APRA releases non-capital components of the supervision of conglomerate groups

The Australian Prudential Regulation Authority (APRA) has today released for consultation clarifications to the governance and risk management components of the framework for supervision of conglomerate groups (Level 3 framework).

This includes clarifications to nine prudential standards, intended to become effective on 1 July 2017, and two prudential practice guides. These clarifications are not changes in policy position.

APRA released the Level 3 framework1 in August 2014, but considered it appropriate to wait until the findings of the Financial System Inquiry (FSI) and the Government’s response to FSI recommendations before settling on the final form of the conglomerate framework.

APRA has also announced today that it has deferred the implementation of conglomerate capital requirements until a number of other domestic and international policy initiatives are further progressed. These policy initiatives include:

• APRA’s implementation of the FSI recommendation on unquestionably strong capital ratios for ADIs (FSI recommendation 1);
• consideration of proposals in relation to loss absorption and recapitalisation capacity (FSI recommendation 3); and
• proposed legislative changes to strengthen APRA’s crisis management powers (FSI recommendation 5).

Taken together, these initiatives will influence APRA’s final views on the appropriate requirements with respect to the strength, resilience, recovery and resolution capacity of conglomerate groups.

APRA Chairman Wayne Byres said: ‘The group governance and risk management requirements released today will further strengthen conglomerate groups, by enhancing oversight of group risks and exposures, and limiting potential contagion and systemic risks.’

‘While the timetable for the implementation of the conglomerate capital requirements has been extended, in APRA’s view this is the most appropriate course of action. To finalise the conglomerate capital requirements at this stage would introduce the possibility of needing to amend them within a few years, and this would be unnecessarily disruptive and inefficient for the groups directly affected.’

Given some time has passed since the prudential standards were released in August 2014, APRA is providing a six-week consultation period (until 13 May) for comments on the clarifications to the nine non-capital prudential standards. APRA also invites submissions on the two prudential practice guides by 27 May. As the consultation largely deals with issues of clarification, APRA is not expecting any changes to the underlying policy positions.

While the clarifications to the cross-industry standards of Risk Management, Outsourcing, Governance, Business Continuity Management, and Fit and Proper largely relate to their application to conglomerates, these standards also apply to all authorised deposit-taking institutions (ADIs), general insurers and life companies. As such, APRA encourages all entities covered by these standards to review the clarifications.

The Level 3 framework, including prudential standards, prudential reporting forms, and draft prudential practice guides can be found on the APRA website.

1 APRA releases framework for supervising conglomerates but defers implementation