The Australian Government has released the Australian Prudential Regulation Authority (APRA) Capability Review, responding to it in the process.

The Government commissioned the review on 11 February in response to endless criticisms of APRA (the prudential regulator of the Australian financial services industry) by the Hayne Royal Commission.

The review panel made 24 recommendations, directing 19 to APRA and the remaining five to the Government. They found that APRA is an "impressive and forceful" regulator in matters of traditional financial risk, but needs to make organisational changes.

The Government claims that APRA is already implementing a number of the recommendations and will soon begin to implement the remainder.

The Government has also agreed to take action on all five of the recommendations directed to it. In response to the review, it will:

• ensure that APRA has enough power to prevent inappropriate directors and senior executives from being appointed or re-appointed to regulated entities - an extenion of its Banking Executive Accountability Regime;
• consider changes to APRA’s regulatory set-up, including a review of penalties and changes to its private health insurance licensing powers;
• set up the long-awaited Financial Regulator Oversight Authority in the hopes that this will streamline and improve the effectiveness of both APRA’s "accountability arrangements" and those of the Australian Securities and Investments Commission or ASIC;
• outline its expectations for APRA soon; and
• work with APRA to help it attract and retain highly skilled staff.

APRA's tasks are, with the exception of one unreported item, as follows.

It should address "variation in leadership capability" for all management levels, also developing a "cultural change programme" that fosters internal debate and contestability.
It should set transparent standards to hold staff and itself accountable for the timeliness of approvals and other commercially-important decisions for regulated institutions.
It should revise its organisational structure, restructuring supervision divisions along industry lines and revise management structures and levels, with a view to widening spans of control.
Its chairman's job should cease to be restricted to overseeing banks specifically and become a broad organisation-wide job.
It should retain its long-standing ability to make people safer financially and the markets more stable.
It should hire more people so that it can impose onerous supervision regarding both non-retail and retail credit risk.
It should be more assertive in articulating the objectives of its macro-prudential policies, the design of the instruments it chooses and its assessment of the results of its decisions.
It should advise the Government of the current state of its "resolution capability" - a phrase that entered the public domain after the worldwide financial crisis began in 2008-9. "Resolution plans," i.e. plans whereby banks can collapse in an orderly way if the market so dictates, became a requirement of the US Dodd-Frank Act 2010, which the Trump administration has failed to rescind. Australia has them as well.
It should try to build strong alliances with public and private sector experts, other regulators and financial firms to strengthen the cyber-resilience of the sectors it regulates.
It should increase its IT risk capacity.
It should create a competition champion within its own walls, preferably at "member level." His job should be to ensure that people in all APRA's departments take stock of competition.
It should concentrate on assessing appropriate results regarding governance, culture and "accountability risk" at regulated entities, not just appropriate processes. It should embed its recent "entity self-assessment process" into its more intense supervision of governance, culture and "accountability risk" by making it a biennial requirement.
It should hold prudential inquiries.
It should create a new superannuation division, headed by an executive general manager.
It should "embed and reinforce its increasing focus on member outcomes," publishing objective benchmarks to help it assess the performance of products.
It should depart from its "behind-closed-doors approach" with regulated entities and take a harsher approach towards recalcitrant institutions.
It should reinvigorate its approach to collaboration and the sharing of information with regulators.
It should use its existing "external accountability framework" more effectively.

Graeme Samuel, the former head of the Australian Competition and Consumer Commission or ACCC, chaired the panel, which also consisted of Diane Smith-Gander and Grant Spencer. Many people contributed.

Before Prime Minister Scott Morrison and his Liberal Party won last year's general election, they promised to usher in the changes recommended by the Royal Commission post haste. Morrison, however, had voted against the setting-up of the commission 23 times between April 2016 and June 2017, denouncing the idea in September 2016 as "nothing more than crass populism." The Government is now saying that there is only a chance at best that it will pass the necessary laws before the end of this year.

The report notes the regulator’s “low appetite” for enforcement and looks for a more “active and forceful approach” by the regulator to take on companies in public. It suggests that APRA staff who do not toe the line might endanger their livelihoods, saying that “career progression is perceived by many as being best served by close alignment with some managers’ views – a patronage model of advancement.”

The Sydney Morning Herald has responded to the report by stating: "When the 36 largest financial institutions are ordered by the regulator to undertake detailed self-assessments but only two voluntarily release their findings, it speaks volumes about transparency. But when the Australian Prudential Regulation Authority doesn’t force the 34 to be transparent, it speaks volumes about the regulator. Indeed, when APRA was itself placed under the microscope by an external review panel, it was found to be plagued by a similar organisation and cultural stasis experienced by the organisations it is charged with regulating."