In brief 4 min read
In the wake of the Financial Services Royal Commission (Royal Commission) and the introduction of the Banking Executive Accountability Regime (BEAR), APRA has undertaken a review of its enforcement strategy. The Enforcement Review Final Report (APRA Final Report) and an updated Enforcement Approach have now been released. While the new Enforcement Approach falls short of ASIC's 'why not litigate' approach, it suggests APRA will take a more active and 'constructively tough' approach to enforcement, supported by a new enforcement team. Partner Simun Soljo, Senior Overseas Practitioner Francesca Bonner-Evans and Lawyer Ellen Trevanion report.
The Royal Commission placed increased scrutiny on ASIC and APRA's ability and willingness to bring enforcement action against financial services entities that fail to comply with their obligations.
Starting in November 2018, newly appointed APRA Deputy Commissioner John Lonsdale has led a comprehensive review of APRA's enforcement appetite and approach. The APRA Final Report was delivered to the APRA Board in late March 2019 and has formed the basis for the new Enforcement Approach released on 16 April 2019. Chairman Wayne Byres stated publicly that APRA will implement all recommendations in the APRA Final Report and intends to adopt the new 'constructively tough' approach immediately.
The APRA Final Report made a number of recommendations, many of them focusing on APRA's internal operations. The recommendations of particular significance to industry are summarised below.
A 'constructively tough' enforcement approach
The APRA Final Report concluded that APRA's historical approach to enforcement as a 'last resort' diminished the credible threat of enforcement action and risked undermining APRA's supervisory efforts. It recommended a new 'constructively tough' approach to enforcement.
The Final Report also recommended combining APRA's investigation and legal specialists into a single team to advise and support supervisors in relation to enforcement. This mirrors the use of specialist units at the ACCC and ASIC's new Office of Enforcement.
Increased cooperation with ASIC
While APRA is unlikely to take the same regulatory approach as ASIC, the APRA Final Report recommends greater cooperation between APRA and ASIC when it comes to enforcement, including increased information sharing, consultation when either agency is considering enforcement action and coordinating action where appropriate.
The APRA Final Report also recommended legislative change to allow ASIC and APRA to bring joint proceedings and to share information obtained under ASIC's search warrant powers and examination powers.
Additional legislative powers
The APRA Final Report recommended giving APRA further enforcement powers in relation to superannuation (a penalty regime for breaches of additional license conditions and the introduction of an explicit power to order an RSE Licensee to undertake a merger by way of a successor fund transfer), and private health insurance (powers to impose additional license conditions, discretion to revoke registration and the power to effect compulsory transfers where APRA has viability concerns).
The Report also recommended higher penalties and the extension of the BEAR across all regulated entities (consistent with Recommendation 6.8 of the Royal Commission Final Report).
While the Enforcement Approach states that court-based enforcement is likely to represent a limited proportion of overall regulatory activity, we expect the new approach will lead to more active enforcement and intervention.
The Enforcement Approach states APRA will consider enforcement action where an entity or individual has not:
- adequately prevented or addressed financial, operational or behavioural prudential risks;
- conducted business with honesty and integrity, or with due skill, care and diligence; or
- dealt with APRA in an open, cooperative and constructive way,
and where that conduct has:
- had an adverse impact;
- created a risk that there may be an adverse impact; or
- affected APRA's ability to make accurate and timely assessments,
on the entity or individual's financial soundness and stability (or the interests of members in a super fund).
APRA will prioritise the issues and entities that pose the most serious prudential risks. It will be forward-looking in seeking to prevent harm, mitigate risks, and ensure remediation happens, while focusing on the prudential outcome it is seeking to achieve. In determining when and how to take enforcement action, APRA will consider the need to deter recurrence, both by the entity concerned and in the wider industry.
It will also consider whether a proposed regulatory response is proportionate and reflects the nature and seriousness of the contravention, the history of the entity's conduct and its ongoing conduct in dealing with the issues, and action proposed to be taken by other regulatory and law enforcement agencies.
APRA says in the Enforcement Strategy that 'where entities or individuals are failing to meet prudential obligations, APRA will act quickly and forcefully, and be willing to set public examples to deter unacceptable practices from occurring in the future'.
We expect to see a more active regulator willing to take tougher action sooner. While we would not expect APRA to take court action frequently, it may be more willing to exercise its intervention powers (including recent legislation giving it intervention powers in relation to super), and to act well before there is any threat to the financial viability of a regulated entity. It will also benefit from more information-sharing and coordinated action with ASIC.
While APRA's approach to enforcement will continue to be a nuanced one, and the changes to the Enforcement Strategy are a far cry from the 'why not litigate' approach being adopted by ASIC, regulated entities can still expect APRA to be a more active, interventionist regulator than we have previously seen.