The Treasurer has announced that he has appointed a panel of 3 experts to undertake a capability review of the Australian Prudential Regulation Authority (APRA) as recommended by the Banking, Superannuation & Financial Services Royal Commission Final Report and the Productivity Commission.

As part of its activities, it is anticipated that the panel will give specific consideration to APRA’s capability to promote financial stability within its frameworks as well as its readiness to respond to issues raised by the Royal Commission and the Productivity Commission.

This includes APRA’s capability to regulate superannuation entities for the benefit of members, the role of enforcement activities and coercive powers and the supervision of culture, governance and remuneration in regulated institutions.

The panel’s work will commence in March 2019 and will report to government by 30 June 2019.

APRA’s view of its supervision capability

In a recent speech APRA Chairman Wayne Byres said:

“The Commission’s Final Report,…, firmly placed primary responsibility for misconduct on the financial institutions concerned and those who managed and controlled them: their boards and senior management. Of course, just as there was a need to improve the regulation and supervision of financial risks following the events of 2008, the Commission also exhorted regulators in Australia to be more forceful, particularly in relation to standards of governance and culture within the financial sector. We will certainly do so. But to generate lasting change, sound principles and policy reforms must ultimately be accepted and genuinely embraced by those who operate financial businesses as the way business must be done, and not just an impediment to getting on with business….

our supervision methodology is generally in line with evolving international practice, but our supervision intensity needs to be increased, and our focus broadened. We made this one of our strategic priorities a year ago; recent events have only reinforced the importance of doing so.

As with many things in life, it’s easier said than done. To state the obvious, prudential supervisors can’t be everywhere. APRA has a touch under 600 institutions – banks, insurers and pension funds – to supervise, and a little over 600 staff to do it. Of that complement, only about 300 of the staff are directly involved in frontline supervision. In the case of banking, we have around 135 frontline supervisors covering 143 authorised deposit-takers – a ratio of just under one frontline supervisor per bank. Those organisations collectively employ over a quarter of a million staff and have aggregate assets of more than A$4.7 trillion. These figures and ratios will differ in each jurisdiction represented in the room today, but one basic fact will not: supervisors have a lot to watch over.

Because supervisors can’t be everywhere, it’s necessary to focus supervisory attention on the strength of a bank’s own policies and systems of governance, risk management and control. These must always be the primary lines of defence, and making sure they are as robust as possible is the typical modus operandi of supervisors around the world. However, our experience in recent times has highlighted some important ways that these lines of defence are undermined, and to which we will need to pay more attention in future…

The cases [mortgage lending, remuneration, conflicts of interest] also make clear the case for a much stronger supervisory focus on governance, culture and remuneration within financial institutions – something we have been building in recent years. However, unlike financial risks, issues of culture are difficult to identify and correctly diagnose, and simply requiring more capital or liquidity to offset perceived shortcomings is not the right solution. Regulation can help with some of the design features of a good framework, but ultimately insightful and astute supervisory judgement is essential. An increased intensity will require additional resources, new skills and, in some cases, a different approach. Yet if we genuinely want to make sure policymaking efforts over the past decade change actual behaviours in the financial system, these issues need much more attention.”