Download speech as pdf
Appearance before House of Representatives Standing Committee on Economics
Review of APRA’s 2015/16 Annual Report
13 September 2017
Thank you for the opportunity to appear here today.
APRA’s 2015/16 Annual Report was published some time ago, but many of the issues it discusses are still relevant. At a macro level, Australia continues to benefit from a sound financial system, reflecting a long period of sustained economic growth as well as ongoing effort and vigilance in building and maintaining resilience in financial institutions. Our 2015/16 Report highlighted, however, there was no room for complacency. We called out risks in the housing market, the funding profile of the banking system, poor experience in some segments of the insurance industry, and the need to enhance governance and transparency in the superannuation industry. These issues remain prominent today.
We will no doubt discuss at least some of these matters during this hearing, but in the interests of time I thought I would use these opening remarks to briefly update the Committee on APRA’s response to the recommendations most relevant to us from the Committee’s Review of the Four Major Banks.
One of the recommendations was for a review of the licensing requirements for Authorised Deposit-taking Institutions (ADIs).
Concurrently with this recommendation, APRA had been examining developments in other jurisdictions. At the start of this year we commenced an organisational restructure that included the creation of a new centralised unit tasked with overseeing APRA’s licensing activities to ensure they are suited to the increasingly diverse range of applicants that seek to engage with us. Then, in August this year, APRA released a discussion paper on proposed revisions to the licensing framework for ADIs. This includes a version of the ‘two phase’ licensing regime recommended by the Committee, designed to make it easier for applicants – particularly those with innovative or otherwise non-traditional business models – to navigate the ADI licensing process while at the same time maintaining overall entry standards. To date, this proposal has been well received and a number of potential applicants are in discussions with us about taking advantage of this new approach.
A number of other recommendations of the Committee were designed to strengthen accountability within financial institutions and, importantly, to make this more transparent to the Australian community.
The Government responded to these recommendations with, amongst other things, the new Banking Executive Accountability Regime (known as the BEAR). The BEAR involves a range of enhanced powers for APRA to enforce its fit and proper and remuneration requirements, stronger powers of disqualification, and new powers for fines to be imposed on ADIs if they fail to live up to the expectations set out in the new regime.
As a package, this is not new territory for APRA. The core objective of the BEAR – establishing clearer accountabilities for, and expected standards of behaviour by, senior executives within banks – is being constructed in a manner that is consistent with APRA’s prudential mandate. While there are a range of new elements in the proposed reforms, the BEAR should essentially be seen as a strengthening of the existing prudential framework. Indeed, once the new framework is put in place for banks, APRA will consider whether some of the concepts within the regime have wider application. To the extent that they can add to community trust and confidence that all prudentially-regulated institutions are well-governed and prudently managed, then they might have significant benefit more broadly.
Finally, let me note that this issue of community trust and confidence was an important consideration behind our recent decision to establish a Prudential Inquiry into the Commonwealth Bank of Australia (CBA). The CBA has experienced a number of incidents over recent years that have significantly damaged its reputation and community standing. After the AUSTRAC matter came to light, it was difficult to see how the bank could quickly remedy the situation by itself. Our Inquiry provides the opportunity for the CBA to demonstrate that it has and will take these issues seriously, and is responding to them. Where action is not deemed sufficient, the Inquiry will make clear recommendations for the CBA to implement. Our decision to make the Inquiry reports public provides an opportunity for the broader community to understand what common themes may have been behind these incidents, and provide assurance that they have been identified and will be addressed. In that sense, we very much see the Inquiry as making a constructive contribution to strengthening the reputation and public standing of the bank. As an added benefit, any issues identified will provide useful learnings to others in the industry.
With those remarks, my colleagues and I are happy to answer the Committee’s questions.