APRA’s 2023 priorities about ‘embedding’ regulatory reforms

The Australian Prudential Regulation Authority (APRA) has released its policy and supervision priorities for 2023, setting out a series of goals for the next 12–18 months. It said it hopes this will help provide stakeholders with “a consolidated and transparent workplan with timeframes that enables more efficient forward-planning”.

The regulator noted that as we are currently in “a time of global economic uncertainty”, its 2023 agenda focuses on embedding recent regulatory reforms as well as bolstering operational resilience and ensuring entities have sufficient financial strength to act as a buffer against any emerging financial stresses.  

Overall, APRA has fewer policy priorities than usual partly as it looks to ensure recent changes (such as the new capital framework) are well in place and partly due to its focus on reducing the size and complexity of the prudential framework over time. 

Key policy priorities for 2023 include:

• Completing key reforms to strengthen the financial and operational resilience of APRA-regulated entities and improve outcomes for superannuation members
• Modernising the prudential architecture to make the framework clearer, simpler, and more adaptable. This will involve incremental changes in framework design, in how APRA writes policy, and in how the industry navigates it
• Reviewing and rationalising core standards including for governance and the regulation of conglomerate groups

Priorities for banking

For the banking sector, APRA will largely be focused on embedding the new capital framework standards and finalising revisions to the remaining financial risk standards including interest rate risk, liquidity risk, and market risk. 

Over the year, APRA will review problem asset management and credit portfolio management and — as the industry approaches the refinance of the Term Funding Facility (TFF) — review the banks’ issuance planning and liquidity stress testing.

It flagged that it would also continue to engage with entities to ensure any business models and practice changes such as banking-as-a-service, new product development, strategic partnerships, and structural changes to accommodate non-banking business are subject to “robust risk management and appropriately capitalised”. 

APRA expects to finalise and consult on Prudential Standard CPS 230 Operational Risk Management (CPS 230) in the first half of this year. The standard will replace five existing standards for business continuity and outsourcing. The new standard is expected to come into effect from 2024.

Given the emergence of more complex corporate structures in the industry in recent years, APRA said it intends to release a discussion paper to seek industry feedback on five key topics on groups: financial resilience, governance, risk management, resolution, and competition issues. 

APRA will also update its guidelines for licensing new non-operating holding companies. It expects to consult on any specific changes to standards in 2024, which would come into effect from 2025 onwards.

In other priorities for the banking sector, APRA said it will finalise its Prudential Standard APS 117 Capital Adequacy: Interest Rate Risk in the Banking Book in the second quarter of 2023 and release a prudential practice guide for consultation ahead of it coming into effect in 2025.

This year, the regulator will also commence the review of Prudential Standard APS 210 Liquidity (APS 210) to ensure the standard is updated and fit for purpose. A discussion paper will be released “in the latter half of the year” with changes expected to be finalised in 2024.

Among the other banking priorities include a review of APS 910 Financial Claims Scheme (APS 910) to ensure that banks are adequately prepared in the event they need to use the Financial Claims Scheme. This will reportedly take into account “developments domestically and internationally” over the past 10 years. The regulator said it expects to consult on any potential changes to APS 910 in 2024.

It will also consult on the prudential treatment for crypto assets in 2024, which is expected to come into effect in 2025. 

For its supervisory priorities, APRA said it will focus on:

• Cyber resilience (through “detailed assessments and rigorous pursuit of breaches”)
• Embedding the capital reforms for banks and insurers
• Holding trustees to account to improve superannuation member outcomes
• Working to address challenges in the availability, affordability, and sustainability of insurance

Addressing today’s risks and challenges ‘beyond the horizon’

Releasing its priorities for the coming year, the new APRA chair John Lonsdale commented: “In an environment of rising interest rates and inflation, declining property prices and ongoing geopolitical uncertainty, APRA’s 2023 priorities seek to ensure that we can swiftly address today’s risks as well as new challenges beyond the horizon.

“Following several years of regulatory reform, 2023 will bring a lighter APRA policy load. This will help regulated entities focus on embedding prior major reforms such as capital reforms in banking and insurance, as well as responding to challenges in the operating environment in the period ahead.”

The APRA chair said it would continue to “lean into” key supervision priority areas and noted that operational resilience, including cyber preparedness, continues to grow in importance as a supervisory priority.

He flagged thw “significant data breaches” at Optus and Medibank late last year to underscore why this was necessary.

Mr Lonsdale concluded: “We have important work to do on climate risk, governance, culture and recovery planning while the superannuation sector can expect no let-up in our efforts to expose and eradicate underperforming products or actions that are contrary to members’ best interests.”

[Related: APRA extends timelines on revisions to market risk standards]