Let me start, Chair, by congratulating you on your appointment to lead this Committee. And on a similar note, I’d also like to introduce Geoff Summerhayes, who was appointed as the third APRA Member from 1 January this year and is therefore making his first appearance before this Committee. Geoff will direct our work on insurance related matters - life insurance, general insurance and private health insurance – as well as having responsibility alongside Helen and myself for APRA’s overall strategy and approach.
I thought I’d start by briefly updating the Committee on the position of the Australian financial sector in light of recent volatility in global financial markets. In short, and as I noted in our recent appearance at Senate Estimates, Australia continues to benefit from a sound financial system. Financial market developments are certainly something we are keeping a close eye on, and there are no grounds for complacency given the global outlook, but the volatility in equity markets and increases in credit spreads in recent months are well within the capacity of the Australian financial system to handle without any significant stress.
APRA’s regulatory agenda for 2016 is heavily influenced by the recommendations of the Financial System Inquiry (FSI). In banking, an important focus will be on how we refine the prudential framework for the deposit-taking sector that delivers on the FSI’s recommendation for ‘unquestionably strong’ capital ratios. In doing this, we need to be mindful of the still-evolving international regulatory framework, but as things stand today we should be in a position around the end of the year to set out how an ‘unquestionably strong’ framework will be achieved. Actual implementation of any changes will occur in an orderly fashion over the following couple of years.
We also have important pieces of work underway in relation to securitisation and bank funding:
- we are currently consulting on proposals for a simpler regulatory framework for securitisation, which we envisage will not only provide an appropriate set of prudential requirements, but also help re-establish a more resilient securitisation market; and
- in the next few weeks, we will commence formal consultation on the Australian implementation of the Net Stable Funding Ratio (NSFR). The NSFR is a new international standard designed, in simple terms, to discourage banks from becoming overly reliant on volatile short-term borrowing when funding illiquid assets. Australian ADIs have necessarily strengthened their funding profiles relative to the pre-GFC period: to the degree the NSFR will reinforce and continue this trend, it will also help contribute to the FSI’s objective of ‘unquestionably strong’.
Our supervisory work on lending standards for housing will continue in 2016. Housing lending continues to grow at a solid rate – around 7 per cent per annum – but there is a compositional shift occurring as investors are less prominent and owner-occupiers account for a greater share of new lending. Importantly from our perspective, serviceability assessment standards have improved across the industry, although we still have further work to do to ensure improved lending policies are fully implemented, monitored and enforced.
Turning to superannuation, there are three areas that will receive particular emphasis in 2016.
Firstly, the robustness of strategic and business planning being undertaken by boards. In a rapidly evolving environment, superannuation trustees need to have in place robust processes for setting their strategic direction, establishing business plans, and reviewing their operations, services and performance against appropriate benchmarks. This is an area where we observe industry practices can be improved.
Second, we will also be looking at board appointment, renewal and performance assessment processes, with a view to highlighting better practices, as well as areas where improvements are required in line with accepted principles for sound governance.
And third, APRA will be following up our 2014 work on conflicts management, which identified oversight of related party arrangements as a particular area of weakness in superannuation industry practices. Although it did not refer any specific matters to APRA, similar issues were identified by the Royal Commission into Trade Union Governance and Corruption. We will therefore be reviewing more deeply – for a sample of funds across all industry segments - practices in relation to the management and oversight of different types of related party arrangements. This work will assess the extent to which issues we highlighted in our 2014 review have been addressed, and identify where further improvements in practices are still needed.
In the area of insurance, there are a couple of issues of note:
- The Committee would be aware that APRA took over the prudential supervision of the private health insurance (PHI) sector from PHIAC in July last year. Internally, the integration of the two agencies is well advanced. We also plan, by mid-year, to release a roadmap to private health insurers for the alignment, where appropriate, of the PHI prudential framework with those that apply to other sectors that APRA supervises. This work will occur progressively over the next few years.
- In general and life insurance, we are currently conducting stress testing with a selection of life insurers and, in a separate exercise, general insurers to see how the industry responds to a severe economic and liability shock. And in addition to APRA’s ongoing focus on the prudential soundness of the life insurance industry following a period of underperformance, we have also engaged with the efforts to improve the standards, performance and sustainability of the industry: there has clearly been a gap between community expectation and industry practice that needs to be closed.
Finally, an issue that we are delving into across all of the industry sectors that APRA supervises is culture.
Our interest in culture reflects our prudential mandate: a good culture helps protect against poor outcomes. Our work is primarily directed to detecting the potential for the financial institutions we supervise to be badly mismanaged, such that they put their own viability at risk. Although we’re not the lead regulator when it comes to instances of consumers being unfairly treated, we are very interested in what those episodes tell us about the culture within financial institutions, and the extent to which incentives might be operating to encourage imprudent behaviour. A little over twelve months ago, we also instituted a new standard that, amongst other things, introduced an explicit requirement on Boards to form a view about the risk culture of their institutions, assess whether it was consistent with their strategy and risk appetite, and – if they felt change was needed – ensure something was done about it. While we would observe that Boards are giving more attention to issues of culture, I think it also fair to say that they are still grappling with how best to do this in a robust and systematic manner.
With that overview of our activities, my colleagues and I would now be happy to take your questions.