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BFCSA: APRA adopts 'constructively tough' approach. What Rot!!!

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APRA adopts 'constructively tough' approach

Australian Financial Review Apr 16, 2019 11.06am

James Eyers


Banks and super funds that fail to work constructively with the prudential regulator face public shaming, stiff capital penalties, operating restrictions and, potentially, litigation, under APRA's tough new enforcement approach that chairman Wayne Byres says will result in faster and more aggressive action.

“We should be quicker and more forceful with unco-operative institutions,” Mr Byres said, after the regulator's own review into its enforcement culture decided it needed to be “constructively tough” to deter misconduct in the financial services sector.

The Australian Prudential Regulation Authority will target not only financial risk but "behavioural risk" and says it will punish entities that fail to conduct business with "honesty and integrity", "due skill, care and diligence" and those that fail to deal with APRA "in an open, co-operative and constructive way".

APRA will work more closely with the Australian Securities and Investments Commission, as the two agencies look to share more information, which will deliver to APRA details gathered by ASIC under its coercive powers.

The "enforcement strategy review" – led by its deputy chairman John Lonsdale and which began in November after APRA was criticised by the Hayne royal commission for being too soft – also encouraged APRA to develop an "enhanced communication strategy" to “send strong messages” to the market to achieve deterrence. An "enforcement approach" document released by APRA on Tuesday adopts all of the report's recommendations.

APRA also will seek additional powers from the government, including an explicit power to compel underperforming funds to merge, a measure that dropped out of the Members Outcome bill that passed the parliament this month.

It will seek additional penalties for the banking executive accountability regime (BEAR), to allow it to levy fines for misconduct that is not at the egregious end of the scale. The report said this had been important in Britain to fine senior bankers. The report described the adequacy of penalties available to APRA as "weak".

Given the tools it has for penalty and licence conditions, APRA said court actions would "represent a relatively limited proportion of overall regulatory activity".

Mr Byres defended the regulator against criticism from the Hayne royal commission that APRA never went to court.

“It’s all well and good to say we should have gone to court, but we always have to make decisions about the best use of our resources," he said. But with new penalty provisions and BEAR now in place, "it’s a different cost-benefit trade-off now".

“There’s no suggestion in the report that major risks were left unaddressed for periods of time. The first option is to get the problem fixed.

"You can always look at instances and say ‘I wish I had done something quicker when I look back with the benefit of hindsight’.

"But I wouldn’t want to suggest that is because people were sitting on their hands. But it was that when they embarked on a process, maybe it was taking longer, and we could have benefited from upping the intensity."

The report contains examples of the sort of misconduct APRA will target under its new approach but that might have gone through the cracks under its previous approach, where enforcement was considered a last resort.

For example, action is more likely to be taken against senior executives at large banks who do not promptly report "material data errors"; for problems remediating customers; for "governance deficiencies"; and where superannuation funds have not acted in the best interests of members even if the funds have taken steps to prevent issues recurring.

APRA said it would become "deliberately strategic" and "more innovative" in its enforcement. Describing itself as a "preventative, safety-based regulator", it said it was appropriate to act "well before the risks – including financial, operational and behavioural risks – present an imminent threat to financial viability".

After the prudential inquiry into Commonwealth Bank, APRA applied a $1 billion capital penalty to ensure the bank acted on the report, a rare public shaming given these co-called "Pillar 2" adjustments traditionally have been secretive.

However, Mr Byres said APRA would be more public when it put capital penalties on banks.

“If we had another case like the CBA, which was being played out in the public domain, then very clearly the public would expect to know what is the regulatory action being taken,” he said. “The review says we should be more open-minded about whether we make those actions public, whereas in the past, we generally would have made them not public and CBA was more the exception to the rule.”

The enforcement review took advice from an external, expert panel comprising former judge Robert Austin, ACCC commissioner Sarah Court and academic Dimity Kingsford Smith. It is separate to the "capability review" being conducted by former competition regulator Graeme Samuel, at the recommendation of the royal commission.

The recommendation that laws be strengthened "to remove any risk of challenge" if APRA ordered the takeover of an underperforming super fund comes after Sunsuper chairman Andrew Frasertold The Australian Financial Review Banking & Wealth Summit last month that some larger funds might consider that merging with underperforming smaller funds would not be in the best interests of the members of the bigger funds, so intervention by legislators might be warranted.

The review said APRA's enforcement powers relating to private health insurance "have significant shortcomings".

Legislative changes may also be needed to allow APRA and ASIC to jointly exercise investigation powers.

The review said information received by one of either APRA or ASIC under investigative powers should be "deemed to have been received by both” and "it should not be necessary to conduct a legal analysis on whether procedural fairness must be afforded in each instance where information-sharing is proposed during a joint investigation".

The report found APRA still had a way to go to embed this new enforcement culture. While there had been a recent positive shift at the top of APRA from its historical risk aversion to taking enforcement action, “such a shift has yet to be embedded across the whole organisation,” it said.

Wilson Sy, a former head researcher at APRA, said more transparency would be needed to engender confidence that APRA was enforcing the law effectively.

"APRA should be willing to disclose useful information to the public rather than use its secrecy provisions to protect the major banks," Dr Sy said.

"APRA should be required, through an amendment of the APRA Act, to ensure a well-informed public. To this end, APRA should demonstrate regularly its knowledge and capabilities through publications in research journals and conferences so as to signal to the industry that it is a competent and serious regulator.”

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