Opening Statement to the House of Representatives Standing Committee on Economics - October 2020
Wayne Byres, Chair – House of Representatives Standing Committee on Economics, Canberra
Thank you for the opportunity to appear today to provide the Committee with an update on APRA’s activities and to answer your questions.
Since our last appearance in August, amongst a lot of other activity, we have published both our 2019/20 Annual Report covering our activities for the past year, and our 2020-2024 Corporate Plan outlining our priorities for the future.
As this appearance is to discuss our Annual Report, I would like to quickly touch on some key messages from it.
2019/20 was, without doubt, a year of two distinct halves. Our Annual Report explains how we set out at the start of the financial year with a wide-ranging and ambitious agenda, but needed to quickly adjust our supervisory and policy priorities in early 2020 to respond to the crisis created by COVID-19. It was, in many respects, a crisis on two fronts: we had to swiftly shift our entire workforce to working remotely while at the same time managing a period of high intensity supervision and rapid decision-making.
As we all know, the economic and psychological impact on households and businesses across the country has been profound and dramatic. However, APRA regulated financial institutions - authorised deposit-taking institutions (ADIs), insurers and superannuation funds - have stood up to the challenge, both financially and operationally, and have continued to fulfil their critical roles in society and the economy.
This positive outcome reflects a long period of investment in financial and operational resilience, in which APRA’s strong prudential framework and ongoing supervision has played an important role. This investment has meant that each industry has not only been able to withstand the events of the past year, but has been able to play its part – through measures such as deferring loan repayments, suspending insurance premium increases, and facilitating prompt access to superannuation funds – in assisting those Australians who have been hit hardest by the crisis.
As we discussed the last time we appeared before this committee, APRA has afforded substantial regulatory relief over the past seven months to allow regulated entities to dedicate time and resources to maintaining their operations and supporting customers. Again, we were able to do this without undermining the strength of the financial system because of the resilience that had been built up in prior years. At some point, that resilience will need to be restored, but for the time being we have been clear in saying that financial strength that has been built up in good times is available to be utilised in times such as these.
Nonetheless, the environment ahead remains highly uncertain and we remain focused on ensuring the Australian financial system remains safe and stable. As we have said many times, that stability can never be taken for granted. The full financial impacts of the events of 2020 will flow through over time, and we expect 2021 will, in many ways, be just as difficult as 2020. We therefore need to stay vigilant: as a result, our supervision activities are heavily focused on matters of financial and operational resilience, and our revised Corporate Plan has reset our priorities to reflect the environment created by COVID-19.
Attached to this statement is an updated list of measures taken by APRA this year to respond to COVID-19.
We also believe that it is now appropriate to restart some of the supervisory and policy agenda that was put on hold at the onset of the COVID-19 crisis. A few of the key priorities I would highlight are:
- our work on remuneration, which seeks to respond to the recommendations of the Royal Commission on this issue;
- completion of bank capital reforms, designed to increase the risk sensitivity, flexibility and transparency (but not the current level) of capital;
- reforms to improve the sustainability of individual disability income insurance;
- pushing ahead with our Superannuation Data Transformation project, designed to expand the breadth, depth and consistency of superannuation data collections; and
- instituting a new cyber supervision strategy, designed to align with Australia’s Cyber Security Strategy 2020.
We also continue to strengthen our engagement and coordination with peer regulators. Since we last appeared before this committee, we have signed a new Memorandum of Understanding (MoU) with the ACCC designed to foster closer collaboration between the two agencies. This followed the updated MoU we signed with ASIC earlier in the year.
Finally, we are very pleased to have had additional funding approved in the Federal Budget to ensure APRA remains well-equipped to deal with the challenges we are facing. The increased funding will be broadly used to enhance capacity in a number of areas including to improve the early identification and orderly resolution of institutions that face difficulties; to strengthen oversight of cyber resilience given the heightened threats and increasing attacks on Australian financial institutions; and more generally to improve our ability to respond to the heightened volume and complexity of issues in the current environment. There is also some additional funding to enable us to support implementation of the superannuation initiatives announced by the Government in the Budget.
My colleagues and I are now happy to take your questions.
APRA COVID-19 initiatives
Regulatory concessions: APRA advised temporary changes to its expectations regarding bank capital ratios, to ensure banks are well positioned to continue to provide credit to the economy in the current challenging environment.
Regulatory concessions: APRA advised temporary concessions to facilitate the COVID-19 support packages being offered by banks and other lenders to their borrowers in the current environment.
ADI, LI, GI, PHI, Super
Reduce burden: APRA suspended the majority of its planned policy and supervision initiatives in response to the impact of COVID-19.
ADI, LI, GI, PHI, Super
Reduce burden: APRA announced the temporary suspension of its program to replace APRA’s Direct to APRA (D2A) data collection tool with APRA Connect.
Regulatory concessions: APRA postponed an upward capital adjustment in relation to Individual Disability Income Insurance (IDII), which applied to many LI entities.
Facilitate public sector support: APRA confirmed its regulatory approach to the Term Funding Facility (TFF) announced by the Reserve Bank of Australia (RBA) on 19 March 2020.
Reduce burden: APRA announced it would defer its scheduled implementation of the Basel III reforms in Australia by one year, from 2022 to 2023.
Reduce burden: APRA postponed implementation of reporting standard on private health insurance reforms data collection.
ADI (and RFCs)
Reduce burden: APRA, along with ABS and RBA, announced a range of adjusted reporting requirements.
Regulatory guidance: APRA and ASIC issued guidance to help trustees manage the financial and operational challenges associated with COVID-19, while continuing to meet their obligations to look after members’ best interests.
ADI, LI, GI, PHI
Regulatory guidance: APRA wrote to all ADIs and insurers to provide guidance on capital management during the period of significant disruption caused by COVID-19. Amongst other things, the guidance recommended deferring dividend decision for the next couple of months.
ADI, LI, GI, PHI, Super
Regulatory guidance: APRA wrote to applicants for new banking or insurance and superannuation licences to advise that it is temporarily suspending issuing new licenses for at least six months in response to the economic uncertainty created by COVID-19.
Facilitate public sector support: APRA published expectations on the release of benefits under the COVID-19 temporary early access to superannuation provisions.
ADI, LI, GI, PHI, Super
Reduce burden: APRA announced delayed start dates for six prudential and reporting standards that have been finalised but are yet to come into effect.
Facilitate public sector support: APRA released new reporting standard to enable data collection in relation to the Government’s SME Guarantee Scheme.
Facilitate public sector support: APRA launched new data collection to assess progress and impact of the Government’s temporary early release of superannuation scheme.
Transparency: APRA publishes data on amount, value and timeliness of aggregate payments under the Government’s temporary early release of superannuation scheme.
Regulatory concessions: APRA published additional guidance to assist ADIs in relation to the regulatory treatment of loan repayment deferrals and expectations in relation to mortgage serviceability assessments.
11 May (and weekly thereafter)
Transparency: APRA published fund-level data on amount, value and timeliness of payments under the Government’s temporary early release of superannuation scheme.
Regulatory guidance: APRA published additional guidance to assist ADIs in relation to their market risk capital requirements.
Regulatory concessions: APRA published frequently asked questions (FAQs) on expectations in relation to residential property valuations.
Transparency: APRA launched a new COVID-19 Pandemic Data Collection to enable assessment of the impact of COVID-19 on the superannuation industry and the outcomes being delivered to members.
Regulatory guidance: APRA published additional guidance to assist ADIs in relation to the capital treatment of securitisation schemes.
Regulatory concessions: APRA announced an extension of its temporary capital treatment for bank loans with repayment deferrals, as well as temporarily adjusting the capital treatment of loans where terms are modified or renegotiated (‘restructured’).
9 July (and monthly thereafter)
Transparency: APRA released the aggregate industry data on the amount, type and risk profile of loan repayment deferrals.
Regulatory guidance: APRA published frequently asked questions (FAQs) providing guidance to superannuation trustees on the COVID-19 Pandemic Data Collection requirements.
Regulatory concessions: APRA published frequently asked questions (FAQs) on expectations in relation to commercial property valuations.
ADI, LI, GI, PHI
Regulatory guidance: APRA updates its guidance on capital management for banks and insurers, emphasising the importance of keeping dividend payments to moderate levels (ADIs encouraging to retain at least half their earnings).
ADI, LI, GI, PHI, Super
Resumption of activities: APRA announced recommencement of its prudential policy program and a phased resumption of the issuing of new licences.
Regulatory consultation: APRA issued a letter to ADIs regarding consultation on treatment of loans impacted by COVID-19.
Regulatory concessions: APRA formalised the temporary concessions in relation to the regulatory treatment of loans subject to repayment deferrals, and the concessional treatment for loans being restructured.
Regulatory guidance: APRA issued a letter to ADIs in relation to the outcomes from its review of ADIs’ plans for the assessment and management of loans with repayment deferrals.
Regulatory guidance: APRA published guidance on the interaction between JobKeeper payments and ‘work test’ contributions.
Reduce burden: APRA announces updates to the Early Release Initiative (ERI) data collection and COVID-19 Pandemic Data Collection (PDC), with some data items to be discontinued.
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The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $7.9 trillion in assets for Australian depositors, policyholders and superannuation fund members.