Opening to Senate Economics Legislation Committee- February 2019
Wayne Byres, Chairman - Senate Economics Legislation Committee, Canberra
Before I do, however, I should note that although the Royal Commission has assigned some important new responsibilities to APRA, our primary responsibility remains the safety and stability of the financial system, to protect the financial well-being of the Australian community. APRA is the only regulator with a primary focus on ensuring the safety and soundness of the financial system.
It is therefore important to reiterate at the start of this morning’s hearings that Australia’s financial system remains fundamentally sound. While there are areas where the financial sector clearly needs to make significant changes and improvements, the soundness and stability of the financial system has never been called into question by the Royal Commission.
Royal Commission into Misconduct
More broadly, many of the recommendations made within the Report, and supported by the Government, are consistent with submissions APRA made to the Commission. This includes:
- the importance of preserving the ‘twin peaks’ regulatory architecture, and APRA’s prudential mandate;
- a broadening of the Banking Executive Accountability Regime (BEAR) to other industries; and
- a strengthening and realignment of regulatory powers by the Parliament to provide a greater role for ASIC in superannuation.
Within the Final Report, 12 specific entity matters were also referred to APRA for potential further enforcement action. After the Commission’s Interim Report, APRA began reviewing evidence on these matters as it came to light and, where necessary, commencing additional enquiries and investigations. I note that none of the potential breaches of the law or prudential standards that have been referred to APRA carry civil or criminal penalty provisions directly, although other avenues to impose sanctions may be available depending on the specific circumstances.
The Royal Commission report also reinforces the importance of establishing appropriate accountability mechanisms for regulatory agencies. APRA has always acknowledged that high degrees of independence must be matched with strong accountability. At present, APRA is subject to a range of accountability mechanisms that allow the Parliament to oversee APRA’s activities.[1] The proposed new permanent oversight body for APRA (and ASIC) provides an opportunity to reflect on the manner in which the performance of regulators is assessed and reported to the Parliament, and ideally will allow for existing mechanisms to be made both more effective and more efficient.
FSAP
During the course of 2018, the Fund’s Financial Stability Assessment Program (FSAP) conducted an extensive review of Australia, focused heavily on APRA’s regulatory and supervisory approaches with respect to its core prudential mandate. Amongst other things, the review benchmarked APRA against internationally accepted benchmarks for effective supervision, and is expected to be published shortly.
Superannuation
Number of APRA-regulated funds with more than four members
Corporate | Retail | Industry | Public Sector | Total | |
---|---|---|---|---|---|
Jun 2008 | 143 | 239 | 62 | 22 | 466 |
Jun 2009 | 106 | 227 | 59 | 22 | 414 |
Jun 2010 | 85 | 203 | 58 | 22 | 368 |
Jun 2011 | 71 | 190 | 53 | 22 | 336 |
Jun 2012 | 64 | 179 | 51 | 21 | 315 |
Jun 2013 | 50 | 163 | 46 | 20 | 279 |
Jun 2014 | 42 | 145 | 43 | 19 | 249 |
Jun 2015 | 34 | 141 | 42 | 19 | 236 |
Jun 2016 | 29 | 133 | 41 | 19 | 222 |
Jun 2017 | 26 | 120 | 40 | 18 | 204 |
Jun 2018 | 24 | 118 | 38 | 18 | 198 |
Change | -119 (-83%) | -121 (-51%) | -24 (-39%) | -4 (-18%) | -268 (-58%) |
Over the past year, APRA has upped the ante in this area through our Member Outcomes project. This has two complementary streams of work: using data analytics to direct greater supervisory intensity on those funds identified as underperforming, and enhancements to the prudential framework more broadly that aim to continually raise performance across the industry.
The former uses a range of metrics to identify funds that seemed to be delivering poor outcomes for members across a number of dimensions. An initial group of funds – 28 in total – were identified for more intensive review, and the trustees of these funds were challenged directly to justify how they were delivering value for members. Of these, 13 have looked at the evidence and have exited or are exiting the industry, and another seven have changed product pricing or fees in some way to make their offerings more competitive. Of the remainder, five were deemed on further exploration to have better performance than first appeared, and actions in relation to the other three are expected to be agreed shortly.
In December 2018, APRA released new prudential requirements that set a higher bar for RSE licensees by requiring a robust assessment of the outcomes delivered for members to be reflected in their strategic and business planning. Importantly, the reforms apply equally to MySuper and choice products. They are aimed at looking beyond fund-level performance, to cohorts of members – a deeper dive into the way an RSE licensee operates and how its decisions impact members.
Against that backdrop of continuous work to improve member outcomes in superannuation, APRA very much welcomes the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017. The Bill provides a much needed and long-awaited strengthening of the legislative framework by, amongst other things:
- introducing an outcomes test for both MySuper and choice products;
- introducing the potential for civil and criminal penalties on directors of RSE licensees who in future fail to act in the best interests of members;
- enabling APRA to prevent a change in ownership of an RSE licensee;
- aligning APRA’s directions powers in the superannuation industry with its broader directions powers in the banking and insurance industries; and
- providing APRA with the power to obtain much more information on expenses incurred by RSEs and RSE licensees in managing their funds.
Further consolidation in the industry is a likely product of this work. It is difficult to argue that Australia needs as many as 200 superannuation funds or 40,000 plus investment options. But that well-worn adage remains true: past performance is not necessarily a good guide to future performance. We also need to ensure that new competitors to the marketplace, who will inevitably start without a track record and potentially high costs until they can generate scale, are not prohibited from entering the system. For those reasons, we continue to advocate an approach that looks at performance of trustees across a number of dimensions, and does not rely solely on measures of historical returns over a particular time horizon as the only determinant of success or otherwise.
BEAR
As noted earlier, APRA is supportive of the Royal Commission’s recommendation that the BEAR be extended to apply to all APRA-regulated entities. Consistent with our submissions to the Royal Commission, APRA is also supportive of expanding the regime to more explicitly address misconduct, and in doing so provide for an explicit role for ASIC under the regime. This will largely mirror the Senior Manager Regime in the UK, and provide a clearer and more comprehensive set of accountability obligations across the financial sector.
Housing
As the Reserve Bank Governor noted recently, a correction in prices in the major markets was probably inevitable after a period of such rapid increases. That it is happening at a time of solid economic growth and relatively low unemployment is undoubtedly helpful. While housing credit growth is slowing, it is not, as sometimes presented, solely a matter of supply. It also reflects a range of other factors, including a natural reduction in the demand for new credit at a time of declining prices, and when existing household debt levels are already very high. Banks remain willing to lend, and continue to provide competitive offers to the market: as a number of banks have noted, while approval timeframes may have lengthened and maximum loan amounts reduced, neither approval rates nor loan sizes have materially declined.
APRA’s focus in recent years has been to ensure that prudentially regulated lenders were well-positioned in advance to manage the inevitable softening of the market. The sounder lending standards and robust capital positions that have been put in place in recent years have positioned the banking system to withstand the adjustment process. As we have said on many occasions, sound lending standards need to be applied through the cycle, regardless of whether housing prices are rising, falling or moving sideways.
Much of the heavy lifting on lending standards was done in 2015-2017, as a stronger focus on serviceability assessments was progressively built into the system. During 2018, we therefore removed the two temporary benchmarks we had established on investor lending growth, and the share of interest only lending, as they had served their purpose. Only a few ADIs, which have yet to give the necessary assurances we sought regarding their lending standards, remain subject to these benchmarks (although in most of those cases they are not binding).
Footnotes:
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The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, mutuals, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding around $9 trillion in assets for Australian depositors, policyholders and superannuation fund members.