Opening Statement to House of Representatives Standing Committee on Economics - October 2022

Chairman Wayne Byres - House of Representatives Standing Committee on Economics, Canberra.

Good afternoon and thank you for the opportunity to appear here today to discuss APRA’s 2020/21 Annual Report. 

Firstly, I would like to acknowledge all the new members of this Committee. APRA welcomes these hearings as an opportunity to explain our activities to the Parliament and broader community, and answer your questions about how we go about fulfilling our statutory mandate: that is, to protect the Australian community by ensuring that, under all reasonable circumstances, financial promises made by the institutions that APRA supervises are met within a stable, efficient and competitive financial system. 

As the prudential supervisor of the financial services industry, APRA currently supervises around 2000 institutions across authorised deposit-taking institutions (banks, credit unions and building societies), general insurers, life insurers, private health insurers, friendly societies, and most trustees of the superannuation industry. 

In total, these institutions hold about $8 trillion in assets for Australian depositors, policyholders and superannuation fund members. That amount is up by around one-third from just five years ago, highlighting that, notwithstanding the financial and economic ups and downs in recent years, the financial system has continued to grow strongly. 

This hearing is formally to discuss APRA’s Annual Report for the 2020/21 year. That Report detailed how APRA and the Australian financial system responded to the significant health and economic impact of the COVID-19 pandemic that dominated the year. In that report, we noted that the Australian financial system remained financially and operationally resilient during a period of immense disruption, and regulated institutions – banks, insurers, and superannuation funds – all played important roles in supporting the broader Australian community through an extremely difficult time. 

However, given we are about to publish our Annual Report for 2021/22, I thought I would focus my opening remarks on a few more contemporary issues. In doing so, I want to start by emphasising that the Australian financial system remains in sound shape, with financial institutions that are, in aggregate, well capitalised, liquid, profitable and operationally resilient, and well-positioned to continue to deliver services and support the Australian economy.

That is important, because we are obviously not the first to note that the economic outlook and operating environment in Australia is rapidly evolving. More broadly, frequent natural disasters, elevated geopolitical tensions and cyber threats – most recently evidenced by the Optus data breach – and the lingering impact of COVID-19 are creating volatility in financial markets, increasing cost pressures for all industries and heightening risks in the financial system. These pressures are occurring alongside developments in technology and digital innovation which are rapidly changing business models and the operating landscape.

Against that backdrop, I wanted to briefly outline for the Committee some of the key critical work streams underway at APRA to ensure the ongoing stability and resilience of the Australian financial system.

As we repeat often, a strong financial system is not just dictated by traditional metrics of financial strength. New and novel risks are constantly emerging. This means APRA is devoting increasing share of its efforts to a range of industry-wide themes:

• deepening our understanding of how technological change and digital innovation will transform the financial system;
• materially enhancing the cyber and operational resilience of the financial institutions;
• ensuring institutions take well-informed approaches to managing climate-related financial risks;
• establishing plans for institutions’ recovery from financial stress or, if they are no longer viable, arranging their resolution without the need for taxpayer support; and
• strengthening institutions’ governance, risk culture, remuneration and accountability.

On this last point, I note that the Financial Accountability Regime (FAR) legislation is currently before the parliament. APRA and the Australian Securities and Investment Commission (ASIC) have been working extensively in recent months to be ready to jointly administer this regime, including developing joint administration frameworks and systems to support entities with the implementation and ongoing compliance with the FAR. We will be ready to go if parliament passes the legislation.

We also have two major initiatives underway that will materially benefit APRA-regulated institutions, and other stakeholders. These are to:

• modernise APRA’s prudential architecture and approach to regulation in the face of new technology and an evolving financial system; and
• enhance our collection, use and publication of data to support better decision-making. 

Both of these are substantial, multi-year projects that will bring major efficiencies for APRA and the regulated institutions that must comply with our requirements and meet our data obligations.

And then, within each sector of the financial system, we have a number of industry-specific priorities.

In banking, we are devoting considerable attention to analysing the impact of a large and relatively rapid increase in interest rates. The banking industry remains well capitalised and prudentially sound, underpinned by the implementation of the Basel III and “unquestionably strong” capital reforms over the past few years. However, banks and other deposit-takers face funding cost pressures and heightened risks in credit portfolios from an environment of higher interest rates.

A particular focus of many is the housing market. While developments in this market are unlikely to create stability issues, there will inevitably be pockets of stress from borrowers who find themselves over-extended. This will be exacerbated as property prices fall.

In insurance, while adequately capitalised, each of the general, life and private health insurance industries face varying availability, affordability, and sustainability challenges. Factors creating these pressures differ across products and, in some lines of business, are becoming quite acute. 

As a prudential supervisor, we cannot solve these issues ourselves. We are, though, actively collaborating with Treasury, ASIC, industry and other stakeholders to help develop solutions that target the root cause of issues for specific insurance products. There is unfortunately no silver bullet: the drivers impacting affordability of home and commercial building insurance, such as a changing climate, differ from those impacting the availability of public liability or life insurance products. Solutions are likely to require coordinated action across all arms of government and with industry.

Finally, in superannuation our focus continues to be on identifying and addressing fund underperformance, and ensuring trustees have an unwavering focus on the interests of their members. 

In August, APRA published the results of the 2022 MySuper performance test. While there were five failures, and four funds that have now been closed to new members, overall the advent of the test, alongside the existing APRA heatmaps, has driven positive change. Trustees of underperforming funds can no longer hide from the spotlight, and we have seen a steady flow of trustees acknowledging that their members would be better placed in the hands of another, better performing trustee. This consolidation is driving costs down and seeing more members in better performing products.

As the committee would be aware, a review of the Your Future Your Super reforms is now underway. The review will give stakeholders the opportunity to have a say as to what enhancements could be made to the reforms, including the performance test. From APRA’s perspective, a review after two cycles of the test makes good sense. 

Since this is my last Parliamentary appearance as Chair of APRA, before opening up to questions I would like to say that it has been a privilege to serve as Chair of APRA for the past eight years. That has been especially so because of the hardworking and dedicated APRA staff. It is because of them that I am confident that APRA will continue to deliver a safe and stable financial system into the future, just as the parliament and the Australian community have come to expect.

With those comments, my colleagues and I are happy to answer your questions.