Major financial institutions should prepare for group wide regulation as Australia’s peak prudential regulator gears up for stricter supervision of conglomerates.
The Australian Prudential Regulation Authority’s (APRA) planned framework for supervising conglomerates arises from its concern around the potential contagion risks faced by APRA-regulated entities within conglomerate groups. APRA is concerned that the current arrangements for supervising stand-alone APRA regulated entities may not provide adequate protection to end customers.
According to APRA, there has been general industry support of the proposed measures and they will not require the supervised groups to raise additional capital. Regardless, what is certain is that changes will need to be made by the regulated groups in order to comply with the new measures and that will come at a cost, which will ultimately be borne by end customers.
An insight into what APRA is considering can be found in the latest version of its planned framework, which will initially apply to AMP, ANZ, CBA, Challenger, Macquarie, NAB, Suncorp and Westpac.
These so-called “Level 3” groups have material operations across more than one APRA-regulated industry (namely banking, insurance or superannuation) or include an APRA-regulated entity but with material operations in non-APRA-regulated sectors (e.g. financial advice, custody, administration or investment management).
Unfortunately, financial institutions were left with little time to properly consider the latest version of the framework before submissions were due to the major Financial System Inquiry (FSI) at the end of August.
The only saving grace is that APRA has decided to defer the commencement of the new regime until after the issue of the FSI’s Final Report in November 2014 and the Australian Government’s subsequent response to the Final Report.
The proposed Level 3 framework will extend APRA’s regulatory reach into:
- governance across the corporate group;
- intra-group dealings;
- risk management across the group; and
- capital held by all group entities (to ensure sufficient capital is held across the group to cover the potential contagion risk from non-APRA regulated activities).