While speaking at an event in Sydney, Australia, the APRA Chair Wayne Byres emphasized that "the most important attribute" regulators or risk managers "need to possess" is "being ready and able to respond to the demands of a rapidly changing landscape." He then discussed how the role of APRA has evolved over the past five years and outlined the issues APRA plans to address in the near future. He believes that APRA might need new powers as critical functions and data move outside the regulatory perimeter and that the focus will shift to addressing the climate change and superannuation risks and regulating the unregulated service providers in the technology arena.
APRA Chair said that nowadays "macro-prudential" actions are seen as part and parcel of the APRA armory. Moreover, APRA has been granted powers over non-bank lenders, should material risks to financial stability emerge. In the future, the calls for action will come quicker and APRA will need to be ready with the framework and tools to respond. APRA has been also asked to establish performance benchmarks for superannuation funds and remove from the industry those that do not meet them. This is a new territory for APRA, but one APRA is now better equipped to embrace. Next, he highlighted that, five years ago, the technological disruption that is now reshaping the financial system and the associated cyber risks that have come with it were not as immediate as they are today. In this context, he believes that the "traditional modus operandi" of APRA will be "inadequate," as the current regulatory framework is not designed for clouds, ecosystems, and partnership models. APRA needs potentially new powers to ensure that, as critical functions and data move outside the regulatory perimeter, the requisite level of safety and control remain in place. The idea of APRA formally reviewing the capabilities of unregulated service providers would have once been rejected as regulatory over-reach—now such service providers may be so fundamental to the operations of a bank that bank supervision cannot properly be done without it.
Additionally, five years ago, climate change was not on the horizon of prudential regulators. However, domestic and international policymakers, as well as investment decision-makers, are now very attuned to climate risks and that is in turn impacting asset values and markets. The entrance of APRA into this territory followed the signing of the Paris Agreement, the work by the private sector (sponsored by FSB) on climate-related disclosures, and a view that directors’ duties require boards to be cognizant of the climate risks to which their business is exposed. In the current scenario, climate-related financial risks need to be assessed and addressed alongside more traditional balance sheet and operational risks. APRA is working with the Council of Financial Regulators to ensure that "we, and the industries we regulate, have an appropriate awareness of the risks and how they are being managed." To this end, an APRA survey undertaken last year across Australian banks and insurers had climate change as the most commonly cited long-term financial risk, ahead of economic downturns and cyber security.
This rapidly changing landscape and evolving set of expectations has meant there was much grist for the mill for the reviews of APRA that have occurred over the last little while. Over the past year or so, aspects of APRA’s activities have been subjected to six major reviews: by the IMF, the Royal Commission, two Productivity Commission inquiries, the APRA Enforcement Review, and the APRA Capability Review. Collectively, these reviews have delivered nearly 150 recommendations on how APRA might better fulfill its role. Compared to five years ago, APRA now has a much bigger role to play. APRA will be firmly stepping into its expanded mandate and acting more forcefully than it has done in the past. APRA hopes for an open and cooperative relationship with regulated entities, since that is essential to good prudential supervision, but will have little patience when that is not reciprocated. Be it governance and culture, financial stability, superannuation or cyber-related risks, APRA standards and expectations in the future are likely to be more prescriptive and demanding and APRA's enforcement of them will undoubtedly be firmer and more insistent.
Related Link: Speech
Keywords: Asia Pacific, Australia, Banking, Pensions, Superannuation, Cyber Risk, Climate Change Risk, APRA
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