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APRA preparing for ‘unseasonable’ market ‘cold snap’

The prudential regulator’s work has helped ensure that the financial system remains “resilient” when Australia’s “economic summer inevitably ends”, APRA’s deputy chair has said.

In his address to the Financial Services Institute of Australia (FINSIA) in Melbourne, newly appointed deputy chair of the Australian Prudential Regulation Authority (APRA) John Lonsdale claimed that the regulator’s stability measures have helped prepare the Australian economy for an “unseasonable cold snap”.

“It can be easy to overlook how important the stability of the system and resilience of financial institutions are for consumers,” Mr Lonsdale said.

“We need to go back to 1991 to find the last time Australia’s economy contracted for two or more consecutive quarters, and the last time any APRA-regulated financial institution failed was 2011.

“But no summer lasts forever.”

The deputy chair said that Australia has experienced “27 years of continuous economic expansion”, but he added that part of APRA’s remit is “not assuming that this continues indefinitely and thinking about what it would mean to have a new period of economically cooler conditions”.

He continued: “It’s vital to be prepared, and over the coming year, APRA will continue to focus on policies and actions aimed at ensuring banks, insurers and super funds are well placed to withstand any potential period of tougher economic conditions.”

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Also speaking at the FINSIA conference was Reserve Bank (RBA) deputy governor Guy Debelle, who lauded APRA’s work to curb “mounting risks” in the lending space, making reference to the tightening of serviceability standards and caps on investor and interest-only lending.

The deputy governor said that he was concerned that “riskier borrowing’ would be the “accelerator”, not the cause, of a “negative shock” to the economy.

Mr Debelle added: “The [regulatory] measures have helped to reduce the riskiness of new borrowing.

“In turn, this has stemmed the increase in household sector vulnerabilities and improved the resilience of the economy to future shocks.”

In light of concerns raised by industry stakeholders, including head of research at Propertyology Simon Pressley, the RBA governor acknowledged the effect of APRA’s measure on credit growth but said that there was “little evidence” to suggest that the measures have “excessively constrained aggregate credit supply”.

Meanwhile, in concluding his assessment of APRA’s regulatory measures, deputy chair John Lonsdale said: “Australia’s unprecedented period of interrupted economic growth may have years yet to run. We hope it does.

“But when our economic summer inevitably ends — and winter, autumn or just an unseasonal cold snap arrives — the work that APRA is undertaking means Australians can be confident that the financial institutions they rely on are resilient and their money is well protected.”

APRA to revisit misconduct cases as it mulls enforcement

During his address, Mr Lonsdale also revealed that APRA has been revisiting cases of potential misconduct brought to light by the financial services royal commission and will consider enforcement action.

“We are [re-examining] cases of potential misconduct by regulated entities raised during the royal commission where the evidence presented was either new to APRA or contradicted what we had previously been told,” Mr Lonsdale said.

“That process will continue into 2019, and may well lead to formal enforcement action, should we deem it warranted.”

Further, the deputy chair said that a “key priority” for APRA over the first three months of 2019 would be to review its enforcement strategy.

Mr Lonsdale said that the review would make recommendations on which enforcement issues APRA should consider acting on, what factors it should take into account, and whether there are any practical or legislative impediments to its pursuit of a “stronger approach”.

The review, which will be supported by an external advisory panel of experts, will be presented to APRA members at the end of March 2019, with the final recommendations set to be made public after consideration by APRA members.

“Without pre-empting the review, we have acknowledged the need to consider a stronger appetite for formal enforcement action, including giving greater weight to its strategic use as an industry-wide deterrent,” Mr Lonsdale said.

“We will, however, remain a supervision-led, rather than enforcement-led, regulator with a focus on pre-emptively tackling problems before they compromise an entity’s ability to meet its obligations to beneficiaries, or rectifying adverse outcomes in the best interests of customers.”

[Related: Government urged to limit ‘destructive’ APRA powers]

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