Erosion of trust a prudential issue: APRA

Speaking at the Insurance Council of Australia Annual Forum 2019 in Sydney on Wednesday (27 February), the deputy chair of the Australian Prudential Regulation Authority, John Lonsdale, said that while the profits generated from the sale of add-on insurance products “arguably bolstered [the] prudential strength” of insurance providers, it came at the expense of trust.

“The royal commission has highlighted behaviours and practices that suggest the basic principle of insurance – utmost good faith – has not always been adhered to. The result has been an undermining of trust,” he continued.

Mr Lonsdale noted that while the suitability of financial products and sales channels is a concern for the  Australian Securities and Investments Commission (ASIC), he noted that when customer trust is undermined, it becomes a prudential issue.

“Trust is an essential component in all financial service businesses. Its erosion is very much a prudential issue and, appropriately, a matter of concern for APRA,” the APRA deputy chair said.

“The royal commission has therefore encouraged us to do much more in examining culture within financial institutions, and what drives it."

In the final report for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Commissioner Kenneth Hayne said that while culture, governance and remuneration are the responsibility of financial services entities, regulators such as APRA and ASIC have an important role to play in the supervision of these areas.

Noting APRA chairman Wayne Byres’ claim that the regulator’s supervisory resources are limited and therefore it needs to prioritise certain activities, he argued that it’s “essential that there be enough supervision resources, and with the right skill sets/seniority and expert support if needed, to engage constructively with banks on these issues.”

“The work of the [Financial Stability Board], G30 and international practice more generally shows that this work is essential to the proper prudential supervision of banks and, in my view, other large APRA‑regulated institutions,” Commissioner Hayne wrote in his final report.

“Because it is an essential part of prudential supervision, APRA must have the resources to do it.”

Mr Lonsdale said the royal commission’s recommendations pertaining to APRA is in line with the goals it set out in its Corporate Plan for 2018-2022, including broadening its supervisory focus, increasing inter-agency collaboration, and improving performance measurement and accountability.

“A capability review will help APRA be well equipped to fulfil our mandate into the future; and the creation of a new regulatory accountability regime, similar to the [Banking Executive Accountability Regime], and a new regulatory oversight body, will make us more answerable for our decisions and actions,” the deputy chair continued.  

“Increased accountability is beneficial for financial institutions, so I am confident it will also help APRA to lift its standards and performance.”

The prudential regulator will be reviewing its enforcement strategy with the assistance of an independent expert panel. The review has a wide scope that includes consideration of when to hold individuals to account (including under the BEAR), when it would be appropriate to take enforcement action to achieve general and specific deterrence in appropriate cases, and APRA’s governance and other arrangements in relation to enforcement decisions.

“The review… is likely to recommend an increased enforcement appetite, which will mean industry can expect an APRA that is less patient on the time taken by uncooperative entities to remediate issues, more forceful in expressing specific expectations, and prepared to set examples using public enforcement to achieve general deterrence,” Mr Lonsdale said.

The APRA deputy chair said the regulator will release a revised prudential standard on remuneration for consultation later this year, focused on “better alignment of remuneration with prudent risk management outcomes and long-term institutional soundness”.

“It will also have regard to measures designed to reduce the risk of misconduct,” he added.

The regulator has also started preparations to extend the reach of the BEAR beyond authorised deposit-taking institutions to all APRA-regulated sectors, including general insurance.

“APRA... [recognises] that insurers and super trustees can benefit from the same sharpened focus on the clarity of accountability arrangements within financial institutions,” Mr Lonsdale said.

[Related: APRA ‘will not be a police force’, says chairman]