APRA to focus on regulating non-financial risks

The Australian Prudential Regulation Authority (APRA) has publicly released its 52-page Corporate Plan for the 2020-2023 financial years, outlining four areas of strategic focus to improve the financial sector’s management of non-financial risks, improve customer outcomes, and speed up the time it takes to respond to industry challenges. 

“Although it is ultimately up to financial institutions to strengthen community trust in the industry, regulators have an important role to play. In delivering on this Corporate Plan, APRA will be better equipped to ensure the entities we regulate are not only financially resilient but also have frameworks, systems and cultures in place designed to reduce the risk of misconduct and poor consumer outcomes,” APRA chair Wayne Byres said. 

The four strategic priorities include:

• maintaining financial system resilience;
• improving outcomes for superannuation members;
• improving cyber resilience across the financial system; and
• transforming governance, culture, remuneration and accountability across all regulated financial institutions.

In order to improve the management of non-financial risks, APRA will revise its prudential framework to emphasise and clarify prudential expectations and guidance relating to governance, culture, remuneration and accountability (GCRA). 

This is in addition to more frequently sharing GCRA insights with external stakeholders to reinforce prudential expectations pertaining to GCRA; improving supervisory tools and approaches, including through the use of technology; and undertake “intensive” reviews and prudential inquiries to identify and act on poor management of non-financial risks.

Furthermore, it said it will apply a “constructively tough” approach to the supervision of GCRA and “empower” supervisors with market intelligence to identify poor management of GCRA issues and take action where necessary. 

The corporate plan also identifies areas of focus to boost internal capabilities, which are:

• improving and broadening risk-based supervision, which includes boosting its ability to “proactively identify, assess and respond to a broader range of risks in a coordinated way and ensure risks are well-informed and empirically grounded” and reinforcing its new enforcement approach announced in April this year;
• improving its resolution capability, such as by establishing a new prudential standard on resolution and developing “more robust resolution strategies that aim to “minimise financial loss, distress and instability within the financial system in the event of a crisis”;
• improving external engagement and collaboration, including by publishing information papers to explain how it undertakes activities in areas such as enforcement and GCRA;
• transforming data-enabled decision-making, such as by creating a new data collection solution to modernise how APRA collects, stores and accesses data; and
• transforming its leadership, people and culture.

In its corporate plan, APRA expressed concerns about the housing and mortgage markets, citing the decline in house prices, increase in loans in negative equity, and low interest rates as issues that present “some systemic risk” and could impact stability in a financial system that is heavily exposed to mortgages and household capacity for servicing substantial debt”. 

“Declining house prices and subdued wage growth present some systemic risk and have the ability to impact stability within a banking system which is heavily exposed to mortgages and household capacity for servicing substantial debt,” the plan states. 

“Loans in ‘negative equity’, where loan value is greater than the encumbered asset value, are increasing although widespread loan losses are not evident and presently unlikely.”

APRA chair Wayne Byres acknowledged the higher expectations of the prudential regulator, saying that the new corporate plan “fulfils” the recommendations of the financial services royal commission and capability review.

“Amongst other things, we will place greater emphasis on the supervision of ‘non-financial risks’ such as culture and accountability, and take a ‘constructively tough’ enforcement approach when breaches of our prudential standards occur,” Mr Byres said. 

“As macroeconomic and geopolitical risks play out, as technological innovation transforms the industry, and as new risks such as cyber and climate change grow, we must have the right skills and resourcing to continue protecting bank depositors, insurance policyholders and superannuation members.”

The release of APRA’s corporate plan followed on from that of ASIC, which outlined seven strategic priorities aimed at identifying threats and behaviours that are harmful to consumers. 

[Related: ASIC reveals plan to curb misconduct in next four years]