APRA ramps up governance supervision

The Australian Prudential Regulation Authority (APRA) has released a new paper setting out how it proposes to scale up its supervision of governance, culture, remuneration and accountability (GCRA).

The information paper builds on recent work APRA has undertaken on GCRA and reflects APRA’s intensified approach to supervising this area following on from the Financial Services Royal Commission and the Graeme Samuel-led review of the prudential regulator.

In releasing the paper, APRA Deputy Chair John Lonsdale said lifting GCRA practices was an essential step in restoring community trust and confidence in the financial system: “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.” APRA stated it would reinforce its new approach with a degree of transparency that will be at the forefront of its international regulatory peers.

APRA has set out three key attributes to its approach:

• strengthening the prudential framework to lift minimum standards;
• sharpening APRA’s supervisory practices through a more intensive focus on GCRA; and
• sharing insights and GCRA best practices.

APRA acknowledges its intensified approach may lead to more prescriptive regulatory requirements, as well as higher compliance costs and more frequent and deeper engagement for directors and senior managers with APRA.

In scaling up its supervision of GCRA, APRA will double the number of staff dedicated to GCRA-related work.

Key workstreams

The paper sets out a number of workstreams that APRA plans to undertake (or is already undertaking) over the next few years. Some of the key activities include:

Updating the current Prudential Standard on Governance (CPS 510) to incorporate lessons from the Royal Commission and industry self-assessments. Areas for review will include the effectiveness of board obligations in relation to risk culture, the relative emphasis on financial and non-financial risks, and the need to strengthen requirements in relation to compliance and audit functions;

Conducting deep dive and thematic reviews, looking at areas such as risk culture, drivers of effective governance practices, major banks’ compliance functions, remuneration and the implementation of the Banking Executive Accountability Regime (BEAR);

Increasing GCRA-related disclosure by publishing information papers that will include entity specific findings of better or poorer practice, as well as the exploring the potential for entities to self-disclose a greater range of information;

Collaborating with ASIC on GCRA-related projects, including partnering on thematic reviews (for example on reviewing the effectiveness of Board Audit Committees and Internal Audit functions as part of the governance thematic review), as well as enhancing inter-agency information sharing. APRA and ASIC will publish a revised Memorandum of Understanding by the end of 2019;

GCRA declarations and self-assessments: APRA is considering how it can scale the self-assessment process to apply to all regulated entities and intends to incorporate GCRA declarations and self-assessments into the supervision framework. APRA will consult with industry about how this process can be integrated into the prudential framework. APRA also notes that full-scale prudential inquiries (similar to that conducted for CBA) can be a useful tool for the most serious, complex and systemic cases; and

Expansion of BEAR: APRA is working with ASIC and Treasury to design, implement and jointly administer an expanded accountability regime for regulated entities, which will incorporate conduct matters for the first time, and extend to both superannuation and insurance.

APRA in the boardroom?

Interestingly, in its summary of leading international practices, APRA refers to overseas’ jurisdictions’ powers for supervisors to observe board meetings, as well as to veto board and senior management appointments.

APRA notes that it is “considering the benefits associated with observing board meetings” and that it “supports the objective of a strong fitness and propriety regime, and is engaging with the Government about how the intent of this objective could be achieved”.

The AICD will engage further with APRA in relation to its new supervisory approach and keep members updated.