APRA has unveiled its first major restructure since 2019 following the Hayne royal commission, but regulation expert and UNSW academic Scott Donald has questioned whether the decision to combine life insurance, private health insurance and superannuation into a single supervision unit is the best way to serve its prudential regulation purpose.
APRA on Wednesday said it will reduce its supervision divisions to two from 2 September, marking a departure from the three supervision lines (banking, insurance and superannuation) that were adopted as a response to Hayne recommendations and the ensuing APRA capability review.
The two new divisions will consist of a general insurance and banking unit, as well as a life insurance, private health insurance and superannuation unit.
“Over recent years, APRA’s size and responsibilities have increased as the financial system has grown in scale and complexity… and we need to ensure APRA is set up to react swiftly and effectively to key issues and crises,” chair John Lonsdale said in a press statement.
Donald, an associate professor of private and commercial law at UNSW, said the new grouping of industries corresponds to a market conduct focus, which is why ASIC has some similar alignment in its organisational chart (banking supervision is coupled with general insurance and credit, while superannuation is coupled with life insurance).
But he urged APRA to “think carefully about its prudential role and not get dragged into a market conduct role”.
“One of the things that we’ve seen from the Hayne royal commission is strong political imperative to address certain problems, and often the tool that they’re using is not necessarily the one that’s most well suited to it,” he told Investment Magazine.
“That [new structure] certainly means that the interface with ASIC and others will be easier, and that’s really important…You don’t want to pretend that there’s some really nice, clean division between those two types of regulation.
“[But] I’m not sure that APRA as a prudential regulator is necessarily always the best place to place some of the responsibilities that they’ve had more recently.”
‘Two-way adaptation’
There is a classic case of “two-way adaptation” that is happening, whereby APRA propels changes in its regulated industries and imposes certain obligations, and in turn has to reflect those changes in its own organisation to engage effectively, Donald said.
Insurance and super do have close operational links, and he said the new structure may have benefits in addressing issues like claim-handling delays, but ultimately that’s not a “core” part of APRA’s mandate.
Rather, APRA’s principal role is to understand the way risk might affect the stability of individual institutions, and to protect the stability and resilience of the financial system.
“When you do that, it seems to me that there’s a big difference between, particularly, accumulation-based super and insurance,” Donald said.
“Insurance is all about actuarial risk…in the case of pure life insurance, it has to do with the timing of the person’s demise. But in TPD, it’s also not just timing, it’s also kind of whether it’s [illness or injury] going to happen.”
Donald said in some ways, defined benefit plans are also about actuarial assessment and meeting the capital requirements, but DB risks are diminishing in the system as many such plans are closed to new members.
For DC funds, on the other hand, the risks are not so much actuarial but are related to member outcomes, “by which they mean how much money do they get on retirement”, he said.
“That’s the product, to some extent, of both what the fund does, but also how markets reward them and so on, and prudential regulators – not just APRA but others around the world – are really struggling to come to grips with how to think about that risk.”
When asked if trustees should expect changes in dealing with the regulator, an APRA spokesperson said “the frontline supervisory teams remain unchanged” and will maintain a focus on transparency of performance, fees and fund expenses, as well as investment governance and retirement.
Moreover, on the risk front, APRA said it will establish a centralised cross-industry risk team, consisting of an executive director, as well as three general managers of financial risk, non-financial risk and system risk. The team reports to the Audit and Risk Committee and APRA deputy chair Margaret Cole.
Conexus Institute* executive director David Bell said that in 2019, post royal commission and “in response to significant strong recommendations to focus more on culture and misconduct, a single industry model could better incorporate a more specialised focus”.
“I’d view the announced changes…as a degree of acknowledgement that governance practices have improved across many industry sectors,” Bell said.
“Of note, many of the major risks identified by APRA are shared across all sectors. These include areas such as climate, operational resilience, cyber and crisis preparedness. The increase in common risks warrants a centre-of-excellence style risk function.”
Donald added that shared risks can also be “subtly different” across sectors. For example, climate risks in insurance would be liability-driven whereas in superannuation, it would be asset-related.
“The risk team dedicated to looking at risk in banking, super and insurance in relation to climate is going to have three quite different tasks,” he said.
*The Conexus Institute is an independent think tank philanthropically funded by Conexus Financial, the publisher of Investment Magazine.
