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Unlisted assets review, bank stress testing on APRA’s 2024 agenda

By Rhea Nath
4 minute read

The prudential regulator’s supervision and policy priorities for the next six months are set to include embedding lessons from last year’s global banking turmoil along with a deep dive into unlisted super assets.

The Australian Prudential Regulation Authority (APRA) has published its supervision and policy priorities for the first half of 2024, which includes key initiatives affecting the superannuation and banking sectors.

APRA said that over the next year it “intends to provide entities with a better sense of what to expect”.

Among this will be a spotlight on unlisted super assets, with a “deep dive” review into asset valuation and liquidity management practices set to be conducted over the next six months for a cross-section of large and mid-size trustees with material unlisted asset exposures.

This is in addition to a review of funds’ self-assessments against requirements in Prudential Standard SPS 530 Investment Governance.

Last year, a review by the Financial Regulator Assessment Authority (FRAA) had found APRA’s supervision and resolution work in unlisted assets and associated valuation practices may have been “delayed and deprioritised”, with the potential to lead to unfair member outcomes for millions of Australians.

It found APRA’s response to trustee valuations of unlisted assets, which include assets like airports and toll roads, private equity, and office buildings, emerged “in response to ongoing media coverage of the issue rather than APRA’s proactive identification”.

Shortly after, following a two-year process of consultation and reform, APRA published guidance to help super trustees with the formulation, implementation, and oversight of an investment strategy, including unlisted assets.

APRA’s superannuation priorities for 2024 also reiterated its focus on retirement outcomes, on the heels of a recent Treasury consultation into super’s role in retirement.

Released in December, the discussion paper noted the number of retirees with a super account is expected to more than double over the next decade, with 2.5 million Australians set to retire although they lack access to appropriate products to maximise their super.

Some 84 per cent is held in account-based or allocated pensions, highlighting an opportunity for funds to develop new products. Take-up of lifetime income products remains low, it said, and there have been few innovative products new to the market.

“RSE licensees will need to uplift practices to support better retirement incomes, as more Australians enter the retirement phase,” APRA said.

“APRA’s proposed update to SPS 515 includes expectations to support the retirement income covenant. APRA aims to finalise updates to SPS 515 in the first half of 2024.

“All RSE licensees can expect APRA to review their self-assessments against the findings outlined in the joint APRA and ASIC information report on the implementation of the retirement income covenant, published in July 2023.”

The regulator also intends to look into super transparency, holding RSE licensees accountable for addressing underperformance with urgency, particularly where it is widespread across a product set, to improve outcomes to members.

Outlook for banks

Looking at the banking sector, APRA said entities need to be prepared to manage periods of severe financial stress and rebuild their financial resilience if needed.

“The international banking turmoil of early 2023 has highlighted the importance of preparation for adverse scenarios. Accordingly, recovery and crisis management remain a key focus,” it said.

It is consulting on targeted changes to strengthen liquidity management practices and crisis preparedness and aims to complete this consultation in the first half of 2024.

Additionally, some Tier 2 entities can expect prudential reviews focusing on liquidity risk in the next six months, while APRA continues its focus on Tier 1 entities to uplift their liquidity stress testing capabilities following 2023 reviews.

“Stress testing is a critical forward-looking analytical tool that can generate important insights into key risks and vulnerabilities at specific entities and for the system as a whole.

“APRA will conduct a banking stress test in mid-2024 with systemically important banks. The scope of entities involved will be determined in early 2024 and entities will be notified.”

The regulator also highlighted how crypto assets are “a new type of potential exposure” for banks.

“In late 2022, the Basel Committee finalised the international standard for the prudential treatment of banks’ exposures to crypto assets. This will provide the basis for APRA’s prudential requirements for Australian banks,” it said.

“APRA will consult on the prudential treatment for crypto assets in 2024, with new requirements expected to come into effect from 2025.”

It had previously released interim expectations on the management of risks associated with crypto assets in 2022.

APRA noted that banks will soon come under the Financial Accountability Regime (FAR) from March 2024, with insurance and superannuation to follow from March 2025.

“APRA and ASIC will release further information including the regulator rules and transitional rules to help banks prepare for the commencement of the FAR in 2024.

“For the insurance and superannuation industries, APRA and ASIC will release an information package in early 2024 and host a series of webinars to support the insurance and superannuation entities prepare for the FAR commencement,” it said.