Banking watchdog promises ‘constructively tough’ approach to enforcement

The banking regulator has vowed that enforcement action against companies or individuals will no longer be a "last resort" and it will instead be "constructively tough" when dealing with serious risks to the financial system.

The Australian Prudential Regulation Authority (APRA)'s pledge to take a harder line comes after the Hayne royal commission criticised financial regulators for being too timid, and an internal review found its appetite for enforcement had been too low and was lagging its global peers.

APRA chairman Wayne Byres said the regulator would be “constructively tough” on financial institutions.Credit:Louie Douvis

Chairman Wayne Byres said APRA would in future be “constructively tough” when dealing with prudential risks and vowed that its supervisors would be supported in holding financial institutions to account. It would use enforcement "where appropriate to prevent and address serious prudential risks, and to hold entities and individuals to account".

APRA's responsibilities are to protect depositors, superannuation members and insurance policy holders, and to promote financial stability, so it will not be as aggressive in taking court action as the Australian Securities and Investments Commission (ASIC), which polices corporate conduct and has recently adopted a “Why not litigate?” posture.

The banking royal commission said APRA should put a greater emphasis on conduct risks in banks, as well as its primary focus on financial risks, and criticised the regulator for being too reluctant to take court action.

The review by deputy chairman John Lonsdale said the banking regulator had in some cases failed to address risks quickly enough because of insufficient attention it gave to enforcement. Its approach was also "out of step" with regulators in the United Kingdom and the United States.

“The recommendations of the review will still mean that APRA as a safety regulator remains focused on preventing harm with the use of non-formal supervisory tools. However, APRA will be more willing to use the full range of its formal powers – such as direction powers and licence conditions – to achieve prudential outcomes and deter unacceptable practices,” Mr Lonsdale said.

Mr Lonsdale's report said APRA needed to have "effective working relationships" with banks during the global financial crisis, but since then, there had been a greater focus on cultural and behavioural risks in the industry.

It said behavioural standards presented a "particular challenge" for banking regulators around the world, because assessing behaviour required much more judgement than looking at purely financial risks. As a result, APRA had been "hesitant" to take enforcement action over behavioural risks, it said.

APRA accepted all of Mr Lonsdale's recommendations, which included strengthening ties with ASIC; building a more "forceful supervisory culture"; setting up a committee to drive enforcement decision-making; and bolstering the legal powers and penalties available to APRA.

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