Did the Banking Royal Commission awaken the sleeping giants? ASIC and APRA publish Corporate Plans 2019-23

03 September 2019

Australia’s regulators – the Australian Securities and Investment Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) – have recently published their Corporate Plans for 2019-2023, providing the financial services sector with a valuable update on which areas the regulators will be targeting over the next four years.

ASIC’s Corporate Plan

On 28 August 2019, ASIC published its four-year Corporate Plan covering 2019-20 and 2022-23 (ASIC Corporate Plan).

ASIC canvasses its plan to improve enforcement and supervision to create real and positive changes in culture and behaviour, which should produce better outcomes for consumers and investors. It also explains that ASIC will bolster its capabilities by expanding its use of data and technology, including the use of RegTech to widen the reach of its surveillance of the financial services sector.

ASIC has identified the following seven strategic priorities:

High-deterrence enforcement action.
Prioritising the recommendations and referrals from the Banking Royal Commission.
Delivering as a conduct regulator for superannuation.
Addressing harms in insurance.
Improving governance and accountability.
Protecting vulnerable consumers.
Addressing poor financial advice outcomes.

At the recent Financial Services Council Summit 2019, ASIC Chair James Shipton spoke on the strategic priorities outlined in ASIC’s Corporate Plan.[1] Mr Shipton provided the following insight into the regulator’s intentions behind the strategic priorities:

“The strategic priorities we have identified represent the most significant ways in which we are addressing consumer harm, punishing wrongdoing, and encouraging better culture and behaviour – including a greater emphasis on fairness and professionalism – throughout the industry.

One thing that is different this year about our Corporate Plan is that we have highlighted the range of regulatory actions we propose to deploy in relation to each of our strategic priorities."

In the table below, we consider some salient features of ASIC’s Corporate Plan.

Key Features – ASIC’s Corporate Plan
Increasing litigation	ASIC’s Corporate Plan outlines its new enforcement strategy, which focuses on increased and accelerated court-based outcomes overseen by the new Office of Enforcement that began operating in July 2019. Its strategy is underpinned by the ‘Why not litigate?’ operational discipline. The discipline will be applied to matters where ASIC is satisfied that breaches are more likely than not to have occurred. At the aforementioned Financial Services Council Summit, Mr Shipton described the approach as ‘clear eyed’, acknowledging that ASIC will fail in the courts in some cases, but will continue to pursue litigation. ASIC’s Corporate Plan identified a 20% increase in the number of enforcement matters in 2018-19. One action referred to ASIC by the Financial Services Royal Commission was launched last week and two more briefs have been referred to the Commonwealth Director of Public Prosecution.[1] To bolster its reinvigorated enforcement approach, ASIC expressed its commitment to utilising its expanded enforcement toolkit, including imprisonment of up to 15 years for serious offences and fines of up to $525 million for corporations, as well as civil penalties for breaches of the obligation to provide financial services ‘efficiently, honestly and fairly’.
Superannuation	ASIC will be on the look-out for superannuation funds displaying persistent underperformance. In particular, ASIC has identified insurance and advice as two issues contributing to Australians receiving poor value from their superannuation. It will continue to monitor trustee behaviour and publish data and analysis regarding insurance in superannuation. ASIC’s desired outcome of this increased surveillance will be to identify and pursue superannuation fund trustees not acting in the best interests of members. ASIC will continue working alongside APRA to scrutinise risk management and oversight processes to ensure that advice fees are appropriate and authorised. In his keynote address at the Financial Services Summit, Mr Shipton revealed that ASIC is currently examining 25 superannuation funds to test the quality of advice and any conflict issues that may be present.
Governance and Culture	ASIC presents the improvement of governance and accountability as a key strategic priority of the next four years. The Close and Continuous Monitoring program currently sees ASIC staff embedded within the big four banks and AMP to identify internal governance issues and non-financial risks. In ASIC’s Corporate Plan, the regulator reveals that it is examining the scope of this program to include additional financial institutions. The Corporate Governance Taskforce will continue to review governance practices, including approaches to variable remuneration of managerial personal and the interactions between directors and officers. The taskforce will publish two reports by the end of 2019, identifying issues and providing recommendations for cultural change. The report indicates an intention by ASIC to focus enforcement resources toward individuals responsible for governance failures, utilising increased maximum penalties.

APRA’s Corporate Plan

APRA released its four-year Corporate Plan on 29 August 2019 (APRA Corporate Plan).

Interestingly, the APRA Corporate Plan, which cover 2019-2023, revises a similar plan released last year that was initially slated to operate until 2022. Following criticism by the Financial Services Royal Commission, the Productivity Commission[3] and an independent APRA Capability Review,[4] APRA has delivered a revised plan for the next four years believing it better articulates APRA’s vision ‘to deliver a sound and resilient financial system, founded on excellence in prudential supervision’.[5]

APRA’s new strategy will be supported by increased funding in the 2018 Mid-Year Economic Outlook and 2019 Federal Budget, providing an additional $210 million over the next four years.[6]

APRA has identified the following four strategic focus areas to improve:

Maintaining financial system resilience.
Improving outcomes for superannuation members.
Improving cyber-resilience across the financial system.
Transforming governance, culture, remuneration and accountability across all regulated financial institutions.

In the below table we provide comment on these priorities and what they mean for entities regulated by APRA.

Key Features – APRA’s Corporate Plan
Maintaining Financial System Resilience	Soft economic growth and waning public confidence in financial institutions are cited as imperatives for reforms to financial system resilience. APRA will target insurers and authorised deposit-taking institutions (ADIs) in its plan to maintain financial security and stability while improving value for consumers. APRA will enforce its ‘unquestionably strong’ capital expectations by strengthening capital requirements for ADIs and shortening the stress-testing cycle from three years to 12 months. Life insurance and general insurance industries will come under greater supervisory scrutiny for poor product design that drives low customer value and unsustainable risk. APRA will also implement a new prudential framework for private health insurers with a focus on affordability for consumers.
Improve outcomes for Superannuation members	Like ASIC, APRA is targeting underperforming superannuation funds. It aims to facilitate the resolution or exit of consistently underperforming funds. APRA will improve transparency within the industry by collecting and publishing data to be compared against performance benchmarks, and by conducting industry-wide reviews to develop best practice guidelines. Closer monitoring of governance controls and trustee culture aims to reduce the prevalence of theft and loss of members’ funds.
Cyber-resilience	APRA’s Corporate Plan announces intentions to work alongside other government agencies including the Council of Financial Regulators Cyber Security Working Group as well as third parties to improve APRA’s ability to deter, detect and defend against cyber incidents. APRA will enforce minimum cyber-resilience standards to ensure that response plans of financial institutions are fit for purpose. The regulator will employ a data driven approach to develop its own long term baseline metrics against which the resilience of institutions will be measured.
Governance and Culture	APRA’s Corporate Plan states a ‘constructively tough’ approach to governance, culture, remuneration and accountability issues within regulated institutions. It will uplift and clarify existing expectations and support government reforms to extend the legislative accountability regime to all APRA regulated institutions. The regulator will more closely supervise the management of non-financial risks by partnering with other regulators and third parties and employing regulatory technology to its supervisory role. APRA will share the findings of its supervisory activity more frequently to assist firms and regulators in developing benchmarks and identifying underperformance.

Performance benchmarks

In addition to an outline of upcoming changes to its regulation of institutions, APRA’s Corporate Plan includes details of the regulator’s internal conduct and accountability mechanisms. The plan publishes five key performance measures designed to measure APRA’s ability to achieve its purpose.[7]

Performing Entity Ratio. The percentage of regulated institutions that met their commitments to beneficiaries in a given year.
Money Protection Ratio. The total liabilities to beneficiaries in Australia (measured by dollar value) minus those lost due to prudential failures, divided by the total liabilities to beneficiaries in Australia. This is measured over a given year.
Percentage of Financial Claims Scheme (FCS) payments paid within seven days of a declaration. A percentage measure of FCS claims in relation to banks, building societies and credit unions that were paid within seven days of an FCS declaration.
Number of outstanding claims in the event of an FCS declaration. A measure of the total number of claims that remain outstanding following an FCS declaration.
Costs per $1,000 of assets supervised by APRA. A measure of APRA’s operational efficiency, measured by its expenditure per $1,000 of assets under supervision.

The regulators are now wide awake

The tone of each regulator’s Corporate Plan is very proactive: the regulators convey that they intend to take action to drive changes in behaviour that deliver good consumer and investor outcomes.

Importantly, both ASIC and APRA identify fostering cultural change and better governance as a paramount to addressing the exposed shortcomings of the financial services industry. Followers of the Banking Royal Commission will recall that an overarching theme of Commissioner Hayne’s Final Report was that culture drives misconduct, so a focus on corporate culture should go some way towards mitigating a reoccurrence of the misconduct that led to the Royal Commission.

Both Corporate Plans raise some question marks about how effectively each regulator will execute their strategies over the next four years. In a previous article, we commented on the APRA Capability Review and noted that APRA’s ‘behind closed doors’ approach to enforcement was an area attracting widespread criticism. It is peculiar that APRA’s Corporate Plan did not convey an effort to be more transparent or open in its activities. Granted, APRA did publish revised performance measures, but it will remain to be seen whether the regulator is transparent in using its supervisory toolkit and performance against these benchmarks.

The Banking Royal Commission may have been the earthquake that awoke the sleeping giants, but when it comes to executing their corporate plans and achieving their visions, the regulators still have a lot to prove.

_[1]_{James Shipton, Keynote address - Financial Services Council Summit 2019, 28 August 2019}

_{[2] James Frost and James Eyers, Australian Financial Review, “ASIC sues NAB over dodgy loan scheme”, 23 August 2019}

_{[3] Productivity commission, Superannuation: Assessing Efficiency and Competitiveness, 10 January 2019; Productivity commission, Competition in the Australian Financial System, 3 August 2018}

_{[4] Australian Prudential Regulation Authority (APRA) Capability Review, 15 July 2019}

_{[5] APRA, Corporate Plan 2019-2023 August 2019, p 4.}

_{[6] Ibid, p 10.}

_{[7] Ibid, pg 25.}

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