Mackay Chapman November 2023 APRA Update

In this month’s APRA update:

• APRA Chair John Lonsdale’s speaks at FINSIA’s ‘The Regulators’ 2023;
• APRA is initiating consultations on targeted amendments to liquidity and capital requirements to enhance the banking sector's resilience to future stress;
• A response has been issued to the consultation on proposed minor amendments to the prudential framework for authorised deposit-taking institutions (ADIs) and insurers;
• APRA has released new data on superannuation product performance, focusing on fees and investment returns in MySuper and trustee-directed products (TDPs); and
• APRA has intensified its focus on data risk after pilot study with banks reveals slow progress in data risk management practices.

APRA Chair John Lonsdale - Speech to FINSIA The Regulators 2023

APRA Chair John Lonsdale gave a speech to FINSIA’s ‘The Regulators’ 2023. 

“Good afternoon and thank you for the opportunity to speak today alongside my regulatory peers.

Looking around the room, I can see people from across financial services – banking, superannuation, insurance and beyond. On stage we have four different regulators, each with specific areas of focus and responsibility. Yet despite the diversity, there is likely to be commonality in many of the topics discussed today. 

That’s partly a reflection of the array of risks present in the system, which are causing uncertainty and which both regulators and industry need to respond to. Macroeconomic conditions including inflationary pressures and rising interest rates, as well as escalating geopolitical tensions, are live issues concerning the Australian community and they pose risk to financial stability.

The global financial system has also become more interconnected due to advances in technology and communication. New innovations are delivering benefits to businesses and consumers including cost-savings, efficiency and convenience. But the links they foster also deepen the risks that need to be identified and managed. Further complicating matters, emerging digital technologies often straddle international and regulatory boundaries or fall between them entirely. No business or regulator can address these risks in isolation.

One topical issue that highlights the confluence of technology, interconnectivity and the increasing importance of multi-agency cooperation is that of cyber security. Over the past year, APRA has collaborated closely with other regulators in this room and across government agencies to help in the aftermath of several high-profile cyber issues. Our joint focus is to work together to protect Australians and safeguard confidence.

Much of APRA’s focus however is preventative. We are working hard to ensure the banks, insurers and superannuation trustees have the systems, processes and expertise in place to prepare for and repel cyber-attacks.”

The rest of Mr Lonsdale’s speech can be found here.
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APRA Proposes Targeted Changes on Liquidity and Capital in Response to Global Banking Turmoil

APRA is initiating consultations on targeted amendments to liquidity and capital requirements to enhance the banking sector's resilience to future stress. 

Proposed changes, outlined in a letter to authorised deposit-taking institutions (ADIs), draw from lessons learned from recent banking crises in the United States and Europe. The amendments focus on the prudential framework, particularly impacting banks subject to the Minimum Liquidity Holdings (MLH) regime. 

APRA aims to address challenges highlighted during overseas banking turmoil, emphasising the importance of regularly updating liquid asset values and minimising contagion risks.

APRA Member Therese McCarthy Hockey stressed the need to prevent outsized impacts on the system and ensure prudent valuation of liquid assets. 

The proposed revisions aim to enhance banks' readiness to access central bank liquidity when necessary. Acknowledging potential impacts on smaller banks, APRA plans to consider mitigation options during the consultation process. Alongside written submissions, APRA will conduct workshops to gather feedback from the banking industry. The consultation is expected to conclude in the first half of the next year.

Find out more here.
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APRA Releases Response to Consultation on Minor Amendments to Prudential Framework for ADIs and Insurers

APRA has issued a response to the consultation on proposed minor amendments to the prudential framework for authorised deposit-taking institutions (ADIs) and insurers. 

This communication, released 16 November, serves as a continuation of the consultation initiated in June 2023. The initial consultation focused on APRA's proposed updates, designed to ensure a timely refresh of the framework for ADIs and insurers between more comprehensive reviews of prudential standards.

The amendments outlined in the response letter primarily consist of technical clarifications, intending to refine the existing framework without introducing any substantial changes to policy settings. 

Industry stakeholders can access additional details, including the letter to industry, finalised prudential standards, and non-confidential submissions on the APRA website.

APRA releases new insights on superannuation performance

APRA has released new data on superannuation product performance, focusing on fees and investment returns in MySuper and trustee-directed products (TDPs). 

The findings reveal significant variability in administration fees, suggesting potential for industry-wide fee reductions, particularly in TDPs. Trustee-directed products on platforms generally have higher fees, prompting a call for trustees to assess if the added services justify the costs. 

Larger funds exhibit lower administration fees, emphasising the efficiency benefits of scale in superannuation. 

While most MySuper and non-platform TDPs outperform the investment benchmark, over half of platform TDPs fail to meet the benchmark. The data replaces heatmaps, and APRA plans a comprehensive transparency package next year covering investment returns, fees, and performance metrics to enhance scrutiny. 

Deputy Chair Margaret Cole emphasised APRA’s commitment to transparency for better member outcomes, urging trustees to take corrective action for consistently underperforming products.

Quality Data as an Asset for Boards, Management, and Business

APRA has intensified its focus on data risk, evident in regulatory guidance such as CPG 235 on Managing Data Risk and its inclusion in CPS 234 Information Security and CPS 230 Operational Resilience. 

Recent industry cyber events underscore the importance of data storage, deletion, and security. APRA's pilot study with banks reveals slow progress in data risk management practices, emphasising the wide gap between current and optimal practices. 

Quality data is deemed a valuable business asset, impacting decision-making, trend prediction, and profitability. Poorly managed data can lead to misinformed decisions, errors, customer complaints and regulatory actions, causing reputational damage. 

APRA recommends a continuous focus on data management, offering insights and better practices based on its pilot study. 

The engagement includes establishing data governance, clarifying roles, simplifying technology architecture, identifying critical data elements, monitoring data quality, and integrating data management risk into overall risk frameworks. 

Despite progress, APRA notes challenges, urging entities to bridge gaps for effective data risk management and industry resilience.

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The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such.  It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only.  You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.