APRA on Industry Self-Assessments into Governance and Accountability

The Prudential Inquiry was launched following a series of significant operational and governance shortcomings that damaged the reputation of CBA. The report found that continued financial success of CBA had dulled the institution’s senses, especially with regard to the management of non-financial risks. APRA wrote to the institutions’ boards last June asking them to gauge whether the weaknesses uncovered by the CBA Prudential Inquiry also existed in their own companies. In addition, APRA wrote to the boards of 36 authorized deposit-taking institutions, insurers, and superannuation licensees asking them to conduct a self-assessment against the findings and provide that assessment to APRA. APRA has since examined these self-assessments to assess their quality, identify common themes, and, where necessary, challenge institutions’ findings. Overall, it is clear that the weaknesses identified in the final report of the Prudential Inquiry are not unique to CBA. A number of common themes have emerged from the self-assessments, including:

• Non-financial risk management requires improvement
• Accountabilities are not always clear, cascaded, and effectively enforced
• Acknowledged weaknesses are well-known and some have been long-standing
• Risk culture is not well-understood and, therefore, may not be reinforcing the desired behaviors

The paper highlights that significant uplift is required across industries to bring governance and the management of non-financial risks to an appropriate standard. This includes embedding robust frameworks that incentivize delivery of sound outcomes, proactive management of issues, and consistent application of rewards and consequences. Over the next 12 months, APRA will strengthen prudential expectations and increase supervisory intensity for governance, accountability, and culture for all regulated institutions.

APRA is meeting with participating institutions and, as a next step, will be writing to the boards of each of the 36 institutions to provide feedback on their self-assessments and outline the intended targeted supervisory engagement by APRA. The nature of this engagement will depend on the quality and findings of the self-assessment and the risk profile of the institution. For some institutions, the issues identified in the self-assessment are material and the changes required to address them are significant. APRA is, therefore, considering applying an additional operational risk capital requirement to reflect the higher risk profile of these institutions. Many institutions that conducted a self-assessment have developed plans to address the findings. APRA expects all regulated institutions to identify and address points of weakness and continues to encourage institutions that have not yet completed a thorough self-assessment to do so. Institutions should consider the observations in this information paper when designing and implementing steps to enhance risk governance.

Related Links

• Press Release
• Information Paper (PDF)
• Final Report on Prudential Inquiry into CBA

Keywords: Asia Pacific, Australia, Banking, Insurance, Superannuation, Governance, Self-Assessment, Prudential Inquiry, Accountability, Operational Risk, APRA