Statement of performance
I, Wayne Byres, as the accountable authority of the Australian Prudential Regulation Authority (APRA), present the annual performance statement of APRA for the 2019/20 reporting period, as required under paragraph 39(1)(a) of the Public Governance, Performance and Accountability Act 2013 (PGPA Act). In my opinion, this annual performance statement accurately presents the performance of APRA and complies with subsections 39(2) of the PGPA Act.
Purpose
APRA is an independent statutory authority established for the purpose of prudential supervision of financial institutions and for promoting financial stability in Australia. APRA’s role is to regulate relevant financial institutions through a robust prudential framework of legislation, prudential standards and guidance, which aims to ensure that risk-taking is conducted within reasonable bounds and that risks are clearly identified and well-managed. In performing and exercising its functions, APRA is required to balance the objectives of financial safety and efficiency, competition, contestability and competitive neutrality, and, in doing so, to promote financial system stability in Australia.
Corporate Plan
APRA began the 2019/20 financial year with an ambitious agenda. APRA’s 2019-2023 Corporate Plan outlined specific areas for concentrated attention in order to maintain financial system resilience, make tangible and visible improvements in key result areas for the benefit of the Australian community and improve and transform APRA’s internal tools, capabilities and ways of working. Four strategic focus areas to strengthen outcomes for the Australian community were defined and an uplift in APRA’s internal capabilities in five areas was considered essential to attain desired community outcomes.
Changes in APRA’s operating environment
APRA takes a risk-based approach to identifying and assessing areas of greatest risk to regulated institutions meeting their obligations, and to financial stability in Australia, and directs its resources to address those risks. It became clear in early 2020 that APRA needed to review the strategic priorities laid out in its 2019-2023 Corporate Plan and move quickly to respond to a rapidly deteriorating operating environment triggered by the COVID-19 global pandemic. APRA promptly reset priorities and directed resources to key risks and vulnerabilities – including the heightened risk of failure of one or more APRA-regulated institutions – and intensified its efforts to reinforce the stability of the financial system and support the broader Australian economy.
The onset of COVID-19 also prompted a significant change to APRA’s way of working with its entire workforce shifting to working-from-home in early 2020. In such an environment, APRA placed a high priority on supporting the health and wellbeing of its people and providing enabling infrastructure and technology to continue to operate effectively in a distributed work environment.
It is with this context, and the backdrop of APRA’s Statement of Intent1, that the analysis of APRA’s performance for the 2019/20 financial year is presented in this performance statement.
Key performance measures
APRA’s 2019-2023 Corporate Plan outlined the following key measures with which APRA’s performance against its core statutory functions would be assessed for the 2019/20 financial year.
Incidence of failure of APRA regulated institutions
APRA seeks to maintain a low incidence of failure of APRA-regulated institutions while not unnecessarily hindering efficiency, competition or otherwise impeding the competitive neutrality or contestability of the financial system2. APRA aims to identify likely failures early enough so that corrective action can be promptly initiated or orderly exit achieved. APRA monitors two key performance indicators in this respect:
Performing Entity Ratio (PER) – The PER is an indicator of the incidence of failure amongst regulated institutions. It is determined as the number of regulated institutions that met their commitments to beneficiaries in a given year divided by the total number of regulated institutions. The higher the percentage, the lower the incidence of failure.
Money Protection Ratio (MPR) – The MPR is an indicator of the incidence of loss in the financial sector. It is determined as the dollar value of liabilities to beneficiaries held in Australia in regulated institutions less any prudential losses to beneficiaries in a given year, divided by the total dollar value of liabilities to beneficiaries in Australia in regulated institutions. Again, the higher the percentage, the lower the incidence of loss.
Efficient administration of the Financial Claims Schemes
As specified in Section 8 of the Australian Prudential Regulation Authority Act 1998, APRA has responsibility for administering Financial Claims Schemes (FCSs). The FCSs are Australian Government schemes designed to protect Australian depositors and general insurance policyholders in a situation in which an authorised deposit-taking institution (ADI) or general insurer fails3. Under the Banking Act 1959 (Banking Act) and the Insurance Act 1973 (Insurance Act), the relevant Minister may make a declaration which activates the FCS if certain conditions are met. Administration of the FCS, once activated, is one of APRA’s primary responsibilities.
- Authorised deposit-taking institutions – APRA measures the efficiency with which it performs its function in relation to the FCS for ADIs by the percentage of FCS payments paid to account holders within seven calendar days of an FCS declaration4.
- General Insurers – Given the long tail nature of insurance claims, which do not easily lend themselves to measures of efficiency, APRA reports on the number of outstanding claims in the event of an FCS declaration.
Efficient operations
As well as striving to maintain a low incidence of failure and efficiency in administering the FCS, APRA seeks to operate efficiently. APRA’s proxy efficiency measure is costs per $1,000 of assets supervised.
The above key performance measures are supplemented by additional metrics included in the analysis section of this performance statement.
Results
Incidence of failure of APRA-regulated institutions
The strong PER and MPR results presented in Table 1 indicate that APRA continued to perform well against its purpose during the year.
Overall | 2019-20 result (%) | 10 Year average (%) | 20 Year average (%) | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
PER | 100.00 | 99.95 | 99.94 | ||||||||
MPR | 100.00 | 100.00 | 99.97 | ||||||||
By Industry | Banking | General Insurance | Life Insurance | Superannuation | Private Health Insurance* | ||||||
Average (%) | 10yr | 20yr | 10yr | 20yr | 10yr | 20yr | 10yr | 20yr | 5 year | ||
PER | 100.00 | 100.00 | 100.00 | 99.76 | 100.00 | 100.00 | 99.92 | 99.93 | 100.00 | ||
MPR | 100.00 | 100.00 | 100.00 | 99.34 | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 | ||
*APRA became the prudential regulator for private health insurers from 1 July 2015. Therefore only 5-year PER and MPR averages are reported for that industry.
Table 2 provides a further breakdown of the number of failures, the dollar value of losses, the dollar value of protected accounts and the annual PER and MPR by financial year. While the incidence of loss has declined since APRA’s formation, the value of protected accounts has considerably increased, reflecting significant growth in the size of the Australian financial system.
Financial | Number | Losses | Number of | Protected | Annual | Annual |
|---|---|---|---|---|---|---|
2001 | 8 | 5,3414 | 4,350 | $947,923 | 99.82 | 99.44 |
2002 | 6 | 140 | 3,803 | $1,006,845 | 99.84 | 99.99 |
2003 | 5 | 19 | 3,252 | $1,066,480 | 99.85 | 100.00 |
2004 | 1 | 05 | 2,744 | $1,207,241 | 99.96 | 100.00 |
2005 | 0 | 0 | 2,099 | $1,347,813 | 100.00 | 100.00 |
2006 | 0 | 0 | 1,596 | $1,546,338 | 100.00 | 100.00 |
2007 | 1 | 0 | 1,244 | $1,832,609 | 99.92 | 100.00 |
2008 | 0 | 0 | 1,129 | $1,923,369 | 100.00 | 100.00 |
2009 | 0 | 0 | 1,028 | $2,048,163 | 100.00 | 100.00 |
2010 | 1 | 1 | 965 | $2,231,887 | 99.90 | 100.00 |
2011 | 4 | 72 | 832 | $2,462,275 | 99.52 | 100.00 |
2012 | 0 | 0 | 780 | $2,650,832 | 100.00 | 100.00 |
2013 | 0 | 0 | 724 | $2,973,705 | 100.00 | 100.00 |
2014 | 0 | 0 | 706 | $3,319,391 | 100.00 | 100.00 |
2015 | 0 | 0 | 681 | $3,628,841 | 100.00 | 100.00 |
2016 | 0 | 0 | 660 | $3,870,659 | 100.00 | 100.00 |
2017 | 0 | 0 | 602 | $4,100,235 | 100.00 | 100.00 |
2018 | 0 | 0 | 573 | $4,451,132 | 100.00 | 100.00 |
2019 | 0 | 0 | 555 | $4,685,336 | 100.00 | 100.00 |
20206 | 0 | 0 | 527 | $4,523,018 | 100.00 | 100.00 |
1. In the case of superannuation, failures refer to the number of funds affected and include failures due to employer sponsors.
2. The number of institutions excludes small APRA Funds, representative offices of foreign banks and non-operating holding companies. From 1 July 2015, APRA became the prudential regulator for private health insurers. This has been reflected in Table 1.
3. Protected Accounts is an estimate of the funds protected by APRA as defined by relevant legislation and is less than the total assets held by APRA-regulated institutions, which were $7,684 billion at end-June 2020. From 1 July 2015, APRA became the prudential regulator for private health insurers. This has been reflected in Table 1.
4. Includes HIH Group’s estimated $5.3 billion loss incurred by creditors and policyholders, based on liquidator’s advice to creditors in April 2002.
5. Losses incurred due to the failure of an employer sponsor in a superannuation fund were less than $0.5 million.
6. The calculation of Protected Accounts for Authorised Deposit-taking Institutions (ADIs) was adjusted during 2019-20 to reflect a change in data items submitted to APRA.
Efficient administration of the FCS
In the 2019/20 financial year, no declarations of the FCS for banking or general insurance were made. The only time the FCS has been activated to date has been the failed general insurer Australian Family Assurance Limited in 20095. Due to exceptional circumstances, one claim remains outstanding in relation to this institution.
Efficient operations
APRA’s total operating expenditure for the 12 months to 30 June 2020 was $196.2 million, against the original budget of $184.2 million. Relative to the size of the industries that APRA supervises, the cost per $1,000 of assets supervised was 2.6 cents in 2019/20. This compared with approximately 3.0 cents per $1,000 of assets supervised at the start of the decade. The increase from 2015 to 2016 shown in Figure 1 below reflects inclusion of private health insurers under APRA’s purview from 1 July 2015.
During 2019/20, new funding measures significantly increased APRA’s available resources, with average staffing levels increasing from 644 to 734. The increase in resourcing arose due to the Government’s response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission), increasing the supervision intensity of the largest and most complex institutions, providing for significant investment in APRA’s technology for data collection and analysis, and preparation for the introduction of the Financial Accountability Regime. The increase in costs per $1,000 of assets supervised in 2019/20 primarily reflects a broadening of supervisory responsibilities and activities, rather than a decline in APRA’s operational efficiency.
Footnotes
- 5 https://www.apra.gov.au/statement-of-intent-september-2018↩
- APRA endorses the view expressed in the Government’s Statement of Expectations that ‘…prudential regulation cannot and should not seek to guarantee a zero-failure rate of prudentially regulated institutions or provide absolute protection for market participants. A regulatory approach with such intensity would remove the natural spectrum of risk that is fundamental to wellfunctioning markets, and ultimately reduce the efficiency and growth of the Australian economy’.↩
- The FCS does not apply to life insurance companies or to private health insurers. Separate arrangements for compensating members are in place for instances of fraud or theft in superannuation.↩
- https://www.fcs.gov.au/about-apra↩
- On 15 October 2009, the Minister made a declaration under section 62ZZC of the Insurance Act 1973 that Division 3 of Part VC of that Act applied in relation to Australian Family Assurance Limited.↩
Visit
https://www.transparency.gov.au/annual-reports/australian-prudential-regulation-authority/reporting-year/2019-20-48