The Australian Prudential Regulation Authority (APRA) has published its plans to scale up significantly its efforts to lift standards of governance, culture, remuneration and accountability (GCRA) across the industries it regulates.
In an information paper released today, APRA has set out a more intensive regulatory approach to transform GCRA practices across the prudentially regulated financial sector, in line with a key commitment made in APRA’s 2019-2023 Corporate Plan.
APRA’s intensified approach to GCRA aims to strengthen the resilience of financial institutions, including addressing, and ideally preventing, issues such as poor risk governance, misaligned incentives and misconduct that have undermined public confidence in the financial sector over recent years.
The key attributes of APRA’s new approach to GCRA are:
strengthening the prudential framework in areas such as remuneration and risk management, and incorporating the wider use of risk governance declarations and self-assessments;
sharpening APRA’s supervisory focus by increasing internal resourcing and capabilities for GCRA supervision, adopting new tools to assess GCRA practices and holding entities more forcefully to account when deficiencies are identified; and
sharing APRA’s insights to better inform industry and the public about APRA’s work, promote better GCRA practices, and drive greater accountability among boards and management.
The new approach builds on a program of work that APRA commenced in 2015, including APRA’s thematic reviews of risk culture and remuneration, the Prudential Inquiry into the Commonwealth Bank of Australia, and the results of the subsequent self-assessments of a range of large financial institutions. It also responds to recommendations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) and the APRA Capability Review.
APRA Deputy Chair John Lonsdale said lifting GCRA practices was an essential step in restoring community trust and confidence in the financial system.
“Australia’s banks, insurers and superannuation licensees are financially sound and resilient, but a strong balance sheet alone is not enough for institutions to remain in good prudential health,” Mr Lonsdale said.
“Although governance, culture, remuneration and accountability are often termed ‘non-financial risks’, a failure to address weaknesses in these areas can cause major financial losses through reputational damage, fines and expensive remediation programs. Remediation costs relating to issues identified in the Royal Commission have cost industry in excess of $7 billion to date, and are likely to rise further as both new and historical issues come to light.
“Last year’s risk governance self-assessments made clear that industry was grappling to manage GCRA risks, many of which were well-known and long-standing. Although boards are ultimately responsible for GCRA within their institutions, we have concluded that a higher degree of regulatory prescription and oversight is needed to achieve the requisite improvement in GCRA practices and community outcomes.”
Mr Lonsdale said APRA would reinforce its tougher new approach with a degree of transparency that will be at the forefront of practice among peer regulators internationally.
“APRA is committed to harnessing transparency as a tool to drive better prudential outcomes. Over coming years, our enhanced GCRA team will undertake a range of GCRA-related thematic reviews and deep-dives, as well as utilise entity self-assessments and industry-wide surveys. Our intention is that the results and findings of these be published to the fullest extent possible.
“We believe that using transparency to increase scrutiny and accountability will help ensure GCRA is a higher priority for boards and management, and make it more likely they will act to identify and address weaknesses at an early stage,” Mr Lonsdale said.
The information paper on APRA’s approach to GCRA is available below: