APRA releases consultation package for the supervision of conglomerate groups (Level 3)

The Australian Prudential Regulation Authority (APRA) has today released for consultation proposed requirements for the supervision of conglomerate groups (Level 3 groups). The consultation package includes a response to submissions received on its March 2010 discussion paper and eight draft prudential standards.

Conglomerate groups, referred to as Level 3 groups, are groups comprising APRA-regulated institutions that perform material activities across more than one APRA-regulated industry and/or in one or more non-APRA-regulated industry.

APRA’s proposed Level 3 framework will assist it to ensure that its supervision adequately captures the risks to which APRA-regulated institutions within Level 3 groups are exposed and which, because of the operations or structures of the group, are not adequately captured by the existing prudential arrangements for stand-alone entities (Level 1 supervision) and single industry groups (Level 2 supervision).

APRA’s proposed Level 3 framework consists of four components: group governance, risk exposures, risk management and capital adequacy. The proposed overarching requirements of the framework are:

• a Level 3 group must have a robust governance framework that is applied appropriately throughout the group;
• the intra-group exposures and external aggregate exposures of a Level 3 group must be transparent and prudently managed;
• a Level 3 group must have an effective group-wide risk management framework in place; and
• a Level 3 group must have sufficient capital to support the risks of the entire group, including material risks that arise from non-APRA-regulated activities;

This consultation package focuses on the requirements for group governance and risk exposures.

APRA Chairman Dr John Laker said the introduction of a Level 3 framework in Australia is a significant evolution of APRA’s broader prudential framework.

‘One of the key lessons from the global financial crisis was the need to enhance supervisory regimes to better capture the risks facing regulated institutions that are part of a wider conglomerate group. APRA’s Level 3 framework addresses this need and, once implemented, will underpin a safer financial system in Australia,’ Dr Laker said.

Consultation on the proposed governance and risk exposure prudential standards closes on 1 March 2013.

Over the course of 2013, APRA will consult on its proposed Level 3 risk management and capital adequacy prudential standards as well as a set of prudential practice guides, reporting standards, reporting forms and instructions, and consequential amendments to other prudential standards that give effect to the Level 3 framework. The Level 3 prudential standards are expected to take effect from 1 January 2014.

The response paper and draft prudential standards can be found on the APRA website.