Graeme Samuel

An independent review into the prudential regulator will likely reveal that APRA does not have the wherewithal to fulfil the full breadth of its mandate to respond effectively to emerging financial stability risks at banks, insurers and superannuation funds.

APRA has a very strong focus on capital and liquidity within banks but it possibly hasn’t met community expectations in terms of the prudential regulation of superannuation funds, says Kevin Nixon, global senior advisor at Deloitte Risk Advisory and a former head of Regulatory Affairs at the Institute of International Finance (IIF) in Washington DC.

“The capability review will likely show a gap between APRA’s mandate and its capabilities to carry out that mandate,” he said, noting that most of the recent criticisms of the prudential regulator are related to its oversight of the $2.8 trillion superannuation sector.

The APRA capability review – headed by Graeme Samuel – was commissioned by Treasurer Josh Frydenberg following recommendations made by the Hayne royal commission. Samuel is a former chair of Australia’s antitrust regulator.

Due for completion on June 30, the review follows a similar investigation into ASIC by Karen Chester in 2015.

Nixon’s comments come ahead of an important speech by the former chair of the anti-trust regulator on Tuesday at an industry forum where Samuel is participating in a fireside chat called Watching the watchdogs.

The Deloitte regulatory expert is expecting that the review will set out far-reaching recommendations including more funding for APRA, greater powers and more enforcement tools.

To Nixon, the big question is what punitive powers the government could give APRA in the case that risk management and risk governance is found wanting in a superannuation fund.

APRA has had far less experience in superannuation than with the bank sector, he argues.

“APRA has had a lot of experience with the banks,” Nixon says, explaining that where an individual bank’s risk management and risk governance is not up to standard, the regulator can apply higher capital ratios.  More capital reduces risk while providing an incentive for banks to fix problems.

“This is a great tool for APRA to use on the banks and the banks are very aware of the prudential regulator’s ability to raise capital levels but the problem is there is no equivalent tool for superannuation funds so that becomes a capability gap.”

“If you look at measures that could be put in place to reduce risk and incentive remediation, there is a range of things they [APRA] could do that would have the same effect as raising capital on a bank balance sheet. These include placing limits on investment, limits on a fund taking on new members, further controls on liquidity and limits on M&A activity.”

A good report card

That said, Nixon urges the superannuation industry to watch out for any unintended consequences from such measures since, as he sees it, the prudential regulator will need to get “very creative” with its rules.

For instance, he queries whether APRA can prevent a pending merger taking place because they don’t believe the risk governance is suitable.

Importantly, he concludes, the industry shouldn’t see the importance of the capability review as being about APRA getting a good report card.

“This is not what this is. This is about APRA’s capability to meet its mandate and whether it has enough power over those it regulates to do what it needs to do.”

Referring to the final report of the royal commission which identified widespread misconduct in the financial services sector, Nixon stressed that misconduct is a prudential issue as it can effect trust in institutions. He added that Commissioner Hayne flagged a closer relationship between the prudential and corporate watchdogs.

“I think ASIC’s tilt towards litigation, the review of APRA’s capability and the prospect of these two regulators working more closely together have strong implications for the super industry.”




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