Reflections on APRA’s role in lifting standards and facing challenges

By Governance Institute

After a distinguished 21 years with the Australian Prudential Regulation Authority (APRA), Deputy Chair Helen Rowell’s term will end in late June 2023. She delivered her final speech for APRA at Governance Institute’s NSW Governance and Risk Management Forum on 16 May 2023. We sat down with her after the event as she reflected on her career with the regulator.

Helen Rowell has certainly had a front-row seat watching APRA, and its supervision evolve with the many challenges it has faced.

Rowell joined the regulator 21 years ago after spending more than 17 years at what was then Towers Perrin, an employee benefits and actuarial consulting group.

APRA was dealing with the aftermath of the HIH collapse — the biggest corporate failure in Australian history. It had a far-reaching impact not just for the insurance sector, but more broadly because of its scale and its effect on communities and the economy.

APRA was rebuilding and growing and being part of that and creating a stronger APRA appealed to Rowell. As president of the Actuaries Institute at the time, she had also developed an interest in discussing and making submissions on policy issues.

Rowell says the HIH collapse allowed APRA to lift practices and standards across the insurance industry and more broadly. It also allowed the prudential regulator to be more intrusive and push a bit harder. Before HIH, APRA was largely expected to take a light-touch, low-intervention approach.

Rowell was closely involved in implementing post-HIH reforms to the insurance prudential framework as well as changes to supervision practices to strengthen the regulation of the insurance industry.

APRA’s next major challenge was the global financial crisis (GFC).

‘You saw how something that happened on the other side of the globe because of structured loans and poor risk management cascaded right around the world with funding markets being closed, putting liquidity pressures on the whole financial system,’ says Rowell.

‘It unsettled and destabilised the Australian financial system in a way that hadn’t been seen before.’

Rowell says working with the government, Reserve Bank, Australian Securities and Investments Commission and others to navigate through the crisis was for her ‘a fabulous learning experience’.

‘It was another opportunity to lift standards and it led to stronger requirements in several areas as part of the post-GFC reforms. But the focus was all very much on the financial side – how do we improve capital, how do we improve liquidity management, those sorts of things.

‘It took the Hayne Royal Commission and the incidents leading up to it to bring to the fore the importance of governance, risk management and non-financial risk issues.’

Rowell believes learnings from HIH and the global financial crisis ‘sort of shifted the dial a little bit’ on governance practices and risk management and led to some changes.

But what really had a big impact was the issues uncovered at a leading financial institution like the Commonwealth Bank of Australia (CBA) by the royal commission and the prudential inquiry into CBA.

Among them were shortcomings in CBA’s governance, culture and accountability frameworks, particularly in dealing with non-financial risks, as well as serious breaches of anti-money laundering laws.

These, she says, were failures of governance and conduct rather than financial or prudential issues.

‘For me, that was probably the standout point at which the whole financial sector and even the broader corporate sector stood up and took notice of how the failure of governance and treating your customers poorly can actually do as much damage, if not more damage, than the mismanagement of financial risks.

‘That I think led to a far more fundamental change in the what the financial sector in particular but also APRA thought was important and where we needed to focus to ensure that institutions were well run.’

Rowell says this included a much deeper focus on organisational culture, how it supports good outcomes and how it can be influenced to obtain better results for institutions and their customers.

While there had previously been talk and guidance around the importance of culture, she says it didn’t get as much traction as it needed.

‘But after the royal commission and CBA review, it became really clear that at its core, culture drives everything and if you haven’t got the right culture, you’re not going to get the right outcomes for the organisation, whether financial or non-financial,’ she says.

‘That led to us putting more supervisory effort and focus into understanding the culture of organisations.’

APRA now uses a risk culture survey to obtain an employee perspective on risk behaviours and the effectiveness of the risk management structures within selected institutions. Feedback is then provided to the organisations to help them get a view of their culture and what they need to focus on.

Rowell says the royal commission also highlighted how remuneration and incentives could lead to poor outcomes for institutions and their customers.

‘We first started focusing on remuneration and incentives and developed some standards around these after the GFC in 2010, but again, I don’t think they necessarily got the traction we wanted until the royal commission,’ she says.

‘After the royal commission, we were able to strengthen our standards and expectations that boards put as much weight on non-financial risk components as financial risk components when designing their remuneration structures.’

Rowell has since seen some shifts in this space.

‘There is a greater recognition that you need to have the right incentives in place to drive better behaviours,’ she says.

‘You also need to be able to use those remuneration structures in a way that ensures that there are consequences when risks are not managed well, whether they’re financial or non-financial risks.’

During her career, Rowell also had a lot of supervisory engagements with individual institutions and many crises to deal with at an entity level.

‘These are also quite pivotal in how I think about what good organisational management and sound risk management and governance looks like,’ she says.

‘You get a sense of which entities do it well and you can have confidence in and where you need to sort of push in and do things a bit differently.’

Looking ahead, Rowell believes APRA’s review of CPS 510 Governance will take place later this year and into in 2024. This prudential standard sets out minimum foundations for the good governance of an APRA-regulated entity.

There will also be a review of CPS 220 Risk Management, which requires an APRA-regulated institution to formulate, maintain and give effect to a risk management strategy that provides an overview of how the risk management framework addresses each material risk for the institution.

‘We have a process of periodically reviewing all our standards every five to 10 years depending on how things have shifted and what the priorities are,’ says Rowell.

‘These two are the standards we feel need a refresh to take stock of the lessons we’ve learnt, particularly from the royal commission.

‘The other thing we’re doing as part of our review of our standards is trying to see how we can modernise them and their supporting material to make them more accessible and simpler without weakening them in any way.

‘We will also simplify the guidance to focus on what’s really important and what matters. That’s part of our overall approach to modernising the whole prudential architecture… We appreciate that over time, our prudential framework has become more complex and harder to navigate for boards and executives.’

Looking back, Rowell observes: ‘APRA has been a tremendous experience for me and I have learnt a lot. It’s just been an absolute privilege and I like to think I’m leaving the organisation and the financial sector in a better place than it was back in 2002 when I first joined.

‘Even though there’s been some ups and downs over the years, APRA is highly regarded. It has great people and I feel proud that I’ve been part of building and contributing to it.’

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