Regulator Performance Framework - Self-assessment 2018-19

Introduction

This report sets out APRA’s 2018/19 self-assessment against the Australian Government’s Regulator Performance Framework.

The Framework: Measures of good regulatory performance

The Government’s Deregulation Agenda established the Regulator Performance Framework (the Framework) to assess regulators’ performance when interacting with business, the community and individuals while carrying out their functions. The Framework came into effect on 1 July 2015 and aims to encourage regulators to undertake their functions with minimum impact necessary to achieve regulatory objectives and to effect positive ongoing and lasting cultural change within regulators.

The Framework comprises six Key Performance Indicators (KPIs) that articulate the Government’s overarching expectations of regulator performance, namely:

• KPI 1: Regulators do not unnecessarily impede the efficient operation of regulated entities
• KPI 2: Communication with regulated entities is clear, targeted and effective
• KPI 3: Actions undertaken by regulators are proportionate to the regulatory risk being managed
• KPI 4: Compliance and monitoring approaches are streamlined and coordinated
• KPI 5: Regulators are open and transparent in their dealings with regulated entities
• KPI 6: Regulators actively contribute to the continuous improvement of regulatory frameworks.

In accordance with the Framework, all regulators are to undertake an annual self-assessment of performance against each KPI. The self-assessment report is externally validated through an approved stakeholder mechanism¹ prior to its release to the regulator’s Minister, and publication. The validation process provides an avenue for stakeholders to give feedback on whether the self-assessment accords with their views of performance against the KPIs over the assessment period. Stakeholders consider whether conclusions are reasonable and objective and if the areas identified for further improvement are appropriate or justified².

The Framework is one component of a broader suite of accountability structures in place including those set out in APRA’s Statement of Expectations set by the Government and the Public Governance, Performance and Accountability Act 2013 (PGPA Act). To this end, APRA’s self-assessment against the Framework complements a range of performance reporting mechanisms in place. More information about the Framework can be found at: www.cuttingredtape.gov.au/resources/rpf.

Evaluating APRA’s performance against the Framework

APRA established a set of metrics to support its assessment against the above KPIs. After consultation with approved stakeholders, APRA’s Regulator Performance Framework Metrics were published in July 2015. These metrics, together with measures of good regulatory performance that support each KPI articulated within the Framework, are included in Attachment A of this report. While the metrics provide a useful frame of reference, a range of data sources and qualitative information are used to demonstrate APRA’s performance against each KPI relevant to the reporting period. APRA is planning to review its metrics in 2020 to ensure they remain relevant and appropriate in preparation for its self-assessment against the Framework covering the 2019/20 financial year.

In 2019, APRA conducted its biennial stakeholder survey from which insights from regulated entities and other knowledgeable observers are obtained. The survey results are a key source of evidence for APRA’s self-assessment.

APRA was also subject to a range of reviews conducted during the 2018/19 financial year. Aspects of APRA’s operations (as well as those of other domestic regulatory agencies) were examined by the International Monetary Fund’s (IMF) Financial Sector Assessment Program (FSAP), the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, and the Productivity Commission’s reviews on ‘Competition in the Australian Financial System’ and ‘Superannuation: Assessing Efficiency and Competition’. APRA was also subject to a Capability Review by an external panel of independent experts; the report from this review was released in July 2019³.

In 2018/19, APRA also undertook a comprehensive review of its enforcement approach, assisted by an independent advisory panel of experts in the administration of law and regulatory enforcement. The review was a forward-looking examination of APRA’s current enforcement strategy and how it interacts with APRA’s supervisory approach. As a result of this review, APRA published a new enforcement approach in 2019 and is implementing recommendations designed to better leverage its enforcement powers to achieve sound prudential outcomes.

In summary, the outcome of these reviews is the recognition that APRA has been successful in delivering on its core mandate being the financial safety of the institutions it regulates and a sound and resilient financial system. However, the reviews acknowledge that APRA’s operating environment is rapidly evolving and becoming increasingly complex, and APRA needs to expand its focus and capabilities to enable it to continue to be fit for purpose and meet its mandate into the future.

The reviews collectively provided 157 recommendations and suggestions for APRA to consider to strengthen regulation and supervision practices. APRA supports all recommendations from the Royal Commission and Capability Review directed at APRA together with APRA’s own review of its enforcement approach. These recommendations, in addition to those directed at APRA by the IMF as part of the FSAP (and supported) and the Productivity Commission findings, have been factored into APRA’s 2019-2023 Corporate Plan.     

Whilst the focus of these reviews differ to the measures to assess good regulatory performance articulated in the Framework (as per Attachment A), the relevant findings and evidence from these reviews have been incorporated into this self-assessment report. Importantly, APRA has embraced these reviews as opportunities for continuous improvement, with actions to address a number of recommendations directed at strengthening the regulatory frameworks and practices already underway.

Footnotes:

¹ APRA’s approved stakeholder consultation mechanism includes the following industry associations: Australian Banking Association (ABA), Association of Superannuation Funds Australia (ASFA), Community Owned Banking Association (COBA), Insurance Council of Australia (ICA), Financial Services Council (FSC), Members Health Fund Alliance and Private Healthcare Australia (PHA).

² The validation process is not intended to be an audit of APRA’s self-assessment or an opportunity for stakeholders to deal with specific individual experiences or interactions with a regulator.

³ The Royal Commission recommended an independent panel of external experts complete a review to assess APRA’s capability to deliver upon its statutory mandate, its ability to respond to an environment growing in complexity and the emerging risks for APRA’s regulated sectors.  

Overall self-assessment

Overall, APRA considers it has met all six KPIs set out in the Framework. However opportunities for improvement have been identified in relation to three KPIs. These, together with actions APRA is planning to take to address the areas for improvement identified, are included in the summary table below. Detailed assessments against each KPI comprise the body of this report and support the overall self-assessment below.

KPI 1 - Regulators do not unnecessarily impede the efficient operation of regulated entities

KPI 2 - Communication with regulated entities is clear, targeted and effective

KPI 3 - Actions undertaken by regulators are proportionate to the regulatory risk being managed

KPI 4 - Compliance and monitoring approaches are streamlined and coordinated

KPI 5 - Regulators are open and transparent in their dealing with regulated entities

KPI 6 - Regulators actively contribute to the continuous improvement of regulatory frameworks

General stakeholder feedback

APRA’s self-assessment report was externally validated. APRA received responses from six of the seven industry associations as part of the validation process. The responding stakeholders were appreciative of the opportunity to provide feedback to APRA.

Overall, industry associations broadly agree with APRA’s 2018-2019 self-assessment and that APRA’s conclusions are reasonable. Industry associations recognise that APRA is undergoing organisational change, partly in response to recommendations arising from the range of reviews conducted during the 2018/19 financial year but consider that APRA continues to undertake its role as a prudential regulator well and conduct its regulatory activities in an open and transparent manner.

Industry associations endorse the opportunities for improvement identified by APRA in its self-assessment report and support improvement plans.

Some industry bodies noted specific areas for improvement based on their (or their members) dealings with APRA. Two of the more common responses related to more consideration of the increasing cost of regulation for their members (particularly smaller financial institutions) and opportunities for APRA to work more closely with the Australian Securities and Investments Commission (ASIC).

Stakeholder feedback relating to each KPI is included in the body of this report. 

KPI 1 - Regulators do not unnecessarily impede the efficient operation of regulated entities

Measures of good regulatory performance

APRA’s self-assessment against KPI 1

In promoting financial stability in Australia, APRA continues to balance financial safety with efficiency, competition, contestability and competitive neutrality in line with its statutory objectives. APRA achieved its target of 100% compliance with Office of Best Practice Regulation (OBPR) requirements for all changes to the prudential framework made across all regulated industries in 2018/19, which included the preparation of formal Regulatory Impact Statements (to assess the costs and benefits of proposed policy changes) where required. Despite being assessed as compliant by the OBPR, the 2019 biennial stakeholder survey indicated that only 31% (23% in 2017) of stakeholders consider changes to APRA’s prudential framework sufficiently consider the costs of regulation imposed on industry. Although an improvement, this suggests there is significant opportunity for APRA to improve transparency on the assessment of costs (and benefits) for proposed policy changes, and better communicate this process with APRA’s stakeholders.

APRA continued to have a deep understanding of its operating environment and current and emerging issues affecting regulated entities, industries and the financial system more broadly.

APRA continued to enhance the prudential framework across all regulated industries throughout the year in response to, amongst other things, specific risks within regulated entities and broader vulnerabilities in the external environment both domestically and internationally.

APRA targeted full compliance with OBPR principles to ensure costs to industry are thoroughly considered as part of new policy proposals. APRA’s policy development work is directed towards establishing an appropriate balance between financial safety and other considerations, including regulatory costs and is consultative in nature to ensure that APRA does not unnecessarily impede the efficient operation of regulated entities in achieving regulatory objectives. APRA achieved 100% compliance with OBPR requirements for all changes to the prudential framework made in 2018/19.

While targets have been achieved, APRA acknowledges it can do more to improve transparency in terms of how it balances its regulatory objectives and the costs (and benefits) for proposed changes to the prudential framework across all regulated industries.

Supporting evidence for KPI 1

External stakeholder validation

Industry associations generally agreed with APRA’s self- assessment against KPI 1 and that APRA has a sound understanding of current and emerging prudential risks. A notable exception to this was for private health insurance where industry believes APRA’s technical expertise/ capability has declined over the last few years.

A number of industry associations acknowledged and welcomed APRA’s ongoing commitment to industry consultation particularly as part of the policy development process.

Some industry associations expressed concerned about the increasing cost of regulation (particularly for smaller industry participants) with the majority supporting the need for more transparency in relation to the costs (and benefits) of proposed policy changes and welcomed better communication of this process with APRA’s stakeholders. 

KPI 2 - Communication with regulated entities is clear, targeted and effective

Measures of good regulatory performance

APRA’s self-assessment against KPI 2

APRA’s communication with regulated entities is considered clear and effective. This was validated in the biennial stakeholder survey where 95% of regulated entities (94% in 2017) confirmed that APRA’s communication is clear and effective and 92% (88% in 2017) thought that APRA’s publications are clear and effective. While these results are very strong, APRA considers it could do more to ensure that communications are targeted and cater to all stakeholder needs.  

The 2019 biennial stakeholder survey results identified a number of positives in which APRA can further build on in relation to its communication approach with regulated entities and external stakeholders more broadly.

Overall, APRA is consistently considered very effective in communicating the findings of supervisory visits to regulated entities with 92%-93% of stakeholders agreeing or strongly agreeing in 2017 and 2019 respectively.

Specifically, the biennial stakeholder survey identified an improvement of four per cent (from 40% in 2017 to 44% in 2019) in the percentage of stakeholder responding to the usefulness of speeches by senior APRA representatives which has been a conscious effort by APRA to uplift its internal capabilities in this area. Similarly, there was a marginal uptick in the percentage of stakeholders reporting that other information on APRA’s website such as policy papers and FAQs were useful, albeit from a relatively low base (42% in 2017 to 45% in 2019).

Supporting evidence for KPI2

External stakeholder validation

Industry associations generally agreed with APRA’s assessment of KPI 2 that it is clear, targeted and effective in its communications and agreed that there are opportunities for improvement. Specific examples provided by some industry associations where APRA’s communication could be improved included:

• Clearly articulating the purpose for data collections so that entities understand the benefit being gained and how the collection fits within APRA’s prudential oversight requirements.
• Sufficient lead time between the release of new prudential standards and commencement.
• Greater investment in maintaining APRA’s website as a key channel of communication.

KPI 3 - Actions undertaken by regulators are proportionate to the regulatory risk being managed

Measures of good regulatory performance

APRA’s self-assessment against KPI 3

Throughout 2018/19, APRA continued to take a risk-based approach to identifying and assessing areas of greatest risk to regulated entities in meeting their obligations to beneficiaries; and to financial stability in Australia, and directing its resources to address those risks. This was validated in the biennial stakeholder survey where 90% of stakeholders (86% in 2017) considered that APRA is primarily risk-based in it supervision.

APRA’s Statement of Intent includes amongst other things a description of APRA’s supervisory approach

“APRA adopts a risk-based approach to prudential supervision that is designed to identify and assess those areas of greatest risk to an APRA-regulated institution (or to the financial system as a whole) and then direct resources and attention to these risks. APRA seeks to ensure that its judgments are accurate, timely and robust and that its responses are targeted and proportionate.”  

APRA’s long established risk assessment and response systems — the Probability and Impact Rating System (PAIRS) and the Supervisory Oversight and Response System (SOARS) — are critical tools for identifying institutions that have a higher risk/ impact of failure and tailoring APRA’s approach accordingly.

As mentioned in last year’s self-assessment, APRA is reviewing its supervision model (including PAIRS and SOARS) to ensure that it remains fit for purpose and responsive to a rapidly changing environment, as well as one that drives consistent, informed and comprehensive prudential supervision across the financial system.

Supporting evidence for KPI3

External stakeholder validation

Industry associations generally agreed with APRA’s assessment of KPI 3 and are supportive of the approach taken by APRA in recent years to demonstrate proportionality, including graduated approaches, simplification measures and lower supervisory intensity. Specific feedback is highlighted below.

‘… we believe the consultative supervisory approach taken by APRA to seek to work in cooperation with [industry] to reach and maintain primarily risk-based compliance has been successful to this point and should be maintained to the greatest extent possible. A regulator who poses a constant litigation risk may be less likely to be capable of building the degree of trust and openness necessary to achieve the objective of identifying prudential problems before they affect the ability of an [entity] to meet its financial obligations.’

KPI 4 - Compliance and monitoring approaches are streamlined and coordinated

Measures of good regulatory performance

APRA’s self-assessment against KPI 4

APRA maintained strong working relationships with Australia’s key regulatory agencies throughout the year particularly those within the Council of Financial Regulators (CFR) including the Australian Securities and Investments Commission (ASIC), The Reserve Bank of Australia (RBA) and Treasury. However APRA has recognised it can promote more coordinated and streamlined approaches across CFR agencies as well as other domestic and international peer agencies to achieve regulatory objectives.

APRA recently established a dedicated Regulatory Affairs unit and explicitly acknowledged uplifting its capabilities in relation to collaborating with domestic and international peer regulatory agencies in its 2019-2023 Corporate Plan. The independent reviews conducted during the year reinforced this strategic objective.

APRA continued to play an important role as the central repository of statistical information on the Australian financial system. APRA collects, distributes and publishes data on behalf of a number of other Government agencies including the Reserve Bank of Australia (RBA) and the Australian Bureau of Statistics (ABS). Undertaking this role has enabled a coordinated approach to reporting of statistical information for regulated entities, however the amount of data and information needed to achieve regulatory objectives has been called out within the biennial stakeholder survey as requiring attention with 31% of stakeholders (34% in 2017) indicating that the data collected was ‘too much’ or ‘far too much’. In saying this, 68% of stakeholders did note that the information collected was ‘about right’.

APRA is cognisant of the cost of collecting data from regulated entities. As such, and as outlined in APRA’s 2019-2023 Corporate Plan, APRA is  continuing with its multi-year transformation program to create a modern, efficient and flexible data collection solution which will serve APRA and industry for years to come.

APRA’s data strategy intends to transform the data it collects into a collective strategic asset, in consultation with key stakeholders (including industry participants and other regulatory agencies), to facilitate more effective and transparent sharing of data and better insights – both at an entity and industry-level, but also cross-agency and for the general public. A forward looking review of cross-agency data needs was also recommended by the IMF as part of the FSAP in 2018/19. 

Supporting evidence for KPI 4

External stakeholder validation

Industry associations generally agreed with APRA’s assessment of KPI 4 that compliance and monitoring approaches are streamlined and coordinated and validated APRA’s strong relationship with key regulatory agencies, particularly those within the Council of Financial Regulators. In saying that, industry associations welcomed greater coordination between APRA and ASIC particularly in relation to data collections and extending the Executive Accountability Regime to all APRA regulated entities. Specific feedback is highlighted below.

‘APRA should be cognisant of the extensive investment required of [industry] when implementing changes to reporting requirements. While there is a need to keep reporting up to date with emerging technologies and data management processes, any regulatory reporting changes have resourcing implications which can vary across [members].’

‘One area that has caused some concern in the past is the apparent failure for ASIC and APRA to appropriately liaise. We accept that this position is changing and our members do acknowledge this change. We are pleased that APRA going forward will adopt a ‘whole of system’ approach to its decisions and activities.’

KPI 5 - Regulators are open and transparent in their dealings with regulated entities

Measures of good regulatory performance

APRA’s self-assessment against KPI 5

During 2018/19, APRA continued to be open and transparent about its performance in line with expectations set by the Government in APRA’s Statement of Expectations, APRA’s own Statement of Intent and the PGPA Act. This is validated by the biennial stakeholder survey, where 83% of stakeholders considered APRA to be consultative in its supervision and 75% reported that APRA handled requests for approval, variation or exemptions well (when required).

The Australian Government sets out its expectations of APRA including managing relationships with key stakeholders and issues of transparency and accountability in APRA’s Statement of Expectations (SOE). APRA responds to the Government’s Statement of Expectations with its Statement of Intent. APRA’s Statement of Intent specifically acknowledges that:

“APRA seeks to maintain open and constructive relationships with the institutions it regulates”.

As with other Commonwealth entities, APRA’s performance framework and governance and accountability requirements are set out in the Public Governance, Performance and Accountability Act 2013 (PGPA Act). The PGPA Act requires APRA to prepare an Annual Performance Statement (APS) to be included in its Annual Report. The APS provides an informative summary to Parliament and the public on APRA’s performance against its four-year Corporate Plan and how it continues to deliver on its mandate.

APRA’s 2019 biennial stakeholder survey indicated that 83% of stakeholders believe that APRA is consultative in it supervision. While APRA acknowledges that this is a strong result, it is a decline of four per cent from the 2017 survey results. In saying that, 75% of stakeholders either agreed or strongly agreed that the resolution of technical and supervisory requests is timely and that requests for approval, variation or exemption from a prudential or reporting standard were handled well, which was an improvement on the 2017 survey results.

To supplement prudential engagements with regulated entities, APRA uses a range of channels to communicate various policy, statistical and other announcements with relevant stakeholder groups. Regular engagement on a bilateral and multilateral basis with professional and industry associations continues to take place. APRA also engages with the Government and other regulatory agencies, the media and the general public and provides ready access to information on its website.

Supporting evidence for KPI 5

External stakeholder validation

Industry associations generally agreed with APRA’s assessment of KPI 5 that APRA has maintained open and transparent dealing with regulated entities and strong engagement and communication with APRA personnel. In saying that, one industry association did highlight that some of its members have experienced turnover in their key contacts at APRA and instances where timely notification of changes in supervision teams could be improved.

KPI 6 - Regulators actively contribute to the continuous improvement of regulatory frameworks

Measures of good regulatory performance

APRA’s self-assessment against KPI 6

APRA continued to engage with and receive feedback from stakeholders throughout the year and work proactively with domestic and international agencies to continuously improve regulatory frameworks and practices.

In line with its published Service Charter, APRA maintained its commitment to receiving regular feedback from key stakeholders to inform improvements to regulatory frameworks and practices including formally surveying regulated institutions, industry bodies and other knowledgeable observers via its biennial stakeholder survey. Commencing in 2009, the biennial survey is undertaken by an independent party with survey results publicly available on APRA’s website.

As previously highlighted, APRA was subject to a number of independent reviews throughout the year, which culminated in a series of recommendations aimed at improving APRA’s operations and capabilities, regulatory frameworks and practices and the ongoing stability of Australia’s financial system. APRA embraced these reviews as opportunities for continuous improvement. APRA is working closely with other agencies particularly those that form part of the Council of Financial Regulators (CFR) on the implementation of agreed recommendations.

APRA continued to deliver a number of reforms to the prudential framework across all regulated industries during the 2018/19 financial year. APRA’s cooperative and collaborative approach to policy development was confirmed by the 2019 biennial stakeholder survey results, where 82% of stakeholders (84% in 2017) agreed that APRA’s consultation packages provide a good base for consultation with industry.

APRA continued to play an active role in relevant domestic and international groups and forums for banking, insurance and superannuation to remain informed on, and contribute to, best practice regulatory developments and to determine how they should apply in the Australian context.

Supporting evidence for KPI 6

Industry associations agreed with APRA’s assessment of KPI 6. Specific feedback is highlighted below.

‘We consider that APRA has … and has been generally effective in actively contributing to the continuous improvement of prudential regulation frameworks.’’

Footnotes:

⁴ ADI - 14; General Insurance - 1; Life Insurance – 4; Private Health Insurance – 3; Superannuation – 7; Cross Industry – 11. 

Attachment A – Performance measures relevant to each KPI

KPI 1 – Regulators do not unnecessarily impeded the efficient operation of regulated entities