9 August 2019
Wayne Byres, Chairman – House of Representatives Economics Committee, Canberra
Thank you for the invitation to appear this afternoon.
This hearing is to formally inquire into APRA’s 2018 Annual Report, which was finalised almost a year ago. In that report, we highlighted APRA’s work to continue to build and maintain financial system stability and resilience, to strengthen governance in the superannuation sector, to build cyber security resilience, to drive better data-enabled decision-making within APRA, and respond to the scrutiny facing financial institutions after a range of incidents which eroded consumer confidence and trust.
However, a lot of water has passed under the bridge since that Report was published, so I thought that rather than delving into the Report I would focus on more recent developments.
APRA’s primary role is to maintain and protect the stability and soundness of the financial system and the institutions within it. We regulate a wide range of institutions across banking, insurance and superannuation and we are protecting about $6.5 trillion in assets for bank depositors, for superannuation members and for insurance policyholders.
The Committee should note that the Australian financial sector remains financially sound and resilient; on many financial metrics, the system is in good health. But we also should not take this for granted. There are a range of vulnerabilities domestically and internationally – macro (very low interest rates, inflated asset prices, slowing growth rates, high debt levels), industry (cyber attacks, technological disruptions), and political risks (Brexit, and global political and trade tensions), just to name a few – that mean we need to remain vigilant. It is not a time to rest on our laurels.
While APRA has continued to deliver on its core prudential mandate, the year has also been one of unprecedented review and scrutiny of institutions and regulators. Over the past 12 months or so, six important reviews and inquiries have examined various aspects of APRA’s activities and operations:
the IMF completed an extensive year-long review of the Australian financial system, focused heavily on APRA’s regulatory and supervisory approaches with respect to its core prudential mandate. Its report was published in February this year;
over the same period, the Royal Commission conducted its hearings and investigations into misconduct in the financial services sector, culminating in its report also released in February;
there were two Productivity Commission inquiries that have been published during the past year: Competition in the Australian Financial System in August 2018, and Superannuation: Assessing Efficiency and Competitiveness in January 2019;
APRA itself undertook a review of its enforcement activities and released a new Enforcement Approach outlining the future role and use of enforcement activities by APRA in achieving prudential outcomes. This new approach took effect immediately when we announced it in April; and
most recently, the report of the APRA Capability Review was finalised and published.
Collectively, these reviews have delivered more than 100 recommendations for APRA to consider, plus another 50 that potentially involve multi-agency work. While the focus of the various reviews has been different, broadly they have found APRA to be – in the words of the Capability Review – ‘an impressive and forceful regulator’ when examined in its traditional domain of financial risk. But they have noted that to be successful in the future significant new competencies and different approaches will be needed. I will come back to these reviews shortly.
APRA’s activities over the past year
Before looking ahead, I’d like to recap our main achievements over a busy past 12 months:
- Mortgage lending – APRA has overseen a substantial strengthening of mortgage lending standards across the prudentially regulated sector. This has allowed us to remove the temporary mortgage lending benchmarks on investor and interest-only lending that we instituted over the preceding years. We also amended guidance on the minimum interest rate floor that lenders use in borrower serviceability assessments, reflecting the very low interest rate environment that we are now in.
- Information security – We developed and finalised an important new prudential standard focused on information security management and updated guidance on cloud computing services. As the digitisation of financial services continues apace, the need for heightened information security and cyber resilience will also grow in criticality.
- Remuneration – A couple of weeks ago, we issued a draft prudential standard aimed at clarifying and strengthening remuneration and accountability requirements in APRA-regulated entities, responding – amongst other things – to the recommendations of the Royal Commission.
- Member outcomes in superannuation – Building on our work over the last few years to tackle underperforming funds and products, we are finalising a new prudential standard imposing heightened requirements on superannuation trustees to demonstrate how they are delivering good outcomes for their members. This heightened scrutiny means the industry continues to consolidate, with many funds electing to merge or otherwise leave the industry in response to heightened standards. And to ensure these standards are adhered to, we welcomed, and have already used, the new directions power granted to us by the Parliament in April this year.
- Unquestionably strong capital for ADIs – Our program of work to embed unquestionably strong capital ratios in the ADI sector, as recommended by the 2014 Financial System Inquiry, continued with the release of additional discussion papers on the proposed new framework. However, it is important to note on this point that APRA has ensured the ADI sector by and large already meets these new requirements, with risk-based capital ratios at an all-time high.
- Loss absorbing capacity for ADIs – Our work on capital strength is being supplemented by the completion of another FSI recommendation: that is, to institute requirements that oblige the largest ADIs to have additional loss absorbing capacity to facilitate, should a crisis occur, their orderly resolution and reduce the need for taxpayer support.
- BEAR – We have completed the roll-out of the BEAR to all ADIs, with more than 1,400 accountable persons now registered and subject to the BEAR’s heightened accountability obligations.
- Licensing – Our new licensing framework for banking has seen the granting of nine new ADI authorisations to five domestic and four foreign bank applicants.
- Life insurance claims and disputes – ASIC and APRA jointly released information and an online tool which allows policyholders for the first time to compare life insurers’ performance in handling claims and disputes, bringing much greater transparency to this issue.
- Private health insurance – We launched a review of capital requirements for private health insurers to ensure they remain sufficient to protect policyholders, having completed a program of review of the sector’s risk management and governance standards.
The Royal Commission, the Enforcement Review and the APRA Capability Review
Let me turn now to a few of recent reviews impacting APRA.
The Royal Commission’s Final Report made 76 recommendations, 10 of which were directed at APRA. These addressed APRA’s expanding role in governance, culture and remuneration, increasing engagement with ASIC, including greater shared responsibility for superannuation regulation, and making some adjustments to its prudential framework. The report also recommended that APRA should adopt a stronger stance on enforcement and referred 12 specific cases to APRA for review.
APRA accepted all the recommendations directed at it and this week published a report on our progress in addressing them. In short, all are on track to be delivered in the timeframes we committed to in February.
As I referred to earlier, we also released our new Enforcement Approach, as well as the review report that led to its development. APRA is not primarily an enforcement agency like ASIC, but we have committed to using our existing and new enforcement tools more quickly, particularly on uncooperative institutions, and to make this action more transparent where appropriate. Recent examples of the new approach in action are the announcements regarding directions against two superannuation trustees, the announcement requiring restatement of three banks’ funding profiles, the additional capital requirements for three major banks in response to risk governance shortcomings, and the fining of one institution announced yesterday for failing to meet reporting requirements. You can expect to see other announcements along these lines in the future.
APRA’s Capability Review kicked off in March this year, and the report was handed to the Government at end June. The goal of the review was to provide a forward-looking assessment of APRA’s ability to respond to an environment of growing complexity and emerging risks for APRA’s regulated sectors.
The Panel’s report recognised APRA’s as a high quality prudential supervisor that has successfully delivered on its core mandate – the financial safety of regulated entities and a sound and resilient financial system – over a long period of time. But it also said that APRA needed to expand its capabilities in a number of areas, and revise its approach in others. These included strengthening its own leadership capabilities and organisational structure; increasing resourcing and supervisory focus in governance, culture, remuneration and culture; giving greater prominence, and allocating more resources, to member outcomes in superannuation; and better communicating what it does and how it does it.
We supported all 19 recommendations directed at us; a further five are for the Government.
The Capability Review represents an extremely useful road map for the future. It quite rightly makes the point that APRA must adapt and evolve if we are to be successful into the future. We agree: many of the issues identified in the report are aligned with our published strategic plan, which had already acknowledged the need to broaden our risk-based supervision into new areas, to improve our data-enabled decision making, to build our resolution capability, to strengthen our external engagement and communications and to enhance our leadership, people and culture. The Capability Review, however, challenges us to go much further, harder and faster in many of these areas.
APRA has been clear from the outset that we support all of the Panel’s recommendations. Everyone at APRA takes the Review’s findings seriously, and we recognise the need to improve and adapt to remain an effective regulator in an increasingly complex financial environment. We have also made clear – as noted by the report – that for a number of them to be fully implemented, increases in funding, and/or changes to legislation or policy will be required.
Finally, I wanted to let the Committee know that APRA’s Corporate Plan will be released later this month with our updated strategy. The strategy will be focused on the activities and capabilities we need to do our job well. Aside from lifting our own internal capabilities, it will highlight four key outcomes that APRA is seeking to deliver to the community in the period ahead, and which I would expect this Committee will want to monitor our progress: maintaining financial system safety and resilience; improving outcomes for superannuation members; improving cyber resilience across the financial system; and overhauling governance, culture, remuneration and accountability within the financial sector.
With these remarks my colleagues and I are happy to answer any questions.