Following a recommendation from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the Government announced a review of APRA’s capabilities (Review). The Review was undertaken by an expert panel that was chaired by Graeme Samuel AC and its report was provided to the Government on 28 June 2019.

Key implications

The main findings are that APRA’s internal culture and regulatory approach needs to change. As a result of the implementation of the recommendations, APRA:

  • will become a more experienced, responsive and targeted regulator that will more frequently use advice from external experts and CBA style prudential inquiries;
  • will embed its ‘constructively tough’ approach to enforcement and move from its ‘behind closed doors’ approach to a transparent supervisory challenge and enforcement approach;
  • will increase its focus on governance, culture and accountability (GCA) issues, credit risks, cyber resilience, IT risks and competition; and
  • will have the power to veto the appointment of directors and senior executives.

Specifically, for superannuation APRA will:

  • have a specialist superannuation Division; and
  • continue to focus on member outcomes and support this by publishing objective benchmarks for product performance and publication of its expectations for member outcomes.

Superannuation trustees should:

  • in relation to GCA, ensure that their structures and procedures are appropriate and in doing so could prepare for the future application of the Banking Executive Accountability Regime (BEAR) to superannuation;
  • be prepared for more in-depth APRA reviews; and
  • ensure that its member outcomes target outcomes rather than factors contributing to outcomes (e.g. member retention).

A long time coming

The Review has been an outstanding action on the Government’s ‘to do’ list for a while. It was first recommended by the Financial System Inquiry in 2014. The Productivity Commission and Commissioner Hayne recommended that APRA’s capability be reviewed immediately. Commissioner Hayne also recommended that APRA and ASIC be subject to at least quadrennial capability reviews.

What were they doing?

The Review was undertaken by 3 independent experts (Graeme Samuel AC, Diane Smith-Gander AO and Grant Spencer). It was tasked with:

  • assessing APRA’s capability to deliver on its statutory mandate;
  • assessing APRA’s ability to deal with an increasingly complex environment with emerging risks for the sectors that it regulates; and
  • recommending enhances to APRA’s future capability.

Government and APRA response

APRA have supported all the recommendations and requested further funding. The Government has also supported all the recommendations and stated that it will act ‘promptly’.

APRA will be a different regulator

On the implementation of the recommendations, APRA will be a different regulator. Some of the key issues that will be addressed are:

Internal organisation and focus

  1. More responsive: APRA will hold itself accountable for the timeliness of approvals and other commercially-important decisions and make its adherence to its own standards publicly available. Management structures will be revised to enhance efficiency, speed of decision making and empowerment.
  2. More industry specific focus: APRA will be reorganised along the lines of the industries that it regulates. There will be a specific Superannuation Division.
  3. More experienced staff and external experts: The limitations on APRA’s remuneration of its staff will be reviewed to enable greater variation in remuneration levels. External panel of experts to be established to undertake more in-depth assessment of entities GCA risks.
  4. Areas to build capacity: APRA will build capability in the areas of credit risks, cyber resilience, IT risks and competition.

Supervision and enforcement moving into the daylight from ‘behind closed doors’

This area of APRA’s report has received the most publicity. Some key messages are:

  • Focus on GCA: APRA must focus on outcomes and not just processes and enhance its approach to assessing these risks. This includes a biennial self-assessment of these risks.
  • Transparency: The governance self-assessments, APRA’s assessments of them, APRA’s thematic reviews and any rectification requirements imposed by APRA will be published.
  • CBA style prudential inquires: These will be used. It is expected that there will be several in the next few years, and in time they will involve retail and industry superannuation, insurance and banks.
  • Non-objections power to veto directors and senior executives: APRA will have a power to veto the appointment and reappointment of directors and senior executives.

Superannuation specific issues

APRA should continue its focus on member outcomes and legal requirements designed to protect members’ savings (e.g. sole purpose test, MySuper obligations, fee requirements and conflicts of interest). This will involve:

  • publishing objective benchmarks on product performance and publicly stating its expectations for member outcomes;
  • developing a performance tool that focuses on member outcomes;
  • collecting product level data to facilitate comparability across funds; and
  • increasing its resourcing of the superannuation industry.

The panel found that supervisors had focused on factors contributing to outcomes (e.g. brand loyalty and member identity) rather than the outcomes themselves.