Thank you for the opportunity to be part of this event again.
APRA has a very full agenda; impossible to outline in the space of a few minutes. For those who crave the detail, our Corporate Plan and our published Policy and Supervision priorities set out our work agenda with much more depth than I can do justice to today.
In the time I have, I thought I would briefly outline a few broad themes impacting the industries we regulate, as well as highlight some key initiatives to improve the regulatory infrastructure.
I’ll start with banking.
Despite two years of considerable turmoil and volatility, the Australian banking system remains resilient. It is well-capitalised and well-funded.
That said, we’re alert to two major shifts facing the industry: digital disruption, and the emergence of higher inflation and rising interest rates. I spoke about digital disruption in a speech a couple of weeks ago, so won’t dwell on that today. When it comes to inflation and interest rates, I’ll simply note that many businesses and households haven’t experienced an inflationary period, and a generation of borrowers haven’t experienced material increases in rates. Not everyone will be prepared or know how to navigate it. Banks’ credit risk capabilities will be tested.
Unsurprisingly, we’ll continue to pay special attention to residential mortgage portfolios and housing lending standards given their importance to system stability. There’ll inevitably be pockets of stress, particularly if rates rise quickly and, as expected, housing prices fall. With a well-capitalised system, and lending standards that have been fairly sound in recent years, we start with a banking system that’s well placed to deal with these challenges. Nonetheless, we’ll be watching developments closely.
As with banking, Australia’s insurance industry is financially sound, and has navigated the past few years well.
But a common theme that increasingly pervades all three sectors of the industry – general insurance, life insurance and health insurance – is the (un)affordability and (un)availability of insurance. Be it because of poor product design, rising claim costs, increasing litigation, or a changing climate, insurers are increasingly raising the price and/or reducing the coverage of the policies they sell. While that may be a sensible business decision for individual insurers in the short run, in the long run it leads to premiums that become unaffordable, cover that is poor value, or even products that are simply not available.
We see an important role for APRA in helping avert such an outcome. There isn’t a single solution, but we can make sure insurers improve their product design, pricing, claims and exposure management. We can work with our public sector colleagues to examine the underlying drivers of the problem and explore ways in which the trends can be reversed. And we can encourage the provision of information to policyholders to help them understand how they can contribute to risk mitigation. Addressing this issue is at the heart of our insurance industry strategy.
Turning to superannuation, Australia’s roughly $3.5 trillion pool of superannuation savings is a wonderful national asset. It provides Australians with the prospect of a more comfortable retirement than they might otherwise achieve on their own, and at the same time provides the country with access to a deep source of long-term capital.
But the system can be better. Put simply, when it comes to superannuation, good enough isn’t good enough. We still have too many trustees that could do better – including, in some cases, by handing their responsibilities to someone else. So, our primary focus continues to be to drive out sub-standard products and practices, using a combination of the Government’s annual performance test, our own heatmaps, intensified supervision, and (when needed) what my colleague Margaret Cole referred to as a more muscular approach to enforcement.
With the new retirement income covenant coming into effect soon, another area in need of attention is the provision of retirement products. As the superannuation system matures, and an increasing proportion of Australians move into the retirement phase, much greater attention needs to be given not just to how superannuation savings are managed, but how they are accessed in retirement. This is a space ripe for innovation and new thinking.
In the small amount of time I have left, I also want to flag two foundational regulatory initiatives high on our agenda. I call them foundational because they’re not about more regulation, or changing regulation, but rather better regulation.
The first is our plan to modernise the prudential architecture.
As financial system risks have evolved, the prudential framework has grown. In total, we now have around 150 prudential standards and practice guides, supported by a myriad of information papers, industry letters and FAQs. It could do with an overhaul.
We’ve therefore kicked off a project to do just that. Our objectives are to make the framework more cohesive; easier to understand and navigate; and less costly to maintain and update. In doing so, we also want to cater to new risks from digitisation. Importantly, we’ll soon begin seeking stakeholder views on how we best do that. I would encourage everyone to engage in that exercise – we’re genuinely keen to hear your views.
The second initiative is the five-year roadmap we laid out in March for transforming our approach to collecting financial data from the over-2000 entities APRA regulates.
Critical to that is our new data collection system, APRA Connect. APRA Connect allows us to collect deeper, broader data sets that can be used in many ways – including by peer agencies, under the principle that data should be collected once and shared.
All new data collections will be instituted through APRA Connect. But we have a major task to review and transition existing collections onto the new system. Only when we’ve done that can we harness the full benefits of APRA Connect: better data for users, collected at lower cost to the industry that provides it.
The March roadmap sets out a plan for each industry that’s been tailored to reflect the work already underway on new data collections, the expected regulatory policy agenda, and the industry’s capacity to accommodate change. Again, it’s an ambitious project and we’re keen to make sure we have active and regular engagement with industry participants as we work our way through it.