Organisations should double down on improving their conduct and culture because the prudential regulator is looking at doing a ‘CBA-style’ inquiry on their regulated entities.
However, the recently-published Australian Prudential Regulation Authority Capability Review highlights that the regulator also has some changes to makes to its own culture.
According to the review, published earlier this week:
APRA is better-positioned to build its capability to regulate GCA risks than it has been for some time. The drag on resources caused by the implementation of Basel III and Murray Inquiry reforms is fading. APRA has also been provided with additional funding to build this capability. But based on a review of internal papers, the APRA Capability Review Staff Survey, focus groups and interviews, the Panel believes that APRA still faces a number of challenges. APRA’s culture and regulatory approach needs a reset. It also needs to be innovative in building its capability — both greater internal capability and use of external resources to complement that.
APRA has indicated that they support Recommendation 4.2 in that there needs to be a greater focus on governance culture and accountability, referred to in the report as GCA, and how similar reviews like the one they did on CBA can be incorporated into their work plan. However, the regulator indicated that, due to the cost of such reviews, the precise number of reviews conducted will be dependent on overall resourcing.
If there are to be more inquires like this on the horizon, the review also recommends that it includes retail superannuation industry, insurance and ADI entities.
Challenges to APRA’s approach to GCA
Generally, while APRA has made some investments in the GCA space, challenges have arisen in resourcing and ‘staff departures’.
Challenges have also come from within the organisation about the focus on GCA as a fundamental risk.
According to the report:
Consultations with APRA during the Review and a Capability Review Staff Survey suggested a degree of scepticism in parts of the organisation about the importance of these risks for a prudential regulator and the need to give them as much prominence in its work as the supervision of traditional financial risk.
However, the report went on to show why governance risk and accountability are critical areas, using the example of the global financial crisis (GFC) to show why this a fundamental risk.
International experience during the GFC highlighted that poor GCA arrangements in financial institutions can damage the safety and soundness of individual institutions and the broader financial system, resulting in significant macroeconomic costs. They are a fundamental prudential risk.