Opening Statement to the House of Representatives Standing Committee on Economics - October 2024

John Lonsdale, Chair - Australian Prudential Regulation Authority
 

Thank you for the opportunity to appear before the Committee to discuss APRA’s Annual Report 2022-23. Last week we tabled our most recent Annual Report for 2023-24 and the two documents provide a comprehensive overview of APRA’s performance and activities to protect the safety and stability of Australia’s financial system.

Australia continues to experience a prolonged period of financial system resilience, supported by regulatory settings that have been strengthened and enhanced over an extended period. Financial services firms, however, face into some significant risks, which warrant ongoing vigilance and preparation.

The international banking issues associated with Silicon Valley Bank and Credit Suisse in 2023 had no contagion impact in Australia. Yet the events offered lessons for how to strengthen APRA’s tools, the resilience of banks and their response to stress events. APRA has since adjusted regulatory settings by improving and simplifying the framework for managing interest rate risk (IRRBB requirements), making targeted adjustments to liquidity settings, and is in consultation with industry on removing Additional Tier 1 (AT1) capital instruments.

In July, APRA confirmed it would maintain the current macroeconomic settings including the mortgage serviceability buffer at 3 percentage points and the counter-cyclical capital buffer at 1 per cent. Macroprudential policy reduces financial stability risks at the system-wide level. APRA’s published Macroprudential Policy Framework details a range of risks and indicators APRA monitors, including credit growth and leverage, asset prices, lending conditions, and financial resilience. In reaching its July decision, APRA considered the uncertain economic and interest rate outlook, geopolitical instability, as well as high levels of household debt and elevated inflation. APRA will continue to monitor vulnerabilities and risks in the system and review the settings of macroprudential policy.

Superannuation is an important component of national savings. Against this backdrop, APRA continues to drive continuous improvement and trustee accountability in delivering quality member outcomes. The annual superannuation performance test, which assesses the long-term performance of superannuation products against tailored benchmarks, is a key measure and year on year, the number of products failing the performance test is decreasing.

As part of our ongoing efforts to improve transparency in superannuation, in October APRA released a package of performance metrics and insights for 876 MySuper and Choice products, which collectively represent most types of investment offerings for accumulation members. We are currently examining trustee expenditure data at a fund level to ensure that RSE Licensees decisions are in members’ best financial interests.

You will note APRA’s recent enforcement actions in relation to three superannuation funds, reflecting our willingness to act should we perceive activities that are not in members’ best interests. 

APRA is focused on the ways in which superannuation trustees are supporting members entering or approaching retirement. Our follow up work to the 2023 joint APRA/ASIC thematic review into trustees’ progress against the retirement income covenant indicates some advancements are being made, but not in tracking and measuring the success of trustees’ retirement income strategies.

APRA continues to work alongside industry, regulators and government to address insurance affordability and availability pressures. Our work includes assessing data to consider some of the issues associated with the protection gap in general insurance, as well as finalising an APRA/ASIC joint review into premium increases in life insurance. We also continue to support the Hazards Insurance Partnership (HIP) to progress disaster risk reduction and natural hazard insurance.

New capital standards for the private health insurance industry came into effect in July 2023. They changed how capital adequacy is determined for insurers and has improved alignment with APRA’s insurance capital framework, consistent with international best practice.  

Since the first significant cyber-attack occurred against an APRA-regulated entity, countering such incidents has become a regular practice across our regulated cohort. Our work to help them lift their defences and response capability – in line with the CPS 234 Information Security prudential standard – is ongoing. 

APRA has recently extended these efforts to help regulated entities better manage operational risks and respond to business disruptions. The new CPS 230 Operational Risk Management prudential standard will take effect in July 2025. It requires regulated entities to set and test operational risk management controls and improve business continuity planning, to better prepare and respond to severe disruptions.

APRA released its latest Corporate Plan in August. It comprehensively lists planned policy, supervision and data collection initiatives, outlining regulatory expectations including in the lead up to Regulatory Initiatives Grid.

The Plan considers current, emerging and long-term challenges like climate and nature-related financial risks and an ageing population. Another consideration is the digitisation of financial services, which, alongside its benefits, has been shown to accelerate transmission shocks in the system. In response, APRA has begun developing the first system stress test to understand the system interconnections and to quantify, assess and respond to identified risks.

Strengthening governance is another area of focus in our ongoing work, including administering the Financial Accountability Regime (FAR), which comes into effect for insurers and superannuation trustees as of March 2025. 

APRA regularly reviews its own capabilities so it might continue to evolve as a modern and future-ready regulator. APRA’s upgrade of its technology and data systems – following funding received in the 2024-25 Federal Budget – will streamline the process of data submission for entities, improve data-driven supervision and APRA’s own internal cyber controls.

APRA recently restructured its supervisory groups, executive team and governance framework to improve decision-making and efficiencies. We also established a ‘supervisory excellence’ practice. These investments in APRA’s people and processes cultivate an inclusive, agile and efficient organisation – one that remains fit to foresee and manage the risks of the future.