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Opening statements

Opening Statement to Senate Economics Legislation Committee– April 2019

Thursday 11 April 2019

Wayne Byres, Chairman – Senate Economics Legislation Committee, Canberra

NB: The Senate Economics Legislation Committee hearings on 11 April 2019 did not proceed after the Prime Minister called the 2019 Federal Election. This is the statement Mr Byres had prepared to deliver.
It has been less than two months since we last appeared before this Committee, but it has undoubtedly been a busy period and there are a few developments I would like to highlight this morning.


Most notably, in the period since we were last before the Committee, the Government announced a major increase in our budget, which is funded by the industries we regulate.
The recent Budget announced an additional $150 million over four years to substantially upgrade our supervisory capabilities in three main ways:
  • enhancing the supervisory framework and approach for governance, culture and remuneration applying to all APRA-regulated entities, including through building internal technical expertise and accessing technical specialists outside of APRA, supporting APRA’s response to key areas of concern raised by the Royal Commission;
  • extending the Banking Executive Accountability Regime (BEAR) to all APRA-regulated entities including insurers and superannuation funds, again as recommended by the Royal Commission; and
  • boosting APRA’s broader supervision capacity across all regulated entities, and ensuring this can be sustained in future years.

This additional funding comes on top of an additional $60 million over four years announced in November last year. That funding is being used to:

  • improve APRA’s data collection, storage and analysis systems to improve supervisory assessment and decision-making;
  • increase the number of frontline supervisors for the largest and most complex financial institutions;
  • enhance APRA’s ability to address new and emerging risk areas by strengthening internal technical expertise and increasing access to specialists outside APRA.
Taken together, this additional funding will support an increase of roughly 100 additional permanent staff, a meaningful increase relative to our long-run operating level of around 600. The challenge for us now is to recruit the right people, and do so at a time the financial services industry is similarly seeking to lift capabilities in the same areas in which the regulators are increasing their focus.

We will also be using our additional resources to implement our new enforcement approach, which we plan to make public later this month. Taking into account developments such as the BEAR regime, the Royal Commission, the learnings from the CBA Inquiry – and the fact we have had new powers given to us – we plan to set out a new approach to enforcement that will see us utilising our enforcement tools more quickly in future, particularly for uncooperative institutions. What will not change, however, is APRA’s role as a safety regulator focused on supervision, with prevention as our primary goal.

As you know, we currently have a Capability Review underway. From our perspective, this Review is timely given the increased resourcing. The results of the Review will help us ensure that our expanded resources are deployed most effectively, and identify any other areas where additional capability is needed to be effective into the future.

System stability and resilience

Shortly after we last appeared, a major review of the resilience of the Australian financial system, and the robustness of the regulatory framework, was published by the IMF. This was the product of an extensive review which took place during 2018. Pleasingly, the IMF found APRA benchmarked well against international standards for effective supervision. They concluded our actions to strengthen mortgage lending standards had lowered financial stability risks and increased financial system resilience. And they validated our stress test results, which showed that the large Australian banks are resilient to significant economic and financial shocks.

There is always an interest in housing markets by this Committee. Housing markets remain weak, but the adjustment in housing prices and activity remains orderly and does not raise material financial stability concerns. As the recent statement by the Council of Financial Regulators noted, housing prices nationally have fallen by 6½ per cent over the past year, but this has followed a period of large price gains in some areas. Further, the improvement in banks’ lending standards – including a lower share of high loan-to-valuation ratio lending – means that households and lenders generally are less vulnerable to falling housing prices than in the past. Despite historically high household debt, signs of financial stress remain relatively contained given a strong labour market and low interest rates.

APRA’s priorities

In the short time since we last appeared here, my colleagues and I have made three important speeches outlining our focus over the next 12 months in the industries we regulate: banking, insurance and superannuation.

In a speech I gave a couple of weeks ago, I emphasised the importance of APRA focusing on its core mandate of promoting and building a financially sound and resilient financial system. While I reiterated the important point that the Australian financial system is fundamentally sound, I stressed it was important to not take this financial safety and stability for granted. The new funding for APRA that has been approved will allow us to take on new responsibilities and adopt a broader and wider focus in our activities, particularly in areas of non-financial risk, without needing to lessen the attention we give to the critical issues of financial safety and soundness.

Elsewhere, our message to the general insurance industry was that they should heed the advice they give to policyholders: to understand the risks they face and take steps to protect against them. Pursuing short-term financial gain at the expense of doing the right thing inevitably comes at a steep cost in reputational damage and lost revenue, and we have challenged the industry to show greater leadership in responding to concerns about products or services, rather than being dragged into action by regulators or governments.

In superannuation, we have told the industry that APRA is commencing a major drive towards increased industry transparency as part of our ongoing push to lift standards and ensure trustees put their members’ interests first. We have announced plans to enhance the consistency and granularity of our superannuation data collection, especially for choice products. We also outlined plans to make more data publicly available – and easier to interpret – so members can make informed decisions about who to entrust with their retirement savings. Finally, we also flagged our broader agenda for superannuation, focussed on lifting trustee board capability, developing a stronger fiduciary culture and tackling conflicts of interest. We subsequently wrote to all trustees two weeks ago setting this out in more detail.

On the subject of superannuation, I would like to stress how pleased we are that Parliament has passed the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 1) Bill 2019. The Bill provides APRA with a broad and long sought-after directions power. It also gives APRA the power to take civil penalty action against trustees and their directors for breaching their obligations to members, including the duty to act in the best interests of members. When last here, I described the Bill as a ‘game changer’ for us, and we are preparing to use the powers that Parliament has granted us to increase the pressure on underperforming trustees to lift their game or exit the industry.

Royal Commission

Finally, I would just like to note our progress on Royal Commission recommendations and referrals, which remain a high priority for us.

We continue to gather evidence on each of the possible enforcement matters referred to APRA, and expect to be able to make an assessment on the merits of further action in the coming months. However, as I noted last time, none of the potential breaches of the law or prudential standards that have been referred to APRA carry civil or criminal penalty provisions directly, although other avenues to impose sanctions may be available depending on the specific circumstances.

With respect to the 10 recommendations which fall within APRA’s responsibilities, we released the first proposed policy changes – in relation to land valuations, particularly for agricultural land (Recommendation 1.12) – a couple of weeks ago. Other actions remain on track against the action plan for each recommendation that we published in the week after the Final Report was released.

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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 $7.7 trillion in assets for Australian depositors, policyholders and superannuation fund members.