In an information paper released yesterday, the prudential regulator set out its new approach aiming to address and prevent issues such as poor risk governance, misaligned incentives and misconduct that have undermined public confidence in the industry.
Remediation costs relating to issues identified in the royal commission have cost the financial services sector in excess of $7 billion to date, with APRA estimating it will only rise as both new and past issues come to light.
The key aspects to the government body’s new tactic include strengthening the prudential framework in areas such as remuneration and risk management and incorporating the wider use of risk governance declarations and self-assessments.
The accountability regime is still being worked on with government, Treasury and ASIC. A new remuneration prudential standard is also in the works, currently it is open for public consultation.
APRA has looked to sharpen its supervision by increasing internal resourcing and capabilities for governance, culture, remuneration and accountability (GCRA), as well as adopting new tools to assess GCRA practices.
Following increased funding from the Australian government in the 2019 budget, the GCRA team’s headcount will double in financial year 2020 from the year before, to 20 full-time equivalents.
The regulator is also trialling natural language processing (NLP) in its risk culture reviews, an artificial intelligence tool which is meant to assess the sentiments and themes contained within large amounts of information.
The early results from APRA’s use of NLP in its risk culture assessments were said to be “highly promising”, especially in finding potential areas for deep dive reviews.
More transparency: More self-assessments, more surveys
The prudential watchdog is looking to be more transparent, aiming to better inform the industry and the public about its work, promote better GCRA practices and drive greater accountability among boards and management.
Among other factors, the new approach builds on the self-assessments APRA asked a number of the major banks, superannuation funds and insurers to complete in the wake of the Hayne commission, examining their behaviour and operations.
All three of the big four banks, with the exception of ANZ, have published their self-assessments.
APRA deputy chair John Lonsdale said APRA is committed to reinforcing its approach with the use of transparency to drive better outcomes.
“Over coming years, our enhanced GCRA team will undertake a range of GCRA-related thematic review and deep dives as well as utilise entity self-assessments and industry-wide surveys,” Mr Lonsdale said.
“Our intention is that the results and findings of these be published to the fullest extent possible.
“We believe that using transparency to increase scrutiny and accountability will help ensure GCRA is a higher priority for boards and management, and make it more likely they will act to identify and address weaknesses at an early stage.”
APRA expects it will be developing and rolling out the industry-wide surveys from around mid-2020, with a small sample number of entities to test first.
The new plans for GCRA also build on a program of work that the regulator commenced in 2015, including its thematic reviews of risk culture and remuneration and the prudential inquiry into CBA, as well as responding to recommendations from the banking royal commission and APRA capability review.
Mr Lonsdale added lifting GCRA practices was essential to restoring community trust and confidence in the financial system.
“Last year’s risk governance self-assessments made clear that industry was grappling to manage GCRA risks, many of which were well known and longstanding,” he said.
“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.
“Australia’s banks, insurers and superannuation licensees are financially sound and resilient, but a strong balance sheet alone is not enough for institutions to remain in good prudential health. 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.”
