Wayne Byres, Chair - House of Representatives Standing Committee on Economics, Canberra - Second hearing into the APRA 2019/2020 Annual Report.
Thank you for the opportunity to appear here today for the second hearing into the APRA 2019/2020 Annual Report.
I would like to outline some of APRA’s key activities and issues that I expect will be of interest to the Committee. Before I do, though, I wanted to acknowledge APRA’s newest Member, Margaret Cole, who took up duties on 1 July and is appearing before this Committee for the first time today. Margaret has taken on primary responsibility for overseeing APRA’s activities in relation to superannuation. Helen Rowell has assumed responsibility for oversight of the general, life and private health insurance industries following the departure of Geoff Summerhayes at the end of last year.
As discussed with the Committee when we appeared in March, APRA’s 2019/20 Annual Report outlined our rapid shift from a wide-ranging regulatory and supervisory agenda to a targeted and proactive response to the severe disruption and heightened financial risk caused by the pandemic, including providing important regulatory relief to regulated entities so they could support their customers, and facilitating broader Government and industry initiatives.
The Report also noted that APRA-regulated institutions had stood up to the challenges of the pandemic, both financially and operationally, and continued to fulfil their critical roles in society and the economy. I’m pleased to note that this remains the case today.
We are now well into the 2021/22 year – meaning we have recently released our Corporate Plan for 2021-2025 and are close to finalising our Annual Report for 2020/21.
2021-2025 Corporate Plan
APRA’s updated Corporate Plan outlines how we intend to ensure the continued strength and resilience of the Australian financial system over the next four years, while also focusing on preparing for future challenges.
Our 2021-2025 Corporate Plan, released in August, sets out APRA’s strategic priorities for protecting bank depositors, insurance policyholders and superannuation members during the current period of disruption and uncertainty, based around the strategic theme of “protected today, prepared for tomorrow”.
Clearly, COVID-19 remains the dominant influence on the current economic and financial environment. However, we are a forward-looking prudential supervisor and, while the impact of the pandemic is likely to be felt for some time yet, our revised Corporate Plan recognises that there are many other factors influencing the shape and risk profile of the financial system, and to which APRA needs to respond.
As part of its goal of protecting the Australian community today, APRA intends to:
- preserve the resilience of banks, insurers and superannuation funds, with a continuing focus on financial strength; cyber risks; governance, risk-culture, remuneration and accountability; and implementing the Government’s Your Future, Your Super reforms;
- modernise the prudential architecture to ensure it remains effective and accessible, cognisant of burden for entities, and adaptable to the rapidly evolving financial sector; and
- better enable data-driven decision-making by continuing to invest in and embed data as a core enabler for achieving APRA’s purpose and strategy, as well as enabling the efficient delivery of important information to other arms of government, and enhancing transparency by publishing more meaningful data and insights.
Under the banner of preparing for tomorrow, the Corporate Plan outlines APRA’s aim of:
- increasing its understanding of, and ability to respond to, the impact of new financial activities and participants, such as technological innovations and new business models that do not fit traditional regulatory approaches;
- helping to address important and complex challenges such as those related to superannuation retirement income products, insurance accessibility and affordability, and the financial risks of climate change; and
- adopting the latest regulatory tools, techniques and practices in areas such as specialist regulatory services, enforcement actions, transparency and resolution.
In addition to strengthening the resilience of the entities it regulates, the Corporate Plan also outlines APRA’s goal of enhancing its own performance by fostering a modern and flexible working environment.
Your Future Your Super reforms and the performance test
As the Committee is no doubt aware, last week APRA released the results from the inaugural MySuper product performance test introduced as part of the Government’s Your Future, Your Super reforms.
APRA assessed 76 MySuper products with at least 5 years of performance history against the objective benchmark. The methodology and the benchmark are set out in the legislation; APRA’s role was to administer the test and provide the results.
A total of 13 products failed to meet the objective benchmark. As we have publicly stated, APRA has no tolerance for members to remain in underperforming products, particularly where the product is closed to new members and as we noted when releasing the results, trustees of the 13 failing products now face an important choice: they can urgently make the improvements needed to ensure they pass next year’s test or start planning to transfer their members to a fund that can deliver better outcomes.
Since releasing the performance test results, APRA has intensified its supervision of trustees with products that failed the test and has required they provide a report identifying the causes of their underperformance and how they plan to address them. Trustees have to monitor their products closely and report important information to APRA – including relating to the movement of members and outflow of funds.
More broadly, the Your Future, Your Super reforms both complement and reinforce our existing superannuation industry strategy and beyond the performance test, the reforms provide two other important changes that will enable APRA to drive higher standards in the superannuation sector:
- The first is the sharpening of the best interest duty to the best financial interest duty (BFID), which makes clearer that trustees must have regard to members’ financial interest first and foremost (beyond other non-financial interests).
- The second is the reverse onus of proof; this change, coupled with the positive obligations under BFID, in practice will require trustees to be able to demonstrate that their decisions to invest or spend members’ funds are based on well founded analysis of expected member financial benefits. Over the period ahead, APRA will be revising its standards and guidance in a number of areas to make sure they are aligned with the new legislative provisions.
Other recent initiatives
Notwithstanding the disruptions of the pandemic, APRA has continued to pursue its longer-term supervision and policy reforms, while closely monitoring the ongoing impact of COVID 19 on the financial system.
Some of the initiatives APRA has undertaken since our last appearance include:
- In April, we released for consultation draft guidance to banks, insurers and superannuation trustees on managing the financial risks of climate change. The guidance is designed to assist regulated entities in managing climate-related financial risks and opportunities as part of their existing risk management and governance frameworks. The guidance was developed in response to requests from industry for greater clarity of regulatory expectations and examples of better industry practice. To supplement this, last week we released an information paper on the Climate Vulnerability Assessment we are undertaking with the five largest banks.
- In July, we announced regulatory support for ADIs offering temporary financial assistance to borrowers impacted by the emergence of widespread COVID-19 lockdowns.. For these banks, APRA is providing regulatory relief to assist them in supporting their customers through this period.
- Also in July, we wrote to a number of general insurers in light of the poor oversight of policy wordings that left insurers exposed to unintended (and unpriced) claims for business interruption (BI) insurance. We are requiring those insurers to review the soundness of their risk management frameworks in light of recent issues with BI insurance, with a view to ascertaining whether similar gaps could exist elsewhere. The review also seeks a specific focus on cyber risk.
- In August, we announced our revised approach to licensing and supervising new banking institutions, which comprises stronger requirements for being granted a banking licence and closer supervision of new entrants as they seek to establish themselves. The revised approach followed a review of APRA’s ADI licensing regime aimed at incorporating learnings since the launch of the Restricted ADI licensing pathway in 2018, including the failure of Xinja Bank in early 2021. The new framework is designed to encourage more sustainable competition in the banking sector by ensuring new entrants are better equipped to succeed.
- Also in August, we released the final prudential standard designed to strengthen remuneration practices across the banking, insurance and superannuation industries. The cross-industry prudential standard introduces heightened requirements on remuneration and accountability aimed at creating more balanced incentive structures, promoting financial resilience and supporting better outcomes for customers. In doing so, it fulfils three of the key recommendations of the financial services Royal Commission directed towards APRA.
Given the disrupted environment, we are keeping our workplans under review and will issue a revised program for the coming months with a view to giving industry stakeholders a clearer picture of upcoming priorities and timetables.
Before wrapping up, I would like to highlight the results of our biennial stakeholder survey, which have just been publicly released. This is APRA’s seventh Stakeholder Survey since 2009, and is conducted independently for us by Orima Research.
Overall, the results showed a strong positive impact from APRA’s activities on the industries it regulates. More than 95 percent of entities indicated that APRA’s supervision helps to protect both their industry and the financial wellbeing of the Australian community. The survey found that 95 per cent of regulated entities believed that APRA effectively communicated its changing expectations during COVID-19, and 87 per cent agreed that APRA’s policy responses were appropriate and helpful to their entity during the pandemic.
Other key findings include:
- 95 per cent agree that APRA’s public communications are clear and effective;
- 93 per cent agree that APRA is effective in identifying risks across their industry; and
- 87 per cent agree that APRA’s increased focus on risk culture had a positive impact on their entity.
As always, a key issue of concern amongst industry stakeholders was regulatory burden. Both in revisiting its immediate workplan, and modernising the prudential framework over the longer-term, APRA is looking at ways to actively respond to this issue.
With these comments, myself and my colleagues are happy to answer your questions.