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Economics Legislation Committee
Australian Prudential Regulation Authority

Australian Prudential Regulation Authority


CHAIR: You are still here—down the back! Mr Byres, how are you? Welcome, and welcome to the officers of the Australian Prudential Regulation Authority. We do welcome you here and thank you for your patience. I notice that you have tabled a copy of your opening statement—are you happy to have it tabled?

Mr Byres : Very happy to have it tabled, Chair.

CHAIR: Thank you very much. Are we all agreed that the statement be tabled? Yes. There being no objection, it is so ordered. Mr Byres, we will go straight to questions.

Senator KETTER: My first question goes to the issues that we had last year in relation to what some would consider to be the politicisation of APRA, particularly around APRA's activities with the Superannuation Legislation Amendment (Trustee Governance) Bill 2015. We are aware that the minister's office had asked APRA to speak to crossbench senators on the legislation. Is it the case that APRA has provided briefings to individual and/or groups of senators?

Mrs Rowell : We provided briefings to individual senators, and also to a group of advisers of senators.

Senator KETTER: Who decided that APRA would start talking to individual senators? Did this come from the Chairman, or did the government direct or suggest that APRA do this?

Mrs Rowell : The minister's office asked if APRA would make itself available to answer questions from senators on the legislation that was before parliament. We discussed it internally, and in particular the Chairman and I discussed whether we would be prepared to do that and agreed that we would, and made ourselves available.

Senator KETTER: Could you please outline on how many occasions, on what dates, for how long, and to which individual senators you provided briefings?

Mrs Rowell : I believe we have provided that information in response to a question on notice previously. I cannot recall all of those details off the top of my head, but there was a question on notice after the last hearing, I believe, which provided a lot of that detail.

Senator McALLISTER: I do not believe it was in this committee—

Mrs Rowell : It may have been at the hearing in Melbourne.

Senator McALLISTER: in the estimates process; it may have been in the hearing into the legislation perhaps. I was present at the last estimates hearing and it was not canvassed, so I think we would be interested in having information that Senator Ketter has outlined.

Mr Byres : We will just take that on notice, because there are a number of points there—including, I think you asked for the lengths of the meetings?

Senator KETTER: Yes, the length of each meeting.

Mr Byres : I am not sure we will have that, but we would have to take that on notice.

Senator KETTER: What was the main reason for the briefings?

Mrs Rowell : As we have explained previously, the main reason for the briefings was because the superannuation framework involves three layers of requirements—there is the legislation and regulations, there is prudential standards, and there is prudential guidance. The governance reforms involved matters pertaining to all of those layers of the framework. Some of the matters in the bill directly related to APRA's powers, and there were questions in the consultation around the nature and scope of those powers, and how we would exercise those powers. And so it was felt appropriate that we should be available to provide information in response to questions around those matters, in terms of the need for the powers, how they would be implemented in practice—those sorts of issues.

CHAIR: And if requested, would you have provided the same briefing to any other senator, whether it was an opposition senator, a Greens senator or a government senator?

Mrs Rowell : Indeed, we would have.

Senator KETTER: I do not think there was any suggestion that there should be briefings for Labor senators.

Senator Bushby interjecting

Senator KETTER: I think you have indicated, Mrs Rowell, that this process was initiated by the minister.

Mrs Rowell : It was, and it was the minister who organised the meetings, and we attended the meetings. We were not part of the decision about who the meetings were with. My understanding was that we would make ourselves available to any senator that had questions around the legislation.

Senator KETTER: You were going to tell us which crossbench senators were invited to attend a briefing.

Mrs Rowell : I can only tell you who we met with. My recollection is that it was Senator Muir, Senator Wang and the advisors to Senators Lazarus, Lambie and Day. I would need to confirm that.

CHAIR: You can confirm that. Is it fair to say that you are very happy to brief any senator?

Mr Byres : The position that we took was that, where people had questions about how APRA was operating, we should try and answer those questions. We were seeking powers. We felt that we should explain to people why we thought those powers were of benefit to us and we should be transparent to all sides of politics and all members of parliament. That was our in-principle position.

CHAIR: You are quite at liberty to extend an invitation here tonight to opposition senators for the same briefing, if you would like.

Mr Byres : We would be happy to explain those issues.

Senator KETTER: If I understand the process correctly, the minister's office contacted some senators, and you were subsequently advised which senators wanted to make themselves available to receive the briefing. Would that be correct?

Mrs Rowell : That is our understanding of the process. You would need to confirm that with the minister's office.

CHAIR: I suggest to you that, with the knowledge that I have, that would not be a problem. I am just putting it out there for you, to be helpful.

Senator KETTER: The fact that Labor senators' offices were not called for a briefing—would you know whose decision that would be?

Mrs Rowell : All I can tell you is that it was not APRA's decision.

Senator KETTER: I want to turn to—

Senator McGrath: Do you want a briefing? They have just offered.

Senator KETTER: I am going to move on to a specific case of the issuing of a banking license to Wide Bay Australia, a building society. The reason for my interest here is that there was a statement issued by ASIC in February 2015 indicating that Wide Bay had failed to properly assess the suitability of customers for home loans referred to it by a company called Financial Technology Securities, which it had a 25 per cent stake in. There was a spike in repossessions—up to 61 in 2014—so ASIC issued a statement indicating that Wide Bay had failed to properly assess the suitability of customers for the home loans. We then found that, three weeks later, APRA approved Wide Bay for a banking license, allowing it to become Auswide Bank from 1 April. Do you work with ASIC on issues relating to financial advice and the links between financial institutions?

Mr Byres : As a general point, there is a high degree of coordination between APRA and ASIC, including information sharing of matters where ASIC and APRA might have an interest in a particular regulated institution. I am not familiar with the facts of that specific case, but it is not clear to me what— effectively, all Wide Bay did was change its status. It was an ADI, an authorised deposit taker, under the act. After the event, it is an authorised deposit taker under the Banking Act. It was simply a question of whether they met the criteria to use the word 'bank' in their business name, and they do, so it is a fairly automatic process—if you meet the criteria, you can use the word 'bank'.

The fact that there may be issues that ASIC had identified that required rectification would not in and of itself be, in any way, a reason to stop that process proceeding. It was an application process that probably would have been in train for a little while. I am quite confident that the relevant agencies, and more to the point the relevant staff within the two agencies, were aware of the respective issues. I am not familiar enough with the case to give you much more of a specific answer.

Senator KETTER: Have you received any advice or correspondence from ASIC about why, in February 2015, they—

Mr Byres : Sorry, you would like us to take that—

Senator KETTER: If you are not in a position to tell me, yes, I would ask if you would take that on notice.

Mr Byres : Yes.

Senator KETTER: If you did receive that correspondence, did you advise ASIC that you were granting a banking licence to Wide Bay?

Mr Byres : As I said, it is not a banking licence. It is just approval to use the word 'bank'. Yes, we will come back to you with the details of the correspondence.

Senator KETTER: When you are looking at that, can you tell me if there were any discussions between APRA and ASIC about the appropriateness of this? The reason there is a concern, I think, is that when an institution has the word 'bank' it is seen as having a particular status and—

Mr Byres : Yes, we are very conscious of that and keen to protect it.

Senator KETTER: Certainly Auswide did issue media statements to that effect seeking to capitalise on that change of title. Before I move off this, have you been monitoring the performance of Wide Bay since it has become Auswide Bank? Do you have any concerns or reason to be concerned about its lending behaviour since then?

Mr Byres : We closely monitor all of the institutions that we are responsible for regulating. We have a fairly defined portfolio and we have supervisors allocated to each individual institution so, yes, we are monitoring Wide Bay, as we do all other financial institutions. As we stand here today, all of our institutions are meeting all of our prudential requirements.

CHAIR: Senator Ketter, we are straying into commenting on specific—

Mr Byres : I am trying to avoid giving too much of a specific answer.

Senator KETTER: I will move away from that now. A final couple of questions in respect of allegations about rate rigging. I understand this is primarily the responsibility of ASIC, and there may well be some announcements there. I am interested in your view about what APRA can do in relation to this matter—this goes to improving culture and behaviour.

Mr Byres : You are correct on that specific matter; that it is a matter where ASIC is leading the investigation. We are informed on progress and we talk to the institutions that are subject to the investigation so we are well aware of what is happening, but we are seeking not to intervene, obviously, in a matter that ASIC is formally investigating. I have made, and others in APRA have made, a number of comments about culture as being one of the areas where we would like to see some improvements across the industry. We have set up a small team in APRA to help focus our efforts in that area. I know ASIC has done likewise, and those two teams are sharing information with one another about what they are observing and what they are seeing. Equally, as much as we can try and push, prod and encourage a more-appropriate culture within institutions I have also been on the record as saying you cannot just regulate it into existence. As well as continual lecturing from me and others it does require leadership from executives within the industry to improve standards of behaviour.

Senator KETTER: I understand your point, but are there any implications for prudential regulation coming out of these allegations?

Mr Byres : Coming out of the specific allegations? It is not clear yet, because it is not clear what the findings will be. It will probably be premature to conclude. There is a general issue that exists in financial institutions—it exists in wholesale markets; it exists in retail markets. When you have reward systems which are heavily based on revenues quite often we have tended to see behaviour which is perhaps not always appropriate. The incentive structures and remuneration frameworks are certainly something that is worth looking further at. At this point it would be premature for me to suggest in any way that that is at the heart of the investigation and the issues that are being investigated by ASIC. It is too early for me to say.

Senator KETTER: Can you explain in language that a layperson would understand what the implications of rate rigging on the market are, particularly with respect to commercial and consumer lending rates?

Mr Byres : I will do my best. BBSW is a benchmark. It is an indicative interest rate. It is a basis from which the interest rates on many other financial contracts are set. When those contracts are entered into there is a presumption that the index rate, BBSW, represents a fair market rate, and that whether you are paying or receiving that rate you are earning or paying what is deemed to be a fair market rate. If for some reason there has been behaviour that distorts that, then inevitably someone may pay more or receive less than they should fairly have done. The extent, scale, impact and degree to which that has occurred is very difficult to predict. It is very difficult to identify where damage may have occurred, if damage has occurred. But at the heart it is essentially saying that people are transacting with one another in financial markets on the basis that these indexes represent a fair market rate, and maybe the index was not a fair market rate.

Senator BUSHBY: Just a quick question on the BBSW. Maybe it is better to take this up with ASIC. I recall that during the banking competition inquiry a number of years ago the LIBOR-fixing controversy broke whilst we were doing that inquiry. I recall asking then—from memory, I think it was one of the deputy governors of the Reserve Bank—whether a similar thing could be happening in Australia. The answer I got was something along the lines of that the BBSW is set very differently to the LIBOR and, therefore, the opportunity for fixing is very limited and it is very, very unlikely that it could be happening here.

I am not asking you to comment on those comments—because it is not a direct quote I would want to find out who said it and what they actually said before I would ask anybody to comment on it. Is the general thrust that BBSW was thought to be not a rate that could be manipulated? Was it the case that that is what people thought? How did we get to a point where it appears that it is being manipulated? How is it being manipulated?

Mr Byres : The first point is that it is a different sort of rate to LIBOR. LIBOR is essentially—or was, when it was subject to manipulation—a hypothetical rate. People put in estimates of what they could borrow and lend at. There did not have to be any actual transactions, so it was often somewhat sarcastically referred to as the rate with which banks do not lend to one another. In the BBSW case, I suspect the reason you got the answer that it is very different to LIBOR was that BBSW is essentially set on the basis of actual transactions that happen in a particular window at a particular time of day. It is real in the sense that someone has done some sort of transaction, so that gives you some comfort that it is not just people making up numbers. But liquidity of markets et cetera has lessened over the years. It is less than it was. That does create a potential for people who wish to do so to test whether they can move the market or shift it around.

Senator BUSHBY: It is an issue that I think deserves a lot more exploration, but, given that it is already 11 o'clock, there is another issue I just want to raise quickly. I may be able to pick it up with ASIC tomorrow, but we will see where we go with that. I note in the opening statement that you have tabled that you mention the outcomes of the Royal Commission into Trade Union Governance and Corruption. You note in there that nothing has been specifically referred to you, but a lot of the observations and findings identify similar themes to a review that you have already done, and that as a result you will be taking a further review of related party arrangements. What process are you going to be looking at to undertake that review? Will it be a formal review or an internal review? What time line do you think you will be looking at? Are you likely to make the findings of that public?

Mrs Rowell : I will answer that. We have yet to fully scope the work that will be undertaken, but we would imagine that it would be similar to the previous thematic reviews that we have undertaken. We will identify a range of institutions covering all segments of the industry, and then we will probably do some on-site review work and review their policies, procedures and arrangements in particular areas. We may even look at specific types of related party arrangements that they have in place and the nature and the quantum of those. In particular, our focus will be looking at the governance, oversight and monitoring of those, and the process that the trustees have in place to justify that they are in the best interests of members and that they are actually monitoring the value and the outcomes that are achieved in that context. We would imagine that we would scope that work and start it probably later this quarter—maybe before June but possibly in the second-half of the year. The review will go for six to 12 months, depending on how many institutions we try to cover and the depth of work that we do. Typically, when we complete a thematic review, we provide specific feedback to the institutions that participated in that review, but we would also try and draw together some general findings and themes and would publish those in a letter to industry or by some other means so that the broader industry, including those that were not specifically part of the review, are aware of the findings and the issues that we find—both better practices and also areas for improvement.

Senator BUSHBY: In Mr Byres' opening statement you say that, even though we are talking about a review that was sparked by the royal commission into trade union governance findings, you will be looking at all types of super funds, not just those that have union involvement. It will be across the board.

Mrs Rowell : It will be across the board. We will be looking at retail, industry, corporate and public—

Senator BUSHBY: Although there have been no specifics references to you at this point, there have been references to others. For example, the royal commission identified a leak of confidential information of CBUS members by employees et cetera, which you would know about, and referred potential breaches of that to ASIC. If ASIC finds that breaches have occurred, would that then have any consequences? Using that as an example rather than speaking about the particular case, if, in a certain situation like that, ASIC found that there were breaches, would that have consequences in APRA?

Mrs Rowell : It would be certainly a matter that we would need to consider. The exact outcome of that consideration would depend very much on the circumstances, but we would certainly look into what issues ASIC found, what action they had taken and what consideration or possible action we might need to take.

Senator BUSHBY: Thank you. I have a heap of stuff here, but, given the time, I will leave it at that.

CHAIR: Thank you very much, Mr Byres, and all of you, for being so patient and coming along to our February session. That concludes our session tonight. I thank the assistant minister for coming along, as well as Mr Byres and the officers. I now formally adjourn proceedings until tomorrow morning at nine o'clock.

Committee adjourned at 23:04