APRA warns of capital penalties as it raps big companies over self-assessments

Finance companies haven’t learnt their lesson and now have to pay a price, regulators say.

APRA Chairman Wayne Byres. Picture Kym Smith

APRA has issued a damning review of the governance self-assessments undertaken by 36 of the nation’s largest financial services companies, warning that some of them faced capital penalties due to their higher operational risk.

Releasing the findings of the review, the prudential regulator’s deputy chairman John Lonsdale said the self-assessments raised no concerns about financial soundness.

“However, they confirmed our observation that the industry is grappling to manage non-financial risks, such as culture and accountability,” Mr Lonsdale said.

“It was not always evident that institutions clearly understood the drivers of their findings.

“Therefore, there is a risk that any planned action to address weaknesses may not be effective or sustainable.”

APRA, he said, was considering additional capital requirements for “several” regulated institutions, reflecting weaknesses in governance and management of non-financial risks.

The agency was seeking assurances from all boards that the weaknesses would be addressed as a matter of priority, and the findings would be used to better target APRA’s efforts to lift standards of non-financial risk management.

The main findings in the review were that non-financial risk management required improvement, and accountabilities were not always clear or effectively enforced.

Also, acknowledged weaknesses were well-known and some had been longstanding, with risk culture not well-understood.

Mr Lonsdale said APRA would shortly write to the boards of all participating institutions and set out its observations of their self-assessments.

He said boards should expect increased supervisory scrutiny of their institutions as they implemented reforms.

“Also, in a number of cases, the weaknesses identified in the self-assessment were sufficiently material that APRA is considering stronger supervisory responses, including the application of an operational risk capital overlay,” he said.

“Boards must be committed to uplifting governance and management of non-financial risks.

“Where this commitment is not forthcoming, APRA will consider the need for further regulatory action.

“We also continue to encourage those institutions that have not yet done a self-assessment to do so as a valuable means of identifying and addressing weaknesses in their business.”