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BFCSA: The man wielding APRA's big stick: Josh plants ex Treasury bod into disastrous APRA

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The man wielding APRA's big stick

Australian Financial Review Apr 16, 2019 7.13pm



John Lonsdale timed his exit from federal treasury into the upper echelons of the prudential regulator perfectly.

After a stellar 32-year career at federal treasury, including working as David Murray’s right hand man on the Financial System Inquiry, Lonsdale landed a job as deputy chair of the Australian Prudential Regulation Authority in May last year.

He took up the position just as the Hayne royal commission was getting into its stride. Almost one year later, Lonsdale is in the box seat to be the man carrying APRA’s big stick. He deserves to be the face of enforcement in superannuation, banking and insurance.

This is the logical outcome of Lonsdale leading the review into APRA’s inadequate enforcement culture. He was assisted in this review by an independent advisory panel comprising former judge Robert Austin, competition regulator Sarah Court and academic Dimity Kingsford Smith.

Lonsdale and the independent experts have done a good job of exposing APRA’s failings including its habit of moving too slowly to remediate issues, its lack of forcefulness in its treatment of recalcitrant institutions and its unwillingness to send strong public messages through enforcement actions.

Enforcement as last resort

Fixing these will require the sort of cultural change that is happening at the big banks, insurers and wealth management companies.

It demands a new tone from the top. APRA staff involved in supervision need to feel empowered to stand up to those who have deliberately delayed and obfuscated with the use of legalistic responses to regulatory obligations.

APRA has had a low appetite for enforcement. It has preferred to work behind the scenes to head off harm before it occurs. It has seen enforcement as a last resort.

The Lonsdale review found APRA’s approach to enforcement was out of step with overseas regulators. Even the International Monetary Fund found that APRA needed to enhance its correction action in a quicker and more active way.

The review of APRA’s enforcement strategy was a classic exercise in clever bureaucratic manoeuvring. This does not diminish its findings but it could worry those who have long been cynical of APRA’s ability to grow some sharp regulatory teeth.

When the Hayne inquiry published its interim report in September last year, it was obvious from many case studies that APRA’s handling of the supervision of misconduct had been inadequate. The Hayne inquiry used a series of questions to highlight APRA’s weaknesses.

It asked if APRA’s regulatory practices were satisfactory, if its enforcement was satisfactory and whether its prudential standards on governance needed to be reconsidered.

Writing on the wall

Commissioner Kenneth Hayne had put the writing on the wall. It was clear he was going to come after APRA in his final report although it was unclear if he would go hell for leather. Another factor looming in the background was the possibility the federal government would finally take up the recommendation of Murray’s inquiry to conduct an APRA capability review.

This review has since been ordered by Treasurer Josh Frydenberg who appointed Graeme Samuel to lead this task.

Not surprisingly, APRA’s board decided in November last year to get on the front foot. The chairman Wayne Byres, the deputy chair Helen Rowell, executive board member Geoff Summerhayes and Lonsdale decided to conduct the review of APRA’s enforcement strategy.

It made sense for Lonsdale to lead this project given his responsibility for APRA’s work on culture, remuneration, crisis resolution and collaboration with the Australian Securities and Investments Commission.

A succinct summary of the consequences of APRA’s low appetite for enforcement is contained on page 15 of the review.

“The review believes the collective effect of APRA’s choices in relation to the trade-offs discussed above has been to diminish the credible threat of consequences for failing to meet APRA’s requirements,” the report says.

“This risks diminishing the effectiveness of APRA’s non-formal supervision approaches. Regulatory theory suggests non-formal, suasion-based approaches are effective largely because they are buttressed by the threat of more severe actions if requirements are not met.

“More formal actions signal the authoritative nature of the regulator and the gravity of its public purpose. Clearly, APRA needs to demonstrate its appetite for enforcement."


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Guest Monday, 19 October 2020