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Twelve months on: APRA’s progress on the Royal Commission recommendations

It has been one year since the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Royal Commission) was released. By its conclusion, over 10,000 submissions, 130 witnesses and 68 days of hearings contributed to 54 recommendations to Government, 12 to the regulators and 10 to industry.

Twelve months on is a timely milestone to reflect on the impact of the Royal Commission; not only on Australia’s financial system and those who interact with it, but also on how APRA has, and continues, to effect change in the industry as it progresses through the important implementation of recommendations phase. 

APRA has made significant headway in responding to the 10 recommendations directed to it – having addressed three recommendations in full (1.12, 6.10 and 6.12 – see below for their description) and making substantial progress towards finalising the remaining seven. APRA has also been undertaking detailed reviews of the 12 formal case referrals involving nine APRA-regulated entities that it received from the Royal Commission. 

APRA has also been working closely with Treasury as the Federal Government pursues its accelerated implementation plan, which will see more than 50 commitments, or close to 90 per cent of those recommendations directed to it, implemented or have legislation before parliament by mid-2020.  

Supervision of governance, culture, remuneration and accountability

The Royal Commission highlighted many instances of conduct across the industry that fell below community standards, and was a critical catalyst for change. For APRA, some of the most important recommendations deal with the influence of remuneration on conduct and behaviour within the financial system.

Royal Commission recommendation 5.1 – Supervision of remuneration – principles, standards and guidance

In conducting prudential supervision of remuneration systems, and revising its prudential standards and guidance about remuneration, APRA should give effect to the principles, standards and guidance set out in the Financial Stability Board’s publications concerning sound compensation principles and practices.

 

 

 
Royal Commission recommendation 5.2 – Supervision of remuneration – aims

In conducting prudential supervision of the design and implementation of remuneration systems, and revising its prudential standards and guidance about remuneration, APRA should have, as one of its aims, the sound management by APRA-regulated institutions of not only financial risk but also misconduct, compliance and other non-financial risks.

 

 
Royal Commission recommendation 5.3 – Revised prudential standards and guidance

In revising its prudential standards and guidance about the design and implementation of remuneration systems, APRA should: 

  • require APRA-regulated institutions to design their remuneration systems to encourage sound management of non-financial risks, and to reduce the risk of misconduct;
  • require the board of an APRA-regulated institution (whether through its remuneration committee or otherwise) to make regular assessments of the effectiveness of the remuneration system in encouraging sound management of non-financial risks, and reducing the risk of misconduct;
  • set limits on the use of financial metrics in connection with long-term variable remuneration;
  • require APRA-regulated institutions to provide for the entity, in appropriate circumstances, to claw back remuneration that has vested; and
  • encourage APRA-regulated institutions to improve the quality of information being provided to boards and their committees about risk management performance and remuneration decisions. 

 

To address recommendations 5.1, 5.2 and 5.3, APRA has developed draft prudential standard CPS 511 Remuneration. This draft standard encapsulates both the Financial Stability Board’s guidance and findings of the review APRA conducted which were outlined in Remuneration Practices at Large Financial Institutions. It proposes requiring boards (including superannuation trustees) to design a remuneration system that encourages the management of non-financial risks, reduces the use of financial metrics in the determination of variable remuneration, and improves information flow to the board about risk management performance and its impact on remuneration. Consultation on CPS 511 closed in late 2019, and APRA has been considering the extensive feedback received. APRA intends to announce its response to the consultation feedback in the next couple of months.

In November 2019, APRA also published an information paper outlining an ambitious agenda for transforming governance, culture, remuneration and accountability (GCRA) across the industries it regulates. This approach represents a significant enhancement of APRA’s regulatory and supervisory focus on GCRA issues. It also responds to recommendations from the Royal Commission – including recommendation 5.7 – Supervision of culture and governance.1

Regulator accountability

In December 2019, APRA released its Governance and Senior Executive Accountabilities. This document describes APRA’s internal governance and accountability arrangements, and is supported by individual accountability statements for senior executive roles and an accountability map. The accountability statements and map cover all four APRA Members, as well as APRA’s six Executive Directors, APRA’s Director of Strategy/Chief Risk Officer and Chief Internal Auditor. The release of this paper addresses recommendation 6.12 – Application of the Banking Executive Accountability Regime (BEAR) to Regulators.

 
Royal Commission recommendation 6.12 – Application of the BEAR to regulators

In a manner agreed with the external oversight body (the establishment of which is the subject of Recommendation 6.14) each of APRA and ASIC should internally formulate and apply to its own management accountability principles of the kind established by the BEAR.

Superannuation

In the superannuation sector, the Royal Commission reinforced the importance of APRA’s intensified focus on the delivery of quality member outcomes that has been underway for the past few years. To reinforce this, APRA finalised the new prudential standard, SPS 515 Strategic Planning and Member Outcomes, which sets out the requirements for more robust business planning and expense management practices by trustees. 

Changes to SPS 250 Insurance in Superannuation, to strengthen the trustee requirements when selecting an insurer, particularly in cases where they are dealing with a related party, will address both recommendation 4.14 – Additional scrutiny for related party engagements and recommendation 4.15 – Status attribution to be fair and reasonable. They will also require any rules that attribute a particular status to a beneficiary in connection with an insurance policy to be fair and reasonable. APRA aims to finalise SPS 250 and the supporting prudential guidance SPG 250 Insurance in Superannuation by the middle of the year. 

Valuation of land

To address recommendation 1.12 – valuations of land, APRA amended APS 220 Credit Risk Management. This provided a stronger set of requirements in relation to the independent valuation of collateral, as well as additional specification of issues that should be taken into account in valuations, particularly of agricultural land. 

Working with ASIC

An important finding of the Royal Commission was the need to strengthen the ability of financial regulators to work together more effectively, especially as the implementation of the Commission’s recommendations will create more areas of common interest. Recommendation 6.10 of the Royal Commission was for APRA and ASIC to update their memorandum of understanding (MoU) to set out more fully how the two agencies intended to work together in future. This new MoU was agreed and published in November 2019. 

Working with Treasury and the Federal Government

In addition to the recommendations directed towards APRA, many of the Government’s 54 recommendations also heavily involve APRA or APRA-regulated entities. To this end, a significant amount of work by APRA has gone into assisting the Treasury shape and draft legislation that will best give effect to the Royal Commission’s recommendations.

In particular, APRA is providing assistance on the reforms that will give effect to the Financial Accountability Regime (FAR), which extends the BEAR to all APRA-regulated entities. APRA was tasked, via recommendation 1.17, with developing a framework for product responsibilities under the BEAR regime; for completeness and efficiency, this is being pursued as part of the broader legislation to give effect to the FAR.

Royal Commission referrals

APRA received 12 referrals from the Royal Commission relating to misconduct that had been identified as being potentially serious and warranting further investigation. 

Over the past year, APRA has closely investigated the conduct underpinning the referrals, which has included reviewing considerable documentary evidence and obtaining independent legal advice as to the nature and extent of any breaches of the law. 

Although a number of matters remain subject to ongoing examination, APRA’s responses to the referrals has to date included imposing additional conditions on the licences of RSE Licensees and using the new directions power provided in the Superannuation Industry (Supervision) Act 1993 at one end of the scale.

The bulk of the referrals APRA received related to historic conduct which has largely been remediated, and as such cannot be subject to civil penalties. Nonetheless, APRA has used its supervisory powers to ensure that underlying prudential issues and root causes are addressed and to prevent this type of misconduct from recurring.  

Across all the referrals, APRA has been in regular contact with ASIC to ensure that the agencies’ actions are, where possible, aligned and complementary. APRA has also decided to undertake two thematic reviews into the industry practices, covering (i) collecting shelf-space fees and (ii) distributing tax surpluses to related entities, which will provide further information on this conduct which the Royal Commission identified as being potentially inconsistent with members’ best interests.

Beyond the Royal Commission

APRA has completed a number of other pieces of work that, while not the subject of a specific recommendation, further support the outcomes of the Royal Commission. 

This work includes the release of the first iteration of APRA’s superannuation heatmap, which highlights relative underperformance of MySuper products across three key performance categories: investment returns, fees and costs and sustainability of member outcomes. It also includes the release of the post-implementation review of APRA's superannuation prudential framework, which included a number of enhancements.  

Further work is being undertaken to increase the effectiveness of cooperation between APRA and ASIC. The agencies support the Royal Commission recommendations to enable ASIC to play a more effective role in regulating conduct in the superannuation industry, while retaining APRA’s critical role as prudential regulator for the sector. APRA and ASIC are already working together to lift industry practices and to achieve better outcomes for members, and we will continue to enhance regulatory co-operation.2

The road ahead

As the prudential regulator, overseeing institutions holding over $6.5 trillion in assets, APRA remains focused on continuing to protect the interests of depositors, policyholders and superannuation fund members and promoting overall financial system stability.

The Royal Commission set an ambitious agenda and APRA is committed to ensuring those recommendations directed to it are implemented as quickly as possible. The issues highlighted in the Royal Commission have also shaped APRA’s wider Corporate Plan, which outlines APRA’s strategic priorities for 2019-2023.

 


Footnotes

1 For further information about APRA’s response to recommendation 5.7, see our ‘APRA’s evolving approach to supervising risk culture’ article, March 2020.
2 For more on recent APRA and ASIC initiatives, see our ‘APRA and ASIC: a new era in cooperation’ article, March 2020.

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 $6 trillion in assets for Australian depositors, policyholders and superannuation fund members.