On Wednesday (17 July), Treasury released the Australian Prudential Regulation Authority’s (APRA) Capability Review, in which it provided an assessment of the regulator’s performance and outlined recommendations for reform.
The capability review was launched earlier this year following the release of the final report of the banking royal commission in February 2019 and sought to assess APRA’s capacity and capability to promote financial stability and its preparedness to address issues raised by the royal commission and “an environment of growing complexity and emerging risks for APRA’s regulated sectors”.
While the review panel applauded APRA’s efforts to build capital requirements, strengthen balance sheets and tighten lending standards in the residential mortgage market in the past few years, several criticisms were laid against the prudential regulator in terms of its internal culture, regulatory approach and leadership and structure.
“The main conclusion of the capability review was that APRA’s internal culture and regulatory approach need to change,” the review report reads.
“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.”
According to the review panel, the prudential regulator also “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”.
It concluded: “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.”
Among the 24 recommendations put forward in the review are proposals for APRA to: change its external governance arrangements, alter internal norms by departing from closed-door approaches, reinvigorate its approach to collaboration, take a more forceful approach in its public communications, and consider more “flexibility in its funding and compensation frameworks”.
The panel therefore recommended that the authority consider a new structure as a way to develop a more open-minded culture, one that was adaptable to change and supportive of engagement.
“A change in organisational structure is more likely to reinforce the required behavioural changes,” it said, suggesting that it separate out banking, insurance and superannuation divisions to increase focus and accountability for dealing with industry-specific issues.
It also argued for APRA’s chair to relinquish his ADI-specific oversight role and adopt a broader organisation-wide role (with remaining members splitting their roles to include a mix of industry, policy and functional responsibilities) and for a new “competition champion” role to be created within APRA.
Given the findings of the review (and of the banking royal commission before it), Centre Alliance senator Rex Patrick last week called on Mr Byres to resign as APRA chair.
“The royal commission found that APRA was asleep at the wheel and the APRA Capability Review has made findings of ‘variability of leadership, cultural problems, lack of transparency, lack of contestability’,” Mr Patrick said.
“These are matters that relate to leadership,” the senator added.
“The chair of APRA has been assigned clear responsibility, has authority vested in him by law and must therefore be held accountable for the performance of the organisation. When you earn $886,000, you have to be the best in the game, full stop,” he said.
“For far too long, there has been a great reluctance for senior officials in the public sector to accept personal responsibility for the failures of performance and governance by, or within, their organisations.
“Ultimately, the buck must stop with someone.”
The senator also suggested that the deputy chairs, John Lonsdale and Helen Rowell, should also “consider their ongoing tenure”.
Wayne Byres on leadership
Speaking to media about the leadership capability at APRA, Mr Byres said: “So first of all, every organisation has leadership variability... I don’t think we’re alone in having leadership variability. But we have, over the last couple of years, put a lot of effort into shifting APRA away….[from] a very high emphasis on technical skills and capabilities, and in recent times we’ve changed our leadership framework, we’ve changed our promotion process, we’ve changed our performance and assessment process to try and give a stronger focus to leadership capabilities, behaviours and values and that’s a work in progress.”
Mr Byres acknowledged that while the regulator is “not where [it] want[s] to be” on leadership capability, “there’s a range of things that we’ve done to try and improve,” he said.
The APRA chair went on to highlight that APRA had been including more gender diversity in its leadership (with around half of the general managers being women), as well as changing the way it thinks about who it recruits, promote and reward.
“With the government funding that we’ve got, we’ve got a great opportunity to build our numbers and bring in more… fresh insights, fresh perspectives,” he said.
“So I think we’ll continue that, but it’s never going to be something that I think you can say it’s done, it’s finished, it’s just one of those management and leadership challenges that you just have to continually invest in,” Mr Byres commented.
The APRA chair went on to tell journalists: “As a leader of an organisation, I understand as well as anyone these issues around culture, leadership, behaviours, there’s no silver bullet here. You need to get a lot of things right to get them effective, and we are like every organisation, we face these challenges. So… we’ve worked hard to deal with those.”
Mr Byres acknowledged that it may be true that some changes of culture may have been slow to change, but that change had been happening nonetheless.
“The report says you know there are aspects of our culture we’re slow to change, and maybe that’s true, but it also, the report also acknowledges it’s occurring while we’re pursuing an ambitious change agenda.
“In recent years, we’ve changed structure, we’ve changed leadership, we’ve changed process and activity. So maybe we’re slow to change, but we’re also undergoing a lot of change. We are a regulator, there is a premium that’s placed on regulators being clear, consistent, persistent. So, you know, maybe there’s too much focus on consistency in APRA,” he said.
Mr Byres said that when he was appointed chair five years ago, there were concerns about “inconsistency in decision-making”, so the regulator has “put a lot of effort into sharpening up consistency, making sure there was good collaboration”.
“That may have played out in terms of slower responses; it may have played out in terms of what’s seen as encouraging conformity. So, getting that balance right is quite difficult,” he said.
“I don’t think any of this in any way should undermine the importance that the role that APRA still plays in getting it right. And, as I said, my view is [that] I understand as well as anyone there are no quick wins here, you’ve got to do it through hard work.”
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.