Blink... and you may have missed it, as many financial entities limped through the holiday period following a year disrupted by border closures, severe operational changes and economic uncertainty, APRA made over 30 announcements in December and January 2021. The theme of these announcements indicate that the prudential regulator has shifted back to its traditional modus operandi and will maintain a heighten focus on crisis readiness and operational resilience over the coming years.
In this article we take a look at APRA’s recent policy and supervision announcements as well as some of the evolving challenges for regulated entities caused by the COVID-19 pandemic. We also provide insights into ongoing supervision activities and outline APRA’s ADI implementation roadmap for new and amended standards. Lastly, we unpack what these proposed changes mean for governance and regulatory reporting teams.
The regulatory landscape
Nearly a year has passed since the Australian Government declared COVID-19 a global pandemic. In response to the economic crisis APRA pivoted its supervisory policies and regulatory priorities to support entity’s operational resilience and maintain critical services in the financial system. This resulted in the postponement of several public consultations, the introduction of additional reporting requirements and the delayed implementation of the D2A regulatory reporting platform replacement APRA Connect. The timeline below summaries key regulatory and public announcements over the last 6 months.
GDP growth figures from the December 2020 quarter confirm the technical recession is over, however the RBA warns that the road to recovery will be uneven and drawn out. A two-speed economy is emerging in Australia as the entertainment, travel and hospitality industries continue to be impacted more severely than other sectors by sporadic border closures, isolated changes to social distancing rules and strict travel policies. While the full financial impact from the events of 2020 is still to be felt, the imminent rollout of a COVID-19 vaccine program brings renewed business and consumer confidence.
Key regulatory announcements
APRA recently published its supervision and policies priorities for 2021. Policy priorities such as strengthening crisis preparedness, including the development of a new prudential standard on resolution and recovery planning, along with updates to standards on operational risk, governance and risk management will come as no surprise to industry. Similarly, a supervision agenda focused on financial system resilience and crisis readiness together with increased scrutiny on cyber security capabilities will not catch regulated entities off guard. Put simply, the 2021 priorities are largely a resetting of the agenda APRA originally planned for 2020.
Perhaps learning from its own operational challenges from the events of 2020, APRA appears to have left slack in its policy implementation timelines. Work to lift governance, culture, remuneration and accountability standards across industries will continue and be accompanied by more cultural deep dives at large financial entities. Basel III (IV) standards will be finalised in 2021, marking a long-awaited milestone and leaving entities with less than 2 years to implement this major reform. Disclosure requirement changes are scheduled to come into effect in 2023.
Underlying APRA’s 2021 supervision priorities is the regulators transition from its PAIRS and SOARS framework, in place since 2002, to the Supervisory Risking and Intensity (SRI) model which is expected to be rolled out by mid-2021. The SRI model has additional industry specific risk categories, like customer and member outcomes, along with recovery and resolution considerations. This is intended to elevate non-financial risks in entity assessments and provide a contemporary framework to supervise evolving prudential risks such as culture, risk governance, remuneration, accountability, operational resilience and cybersecurity.
Stress tests and climate risk assessments are other key cross-industry supervision priorities. APRA has maintained a reliance on regular stress tests to monitor financial system resilience. Entities should expect more scrutiny towards their stress testing governance and scenario development. Likewise, following last summer’s devastating bushfires and the disruptions caused by the pandemic, entities should expect more scrutiny towards climate risk assessments. However, the climate risk outlook is less clear – as APRA member Geoff Summerhayes, the driving force behind the regulator’s climate risk agenda – departed in December 2020 and it remains to be seen who will be carrying the torch for prudential climate supervisory matters.
Consultation and implementation announcements
In August 2020, APRA recommenced select public consultations and announced a phased reintroduction of the issuing of new licenses. APRA then opened and closed the APS 220 Credit Quality consultation on capital measures and reporting requirements for loans impacted by COVID-19 in September 2020. APRA also swiftly closed a consultation on changes to the Economics and Financial Statistics (EFS) collection, which included a number of modifications across the returns along with the introduction of several new fields, giving some reporting relief to entities by delaying the implementation of certain changes until the June and September 2021 reporting periods.
APRA has outlined an ambitious roadmap for ADIs in coming years. The timeline below summaries key implementation dates for ADIs for both new and amended standards along with data driven supervision activities like the cyber resilience data collection. Most notable are the APS 220 Credit Risk Management changes, and the related ARS 220 reporting collection and the Basel III/IV reform. Stress tests at larger ADIs will likely be used to shape the new PPG Stress Testing. Other cross-industry standards are detailed across the bottom of the roadmap, noting implementation dates are subject to change as consultations are ongoing for a number of prudential standards.
For a PDF version of the Roadmap click here.
The pending consultation on the determination of non-confidential data used in quarterly ADI reporting appears long overdue. Added transparency and public disclosure requirements in the rapidly developed COVID-19 returns, coupled with a renewed emphasis on collecting more granular data, suggests that APRA may already be pursuing a non-confidential data agenda in the design of its new collections. Looking ahead, as the post COVID-19 economic recovery develops and Australian Government policies evolve, it is likely that APRA will conduct more frequent open-and-shut consultations to address immediate gaps in its data collections for supervisory purposes and to support The Treasury and other federal agencies in monitoring activities.
Looking to other industries, the Superannuation Data Transformation (SDT) consultation is again top priority for APRA after the Early Release of Superannuation Initiative (ERI) and Pandemic Data collections took precedence in 2020. APRA regulated superannuation entities have received some reporting relief as certain sections of the monthly SRF 921.0 and quarterly SRF 921.1 were scheduled to be discontinued on 31 January 2021. However, the internal mechanics for this change may not be as straight-forward for regulatory reporting teams. Another looming consideration for superannuation entities is their role of APRA Connect guinea pigs, with Phase 1 of the SDT collection scheduled to be one of the first introduced through APRA’s D2A replacement.
Additional reporting requirements
ADIs have borne the brunt of additional pandemic reporting requirements. To this point, no cease date has been formally communicated for the Australian Government Small and Medium Enterprise (SME) Guarantee Scheme collection. Neither has a windup date been set for the Loan Deferrals collection, despite APRA advising its approach was to support deferrals for up to 10 months or until 31 March 2021, whichever comes first. Reporting of Daily Liquidity Report ARF 210.5 also appears here to stay, albeit in a reduced frequency, after modifications were formalised by consultation in December 2020 along with several other reporting changes to ARS 210 Liquidity.
Another looming consideration for all regulated entities is the D2A replacement platform APRA Connect. Following a 6-month suspension due to the COVID-19 pandemic, APRA recommenced its APRA Connect project with a revised implementation approach. A go live date for select forms has been set for the end of September 2021, with a progressive cutover from D2A to ensue in the coming years. Entities will have to wait till later in June, when the superannuation pilot finishes, to get a closer look at the APRA Connect test environment. The maintenance of concurrent D2A and APRA Connect reporting solutions will present a significant operational challenge for regulatory reporting teams for the foreseeable future.
Other regulatory announcements
In other prudential matters, APRA reduced the $1 billion capital add-on applied to CBA by $500 million in November 2020 noting the bank’s progress in addressing concerns over its governance, accountability and risk culture frameworks and practices. Meanwhile the fallout at Westpac from AUSTRAC’s anti-money laundering investigation continues. In December 2020, following almost two years of internal remediation work by the bank, APRA agreed to a court enforceable undertaking from Westpac pledging to substantially lift its efforts to address risk governance deficiencies.
During the holiday period APRA also oversaw the unwinding of Xinja Bank’s deposit book, which is the first time an Australian ADI has undertaken a return of deposits to its customers. Over $252 million in deposits was returned to thousands of customers, the process was completed in January 2021 when the neo bank transferred its remaining accounts directly to NAB. Xinja Bank formally relinquished its banking licence to APRA last month.
The first neo bank exit was accompanied by two entries, APRA granted Intesa Sanpaolo SPA a licence to operate as a foreign ADI and TransferWise Australia a licence to provide purchased payment facilities as a limited ADI in the quarter ending December 2020. A move which will send a signal to industry that APRA is again supporting competition and innovation in the financial system after it suspended the issuing of new licenses in April 2020 for 6-months citing the economic uncertainty caused by COVID-19.
Looking ahead
APRA will continue to work with its peer regulators to amend its regulatory framework, with an emphasis on operational resilience and crisis readiness, in the COVID-19 economic recovery. The culmination of the loan deferral period in March, along with the windup of the JobKeeper and JobSeeker stimulus programs, will likely lead to more scrutiny on ADIs credit risk and capital quality reporting. Entities should brace themselves for more stress testing related activities as the risk outlook evolves in Australia. APRA will continue to vary its supervision priorities to ensure balance sheet strength and financial resilience from regulated entities.
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P.S. We undertake every effort to ensure the completeness and accuracy of our articles. However, the regulatory timetable is constantly evolving. If you have spotted any inaccuracies please let us know at info@regcentric.com.