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Analysis of performance against purpose

Analysis of APRA’s performance in relation to the four strategic focus areas to strengthen outcomes for the Australian community and five areas where an uplift in APRA’s internal capabilities was considered essential, as set out in APRA’s 2019-2023 Corporate Plan, is provided below.

Maintain financial system resilience

Objective

To maintain APRA’s strong track record of maintaining financial safety and stability by reinforcing the resilience of APRA-regulated financial institutions and the Australian financial system to protect the interests of Australian depositors, insurance policyholders and superannuation members.

Performance against objective

APRA’s supervision and prudential policy program is directed at protecting the Australian community by identifying and actively responding to significant risks to financial institutions and the financial system in a timely manner, establishing minimum expectations for financial institutions and empowering APRA’s supervisors to achieve desired prudential outcomes. The consistently strong PER and MPR results presented above indicate that APRA continued to perform well against this objective during an extremely challenging year.

In January 2020, APRA published updated plans on its supervision and policy priorities for the year ahead, consistent with the priorities laid out in the 2019-2023 Corporate Plan. Shortly thereafter, however, it became clear that APRA needed to move quickly to respond to a rapidly changing operating environment triggered by the COVID-19 global pandemic. As such, many planned supervisory activities and policy reforms that were underway were put on hold for at least six months. In their place, APRA re-directed its resources to the assessing and responding to the immediate risks and vulnerabilities generated by COVID-19, as well as its own scenario and crisis planning.

This refocusing of supervisory attention also allowed financial institutions to focus on supporting customers through the unfolding pandemic and economic contraction. As a result, APRA’s frontline supervisors directed their attention to how financial institutions were responding to COVID-19, particularly in the areas of financial and operational resilience. This involved extensive and frequent liaison with key contacts at each institution. On the policy front, all substantive public consultations and ‘in flight’ revisions to the prudential framework were suspended. A notable deferral was the scheduled implementation of the Basel III capital reforms for banks in Australia, which was delayed by one year in line with the decision by the Basel Committee on Banking Supervision to defer the internationally agreed start dates from January 2022 to January 2023.

Figure 2 – Number of prudential engagements  prudential reviews, prudential consultations and prudential meetings

Figure 2 above demonstrates how the prudential engagements conducted by APRA changed over the course of the year. During the period July to December 2019, APRA conducted its normal supervision program of prudential engagements1 including 38 prudential reviews, 32 prudential consultations and 183 prudential meetings. While formal prudential engagements reduced notably in the second half of the year as APRA pivoted its supervisory resources to focus on COVID-19 activities, APRA nevertheless maintained extensive contact with key representatives from regulated institutions to assess COVID-19-related risks and responses – with contact often occurring on a daily basis at the height of the crisis.

In terms of policy reforms, APRA released five updated prudential standards, three prudential practice guides and four reporting standards and consulted on 21 proposed changes to the prudential and reporting framework across all regulated industries in the 2019/20 financial year, as per Figure 3 below. Although not notably less than some prior years, the quantum of consultations was less than originally planned for 2019/20, given the deferral of policy consultation as a result of the onset of COVID-19.

Figure 3 – Number of policy consultations conducted Number of policy consultations conducted in 2015/16, 2016/17, 2017/18, 2018/19 and 2019/20

For all changes made to the prudential framework, APRA achieved 100 per cent compliance with Office of Best Practice Regulation requirements demonstrating its commitment to consulting with Government, financial institutions, peer regulatory agencies and other stakeholders, and analysing the cost, benefits and impacts of any proposed new regulation.

APRA received 266 applications for regulatory relief from financial institutions related to COVID-19 prior to the end of the financial year. As at 25 August 2020, a total of 248 applications were assessed, of which 224 were granted and 24 were declined. The remaining 18 applications remained under consideration. Table 3 provides a breakdown of applications by regulated industry.

Table 3 - Breakdown of applications for COVID-19 regulatory relief by Industry

Industry

# requests received

# approved

# declined

# in progress

Banking

160

136

19

5

Superannuation

42

32

4

6

General Insurance

31

23

1

7

Life Insurance

9

9

0

0

Private Health Insurance

24

24

0

0

TOTAL

266

224

24

18

Figure 4 – APRA-led recommendations from the Royal Commission, Capability Review and FSAP APRA-led recommendations from the Royal Commission, Capability Review and FSAP - closed and open

APRA has addressed in full two recommendations from the Royal Commission, three from APRA’s Capability Review (and parts of four other recommendations) and 15 from the Financial Sector Assessment Program (FSAP) undertaken by the IMF. While good progress has been made on many others, planned work to address a number of the recommendations was delayed when APRA suspended its policy consultations and many of its supervisory activities with the onset of the COVID-19 pandemic. APRA will be recommencing this work in the latter part of 2020, and has plans to address the remaining recommendations within its revised Corporate Plan.

A breakdown of performance by regulated industry is provided below.

Banking

In the face of COVID-19, APRA’s resources were redirected to the near-term financial resilience issues that have confronted the banking industry: liquidity and funding; capital; and credit quality. The operational resilience of the banking sector has also been a priority area for supervisory attention.

Resilience to stressed environments cannot be built in times of stress, but rather is prepared for during more prosperous times. The liquidity and funding positions of ADIs have significantly strengthened since they were last tested in the 2008-09 global financial crisis. Based on previous learnings, systemic liquidity support provided by the Reserve Bank of Australia (RBA) to ADIs has (assisted by APRA) been readily and rapidly delivered since the onset of COVID-19. Actions taken by APRA to increase ADI self-securitisations and re-open the window for banks to seek additional Committed Liquidity Facilities if needed occurred in concert with the RBA’s introduction of the Term Funding Facility and extended open market operations. As a result, despite the considerable financial market volatility, all ADIs have remained well funded and operating well above minimum regulatory requirements.

The strengthening of capital to achieve the unquestionably strong benchmarks set by APRA prior to the onset of COVID-19 has been a major factor behind the financial strength of the Australian banking sector in the face of the pandemic. This has allowed the banking industry to act as a shock absorber to the negative impacts of COVID-19 on the Australian economy. Nevertheless, APRA’s stress testing on a range of scenarios suggested additional prudence was warranted, particularly in March and April 2020 when the uncertainty as to potential future outcomes was at its greatest. At that time, APRA released capital guidance that encouraged the deferral of dividend decisions by the industry, with capital to be first used to absorb any losses and to support the provision of credit to the economy. While APRA committed to increasing its stress testing program from three-yearly to annually in its 2019-2023 Corporate Plan, stress testing activities have subsequently evolved even further to a nimbler and more frequent program of testing as an input to determining regulatory responses and contingency planning in a highly uncertain environment.

COVID-19, and the associated impacts on economic activity, directly affected the incomes of businesses and consumers and, in turn, their ability to make debt repayments. Reflecting the widespread nature of economic interruption, APRA therefore needed to be in close engagement with ADIs on their credit portfolios, particularly where borrowers had deferred repayments. To facilitate the program of deferrals being offered by the banking industry to its customers, APRA granted a regulatory concession that allowed, for a limited time, ADIs to continue to treat customer COVID-19 repayment deferrals as performing loans (which in turn avoided the imposition of higher capital requirements) and provided relief in loan restructuring, subject to ADIs providing minimum expected disclosures and undertaking customer check-ins. Engagement with ADIs and other key stakeholders on expectations regarding loan repayment deferrals and dividend payments continues.

From an operational resilience perspective, pleasingly, banks were adept at maintaining operational service levels with customers experiencing some, but generally limited, disruption to services given the environment. Utilising the framework provided by APRA’s cross-industry pandemic guidance CPG 223, APRA monitored unfolding events by undertaking frequent surveys, regularly engaging with key banking personnel and requesting further information where needed.

In terms of banking policy reforms, APRA modernised and updated three prudential standards:

  • APS 220: Credit Risk Management2;
  • APS 115: Capital Adequacy: Standardised Measurement Approach to Operational Risk3;
  • APS 222: Associations with Related Institutions, and the associated reporting standard ARS 222: Exposure to Related Entities4.

The changes to APS 220 and APS 222 (once they become effective in 2021) will serve to address Recommendation 1.12 from the Royal Commission and five recommendations from the FSAP. Aside from this, much of APRA’s planned supervisory and policy agenda did not proceed (including the conduct of an independent review into problem asset management) so as to allow APRA and the industry to focus on the pressures of the COVID-19 environment.

General insurance

APRA’s risk-based supervision of the general insurance industry needed to step up in intensity at the beginning of 2020 given the significant impacts of natural catastrophe events (including floods and bushfires), the COVID-19 pandemic and increased market volatility. The prudential strength of general insurers remains an important focus for APRA and, on a positive note, despite the deteriorating operating environment and negative earnings impact during the year, general insurers continued to maintain strong balance sheets and report robust capital positions.

Prior to the onset of COVID-19, APRA’s supervision focus was on the catastrophe events of late 2019/early 2020, ensuring that capital positions and claims information were regularly updated, and that appropriate remediation measures (especially concerning impacted reinsurance programs) were being taken. Additionally, APRA continued to pursue its work on a number of key strategic initiatives including external engagement on affordability, the adequacy and appropriateness of insurance cover and managing the industry reliance on overseas reinsurance. However, product design and consumer value work streams were deferred as APRA’s resources were redirected towards the more immediate COVID-19 response.

Given the ongoing uncertainty in the external environment, APRA paid particular attention to the potential for significant downside risks across impacted lines of business. APRA intensified its engagement with peer domestic and international regulators and actively participated in a cross-agency working group on business interruption insurance. The latter is a prominent area of focus due to significant uncertainty regarding the extent of industry exposure as a result of challenges to policy wordings. A test case on this issue has subsequently commenced.

Life insurance

Life insurers were able to maintain their balance sheet strength during the year with all life insurers maintaining capital levels above APRA’s prudential requirements, although not without some notable challenges. Some insurers have, in particular, experienced very adverse outcomes from Disability Income Insurance (DII) products, which has been a longstanding source of loss for the industry. APRA held an industry roundtable in relation to Individual DII products in November 2019 and subsequently notified 20 insurers of specific capital adjustments that would be applied in early 2020 in relation to concerns with these products. However, owing to the changing external environment as a result of COVID-19, the capital adjustments were subsequently postponed to reduce pressure on insurers in a time of stress until the latter part of 2020.

Initiatives to drive an uplift in risk governance maturity and improved data collections across the life insurance industry were progressed, though somewhat slower than planned given APRA’s capacity constraints triggered by COVID-19 and to minimise burden on industry. Risk governance work completed during the year included internal work to develop measures to address unsustainable pricing and product design practices, particularly for Individual DII. Similarly, work was completed to determine a new APRA data collection on Individual DII data. An APRA forum was conducted in June 2020 with the CEOs of life insurers to discuss issues facing the industry and for APRA to set clear expectations in regard to sustainable practices.

Private health insurance

APRA continued its supervisory focus during the year on ensuring that private health insurers continued to develop credible strategies to address the ongoing sustainability and affordability challenges facing the industry and respond prudently to the impacts of COVID-19.

Given the ongoing economic environment and its likely impact on industry sustainability, the prudential strength of private insurers remained a key focus for APRA. As such, APRA increased its monitoring of the industry impacts of COVID-19 (involving more engagement with peer regulators to jointly monitor targeted areas of impact), strengthened capital monitoring activities and issued industry guidance to ensure the consistent treatment of capital for prudential purposes for all insurance claims, particularly those disrupted by COVID-19. Notwithstanding the challenging operating environment, the private health insurance industry managed to sustain a sound capital position with a capital coverage ratio of 1.6x at end June 2020.

Significant progress was made on other planned strategic initiatives aimed at maintaining financial system resilience. This included the assessment of insurers’ recovery plans, increased engagement with the Department of Health to ensure that prudential considerations continued to be factored into the setting of broader health policy, and the release of a discussion paper5 in December 2019 on a revised and strengthened capital framework for private health insurers.

Sustainability of the industry remained a key issue given the increasing number of people opting out of health insurance and Australia’s ageing population. APRA will continue to work with industry and Government to help address those challenges.

Improve outcomes for superannuation members

Objective

To actively drive a superannuation trustee culture of continuous improvement in delivering quality outcomes to superannuation members, including addressing underperformance in the superannuation industry.

Performance against objective

During 2019/20, APRA delivered on a number of commitments directed at improving outcomes for superannuation members.

APRA strengthened the prudential framework through proposing revisions to SPS 250: Insurance in Superannuation6 and in doing so will address Recommendations 4.14 and 4.15 from the Royal Commission once a revised SPS 250 becomes effective. The revised standard is designed to improve outcomes for superannuation members by assisting RSE licensees to select the most appropriate insurance policies for their members and monitor ongoing relationships with insurers.

APRA continued to push RSE licensees to strengthen outcomes for superannuation members through a package of prudential framework reforms designed to improve RSE licensees’ strategic and business planning practices and assessment of performance. SPS 515: Strategic Planning and Member Outcomes came into effect on 1 January 20207, requiring RSE licensees to perform an annual Business Performance Review to assess whether they are delivering sound, value-for-money outcomes for the members they serve. To support SPS 515, APRA released Prudential Practice Guide SPG 516: Business Performance Review. The reforms contained in the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No.1) Act 2019, which gave APRA a new directions power, together with APRA’s supporting prudential requirements in SPS 515, provide a strong platform for APRA to drive a more intense focus on member outcomes across the superannuation industry.

Another major achievement during the year was the publication of the MySuper heatmaps aimed at improving transparency, lifting industry practice and enhancing member outcomes by publicly identifying superannuation products that are underperforming in the areas of investment returns and fees. The first MySuper heatmap was published in December 2019, with an updated version published in June 2020 to reflect changes to fees and costs since the original publication.

Figure 5 – Estimated change in fees and costs paid per annum for MySuper products  $7.50 billion

During the year, APRA supervisors had extensive interaction with superannuation trustees that present as ‘red’ on the heatmap to understand how they plan to address areas of identified underperformance. Experience so far has been that the publication of the MySuper heatmaps has been an effective prudential tool, with 42 per cent of MySuper members seeing a reduction in fees and costs since the publication of the first heatmap. This translates to 6.1 million members saving an aggregate of $110 million a year. In addition, a number of poorly performing funds and products have closed and transferred their members to better performing products.

During the second half of the year, APRA’s superannuation supervision focused heavily on monitoring the financial health of individual superannuation funds in response to the COVID-19 environment and the impacts flowing from the Government’s early release of superannuation scheme, including assessing liquidity risk, the impact on asset allocations, operational risk and other matters. APRA also published weekly data on the early release scheme throughout Tranche 1 and 2. A total of $23.3 billion worth of applications was made from the commencement of the scheme in April 2020 to the first week in July 2020. Payments made to eligible members took an average of 3.3 business days after receipt of the application from the Australian Tax Office (ATO), and 95.2 per cent were made within APRA’s guidance of five business days.

Improve cyber resilience across the financial system

Objective

To seek to reduce the impact of cyber incidents to the Australian community and financial system by ensuring that APRA-regulated financial institutions are proactively undertaking continual actions to strengthen their cyber resilience.

Performance against objective

APRA’s Prudential Standard CPS 234: Information Security8 came into effect on 1 July 2019. This standard set a baseline for all APRA-regulated institutions to improve cyber resilience by requiring institutions to maintain information security capability commensurate with the size and the extent of threats to their information assets, implement controls to protect information assets, and undertake regular testing and assurance of the effectiveness of those controls.

Requirements in CPS 234 relating to third-party arrangements came into effect on 1 July 2020. While some extensions were granted on a case-by-case basis to institutions so they could deal with the impact of COVID-19, an industry proposal for an across-the-board extension for all institutions was not granted, recognising the importance of managing the cyber exposure present within regulated institutions’ supply chains.

CPS 234 was one of the key pillars of the multi-year Cyber Strategy that APRA developed in 2018. Other components of the strategy included uplifting APRA’s data collection and frontline supervisor capability in order to facilitate a better assessment of the management of this risk by regulated institutions and triaging those that warrant closer attention. Work on these areas continued during the year, alongside work to refresh the Cyber Strategy to, amongst other things, align with the Federal Government’s national Cyber Security Strategy.

Figure 6 – Information security incidents notified to APRA  2 system compromises; 1 remote access breaches; 1 unauthorised access; 1 website defacement; 1 denial of service attack; 1 network incursion (potential); and 9 'other' incidents.

A formal information security incident notification mechanism was also established to ensure APRA has visibility of when a material incident has occurred, how an institution is responding to it and what actions are being undertaken to prevent similar future incidents. Under the notification mechanism, 113 information security incidents had been reported to APRA as at end June 2020. These notifications help APRA to continually adjust its focus areas as the nature of cyber-attacks evolves. Review of cyber incident notifications and compliance with CPS 234 requirements will continue to be areas of supervisory focus in the year ahead.

As noted above, APRA has been developing a new 2020-2024 Cyber Security Strategy. In line with APRA’s strategic focus of improving cyber resilience across the financial system, the updated strategy seeks to influence the financial system more broadly (i.e. not just the financial institutions APRA regulates directly). In doing so, APRA intends to broaden its activities from its current focus on entity-based cyber supervision to a more expansive approach, applying a broader set of tools and techniques. This will necessitate acting in greater concert with peer regulators and other government agencies, and dovetailing APRA’s work with Australia’s 2020 Cyber Security Strategy.

Transform governance, culture, remuneration and accountability across all regulated financial institutions

Objective

To transform governance, culture, remuneration and accountability across APRA-regulated institutions’ management of non-financial risks, so as to enhance the resilience of APRA regulated institutions and contribute to rebuilding the Australian community’s trust and confidence in the fairness of the financial system.

Performance against objective

In November 2019, APRA published its plan to significantly scale up efforts to lift standards of governance, culture, remuneration and accountability (GCRA) across the industries it regulates. APRA’s intensified approach to GCRA aims to strengthen the resilience of financial institutions including addressing, and ideally preventing, issues such as poor risk governance, misaligned incentives and misconduct that have undermined public confidence in the financial sector over recent years, as highlighted in the Royal Commission.

Delivery against this plan was delayed due to the onset of COVID-19. In the first half of the financial year, APRA completed a number of on-site and off-site reviews including reviewing board practices, assessing the comprehensive reviews required under the relevant prudential standards (CPS 220 and SPS 220), reviewing large ADIs’ implementation of the Banking Executive Accountability Regime (BEAR) and conducting risk culture deep dives for two regulated institutions. The key insights from this work were that the necessary shift from focusing on design effectiveness to operating effectiveness of risk management frameworks will take time; the distinction between a compliance and risk management mindset was not always well understood; and there needed to be a better understanding of the risks associated with tolerating work-arounds to established processes. In addition, APRA developed internal guidance and trained supervisors in the assessment of an institution’s risk culture maturity.

APRA released draft CPS 511: Remuneration9 for consultation during the year. The draft standard introduced heightened requirements on executive remuneration design and oversight to ensure remuneration practices reward the right behaviours, improve accountability and promote effective management of financial and non-financial risks. However, work on CPS 511 did not proceed beyond the consultation phase given policy suspensions in response to COVID-19. APRA is currently reassessing its timetable for introduction of CPS 511, and has flagged it will recommence consultation on the draft standard towards the end of 2020. Once implemented, CPS 511 will serve to address Recommendations 5.1 and 5.2 from the Royal Commission.

During the year, APRA worked closely with the Treasury and ASIC on policy work relating to the extension of the BEAR to the insurance and superannuation sectors, as recommended by the Royal Commission. Treasury released its proposal paper outlining the Government’s planned approach to the Financial Accountability Regime (FAR) in January 2020. Subsequently, the introduction of the FAR legislation was deferred by the Government, with a revised timetable expected to be outlined later in 2020. In response, APRA has reprioritised its FAR work and will continue to work closely with the Treasury and ASIC in implementing FAR for all APRA-regulated institutions.

Improve and broaden risk-based supervision

Objective

To review of APRA’s supervision model to ensure that it is fit for purpose and responsive to
a rapidly changing environment, as well as being one that drives consistent, informed and
comprehensive prudential supervision and enforcement across the financial system.

Performance against objective

Review of APRA’s supervision model

APRA continued with a significant review of its supervision model. A fundamental component of this review was a redesign of APRA’s risk assessment methodology to elevate non-financial risks and better cater for industry nuances and emerging risks. During the year, APRA finalised its new Supervision Risk and Intensity (SRI) Model, which will replace APRA’s existing risk rating and response tools [the Probability and Impact Rating System (PAIRS) and Supervisory Oversight and Response System (SOARS)]10. The new model will be rolled out during 2020/21.

The roll-out of the SRI Model was originally planned for June 2020 but a decision was taken to defer the roll-out to allow APRA’s supervisory teams to concentrate their efforts on COVID-19-related activities. In addition to developing the new SRI Model, APRA also established a dedicated Supervision Training Academy to enhance APRA’s current supervisory training curriculum. The training academy commenced with the launch of the supervision on-boarding program, with 93 APRA staff participating in the five programs as at 30 June 2020.

Strengthen APRA’s enforcement capability

A review of APRA’s enforcement infrastructure was undertaken during 2019/20, with the aim of ensuring that APRA had the right resources and tools to enable delivery of APRA’s refreshed enforcement approach. The review identified a number of areas where APRA could make additional investment in its enforcement infrastructure. However, in light of COVID-19 and associated resource constraints, APRA will need to pursue these opportunities over a longer timeframe than originally envisaged.

In the 2019/20 financial year, APRA commenced three formal investigations; issued 13 directions to RSE licensees or a connected entity of an RSE licensee; imposed additional conditions on the licences of three RSE licensees; issued 715 infringement notices to three institutions for failing to meet their legal obligations to report timely and accurate data to APRA; and applied additional capital requirements to four institutions in response to the outcomes of respective governance self-assessments.

Table 4 – Summary of APRA’s enforcement actions

Enforcement action

2017/18

2018/19

2019/20

Coercive

Direction and Conditions*

1

11

16

Court Actions**

0

1

0

Enforceable undertakings

1

0

0

Infringement notices

0

0

7151

Statutory/ Judicial managers

0

0

0

Investigative Powers

Notice to produce

3

44

78

Formal investigations

1

252

3

Witness examinations

0

0

2

Search warrants

0

0

0

* Includes formal directions, licence conditions, direction to remove director/manager

** Includes civil penalties, court disqualifications, criminal penalties and injunctions

1. Infringement notices to three institutions

2. 24 of the investigations relate to five superannuation trustees

During the year, a major court action that commenced in 2018/19 concluded.

APRA initiated action in December 2018 against entities within the IOOF group, due to its view those entities, as well as certain IOOF directors and executives, had failed to act in the best interests of their superannuation members. Before taking the court action, APRA had sought to resolve concerns with IOOF over several years but considered that it was necessary to take stronger action – through use of directions, conditions and court action – after concluding the company was not making adequate progress, or likely to do so in an acceptable period of time.

In September 2019, the Federal Court dismissed APRA’s application for a finding that IOOF entities, directors and executives had contravened their obligations under the SIS Act. After considering the judgement, APRA elected not to appeal the decision.

Improve analysis of APRA’s external environment

APRA strengthened its ability to identify, assess and respond to a broader range of risks in a more coordinated way this year. The work undertaken was focused on refreshing APRA’s strategic risk register and providing more cohesive dashboards to APRA’s Executive Board Risk Committee to support decision-making on mitigating actions to address APRA’s key risks from a strategic, environmental, industry and operational risk perspective. Further planned work to optimise APRA’s supporting analytical processes has been slowed given the shift in organisational priorities to support COVID-19-related activities.

Improve resolution capability

Objective

To improve APRA’s resolution capability by, amongst other things, developing a new prudential standard on resolution, designing more robust resolution strategies, and strengthening recovery planning by industry, so as to minimise financial loss, distress and instability within the financial system in the event of a crisis.

Performance against objective

Improve resolution capability

APRA’s resolution function is directed at protecting the Australian community from financial loss and disruption by planning for and implementing prompt and effective responses to a failure or crisis in the financial system. Building APRA’s resolution capability remains a key multi-year priority and in December 2019, APRA provided a ‘Resolution Readiness Report’ to Government. This addressed Recommendation 3.4 from APRA’s Capability Review.

In mid-2019, APRA finalised changes to the application of the capital adequacy framework for ADIs, designed to ensure that adequate loss absorbing capacity (LAC) would be available to support orderly resolution in the event of failure. This was achieved through increasing the total capital requirement for Australia’s largest banks. An additional requirement for smaller entities was, on balance, not deemed necessary.

For much of 2020, APRA’s resolution function was heavily focused on developing institution- specific resolution plans to prepare for and manage potential risks associated with the COVID-19 pandemic. This redirection of resources meant that some of the planned resolution agenda for 2020 set out in APRA’s 2019-2023 Corporate Plan was not able to be progressed. This included a delay in the development of a new recovery and resolution planning prudential standard and associated practice guides, which was originally scheduled to be released for consultation and finalisation in 2020.

APRA continued to work closely with members of the CFR and Trans-Tasman Council on Banking Supervision (TTBC) on work related to crisis preparedness. After the onset of COVID-19, these inter-agency engagements became more frequent. Discussions focused on, amongst other things, sharing observations on emerging risks, stress testing, and developing strategies for responding to the potential distress of one or more Australian financial institutions in order to protect beneficiaries and minimise disruption to the broader financial system.

Strengthen recovery planning

APRA continued work with financial institutions to strengthen recovery planning during the year. APRA built on efforts from the previous financial year by conducting a thematic review of recovery plans across peer groups of small, medium and large ADIs and insurers, notably conducting its first review of private health insurers’ recovery plans. In line with previous years, feedback was provided to institutions where improvement was warranted.

In the second half of the financial year, APRA’s focus shifted to analysing the usability of institutions’ recovery plans in the COVID-19 environment, to support the monitoring of risk indicators, assessment of resilience and the credibility of recovery options.

Improve FCS administration

As part of APRA’s work to ensure FCS readiness, all locally incorporated ADIs provided APRA with FCS self-assessments and action plans. In addition, several ADI FCS payout reviews were conducted by APRA over the course of the year, with findings and recommendations for improvements reported to institutions. APRA continued to monitor ADI progress against plans to address shortcomings identified in line with agreed timeframes.

To better assist the public with information about protected deposits and insurance policies, APRA also refreshed FCS-related content and FAQs on its website.

Improve external engagement and collaboration

Objectives

To promote better prudential outcomes and drive greater accountability by developing and implementing an enhanced communications strategy and supporting communication mechanisms that cater to all stakeholder needs.

To promote a ‘whole of system’ mindset to the collective success of Australia’s financial regulatory regime through a more deliberate approach to collaborating with peer domestic and international agencies on a broader range of risks and mitigation activities.

Performance against objectives

Improve external engagement

Over the past few years, APRA has invested in improving its communications capability, including the expansion and restructuring of its Corporate Affairs team. APRA focused its efforts during the year on increasing the transparency of its activities by publishing a series of information papers, making more information about APRA’s decision-making publicly available, and increasing media engagement.

In addition to APRA’s routine publications, APRA released its inaugural ‘Year in Review’ which was published in January 202011; and an information paper setting out how APRA interprets its mandate (addressing aspects of Recommendation 6.6 from APRA’s Capability Review). The past year has also seen APRA continue to publish more information about its decisions and actions, particularly as they relate to enforcement (such as the imposition of directions and licence conditions on RSE licensees). To support APRA’s greater transparency, APRA increased its media engagement: for example, by conducting print and broadcast interviews on selected matters of public interest such as the MySuper Product Heatmap. Finally, APRA overhauled and upgraded its quarterly Insight publication, and continues to expand its consumer-directed website content and social media presence, including the publication of APRA’s first video content in July 2020.

Figure 7 – External communications – stakeholder feedback *APRA's communications to my entity are clear and effective*APRA's public communications are clear and effective*APRA is effective in communicating the findings of supervisory visits to your institution

Figure 7 demonstrates the continued improvement in APRA’s external communications, which was validated through APRA’s 2019 stakeholder survey results. The figure shows the percentage of respondents who favourably agree with statements around the clarity and quality of APRA’s public and entity communications. Further information on APRA’s stakeholder survey can be found on APRA’s website12.

Improve external collaboration

Over the past year, APRA expanded and strengthened its engagement with domestic and international peer agencies, supported by the establishment of a dedicated Regulatory Affairs team. This engagement helped, in particular, to inform APRA’s approach to new and emerging risks in the financial system, such as cyber security and climate change. As the COVID-19 pandemic unfolded, APRA worked closely with its domestic and international counterparts to maintain a coordinated and integrated approach to overseeing the financial system and preserving financial stability.

Embedding more formal arrangements for inter-agency coordination and information-sharing with peers and international standard-setting bodies was an important task during the year. Closer cooperation between APRA and ASIC was formalised via an updated Memorandum of Understanding (MoU), signed and released in November 201913 (addressing Recommendation 6.10 from the Royal Commission) and strengthened coordination under a revised engagement structure.

Internationally, the opportunities to share COVID-19 regulatory actions and responses with bodies such as the Basel Committee on Banking Supervision and the Financial Stability Board provide a valuable source of information on international developments in a rapidly changing environment.

Overall, APRA has 17 MoUs in place with other domestic agencies and formal information sharing arrangements with 34 international regulatory agencies, as outlined in Chapter1.

Transform data-enabled decision making

Objective

To transform APRA’s data into a strategic asset by further developing its data strategy in consultation with key stakeholders (including industry participants and other regulatory agencies), facilitate greater and more effective data-sharing, and continue APRA’s multi-year transformation program (Program Athena) to modernise the way APRA collects, stores and accesses data.

Performance against objective

Transform data into a strategic asset

APRA continued to develop its data strategy to better enable decision-making and use data as a strategic asset. During the year, APRA built on the broad strategic approach prepared in 2018/19 by completing a current state assessment of data management practices, with learnings and insights incorporated into a future state vision. This assessment identified as a priority the need to enhance APRA’s data management by embedding improved practices for new data collections. The first such initiative will be APRA’s Superannuation Data Transformation project, which is currently under consultation.

In response to COVID-19, APRA initiated a number of new, rapidly-developed data collections to provide insights on priority areas of focus, while seeking to balance APRA’s need for this data with minimising the resulting burden on financial institutions. This included implementing:

  • For ADIs: Two weekly collections on liquidity; one weekly market risk collection for advanced ADIs14; two monthly credit risk collections; and three-monthly capital data collections.
  • For insurance: One monthly life insurance collection on capital; a monthly performance data collection from the five top private health insurers; and a one-off collection on general insurance business interruption exposure.
  • For superannuation: One weekly collection covering the early release scheme; a one-off collection on fund liquidity; and a monthly collection covering a number of areas including insurance, complaints and advice, operational resilience, liquidity, member demographics, and the ‘Protecting Your Super’ package of reforms.
Continue the multi-year data transformation program

A program to modernise APRA’s data collection, storage and business intelligence systems infrastructure began in 2018 and has been transforming how data is collected, stored and delivered to APRA’s supervisors, regulated industries, other agencies and to the Australian community more broadly. Under this program (Program Athena), APRA implemented a new enterprise data warehouse that holds collected data across all financial industries, and a new internal reporting tool to allow supervision activities to access this data.

Following the completion of that work, the program is now focused on implementing a new Data Collection Solution to be known as ‘APRAConnect’. This solution will ultimately replace Direct to APRA (D2A) as APRA’s data collection tool across all supervised industries. APRA publicly released its revised implementation approach15 in early March 2020, but in response to COVID-19 APRA subsequently announced the temporary suspension of the program to allow financial institutions and APRA to focus on the response to the pandemic. APRA expects the APRAConnect project will resume in the 2020/21 financial year as the external environment stabilises.

Transform leadership, people and culture

Objective

To optimise APRA’s workforce by recruiting new resources, skills and capabilities; improving
workforce planning and resource management; resetting APRA’s organisation structure to
promote stronger accountability; and lifting the capability of APRA leaders by greatly
strengthening the focus and prioritisation given to high standards of leadership behaviours
via a new capability framework.

Performance against objective

Optimise APRA’s workforce and improve workforce planning and resource management

APRA began the financial year reorganising its workforce during a period of growth and increased funding. New funding measures increased APRA’s available resources, with average staffing levels increasing from 644 in 2018/19 to 734 in 2019/20. This enabled an upgrade in APRA’s ability to deliver on its broadened set of supervisory and regulatory responsibilities. A significant recruitment effort was undertaken, including a successful campaign involving the Prudential Regulation Authority (PRA) in the United Kingdom that resulted in 25 experienced international candidates being sourced for APRA. Other planned improvements to workforce planning and resource management processes and supporting systems have not progressed as originally planned due to the shift in organisational priorities to support COVID-19 activities. APRA will look for opportunities to pursue these over the year ahead.

Reset APRA’s organisation structure

In December 2019, a number of changes were made to APRA’s organisational structure. These reflected APRA’s changing operating environment, and considerations as to how best to position APRA to deliver on its strategy. Of note, APRA shifted to three industry-based supervision divisions for Banking, Insurance and Superannuation16. At the same time, APRA strengthened and intensified its cross-industry focus on technology and GCRA, and created a new project team dedicated to delivering on the Government’s planned roll-out of the FAR across all regulated industries. In parallel, APRA revised (and published) its internal governance and accountability arrangements and developed individual accountability statements for its senior executives. The changes to APRA’s organisation structure and governance arrangements addressed a key recommendation from the Royal Commission and parts of recommendations from APRA’s Capability Review.

Lift the capability of APRA’s leaders

APRA continued to strengthen its leadership team during the year. New senior executives were recruited and key managerial roles were created drawing from a large field of high quality candidates. A new capability framework was rolled out based on performance outcomes and demonstration of behaviours aligned to APRA’s organisational values. The new framework was an important step in improving the consistency with which the performance of APRA’s people (including APRA’s leaders) is assessed and rewarded. In addition to the existing suite of leader development programs, additional investment in leadership development specifically targeting ‘inclusive leadership’ was initiated and will be completed in the latter part of 2020. The program commenced in November 2019 and all of APRA’s senior management have been actively involved.

Implement further initiatives for ongoing cultural enhancement at APRA

Given the onset of COVID-19, and the resulting abrupt move to an extended period of remote working, APRA placed a strong emphasis on internal communication and inclusion, as well as on the health and wellbeing of its people. A number of upgrades to APRA’s infrastructure and supporting policies were made to enable this transition. For example, in order to support strong, face-to-face communication in an environment of remote working, the implementation of video conferencing technology was prioritised. The expedited and successful roll-out allowed APRA’s people to provide strong positive responses in relation to the levels of support and communication during a period of considerable disruption.

Figure 8 – Pulse survey responses by category*  Question(s) asked each week were different for each category and/or may not have been surveyed that week.

APRA conducted seven pulse check surveys of its people between April and July 2020, with an average response rate of 70 per cent. The surveys consisted of a series of questions directed at understanding staff sentiment across three categories: Support, Wellbeing and Work Arrangements. Detailed survey results for individual areas of the organisation were provided to APRA’s senior executives and people managers for review and action.

In addition, a range of webinars were made available covering leading through change, wellbeing and personal resilience. These were attended by 234 APRA employees.

Drawing from recent experience, APRA is now developing new ways of working in a distributed work environment to drive optimal organisation performance and employee engagement in the future.

Footnotes

  1. Prudential engagements included prudential reviews, prudential consultations and prudential meetings. Prudential reviews aim to identify key risks and confirm that these are well-managed, or to identify areas for improvement and take supervisory action where those areas of risk may bring into question a regulated institution’s ability to meet its financial promises to its beneficiaries. Prudential consultations are discussions with a regulated institution’s Board or senior executives that focus on obtaining an update on key strategic and risk issues, and explaining APRA’s supervisory assessment and any prudential concerns. Prudential meetings are a high-level discussion with an institution to gather information on risks and issues, and are generally held with the strategy, risk and decision owners of the institutions.
  2. https://www.apra.gov.au/news-and-publications/apra-modernises-prudential-standard-on-banking-credit-risk-management
  3. https://www.apra.gov.au/news-and-publications/apra-finalises-updated-prudential-standard-on-operational-risk-requirements
  4. https://www.apra.gov.au/news-and-publications/apra-strengthens-rules-to-combat-contagion-risk-within-banking-groups
  5. https://www.apra.gov.au/review-of-private-health-insurance-capital-framework
  6. https://www.apra.gov.au/news-and-publications/apra-proposes-changes-to-prudential-standard-governing-insurance
  7. https://www.apra.gov.au/news-and-publications/apra-finalises-revised-guidance-on-superannuation-business-performance-review
  8. https://www.apra.gov.au/news-and-publications/apra-finalises-prudential-standard-aimed-at-combatting-threat-of-cyber
  9. https://www.apra.gov.au/consultation-on-remuneration-requirements-for-all-apra-regulated-entities
  10. https://www.apra.gov.au/risk-assessment-and-supervisory-response-tools
  11. https://www.apra.gov.au/news-and-publications/apra-2019-year-review
  12. https://www.apra.gov.au/stakeholder-survey
  13. https://www.apra.gov.au/news-and-publications/asic-and-apra-issue-updated-mou
  14. Advanced ADIs are the major banks and those banks that have approval to use their own internal models for calculating capital.
  15. https://www.apra.gov.au/news-and-publications/apra-announces-revised-implementation-approach-for-apra-connect
  16. https://www.apra.gov.au/apras-organisation-structure