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Member Therese McCarthy Hockey’s remarks to COBA CEO and Director Forum

Good morning. It’s great to join you once again for my second COBA CEO and Director Forum. Events such as this and the COBA Convention later in the year present a valuable opportunity to outline our thinking in important areas relevant to the mutual banking sector – but also to hear what matters to you.

As a risk-based financial safety regulator, proportionality is central to everything we do at APRA. In supervision, it means we devote more time and resources to monitoring entities that pose a greater risk – either because of their systemic significance or because we have concerns about their prudential soundness. In the policy sphere, we need to strike a balance: ensuring there is at least a base level of financial and operational soundness across the industry, while incorporating other considerations such as efficiency and competition.

At a time when the global financial system is evolving rapidly, the array of risks banks need to identify and manage is growing in both scope and severity. This time last year, we saw a banking crisis in the United States emerge and spread internationally with unprecedented speed, facilitated by social media and online banking. The ongoing threat of cyber-breaches continues to expand and has only been exacerbated by the global scourge of scamming. The increasing role of digital technologies in financial services has increased the reliance of banks on third party parties. We had another reminder of the potential consequences of this only a week ago when the online banking app of one of the country’s biggest banks went down, leaving a trail of customers unable to access their funds or pay for goods and services.

Being forward-looking means anticipating changes in the threat environment and adjusting to new operating conditions. Rather than simply accepting the status quo,our response to these evolving risks has been to look at strengthening banks’ liquidity requirements and management of interest-rate risk, as well as introducing a new standard on operational risk management. From our conversations with COBA and its members, we know that banks understand the importance of ensuring these risks are properly managed and your customers adequately protected. But we also recognise that keeping pace with the introduction of new or updated regulatory requirements presents financial and resourcing challenges for the mutual sector that make it harder to compete with its larger rivals.

In the short time I have today before answering questions, I’d like to highlight some of the ways APRA has been and continues to address your sector’s concerns by easing the regulatory burden and enhancing proportionality where it’s safe to do so.

As a starting point, let’s take the newest regulatory requirement for banks to come into effect: the Financial Accountability Regime (FAR), which took force for the banking sector last week. Given that banks were already subject to the Banking Executive Accountability Regime (BEAR), the transition to the FAR doesn’t change much at a headline level, but – as always – the devil is in the detail; in this case, the work required to understand and comply with the Regulator and Transitional Rules, submitting applications to register new accountable persons, and complying with new or enhanced notification obligations. Last year, APRA was reflecting on the feedback from industry regarding regulatory burden. As the Minister Rules for the FAR were being finalised, we supported amendments to reduce unnecessary reporting burden by ensuring the definitions aligned with APRA’s own distinction between significant and non-significant financial institutions (SFIs and non-SFIs). While this was going through due process, we worked with ASIC to make accommodations for the FAR submissions so that banks would have additional time to complete the paperwork.

The introduction of the SFI/non-SFI definitions in recent years was an important initiative recognising the need for greater proportionality and consistency across our prudential framework. By embedding this distinction in prudential standards covering areas such as remuneration and resolution and recovery planning, we’ve been able to introduce more limited requirements for smaller institutions, commensurate with their lower systemic importance and complexity. With other prudential standards, such as CPS 230 Operational Resilience, we have intentionally incorporated proportionality by stating that we expect to see each entity to comply in a way that is commensurate with the size, business mix and complexity of its operations.

Enhancing the proportionality of the framework isn’t the only way we’ve sought to reduce the regulatory burden. As part of our corporate planning process in 2021, we also set about looking at our prudential rule book and considering whether it remained fit for purpose. Through our Modernising the Prudential Architecture (MPA) initiative, we saw an opportunity to make our framework simpler and easier to interact with, rationalise the sheer number of policies, and make it easier to access digitally. The next major MPA initiative we have embarked on is an ambitious plan to publish a digitised Prudential Handbook. The Prudential Handbook, due out in coming months, will enable you to navigate the framework in a structured way, and search for a phrase across the entire framework to find a specific paragraph, making it easier to quickly find the requirements and guidance which is relevant to you.

As part of the MPA project, we developed a compilation of references for ADI directors designed to make it easier to understand their obligations. This led to a bit of a lightbulb moment for us when we found that it was 87 pages! This revelation led us to prioritise the review of our governance standard which is now more than a decade old. We have commenced work to review and update the standard and we will incorporate learnings, including those stemming from the Royal Commission, BEAR and FAR. But we are also thinking hard about what we really want board members to focus on and clarifying the boundary between directors’ and management’s responsibilities.  We will engage with industry from the middle of this year to help inform our thinking.

Complementing the MPA work is a commitment to enhancing transparency. A recent example of this is the Policy and Supervision Priorities document we published at the end of January. You may not have realised but the format of this document is unlike any previous version. In addition to combining our policy and supervision agenda in a single document, for the first time we consciously set out the rationale behind the initiatives alongside. Our hope is that the publication is now simpler to read and our agenda, easier to plan for.  We intend to continue this discipline with the release of our Corporate Plan later this year where, also for the first time, we will incorporate our annual policy and supervision priorities update. We’ve also put considerable effort into reducing data burden, especially for smaller players, by pausing and deferring several data collections and ceasing some ad hoc data collections.

Through our ongoing engagement with industry, including COBA members, we’re often reminded [and very aware] that APRA isn’t the only regulator issuing requirements that entities need to comply with. This brings me to the Government’s announcement in the past fortnight of the new financial sector regulatory grid. APRA’s welcomes this initiative, which we know is something COBA and its CEO Mike Lawrence have advocated strongly for. The truth is that all of us in the regulatory arena understand the importance of coordinating our initiatives, both in terms of timing and impact. Australia’s main financial regulators already engage frequently to coordinate our initiatives in line with our respective mandates. Where the new grid can hopefully assist is to formalise and clarify some of the planning already taking place. While the details are yet to be worked through, we look forward to working with the Government, Treasury and our regulatory peers to ensure the grid delivers the benefits industry is looking for.

So as I wrap up, my closing message is that proportionality will remain central to everything that we do as a prudential regulator, but we make no apologies for leaning into risk areas where required. We will continue to evolve our approach and prudential framework in response to new risks and changes in the operating environment, which is exactly what the community expects from us. Your challenge as mutual banks is much the same: to understand the risks to your businesses from factors such as new rivals, technological innovation and evolving consumer preferences – and make sure you are equipped to respond in a way that keeps your bank strong, safe and sustainable for the long-term.

And with that, I am happy to take your questions.

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.