APRA releases enforcement strategy
10/05/2019
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On the 16th of April, the Australian Prudential Regulation Authority (APRA) released the details of the much anticipated review of its Enforcement strategy. This sets out how it will refocus its enforcement appetite from that of ‘last resort’ to ‘constructively high’. (See HERE).

As a forward-looking regulator, the objective is to prevent and address serious prudential risks. APRA has the authority to use enforcement well before the risks present an imminent threat to financial stability. It may also take action publicly to act as a deterrent for other companies. This is to protect the interests of depositors, policyholders and superannuation fund members.

Some stakeholders have indicated that APRA’s use of its enforcement powers may be an effective counterbalance to the influence of investors over issuers. For example, APRA does not want issuers to use TSR measures, as they encourage risk taking behaviours that may damage the prudential soundness of an institution. But many see the application of TSR measures as the only way to ensure pay and performance are fairly correlated (as an example, see Ownership Matters’ op ed piece HERE). Commissioner Hayne’s enquiry into banking misconduct sidestepped this issue as it was outside his terms of reference (see HERE).

The extent that companies will take more heed of investors than APRA is not likely to be much muted by APRA’s new remuneration standard, to be issued in draft form in June (see HERE) . The standard is expected to prescribe longer deferral periods and a stronger emphasis on the application of malus amongst several other requirements. But other than requiring the integration of non-financial risk management (including mis-conduct risk) into a remuneration framework, actual performance measures and their extent will not be mandated. Hence, if a bank maintained a heavy TSR weighting, it would be up to APRA to play the heavy and use enforcement action to change the framework. Some argue that it has always had enforcement powers and has chosen not to do this in the past, so will not in the future. But part of the reason for lack of enforcement that is likely to be confirmed in the capability review by Graeme Samuel AC (see HERE) has been the absence of expertise in remuneration and culture matters. This is in the process of being addressed now.

APRA’s enforcement approach to date has appeared out of step with international peers. In the UK and US a more proactive and early use of enforcement powers has been adopted. The new guiding principles also outline greater co-ordination between APRA and ASIC around information sharing, consultation and enforcement action (separately or jointly).

APRA’s first choice approach to deal with situations will always be the non-formal approach. So long as the regulated parties are open and cooperative, this is more resource-efficient and timely. The approach below is when APRA needs to exercise its legal powers. This ranges from simple information gathering powers to more coercive and intrusive tools for investigating and directing entities to take action, impose license conditions, ban individuals and refer matters for civil or criminal court action.

Matters of potential enforcement are identified via a set of criteria. These issues include when entities or individuals have not:

  • Adequately prevented or addressed prudential risks;
  • Conducted business with honesty and integrity, or with due skill, care and diligence;
  • Dealt with APRA in an open, cooperative and constructive way.

And in such case, has led to:

  • An adverse impact on financial soundness, stability, or the interest of members (in the case of superannuation);
  • Risk or behaviour could have or could have had an adverse impact on financial soundness, stability or the interest of members (in the case of superannuation);
  • APRA’s ability to make an accurate and timely assessment of an entity’s prudential risk profile has been or could have been impeded.

When taking enforcement action against a company, APRA accounts for the facts, matters and circumstances for the case under consideration. It also follows a series of guiding principles, which are:

  • Risk-based.
    • APRA will prioritise the issues and entities that pose the most serious prudential risks. It is open to all risk types that could have a material prudential impact.
  • Forward-looking.
    • APRA will also exercise its enforcement to prevent or mitigate the impact of serious prudential risks. It will take action to prevent harm and mitigate risks based on expected outcomes instead of simply being reactionary.
  • Outcomes-based.
    • The scope of the enforcement also depends on the target prudential outcome form APRA. Depending on the situation, it may utilise non-formal supervisor approaches as its enforcement.
  • Deterrence
    • The action taken will also consider the need to prevent a recurrence with other institutions. Making the enforcement public would send a message to the rest of the industry. However, this needs to be balanced against the risks to financial stability that such a public announcement could create.

In considering the use of its enforcement powers, there are other factors which APRA may take into account and these are:

  • Proportionality
    • Any action taken should be proportionate and reflect the nature and seriousness of the matter under consideration.
  • History and behaviour
    • Consideration will be given for the conduct of the entity before, during and after the event.
  • Other agencies
    • APRA will also need to account for the actions taken by other regulator or enforcement agencies, to decide if it is necessary to take its own action.

It remains to be seen if APRA will use its enforcement powers to require certain remuneration practices.

See HERE to read the full enforcement approach report from APRA.

© Guerdon Associates 2020
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