APRA seeks to broaden regulatory powers over conglomerates

The Australian Prudential Regulation Authority (APRA) has released a discussion paper that seeks to dramatically broaden its supervisory mandate to cover diverse financial conglomerates, which it considers are currently not adequately supervised.

The discussion paper seeks to add a Level 3 supervisory framework to the existing Level 1 and Level 2 framework, which will extend the prudential regulator’s powers across a number of industries and businesses. APRA said the proposal is a response to the increased danger of a “supervisory blind spot” that might result from complex business structures and conglomerates.

“Hence, a narrow, standalone view of regulated entities is insufficient to obtain a full picture of the financial risks to which depositors and policy holders may be exposed,” APRA said in its discussion paper.

“Although membership of a conglomerate may provide benefits to APRA-regulated entities, it may also increase and change the risks they face. The more material a group’s activities outside of its primary industry, the greater the risk that an industry-focused supervisory regime will not appropriately detect or respond to risks associated with these activities, and the greater the danger of a supervisory ‘blind spot’ that may result in risks building up without adequate remediation.”

Under the existing model, the Level 1 framework concerns supervision that applies to all individual operating entities authorised by APRA, while Level 2 covers group supervision that applies to groups headed by an authorised deposit taking institution — as defined under the Banking Act 1959 — a general insurer or an authorised non operating holding company (Banking Act 1959, Insurance Act 1973 and Life Insurance Act 1995).

Under the proposal, Level 3 will cover group supervision of conglomerate groups containing APRA-regulated entities with material operations across more than one APRA-regulated industry and/or in unregulated entities.

“Group 3 supervision will involve not only assessing both capital adequacy and compliance with governance and risk management requirements, but also ensure that the structure of the group does not give rise to excessive unmitigated risks. Supervisions will take into account the individual structure and character of each group.”

APRA also said it might impose, on a case-by-case basis, additional requirements under the Level 3 framework, which might include additional capital, risk management or reporting requirements.