APRA outlines strategic focus: scams and climate change amid financial sector challenges

APRA chair John Lonsdale tables his first corporate plan responding to emerging challenges and criticisms by the regulator’s supervisor.

Scams and climate change will be key areas of strategic focus for the prudential regulator as it responds to the growing threat of cyber-attacks and the increased frequency of natural disasters.

Enhancing stress-testing across banks, insurers and superannuation funds, and “improving superannuation transparency” will also be priorities of the Australian Prudential Regulation Authority in the four years ahead.

Outlining APRA’s priorities in the first corporate plan as chair, John Lonsdale said cybersecurity and the escalation of hacks and scams were “exposing Australians and causing significant financial, operational and reputational loss for regulated entities.”

Mr Lonsdale said the 2023-24 corporate plan was responding to the government’s statement of expectations for the regulator, which this year included a specific mandate to factor risks related to climate into their policing of the banking, superannuation and insurance industries.

It was also responding to the regulator’s supervisor – the Financial Regulator Assessment Authority – which earlier this year said APRA’s focus on emerging risks such as in how the sector values unlisted assets is “underdeveloped” relative to its handle of risks in the banking and insurance industries.

The regulator will keep its focus on weeding out “unacceptable product performance” from the superannuation sector, increase transparency on performance with “new and expanded statistical publications” and assessing funds’ approach to “liquidity management, stress testing, and asset valuation.”

The regulator said it will progress plans to modernise the “prudential architecture”, transform its use of technology and data to sharpen industry supervision and increase transparency, and cultivate an agile, engaged workforce that is equipped to respond to new and emerging issues.

“Two years after APRA first based its Corporate Plan around the twin themes of ‘protected today’ and ‘prepared for tomorrow’, that philosophy still underpins our work,” he said on Tuesday.

Mr Lonsdale said Silicon Valley Bank’s sudden demise due to its inability to manage interest rate risks in March, and Credit Suisse’s forced takeover shortly after, had rattled public confidence around the world but also offered lessons.

The “digital connectedness of financial systems” had brought great benefits to companies and their customers, he said, but “also allowed for a bank run at a speed never previously witnessed”.

“Australian banks remained resilient due, in part, to many years of work by APRA to maintain a strong and stable banking system, an objective which supports a well-functioning economy,” Mr Lonsdale said.

But he said the events of March were only one of many changes in the operating environment. Other factors threatening the stability of the financial system included rising interest rates, cyber security, and the increased frequency and severity of natural disasters.

In banking, the regulator will address lessons learned through risk-based reviews and targeted changes to requirements regarding liquidity and interest rate changes in the banking book, to ensure these risks are managed appropriately.

In the insurance sector, APRA’s focus will be on “affordability and availability challenges” facing the industry, as claims costs increase due to natural disasters, supply chain disruptions and skill shortages.

APRA plans to review prudential requirements for reinsurance to ensure they remain fit for purpose and focus on the suitability of individual disability income insurance policies offered by life insurers.