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Closer scrutiny and higher transparency is way forward for APRA

by Lewis Panther | 21 Nov 2019
APRA is putting pressure on banks to lift standards of governance, culture, remuneration and accountability after revealing they face remediation costs of $7bn.

The prudential regulator’s Deputy Chair John Lonsdale, who referred to the new tougher approach at FINSIA’s The Regulators lunch, says the measures are vital for restoring trust in the sector.

It is clear APRA is ramping up scrutiny after stinging criticism at the 
Royal Commission. CBA-style Prudential Inquiries are likely to be far more frequent. 

Having a seat on boards is also being considered as part of the APRA continues to flex its muscles.

“A strong balance sheet alone is not enough for institutions to remain in good prudential health,” Mr Lonsdale said.

“Although governance, culture, remuneration and accountability are often termed ‘non-financial risks’, a failure to address weaknesses in these areas can cause major financial losses through reputational damage, fines and expensive remediation programs. 

“Remediation costs relating to issues identified in the Royal Commission have cost industry in excess of $7 billion to date, and are likely to rise further as both new and historical issues come to light.

“Last year’s risk governance self-assessments made clear that industry was grappling to manage GCRA risks, many of which were well-known and long-standing. 

“Although boards are ultimately responsible for GCRA within their institutions, we have concluded that a higher degree of regulatory prescription and oversight is needed to achieve the requisite improvement in GCRA practices and community outcomes.”

Lonsdale touched on the tougher approach at the fifth annual lunch in Sydney when he made it clear that ensuring better outcomes for Australians would come with having a greater level of openness.

He added: “One of the primary areas where APRA has evolved its approach over the past year is in the area of transparency. 

“In line with prudential regulators globally, APRA has historically been economical with the information it disclosed. 

“This caution stemmed partly from legal restrictions on what APRA can say publicly, but also a belief that financial stability was best served by a prudential regulator that conducted its work out of the spotlight. 

“It’s fair to say that mindset has undergone a significant transformation.

“Rather than viewing openness as a potential obstacle to fulfilling our mandate, transparency is now being harnessed by APRA as a tool to achieve better prudential outcomes on behalf of the Australian community. 

“Over the next 12 months, APRA will increasingly open up on its actions, decisions and assessments of entities as a means of informing our stakeholders, influencing behaviour and driving accountability – both for ourselves and the entities we regulate.

“The clearest evidence to date of APRA’s new approach to transparency has been in the area of enforcement.

He says APRA’s thinking is that it can “achieve better prudential outcomes by being more willing to set public examples when enforcement action was taken. 

“It took little more than a month for us to put that into practice, with a media release announcing APRA had issued directions to IOOF group for failing to comply with its new licence conditions. 

“In June, we publicised the decision to impose directions and new licence conditions on AMP Super, announced the decision to impose additional capital requirements for three of the major banks and one insurer in response to weaknesses identified in their risk governance self-assessment, publicised our decision to force several banks to tighten the intra-group funding arrangements for their Australian operations and announced a decision to fine Westpac for failing to meet legal reporting requirements.

“The additional capital requirements we imposed on several entities in response to weaknesses uncovered by their risk governance self-assessments that followed the ground-breaking Prudential Inquiry into Commonwealth Bank of Australia (CBA).”

The CBA inquiry in the wake of the money laundering scandal is regarded as the benchmark for such inquiries.

Dozens of entities had conduct self-assessments using a similar template after. It led to $1.75 billion in capital penalties for the big four banks. 

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