APRA in 2019: An evolving approach, a consistent purpose
John Lonsdale, Deputy Chair - FINSIA “The Regulators” event 2018, Melbourne
Good afternoon, and thank you for inviting me to speak alongside my regulatory peers as we preview our agendas for the year to come.
Having only joined APRA last month, this is my first official speaking engagement as a prudential regulator, but it’s not my first public appearance in this role. That took place last month when I joined the other APRA Members – Wayne Byres, Helen Rowell and Geoff Summerhayes – at Senate Estimates.
In his Opening Statement, APRA Chairman Wayne Byres emphasised that Australia’s financial system remains fundamentally sound. In other words, bank depositors can be confident their money is safe; insurance policyholders can be assured that insurers have the resources to pay valid claims; and superannuation fund members can be assured their savings will be protected. It can be easy to overlook how important the stability of the system and resilience of financial institutions are for consumers. We need to go back to 1991 to find the last time Australia’s economy contracted for two or more consecutive quarters and the last time any APRA-regulated financial institution failed was 2011.
But no summer lasts forever. We have had 27 years of continuous economic expansion in Australia with a financial system that is very financially sound. Part of APRA’s business is not assuming that this continues indefinitely and thinking about what it would mean to have a new period of economically cooler conditions. It’s vital to be prepared, and over the coming year, APRA will continue to focus on policies and actions aimed at ensuring banks, insurers and super funds are well-placed to withstand any potential period of tougher economic conditions.
A new structure
Before outlining APRA‘s top strategic and policy priorities for 2019, I’d like to briefly touch on how my appointment as the new APRA Deputy Chair will affect responsibilities in our Executive Group. APRA has had a three person executive since 2003 – a Chairman, Deputy Chair and Executive Board Member – each with primary responsibility for one area of industry oversight. Wayne has responsibility for authorised deposit-taking institutions (ADIs), Helen for superannuation and Geoff for life, general and private health insurance.
Rather than concentrate on one part of the industry, my role will be focused horizontally across all the sectors we regulate. Although I am taking on some Member-level responsibility for ADIs, and implementing the Banking Executive Accountability Regime (BEAR), Wayne has asked me to look at recovery and resolution preparedness, crisis management and reviewing APRA’s approach to enforcement more generally. I have also been tasked with leading efforts to strengthen APRA’s relationship with other regulators, including the Australian Securities and Investments Commission (ASIC), the Australian Competition and Consumer Commission (ACCC) and AUSTRAC. Most of these initiatives have been in train for some time, but the expansion of the executive group allows me to concentrate APRA’s attention on these issues.
The year ahead
A key priority for APRA over the first three months of 2019 is the review of our enforcement strategy. The review will make recommendations on which enforcement issues APRA should consider acting on, what factors we should take into account, and whether there are any practical or legislative impediments to us pursuing a stronger approach. The review will be supported by an External Advisory Panel of experts and will be presented to APRA members at the end of March 2019. In the interests of transparency, we will make the final recommendations public along with APRAs Enforcement Strategy after consideration by the APRA Members.
Without pre-empting the review, we have acknowledged the need to consider a stronger appetite for formal enforcement action, including giving greater weight to its strategic use as an industry-wide deterrent. We will, however, remain a supervision-led, rather than enforcement-led, regulator with a focus on pre-emptively tackling problems before they compromise an entity's ability to meet its obligations to beneficiaries, or rectifying adverse outcomes in the best interests of customers.
We are also re-examining cases of potential misconduct by regulated entities raised during the Royal Commission where the evidence presented was either new to APRA or contradicted what we had previously been told. That process will continue into 2019, and may well lead to formal enforcement action, should we deem it warranted.
Continuing to administer and monitor the BEAR to ensure it is being followed and understood will be a key priority for us in 2019. We are actively making sure the regime is firmly embedded in the major banks – and preparing other ADIs to implement it – rather than assessing whether it is yet achieving its objectives. The information paper we released on BEAR last month was designed for that purpose. The review of our broader enforcement strategy will also encompass the BEAR.
With ADIs well on track to meet their “unquestionably strong” increased capital levels, 2019 will see APRA make further advancements towards implementing the final elements of the Basel III capital framework for ADIs. Where unquestionably strong is about “how much?”, the revised capital framework seeks to ensure the composition of banks’ capital appropriately targets the risks they face, including in relation to housing lending. This is a complex piece of work with many moving parts. A key component is rethinking how Australia's relatively more conservative capital approach can be explained to provide greater transparency about the strength of our banks and more flexibility in times of stress. Early next year we expect to consult on specific changes to the prudential standards, and we’ll have more to say about the capital framework revisions in coming weeks.
Next year will see APRA progress its work on developing a formal prudential framework for recovery and resolution. “Recovery” refers to a stressed institution taking steps to restore itself to a sound financial condition; “resolution” takes place when an entity is beyond recovery and APRA manages its orderly failure. Our ability to create such a framework has been enhanced by the recently passed legislation expanding APRA’s crisis management powers, which provided a clear basis to make prudential standards on resolution. These are powers APRA hopes never to need however possessing a strong framework to manage failures and crises is a critical component of a resilient financial system. Our proposal to require ADIs to lift their levels of loss absorbing capital, outlined in last week’s discussion paper, is designed to support this work. Consultation for the new framework will commence next year.
In superannuation, we expect to finalise our member outcomes package very soon, and the delivery of quality, value-for-money outcomes to members will be an ongoing focus in 2019. We remain engaged with the trustees of underperforming funds, and our position will be enhanced with passage of the legislation before Parliament giving us the power to direct licensees to take specific actions at an earlier stage – including merging or winding up should that be in the best interests of their members. We welcome recent comments from the Assistant Treasurer that he intends to bring on that legislation for debate imminently.
Next year, APRA will also move towards further aligning the capital framework for private health insurance (PHI) with that used in life and general insurance and you will be hearing more about this issue soon.
Finally, it goes without saying that APRA keenly awaits the final report of the Royal Commission. Both the report, and the Government’s subsequent response to its recommendations, will become high priorities for us once they are made known, and we are confident that the financial system will ultimately emerge stronger from the scrutiny.
Let me finish on a personal note: I may be new to APRA, but during my three decades at Treasury, I saw, at close quarters, the devastating impact of the disorderly failure of a financial institution. Life savings are lost, dreams are shattered, and families are left broken. Those experiences will guide me, and keep me focused, now that I share responsibility, with my APRA colleagues, for trying to stop it happening in APRA’s space.
APRA is continually evolving its approach to supervision, but its primary mandate will not change – ensuring the safety and stability of Australia’s financial system so that the entities we regulate, under all reasonable circumstances, can fulfil their promises to their beneficiaries.
Australia’s unprecedented period of uninterrupted economic growth may have years yet to run. We hope it does. But when our economic summer inevitably ends – and winter, autumn or just an unseasonal cold snap arrives – the work that APRA is undertaking means Australians can be confident that the financial institutions they rely on are resilient, and their money is well protected.