Treasury has released the Australian Prudential Regulation Authority (APRA) Capability Review Report.

The Review was recommended by the Financial Services Royal Commission and was established with the objective of assessing APRA’s capability to deliver upon its statutory mandate under the APRA Act and relevant industry acts.

The Report makes 24 recommendations which seek to ensure that APRA is best placed to deal with its future environment and the challenges which lie ahead. Nineteen recommendations are made to APRA and five recommendations reside with the Government.

The Report observes:

“The main conclusion of this Review is that APRA’s internal culture and regulatory approach need to change. There is also variability in its leadership capability. There is no doubt that in matters of traditional financial risk APRA is an impressive and forceful regulator. But the Panel observes that APRA’s tolerance for operating beyond quantifiable financial risks has been low. APRA appears to have developed a culture that is unwilling to challenge itself, slow to respond and tentative in addressing issues that do not entail traditional financial risks. In combination with APRA’s organisational structure, these factors limit its ability to deliver on the breadth of its mandate and adapt to new challenges. ”

“It should retain its focus on maintaining financial safety and stability but focus more intensely on governance, culture and accountability (GCA) in the financial sector. It should accept that GCA risks have a major bearing on financial risk. This Review is careful not to make the distinction between financial and non-financial risks common in discussions of GCA. Weaknesses in GCA frameworks feed directly into financial safety and stability. For a prudential regulator there is no binary choice between supervising financial or GCA risks. “

APRA organisation recommendations

With respect to APRA’s organisation structure, the Report recommends APRA should:
a. restructure supervision divisions along industry lines — banking, insurance and superannuation;
b. revise management structures and levels, with a view to widening spans of control and enhancing efficiency, speed of decision-making and empowerment;
c. shift internal configuration to better support industry-focussed strategic activities and more agile ways of working; and
d. create distinct people-leader and technical-specialist career pathways.

It also recommends APRA’s Chair should relinquish his ADI-specific oversight role and adopt a broader organisation-wide role. The remaining Members should split their roles to include a mix of industry, policy and functional responsibilities.

The Report says a key focus of the new Superannuation Division should be the overall performance of the superannuation system for members. APRA should embed and reinforce its increasing focus on member outcomes, and continue to ensure that trustees prudently manage member funds.

In relation to competition, the Report says APRA should:
a. create a competition champion within APRA, preferably at Member level. Their role should be to ensure that issues of competition are embedded effectively across all areas of APRA;
b. ensure that there is sufficient tension in the internal debate and analysis of competition. It should test how policies are developed and applied by supervisors. This could be done in the Quality Assurance function and reported to the competition champion; and
c. report regularly on competition developments in its external accountability assessment.

Government Response
The Government has responded by agreeing to the five recommendations addressed to it.

In particular, the Government says:

• it will ensure that APRA has sufficient powers and flexibility to prevent inappropriate directors and senior executives from being appointed or re-appointed to regulated entities, as part of extending the Banking Executive Accountability Regime;
• it will consider a review of APRA’s penalties, providing a power to appoint a person to undertake a review of an entity, and enhancing private health insurance licensing powers.
•  it will consider the need for any additional funding as part of the 2020-21 Budget process.

APRA’s response

APRA says it supports all of the 19 recommendations addressed to it.

APRA says it had already identified and begun work on many of the changes needed to strengthen its capability in the areas identified in the review. In addition, it notes that APRA’s new enforcement approach came into effect in April 2019, and implementation has begun on actions to respond to the Hayne Royal Commission.