suspect there is quite a way to go yet with Government consideration of options and with industry consultation before we get to the detail of new licensing rules or standards - and exactly what APRA’s role in those might be.
Let me close my remarks by noting that, in the event APRA was asked to become involved in prudential regulation of trustee companies, we would draw heavily on hard learnt lessons from our experience with other parts of the financial system.
This brings into the picture such challenges as:
- the need for prudential supervision to strike an appropriate trade-off between securing absolute safety at any cost and the desirability of leaving room for risk-taking, innovation and contestability in financial markets;
- the need to select an appropriate point on along the spectrum between a consultative/cooperative relationship with industry at one end, and regulatory/ inquisitorial approach at the other – moreover, experience tells us that the right balance here can change from institution to institution and from sector to sector, and it can change over time with the one institution; and
- understanding that fine judgments often need to be made about the timing, and vigour, of public intervention by a prudential supervisor in the affairs of a troubled financial institution.
No doubt we will have occasion to think and say more on these themes in months ahead.