APRA Threatens Financial Institutions: Penalties Based on Inadequate Management of Non-Financial Risks

APRA Threatens Financial Institutions: Penalties Based on Inadequate Management of Non-Financial Risks

APRA Threatens Financial Institutions

Penalties Based on Inadequate Management of Non-Financial Risks

The Australian Prudential Regulation Authority (APRA) has indicated that a “significant uplift is required across industries” in order to account for charge penalties due to inadequate management of company culture.

The information was made public on May 22 and addressed a number of common themes that were found across 36 banks, insurers and superannuation licensees. Some of the institutions included ANZ, Allianz, AMP Life, AustralianSuper, NAB, NIB, QBE, and Westpac. Following APRA’s Final Report of the Prudential Inquiry into the Commonwealth Bank of Australia (CBA), the regulator requested the financial institutions to conduct a self-assessment against CBA’s findings. The quality of the self-assessments varied greatly. APRA was disappointed in a small number of institutions as they “applied a lighter touch process, such as a ‘tick the box’ approach”. For these institutions, APRA will engage with them to ensure justifications and evidence are obtained in relation to the assessments.

APRA indicated that ‘non-financial risk management requires improvement as accountabilities are not always clear.’ While most participants have committed to improve its operational, compliance and conduct management, APRA mentioned they have “generally rejected the notion that the cultural traits of complacency, insularity and collegiality underpinning the Prudential Inquiry findings are prevalent.”

The findings have led APRA to strengthen regulation and increase supervisory for all financial institutions under regulation with a focus on accountability, culture and governance. According to the assessments, for some institutions deemed as operational risky, APRA is considering imposing an additional level of operational capital. Last year, following the Prudential Inquiry, CBA was required to hold an additional $1 billion in its capital reserves to reflect the higher risk profile.

Current financial sector

The Australian economy has been largely driven by its competitive, profitable and sophisticated financial institutions. While the Australian bank giants are among the world’s largest banks by market capitalisation, they are also titled as few of the safest banks. This is due to the highly regulated environment in Australia, with all regulated institutions required to comply with relevant Australian Acts and legislations. The main regulators for the Australian banking system are APRA and Australian Securities and Investments Commission (ASIC).

It is not the first time Australian financial institutions are pressured with regulation. One of the recent infamous inquiries, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, has revealed a culture of greed within several Australian financial institutions. Received over 10,000 submissions, the inquiry period began in 2017 by the Australian government pursuant to the Royal Commissions Act 1902 and ended early 2019. The investigation found institutions involved in money laundering, terrorism financing, inappropriate statutory reporting standards and impropriety in foreign exchange trading.

After the revelation of the Royal Commission, many major banks and financial institutions were under significant pressure to restructure its operation and management, and saw several senior management resignations. Philip Chronican was appointed as the new Chairman for National Bank of Australia (NAB) following the Royal Commission.

Several recommendations for APRA were included in the report. It suggested that APRA should exercise greater oversight and emphasise the need for financial entities to have better non-financial management. Commissioner Kenneth Hayne also recommended co-operation between APRA and ASIC and proposed a new oversight authority for the two regulators. The new oversight body will “assess the effectiveness of each regulator in discharging its functions and meeting its statutory objects.” It was clear that investors were unhappy with APRA’s information paper. All the bank giants, NAB, CBA, ANZ and Westpac, experienced a drop in their share price. As trading approaches noon, their stocks had dropped to an average of 1.2%. CBA had the lowest fall of 0.67% to $78.47. Westpac fell by more than 1.8% to $28.28.

Future focus for financial institutions

Australia’s financial services sector is the largest driver for the national economy. The financial sector of the economy contributed $140 billion to GDP over the last year. Particularly, Australian banks have been some of the most profitable business in the world. However, numerous inquiries and revelations have exposed the majority to focus its business on profit, instead of integrity and honesty.

Misconduct such as customer exploitation and corporate misbehaviour found in many financial entities will lead to a company’s downfall if not addressed. Brand reputation and customer satisfaction are few of the main drivers for a business’s growth. More importantly, Australia’s regulators put laws in place to minimize the incidence of failure of regulated businesses, and promote financial system stability in Australia. For the benefit of the economy and the country, it is in the company’s best interest to ensure operational management is lifted to an appropriate standard. Otherwise, severe financial penalties may be imposed.

By Jack Lee

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