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APRA proposes updates to related parties framework for ADIs

The Australian Prudential Regulation Authority (APRA) has today proposed changes to requirements for authorised deposit-taking institutions (ADIs) in managing risks from associations with related parties.

In a discussion paper released for consultation, APRA outlined revisions to Prudential Standard APS 222 Associations with Related Entities, and the associated reporting standard, ARS 222.0 Exposures to Related Entities.

The prospective changes seek to update and, where possible, streamline longstanding requirements and ensure APS 222 aligns with last year’s changes to Prudential Standard APS 221 Large Exposures (for exposures to unrelated parties of an ADI) and the changed operating environment.

Deficiencies in governance and internal controls in relation to related party dealings can lead to financial or reputational damage in one business affecting other parts of the business.

APRA’s proposals to modernise the framework include:

  • broadening the definition of related entities to include substantial shareholders, individual board directors and other related individuals;
  • explicitly addressing ‘step-in risk’ by incorporating guidance from the Basel Committee on Banking Supervision;
  • tightening certain limits on exposure to related entities in line with limits on exposures to unrelated entities in the revised APS 221 (which deals with exposures to unrelated parties);
  • removing the ability for certain overseas subsidiaries to be consolidated with the standalone ADI for prudential purposes; and
  • updating existing reporting requirements to align with the changes to the framework.

A three-month consultation period on the proposed revisions to APS 222 and ARS 222.0 has now commenced, with APRA accepting submissions until 28 September 2018. Subject to feedback received during the consultation period, it is envisaged the finalised framework will be implemented from 1 January 2020.

Copies of the discussion paper are available at: https://www.apra.gov.au/revisions-related-parties-framework-adis.

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $6 trillion in assets for Australian depositors, policyholders and superannuation fund members.

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