Silver linings: APRA told to fix culture, leadership and structure but may escape APS pay-rise policy

By Stephen Easton

July 17, 2019

Picture: Getty Images

The four members of the Australian Prudential Regulation Authority need to encourage more “internal debate and contestability” within the agency and a higher level of leadership capability at all levels, according to an independent review.

And they should not have to comply with the Australian Public Service enterprise bargaining policy, say reviewers Graeme Samuel, Diane Smith-Gander and Grant Spencer. Treasurer Josh Frydenberg stopped short of agreeing APRA should be totally exempt from the policy but is willing to discuss flexibility on pay.

Getting out of the strict limits on improvements to pay and conditions would help “help facilitate a number of recommendations” and the government should be open to “greater variation in remuneration levels” at APRA, the panel advises.

“The government agrees APRA should have the flexibility to attract and retain the staff it needs to deliver its mandate,” responded Frydenberg, who agreed with four other recommendations for he and his cabinet colleagues.

“The government will work with APRA and the Australian Public Service Commission (APSC) to better understand and address any restrictions within the current APS Bargaining Framework in order to ensure that APRA can attract and retain high skilled staff, particularly in niche areas subject to high market demand.”

The Treasurer said the agency was already working towards some of what the review recommended and would quickly get started on the rest. Any proposal for additional funding would be considered ahead of the 2020-21 federal budget.

Fortune favours the bold

The regulator is in line for a significant restructure and its statutory members will rethink their own roles, after agreeing to implement 19 detailed recommendations from the panel.

“The main conclusion of this review is that APRA’s internal culture and regulatory approach need to change,” the report states. “There is also variability in its leadership capability.”

Cultural change is on the agenda. The authority was told it needs to become a more bold and outgoing organisation. In the words of the reviewers, it should “change its existing internal norms that create a low appetite for transparent supervisory challenge and enforcement” in four ways.

It needs to get away from its strong preference for dealing with banks, superannuation funds and insurance companies “behind closed doors” and get tougher with the more “recalcitrant” of them. It must build up “organisational confidence” through greater support to managers, and ramp up its risk appetite so it is less afraid of escalating its enforcement actions.

APRA chair Wayne Byers was told to take on a “broader, organisation-wide role” beyond oversight of authorised deposit-taking institutions. “The remaining members should split their roles to include a mix of industry, policy and functional responsibilities,” the review advised.

The report calls on APRA to report publicly on how long it takes to make “commercially important decisions” while also being more “transparent and assertive” about how it goes about its independent regulatory role and the risks in the financial system that it aims to manage.

Later it adds that “a more strategic, active and forceful approach” to public communications is needed to “shape community and government expectations” of the body.

Two recommendations go to the risks and benefits of technology.

  • “APRA should seek to build strong allegiances with public and private sector experts, other regulators and financial firms to augment its internal capacity and to collaborate on ways to strengthen the cyber resilience of APRA’s regulated sectors.
  • “To better prepare for and respond to the consequences of digital innovation and disruption, APRA should increase its IT risk capacity and capability, including though increased collaboration and partnerships. In doing so, APRA should consider the implications of new business models, management and transformation of legacy IT landscapes, greater reliance on third-party providers (for example, cloud providers), and technology-enabled competition.”

The reviewers also told the authority to reach out more and work in concert with its international peers and other Australian regulators. In their eyes, APRA is far from a failure but needs to implement some major changes all the same.

As the report notes, much of its success has come from being in the lucky country and sharing in its luck.

“Since APRA’s inception in 1998 there have been very few failures of significant financial institutions and no systemic financial crisis in Australia. Such a track record is rare internationally. APRA is highly respected by its global and Australian peers and by the entities that it regulates. This respect is well deserved.

“APRA’s successful track record has been supported by a strong regulatory architecture, sound economic policies and benign economic conditions in Australia. The financial sector has benefited from strong tailwinds which have underpinned growth and profitability in the sector. APRA’s external environment will not always be as conducive.”

Byers said the report presented a “comprehensive and ambitious” view of the authority’s future as he issued his plan to implement its 19 recommendations.

“The report highlights the increasingly complex industry dynamics in which APRA operates and that the expectations of its role and mandate have increased,” said the chair of the body. “Appropriately, the report notes APRA has not stood still in the face of these developments, but highlights the need to accelerate the necessary changes if APRA is to remain a successful prudential supervisor into the future.”

A revised corporate plan will be published this August setting out how the authority intends to approach the reforms.

Shadow treasurer Jim Chalmers said the opposition had not reached a “considered view” on Wednesday but broadly supported the recommendations.

“Clearly APRA needs to lift its game, and the recommendations outlined today are likely to be a step in the right direction,” he said in a statement, criticising the government’s long period of opposition to holding the Hayne royal commission and its budgetary priorities.

“The report makes it clear that the Government’s cuts to APRA funding have hampered the regulator’s ability to police the sector.”

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