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APRA ‘cannot afford to be complacent’ as economic conditions look to worsen

4 minute read

The prudential regulator has released its latest corporate plan.

On Monday, APRA issued its 2022-23 corporate plan detailing how the regulator intends to ensure Australia’s financial system is stable, competitive and efficient in the years ahead.

The plan retains a focus on the two themes outlined in APRA’s 2021-2025 corporate plan released last year, namely being ‘protected today’ and ‘prepared for tomorrow’.

APRA said that the new plan was designed to respond to the rapid changes in its operating environment, with external environmental factors including rising inflation and interest rates, escalating geopolitical tensions and a range of new technologies.

“Despite the economic challenges of the past two years, Australia’s financial system remains stable and resilient. In part, this is the result of many years of preparatory work by APRA and the institutions we supervise,” said APRA chair Wayne Byres.

“However, we cannot afford to be complacent. Global economic conditions are forecast to deteriorate over the period ahead, exacerbated by the ongoing war in Ukraine, while the increases in cost of living and recent flooding events remind us that Australia is facing its own turbulence.”

To preserve the financial and operational resilience of banks, insurers and super funds, APRA stated that it would continue to target its supervisory and policy activities in a number of areas and also use its suite of regulatory powers when necessary to achieve desired outcomes.

For the super sector, the regulator plans to intensify pressure on trustees to stop offering products with high fees and poor performance while also scrutinising choice super products. 

It aims to achieve this through its annual performance tests and heatmaps along with heightened supervision of trustees of products that fail or perform poorly on the tests and by using its prudential powers to take action against trustees when it is warranted.

While recently noting that it does not have an optimal size in mind for the super sector, APRA said it wants to accelerate “beneficial industry consolidation” in order to establish viable and durable business models across the sector.

Additionally, it will seek to continue rectifying substandard practices through robust supervision, the strengthening of prudential standards and reinforcing minimum expectations regarding a number of issues including fund expenditure, investment governance and strategic and business planning.

On the banking sector, APRA stated that it would heighten its vigilance on the flow-through effects from COVID-19, geopolitical tensions, rising inflation and higher interest rates as part of its core supervisory activities to ensure Australia’s banks remain resilient.

The regulator said it would embed key prudential reforms, including ‘unquestionably strong’ capital ratios, Basel III requirements and its prudential standard for remuneration, while also upgrading the business continuity and contingency practices of banks with a focus on recovery planning, operational resilience, and critical function resolvability.

In the insurance sector, strengthening governance, risk management and business strategy practices were outlined as key priorities. According to APRA, this will include addressing deficiencies identified in self-assessments undertaken by general insurers and embedding new capital requirements for private health insurers.

APRA will maintain its focus on promoting the sustainability of insurance products for the long-term benefit of consumers. It also seeks to align the prudential framework with the Australian Accounting Standard Board’s new accounting standard for insurance contracts.

Improving resilience and reducing the risk and impact of a disorderly exit of an insurer by ensuring effective continuity, recovery and resolution plans are also goals for the regulator.

Across the financial system more broadly, strengthening cyber resilience and embedding good governance, risk culture, remuneration and accountability practices were stated as being priorities.

“As Australia’s prudential supervisor, APRA wants to see banks, insurers and superannuation trustees retain their financial and operational strength. That best positions them to support their customers through periods of volatility and disruption,” said Mr Byres.

“Our latest Corporate Plan will help us achieve these objectives by focusing on delivering our existing strategic priorities whilst keeping a watchful eye on changes in our operating environment and responding as needed.”

Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.