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Australian Prudential
Regulation Authority
Protecting Australia’s depositors, insurance
policyholders and superannuation fund members
APRA’s vision
is to be a world-class integrated prudential supervisor recognised
for its leadership, professionalism and innovation.
APRA’s core mission
is to establish and enforce prudential standards and practices
designed to ensure that, under all reasonable circumstances,
financial promises made by institutions we supervise are met
within a stable, efficient and competitive financial system.
We also act as a national statistical agency for the Australian
financial sector and play a role in preserving the integrity of
Australia’s retirement incomes policy.
APRA’s values
underpin the critical role we play in protecting the financial well-
being of the Australian community. High standards are required in
everything we do. In our work and in our interactions with others,
we value and seek to demonstrate:
Integrity
Collaboration
Professionalism
Foresight
Accountability
APRA’s supervisory approach
is forward-looking, primarily risk-based, consultative, consistent
and in line with international best practice. The approach also
recognises that management and boards of supervised
institutions are primarily responsible for financial soundness.
2
Financial regulation in Australia
The Australian Prudential Regulation Authority (APRA) is one of four
independent agencies that oversee the Australian financial system.
The other three are the Reserve Bank of Australia (RBA), the
Australian Securities and Investments Commission (ASIC) and the
Australian Competition and Consumer Commission (ACCC).
APRA is responsible for prudential Established in 1998, APRA is a
supervision of individual financial Commonwealth statutory authority
institutions and for promoting financial established under the Australian
system stability in Australia. ASIC Prudential Regulation Authority Act
is responsible for financial market 1998. APRA’s high-level powers
integrity, business conduct and for the prudential supervision
disclosure, and consumer protection of institutions derive from this
in the financial system. The RBA is Act and from specific industry
responsible for monetary policy, legislation: the Banking Act 1959; the
stability of the financial system Insurance Act 1973; the Life Insurance
and the safety and efficiency of Act 1995; and the Superannuation
the payments system. The ACCC is Industry (Supervision) Act 1993.
responsible for competition policy.
APRA is primarily funded by levies
APRA, ASIC and the RBA work paid by the institutions it supervises.
together to ensure a coordinated APRA’s head office is located in Sydney,
approach to the resolution of and it also has offices in Melbourne,
issues relating to the stability of Brisbane, Canberra, Adelaide and Perth.
the financial system. Together
with the Commonwealth Treasury,
these agencies form the Council of
Financial Regulators, which provides
advice to the Australian Government
on the adequacy of Australia’s
financial regulatory arrangements.
3
What is APRA’s role?
APRA supervises Australia’s authorised deposit-taking institutions
(banks, building societies and credit unions), life and general insurance
and reinsurance companies, friendly societies and superannuation funds
(excluding self-managed funds).
APRA promotes safety and APRA collects data for its own purposes
soundness in business behaviour and acts as a national statistical agency
and risk management on the part for the financial sector, collecting
of the institutions it supervises. It data on behalf of the RBA and the
establishes and enforces prudential Australian Bureau of Statistics.
standards and practices designed
APRA plays a role in preserving the
to ensure that, under all reasonable
integrity of Australia’s retirement
circumstances, financial promises
incomes policy. In addition, APRA
made by the institutions it supervises
administers the regulations under which
are met within a stable, efficient
people can, in limited circumstances,
and competitive financial system.
apply for the early release of
APRA refers to depositors, insurance their superannuation benefits on
policyholders and superannuation specified compassionate grounds.
fund members as ‘beneficiaries’. The
APRA also has responsibility for
financial interests of these beneficiaries
administering the Financial Claims
lie at the centre of APRA’s mission.
Scheme arrangements, which provide
APRA promotes financial stability by depositors in a failed deposit-taking
requiring institutions it supervises institution with timely access to
to manage risk prudently so as their deposit funds (up to a limit),
to minimise the likelihood of and eligible policyholders and other
financial losses to beneficiaries. claimants with access to funds to
meet insurance claims in the event
However, APRA cannot eliminate
of the failure of a general insurer.
completely the risk that a
financial institution might fail
and attempting to do so would
constrict the financial system.
4
Promoting stability and confidence
A stable and efficient financial system is crucial to the effective
functioning of the Australian economy. Without confidence and
stability in the financial system, individuals and corporations would be
less able and less willing to borrow, protect their assets and invest.
Prudential supervision plays an important role in supporting this
confidence and stability.
Financial transactions necessarily Potential risks can also emerge from
involve some form of promise to meet many unpredictable sources, such as
financial commitments. For example: natural or human catastrophes. The
complexity of modern financial markets
» a deposit-taking institution accepts
means that financial institutions must
deposits from members of the public
approach their risk management with
and promises to repay them on
a high degree of professionalism.
demand or at some future time;
For these reasons, most countries
» an insurance company accepts
have established prudential
premiums on the promise to
supervisory agencies to ensure
meet insurance claims when a
risks taken by financial institutions
specified event occurs; and
are within reasonable bounds so
» a superannuation fund trustee that institutions are well placed
receives contributions from to meet their obligations.
members and is responsible for
In the rare event an APRA-supervised
managing those funds to provide
institution fails, APRA seeks to
for a member’s retirement.
minimise losses to beneficiaries
Beneficiaries are not in a position and to the financial system.
to assess fully whether financial
Because problems in one financial
institutions are well managed
institution can be transmitted to
and, consequently, whether they
others, prudential supervision helps to
are able to meet their financial
preserve stability across the financial
promises when called upon to do
system and the broader economy.
so. This is why APRA exists.
For a financial institution, risk can arise
from a wide variety of sources, such as:
» adverse economic conditions
might cause borrowers to
default on their loans;
» premiums charged by insurance
companies might not adequately
cover future claims; or
» the value of assets held by a financial
institution might decline as a result of
adverse movements in market prices.
5
Our approach
APRA supervises financial institutions across the deposit-taking,
insurance and superannuation sectors.
APRA’s work falls into four main areas: The primary responsibility for
financial safety and soundness
» establishing prudential standards
within an institution rests with
to be observed by supervised
its board of directors and senior
financial institutions;
management. APRA’s approach is
» assessing new licence applications; to ensure that boards and managers
understand these responsibilities.
» assessing the financial soundness
of supervised institutions; and APRA is legally prohibited from
publicly revealing most details about
» where necessary, carrying out
the institutions it supervises. APRA’s
remediation, crisis response
commitment to confidentiality ensures
and enforcement.
there is a high level of trust between
APRA’s aim is to identify potential APRA and supervised institutions.
weaknesses in supervised institutions
The names of all the institutions
as early as possible. When we
APRA supervises are listed on APRA’s
discover any weaknesses, we work
website (www.apra.gov.au) under
with the institution to fix them.
respective industry headings. Other
institutions, such as Registered Financial
Corporations (RFCs, including finance
companies) and Discretionary Mutual
Funds (DMFs), are required to provide
statistics to APRA but they are not
prudentially supervised by us.
6
The prudential framework
APRA operates under laws determined by the Australian Parliament.
Among other things, these laws grant APRA the power to set prudential
standards that underpin its supervisory approach towards supervised
institutions.
For deposit-taking and insurance » liquidity;
industries, APRA has developed
» credit risk;
a comprehensive framework of
prudential standards and prudential » operational risk;
practice guides to promote sound
» market risk;
financial and risk management
and good governance. In the » insurance and reinsurance risks;
superannuation industry, APRA
» contagion risk from related entities;
administers regulations and
operating standards put in place » outsourcing; and
by the Australian Parliament.
» business continuity.
APRA’s prudential standards set
The superannuation operating
out minimum capital and risk
standards address:
management requirements, which
are legally binding. Prudential practice » capital requirements;
guides provide guidance on how
» risk management;
supervised institutions might best
satisfy the prudential standards. » outsourcing;
APRA follows a risk-based approach » adequacy of resources; and
under which institutions facing greater
» fitness and propriety of
risks receive closer supervision. This
responsible persons.
enables APRA to deploy its resources in
a targeted and cost-effective manner. APRA recognises the complexity
and diversity which exists among
The framework of prudential
institutions and avoids a ‘one-size-
standards and prudential practice
fits-all’ approach. APRA’s supervision
guides addresses the inherent risks
allows institutions to use a variety
faced by institutions, the controls
of approaches to comply with high-
adopted to manage and mitigate
level principles, rather than APRA
those risks, and the level of capital
seeking to direct an institution
needed by each institution to
through detailed prescription.
withstand unexpected losses.
Notwithstanding this principles-based
Among other things, APRA’s focus, APRA by necessity prescribes
prudential standards address: some absolute requirements, such
as minimum capital requirements.
» solvency and capital adequacy;
The key elements of APRA’s approach
» corporate governance;
to prudential supervision are outlined
» fitness and propriety of in the APRA Supervision Blueprint,
responsible persons; which is available on APRA’s website
(www.apra.gov.au). The Blueprint
» asset quality and concentration;
sets out the objectives, processes and
» liability valuations; procedures for APRA’s supervision.
7
How we supervise
All deposit-taking institutions, life and general insurance and reinsurance
companies and friendly societies must hold an APRA licence to operate in
Australia. APRA also licenses trustees of prudentially regulated
superannuation funds.
After an institution is licensed, it is Off-site analysis
subject to ongoing supervision. The
main purposes of this supervision are APRA’s off-site analysis involves
to ensure that institutions are managing assessing the financial strength of
their risks prudently and are meeting an institution and making qualitative
their prudential requirements, and judgments about the effectiveness
to identify those institutions that of the institution’s management,
are unable or unwilling to do so. operations and risk management
systems. The analysis is undertaken
The two main supervisory tools on a continuous basis and includes:
APRA uses are on-site and off-site
analysis. These reviews are undertaken » regular financial analysis supported
by prudential supervisors with in- by APRA’s statistical collections;
depth knowledge of institutions in » analysing emerging risk across
a particular sector, and supported APRA-supervised industries;
by specialist risk experts.
» risk-rating assessments (see ‘PAIRS’
assessments page 9); and
» analysis and assessment of
prudential issues as they arise.
8
APRA’s off-site work addresses Risk assessment
the material risks to which the
assessed institution is exposed, and The centrepiece of APRA’s supervisory
typically includes reviews of: risk assessment is the Probability and
Impact Rating System (PAIRS). PAIRS
» capital adequacy; helps supervisors make judgements
» earnings and financial performance; about a supervised institution’s
risk position. The main objectives
» key risk areas (including asset of PAIRS assessments are to:
quality, management, market
risk, insurance risk, liquidity risk » determine the probability that
and operational risk); and the institution may not meet
its financial promises; and
» changes to business mix,
organisational structure and » assess the potential consequences
governance arrangements. of not meeting those promises.
APRA supervisors meet regularly with Supervisory outcomes
the management of each supervised
institution to review their assessment
and action
of its prudential condition. Supervisors It is not enough for an APRA supervisor
and APRA management also meet just to identify risk. APRA must also
with the boards of supervised respond appropriately to identified
institutions on an as-needed basis. risks. APRA’s supervisory responses
are driven by its Supervisory Oversight
On-site analysis and Response System (SOARS).
APRA supervisors regularly visit the Supervisory responses can range
premises of supervised institutions. from a normal cycle of review to a
During these visits, supervisors speak heightened supervisory stance that
with staff and, where appropriate, requires extra supervisory oversight,
examine records and files. These to mandating improvements or to
reviews typically target a particular restructuring a supervised entity.
risk area. They assess the effectiveness
of an institution’s risk management
framework, including its internal
governance processes. The frequency
and length of these on-site reviews are
determined on a case-by-case basis.
APRA increases the frequency and
intensity of its on-site reviews where
supervisors identify an institution
facing a greater than average risk.
9
Licensing and authorisation
In order to obtain an APRA licence to operate in Australia, applicants are
required to present a submission addressing APRA’s licensing criteria.
These licensing criteria will vary In addition to addressing financial
depending upon whether the soundness and risk management,
applicant is applying for a licence APRA’s assessment covers the adequacy
to operate in the deposit-taking, of operational resources, the quality
life insurance, general insurance or of management and the reputation of
superannuation industry. Applicants the applicant. Subject to meeting the
must be able to demonstrate their minimum requirements, APRA treats
strategic and financial viability, an all applications equally, whether from
effective risk management framework institutions in Australia or overseas.
and a capacity to meet all of
APRA’s prudential requirements.
Remediation, crisis response and
enforcement
From time to time, an institution may be unable or unwilling to meet its
prudential requirements. APRA engages with these institutions to rectify
the outstanding issues through a range of remedial actions.
APRA has substantial legal powers that If the Court finds the case proven,
enable it to intervene where there is the individual is disqualified and their
a threat that an institution may not name added to the Disqualification
be able to meet its obligations to its Register on APRA’s website.
beneficiaries. APRA will also intervene
In extreme situations, APRA can
where there is a threat to the stability of
appoint a statutory manager with wide-
the financial system. In these contexts,
ranging powers to assume control of a
APRA has the power to conduct
deposit-taking institution. In the case
investigations of supervised institutions
of general and life insurers, APRA can
and, in some cases, to give them
recommend to a Court that a judicial
directions of a wide-ranging nature.
manager be appointed to take control
Where APRA concludes that the of the institution. In the superannuation
conduct of an individual in a supervised industry, APRA may replace a trustee
institution is inappropriate, APRA can where that trustee is unable to
apply to the Federal Court to have that meet its prudential obligations.
person disqualified from working in
their relevant industry.
10
Elements that underpin APRA’s
prudential supervision
» The board and management » APRA’s prudential standards
of a supervised institution and guidance material are
are primarily responsible for generally principles-based,
its financial soundness and recognising that sound
prudent risk management. prudential outcomes can
be achieved by different
» APRA’s prudential supervision institutions in differing ways.
is designed to encourage
healthy risk management » APRA’s prudential supervision
cultures within the strives to be flexible. APRA
institutions it supervises. responds to emerging risks
and adapts to changing
» APRA aims to minimise the circumstances of supervised
risk of an institution failing; industries and institutions.
but survival and failure are
ultimately in the hands of » In order to maintain high
the institution itself. standards, APRA benchmarks
itself against best international
» APRA’s prudential supervision and market practices.
is risk-based, focussing
attention and resources » In conducting supervision,
on areas and institutions APRA strives to be consistent,
of greatest potential realistic and effective.
risk to beneficiaries.
» As far as possible, APRA seeks
to intervene early to address
potential problems before
they emerge. APRA’s risk
assessments anticipate future
events and an institution’s
preparedness to handle them.
11
Head Office Brisbane Melbourne
Level 26 Level 23 Level 21
400 George Street 300 Queen Street Casselden Place
Sydney NSW 2000 Brisbane QLD 4000 2 Lonsdale Street
Melbourne VIC 3000
GPO Box 9836 GPO Box 9836
Sydney NSW 2001 Brisbane QLD 4001 GPO Box 9836
Melbourne VIC 3001
Tel 02 9210 3000 Tel 07 3001 8500
Fax 02 9210 3411 Fax 07 3001 8501 Tel 03 9246 7500
Fax 03 9663 5085
Adelaide Canberra
Level 5 243-251 Northbourne Perth
100 Pirie Street Avenue Level 15
Adelaide SA 5000 Lyneham ACT 2602 QV1 Building
250 St Georges Terrace
GPO Box 9836 GPO Box 9836
Perth WA 6000
Adelaide SA 5001 Canberra ACT 2601
GPO Box 9836
Tel 08 8235 3200 Tel 1300 131 060
Perth WA 6001
Fax 08 8232 5180 Fax 02 6213 5307
Tel 08 9481 8266
Fax 08 9481 8142
APRAinfo 1300 55 88 49
www.apra.gov.au
