Onus of responsibility on industry: APRA

The response from APRA’s submission to the Hayne royal commission interim report said that there is a role for APRA and ASIC in setting and enforcing culture but ultimately change could only come from the industry.

“Ultimately behavioural change will only occur if boards take ownership for the actions of their organisations and the consequences of those actions,” it read.

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“Solutions to past problems must involve industry taking more responsibility, not less, for maintaining appropriate standards of conduct and guarding against misconduct.”

APRA identified three questions posed by the commission with respect to the regulators and their responses to misconduct, conduct and compliance risk, and regulatory architecture.

It said in the submission that, in relation to misconduct, the regulator responded by focusing on strengthening the governance and practices of entities and said its responses were appropriate.

“APRA believes its response to misconduct and misconduct risk has been broadly appropriate given its core prudential mandate and risk-focused approach,” it said.

The submission said that APRA agreed that governance, culture and incentives drove conduct and that more action could be taken.

“APRA has committed to continue to facilitate the improvement of accountability, governance and risk culture within financial institutions,” it said.

APRA agreed with the interim report that regulation needed to focus more on misconduct and APRA would examine that.

“The evidence before the royal commission highlights the need for APRA to examine the means by which it can more actively contribute to a regulatory framework that limits the potential for misconduct to occur in the future,” it said.

The authority disagreed with the commission’s call for simplification of regulation arguing that simplifying the structure would be no small task as it was impossible to start with a clean slate.

“APRA does not see simplification of laws and regulations as in itself likely to drive materially better practices,” it said.

APRA maintained that the current structure of regulation and responsible regulators should stay the same, with APRA focusing on safety and soundness while ASIC focuses on consumer protection.

“The regulatory architecture which emanates from this structure may at times be complex, but given the nature of the financial services sector, some degree of complexity is inevitable,” it said.

APRA conceded that there was no easy fix to misconduct in the industry and the way forward would likely involve a range of measures.

The authority identified some of those measures as:

• institutions being committed to incentive structures that reward outcomes for meeting broader community expectations as much as they do financial targets;
• a clearer regulatory and institutional focus on individual accountability, through incentive structures and appropriate responses to poor outcomes;
• regulatory powers and resources dedicated to detecting misconduct and taking action, including formal enforcement where appropriate; and
• stronger industry codes, self-regulation and dispute resolution mechanisms.

APRA said it would work with the commission and government to strengthen standards and guidance for governance and risk management. 

“APRA intends to strengthen the prudential standards to focus not only on policies and frameworks, but their implementation in practice and the outcomes achieved,” it said.