The Australian Prudential Regulation Authority (APRA) has today released a discussion paper containing proposals on supervising conglomerate groups. These are groups with APRA‑regulated entities that have material operations in more than one APRA‑regulated industry and/or have material unregulated entities.

APRA’s proposed ‘Level 3’ supervision framework is designed to complement its existing industry‑based supervision of stand-alone entities (Level 1 supervision) and its supervision of single industry groups (Level 2 supervision).

The Level 3 framework contains proposals, building on APRA’s existing capital requirements, to ensure that a conglomerate group holds adequate capital to protect the APRA‑regulated entities from potential contagion and other risks within the group. The framework also contains proposals on a range of principles‑based risk management and governance standards that will apply to the parent company of the Level 3 group.

APRA Chairman Dr John Laker said that the global financial crisis has highlighted the importance of taking a broad, group‑wide view of prudentially regulated entities.

‘APRA’s proposals are intended to strengthen the financial soundness of APRA‑regulated entities within a conglomerate group, without unduly constraining the structure or scope of operations of the group. The flexibility of Level 3 supervision will give both APRA and the group itself a better understanding of the risks that arise from the group and its activities.’

Submissions on the Level 3 proposals are invited by 18 June 2010. Following this initial consultation, APRA will release draft prudential standards and reporting standards to implement the Level 3 framework. These standards will also be subject to public consultation.

The discussion paper can be found on the APRA website.