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Standing Committee on Economics
02/12/2019
Australian Prudential Regulation Authority annual report 2019

BYRES, Mr Wayne, Chair, Australian Prudential Regulation Authority

LONSDALE, Mr John, Deputy Chair, Australian Prudential Regulation Authority

ROWELL, Mrs Helen, Deputy Chair, Australian Prudential Regulation Authority

SCOTT, Mr Warren, General Counsel, Australian Prudential Regulation Authority

SMITH, Ms Suzanne, Executive Director, Superannuation, Australian Prudential Regulation Authority

SUMMERHAYES, Mr Geoff, Member, Australian Prudential Regulation Authority

Committee met at 08:01

CHAIR ( Mr Tim Wilson ): I declare open this hearing of the House of Representatives Standing Committee on Economics and welcome representatives of the Australian Prudential Regulation Authority, members of the public and media who might be watching through the internal network.

The Australian Prudential Regulation Authority is the prudential regulator of the Australian financial services industry and currently supervises institutions holding $6.4 trillion in assets for Australian depositors, policyholders and superannuation fund members. APRA is currently undergoing a period of organisational change as it responds to the findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and the APRA Capability Review. The royal commission recommended strengthening APRA's prudential and supervisory framework in a number of areas. APRA has indicated it will implement the recommendations as quickly as possible, and part of why we are here today is to see how that is going. There are 10 recommendations requiring APRA's direct attention. Of the 10, it is expected that nine will be completed by the end of 2020. Of those, four are expected to be completed in 2019.

The Treasurer commissioned a capability review of APRA, led by Graeme Samuel AC—a fine constituent of the Goldstein electorate—which was finalised in July. The capability review panel made 24 recommendations, with 19 directed to APRA and five to the government. The capability review panel described APRA as 'an impressive and forceful regulator' in relation to traditional financial risks. However, it also identified important areas for improvement to ensure that APRA can respond to an environment of growing complexity and emerging risks in APRA's regulated sectors, particularly non-financial risk.

The review stated:

APRA appears to have developed a culture that is reluctant to challenge itself, slow to respond and tentative in addressing issues that do not entail traditional financial risks.

I can think of some other organisations in that camp at the moment!

In September Professor Samuel gave evidence at a public hearing, where he provided the committee with his assessment of APRA's capability to deliver its statutory mandate and its ability to adapt and respond to the findings of the royal commission and the capability review. Professor Samuel told the committee it was too early to say whether APRA's leadership had heeded the capability review panel's critiques, and I share that view. However, he said he was disappointed in the initial response to the capability review's recommendations and that there tended to be pushback. He told the committee:

… we will have to wait and see over the next year the extent to which they are embraced with enthusiasm, alacrity and efficiency. That will be the real test.

This is the committee's second hearing with APRA this year, following its appearance before the committee in August. The committee determined that additional information and questioning was required to properly scrutinise APRA. Today, the committee will continue its ongoing scrutiny of APRA and how APRA promotes financial stability through the prudential regulation of authorised deposit-taking institutions, insurers and superannuation licensees. The committee is particularly interested in APRA's progress in the implementation of the royal commission and capability review recommendations.

I remind witnesses that, although the committee does not require you to give evidence under oath, this hearing is a legal proceeding of the parliament and warrants the same respect as proceedings of the House. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament.

Mr Byres, we normally invite you to make an opening statement. The deputy chair feels—and it's a view that I share—that it is very long. I'm just wondering whether, rather than going through it, you can give an abridged version or whether we can go straight to questioning, allowing the members to read the copy?

Mr Byres : I wasn't intending to read it word for word, but I might just highlight a couple of key points in it because I think it is important and I do particularly want to say a few things, particularly a couple of paragraphs, upfront. First of all, thank you for the opportunity to appear this morning. As you noted, when we last appeared—and I use that word loosely—it was early in the aftermath of the capability review. Since that time many things have been done to action the recommendations that were put before us both by the capability review and the royal commission.

I want to talk about a few of those things very quickly by way of opening, but, given it has dominated the headlines over the last couple of weeks, I would like to start with a few brief comments on the AUSTRAC statement of claim in relation to Westpac. These are obviously very serious allegations that have caused us, as the prudential regulator focused on the safety of institutions, to carefully consider what they mean for the prudential standing of Australia's second-largest bank. The bank is financially strong, but the AUSTRAC matter has raised issues of governance, culture and accountability in relation to risk management, particularly as it relates to AML/CTF obligations. While we have to be careful not to duplicate or cut across matters for which AUSTRAC is the appropriate regulator and which are before the courts, we are actively considering what further action is required by us. This includes examining whether obligations under the Banking Executive Accountability Regime have been met and how Westpac's management of operation on compliance risks needs to be enhanced more broadly. As you would expect, we are doing that in close coordination with AUSTRAC and ASIC.

The other key point I want to call out, by way of setting the scene for this morning's appearance, is that a lot has been done since we last spoke to this committee. It's all built around our corporate plan, which was published in late August. The plan is built on the recommendations from, amongst others, the royal commission and the capability review. It sets out four key community outcomes that we are seeking to deliver for the Australian community: maintaining financial system safety and resilience; improving outcomes for superannuation members; transforming governance, culture, remuneration and accountability within the financial sector; and improving cyber-resilience across the financial system. No doubt we'll talk about all of those this morning, and I think they'll be issues which this committee wants to continually explore.

The opening statement covers what we have done in each of those areas in terms of financial resilience, our upcoming proposals on superannuation heat maps, our work on governance, culture, remuneration and accountability—particularly on remuneration, which has been a highly contentious issue—and the work we are doing on cyber-resilience. As you said, it is a long statement—that's why I wasn't proposing to read it—but I think it demonstrates that we have been active in responding to the issues that are on our plate. Even that long statement doesn't cover a whole raft of other things that we have done since we last spoke to this committee in August. We have published our annual report, delivered a range of speeches on our plans and activities, updated our enforcement approach and released a number of major papers. Last Friday we, along with ASIC, published the updated APRA-ASIC MOU, which was an important recommendation of the royal commission and embeds stronger and closer cooperation between the two agencies. Today we are announcing measures designed to improve the viability of disability income insurance products. Finally, today marks the move to a new organisational structure for APRA, which was a recommendation of the capability review, including a division dedicated to superannuation. My colleague Suzanne Smith, who is appearing before this committee for the first time today, is leading that division as its executive director. With those opening comments, we are in your hands for questions.

CHAIR: Thank you very much, Mr Byres. It's good to see you. Going to the topical matter—since you raised it as well—around Westpac and their AUSTRAC notification, what was the timeline or what engagement did APRA have related to that notification?

Mr Byres : We have a regular liaison arrangement with AUSTRAC that meets on a quarterly basis now. Through those arrangements, we are aware of issues that are on their agenda and we obviously keep them informed of issues that we identify that may be of interest to them. Westpac was one of the entities discussed through that process, as were other entities.

CHAIR: What are the other entities?

Mr Byres : I don't think I should be talking about what AUSTRAC is or isn't doing, but it is known; a number of entities have made public statements that they have issues with which they are dealing with AUSTRAC.

CHAIR: Was the specific example of Westpac and the current allegations against them raised in this meeting?

Mr Byres : Generally, yes.

CHAIR: What does 'generally' mean?

Mr Byres : We were aware of the Westpac issue. Again, they had made public disclosures. In fact, I think at the time that they first reported it to AUSTRAC, we were aware that they had made that reporting to AUSTRAC.

CHAIR: Were you aware before they made the public reporting or were you aware at the same time as they made the public report?

Mr Byres : We would have been aware before the public reporting.

CHAIR: What time frame is that? They notified in their annual report, so—

Mr Byres : They notified AUSTRAC, if I remember correctly, in mid-2018. We would have become aware of it through Westpac sometime shortly after that.

CHAIR: So that is sometime in mid-2018.

Mr Byres : In 2018.

Mr Byres : Under the BEAR legislation, what is the appropriate course of action around accountability around such notifications, considering the volume of the breaches?

Mr Byres : It's important to note that the breaches occurred by and large—not entirely, but by and large—prior to the BEAR coming into effect.

CHAIR: Yes. I'm not seeking to be hypothetical but, had they occurred today, what would the appropriate response have been in the context of the BEAR?

Mr Byres : There are two sets of obligations under BEAR. One is an obligation on the entity to, amongst other things, conduct its affairs with due skill, care and diligence, cooperate with APRA et cetera—there are a range of obligations there. Those are obligations on the entity as an organisation. A failure to adhere to those obligations allows APRA to seek fines from the court. We can't impose them ourselves, but we can apply to the court for a penalty.

CHAIR: Just for clarity on that, is that post any successful legal action by AUSTRAC or is that concurrent with?

Mr Byres : That is a tricky legal question. We need to make sure we don't do anything that cuts across or is seen to be in contempt of the actions that AUSTRAC are taking.

CHAIR: I understand.

Mr Byres : As long as we are very careful about the way we proceed, there is nothing that precludes us from examining the issues, but we need to be careful about not trying to run two cases on the same facts at the same time.

CHAIR: Is there a separate APRA investigation in Westpac?

Mr Byres : Different regulators are doing different things. AUSTRAC obviously has its actions that are currently before the courts. Both APRA and ASIC have been public in saying that we are looking at the implications of that for the statutory obligations that we are respectively responsible for. In our case, it's primarily the BEAR and the associated prudential standards; in ASIC case, it's various issues under the Corporations Act.

CHAIR: Is there an investigation, then?

Mr Byres : We are actively looking at the issues, yes, but there is not as yet—

CHAIR: There is not a formal investigation. You are simply, it would be fair to say, scoping the ground for the potential of that.

Mr Byres : We are preparing to look at how we will proceed, given the sensitivities of three regulators on an issue and the importance that one of those issues is currently before the court.

CHAIR: Okay, so we've got to the bottom of the entity component, and then there's the—

Mr Byres : Then there are various people designated by Westpac, under the act, as accountable persons. That, broadly, includes the board of directors, individually; the chief executive; and, by and large, the next layer of group executives within the organisation—that's pretty common across all of the banks. Each of those accountable persons has their own obligations under the Banking Executive Accountability Regime to, similarly, act honestly; to conduct their affairs with due skill, care and diligence; and to make sure they don't do anything that might unduly jeopardise the prudential standing or reputation of a bank. In that case, the immediate onus is on the bank to make sure those people are appropriately held to account, but if there is a sense that that is not done efficiently or effectively then there is the opportunity for APRA, if the circumstances warrant it and the behaviour is sufficiently serious, to seek disqualification of individuals.

CHAIR: When you're talking about scoping out the works around a potential action, but not, at this point, a formal—

Mr Byres : We're thinking about a range of actions that we might take.

CHAIR: You're considering your options—how about that?

Mr Byres : Yes.

CHAIR: And that includes both at an individual level and at an entity level?

Mr Byres : Yes.

CHAIR: What is the likely time frame in which APRA is likely to consider these matters?

Mr Byres : We are actively considering the matters now, in terms of what courses of action and what steps we're going to take. It may be broader than just a particular investigation under the BEAR. As to the speed with which we can pursue each of those steps, some will be entirely within our control and we can pursue them reasonably quickly; others, though, may need to be coordinated with other regulators or may need to wait until matters before the court are properly decided. I'm sorry to give the answer, but it depends.

CHAIR: But is it something we're likely to see before the end of this calendar year, or is it something—

Mr Byres : In terms of our saying what we are doing—the various courses of action?

CHAIR: Yes.

Mr Byres : Yes.

CHAIR: So we've got a month—

Mr Byres : We haven't got long to go.

CHAIR: You haven't got long to go, so we should expect something shortly. What processes is APRA undertaking related to other entities that have AUSTRAC notifications and/or are aware that they cannot fully exonerate themselves of potential issues around anti money laundering? As you have said, a number of financial institutions have outlined that there may be potential issues with AUSTRAC. Are you looking at other investigations with other entities?

Mr Byres : First and foremost, we are not AML experts. We don't profess to be AML experts. Obviously, we know what the laws are, in the same way that others do, but, in terms of judging and investigating the seriousness of any shortcomings in other institutions, that's not our bailiwick; that's very much AUSTRAC's. So, as I said, we try to keep ourselves informed of the issues that AUSTRAC has identified or that have been reported to AUSTRAC; we try to be alert to their view of the seriousness or otherwise of the matters, and to generally keep ourselves informed. But we don't want to wade in and try and cut across where AUSTRAC is undertaking its proper investigations.

CHAIR: So, basically, you're not going to—sorry, Mr Lonsdale?

Mr Lonsdale : I was just going to add that these are primarily matters for AUSTRAC. But, in terms of what APRA does for these issues, we are in close consultation with AUSTRAC on issues, and we do have, for many of the banks, large remediation plans, looking at non-financial risks that flow from the self-assessments coming from the CBA prudential inquiry. So we would ask ourselves: 'Is there anything that we have seen that would cast doubt on the bank's ability to fulfil those remediation plans?' If you go back to Westpac, that was one of the issues, I think, Mr Byres was alluding to—that, when we look at Westpac, we'll look at it from a legal end, but we will also look at it from a non-financial risk end and what that means for the remediation plans that banks have in place.

CHAIR: Understood. I'm just trying to get to the bottom of it. To me, it sounds like you are not going to reveal the details of information about other potential actions, even though I can take it from your remarks that you are investigating other pathways related to potential breaches of anti-money laundering under the BEAR; is that right?

Mr Lonsdale : They are issues for AUSTRAC.

CHAIR: No, that's why I said the BEAR.

Mr Lonsdale : For the BEAR, to my understanding Westpac is the only case that we are currently looking at.

CHAIR: Right. In the context that they are the only bank covered by the BEAR.

Mr Lonsdale : In the context that the AML issues as they relate to BEAR.

CHAIR: Sorry, I'm trying to clarify because I'm not 100 per cent sure I understand. Are there other issues related to AUSTRAC which fall somehow within the purview of APRA but are not from a bank?

Mr Lonsdale : What I'm saying is we are in close consultation with AUSTRAC on a range of issues.

CHAIR: Yes, tick.

Mr Lonsdale : In terms of the investigation that we were doing on an AML issue related to BEAR, Westpac is the only case where we are currently investigating BEAR obligations.

CHAIR: But there are other obligations that are non AML related; is that what you are saying?

Mr Lonsdale : There could well be.

CHAIR: I would have thought as the regulator you could say yes or no.

Mr Lonsdale : From time to time, there are cases that come up as part of APRA's resolution and enforcement committee that raise BEAR accountability issues where we do look at BEAR issues, but they are quite separate to this.

CHAIR: Okay. That provides clarity, thank you for that.

Dr LEIGH: The chair has asked a number of questions about the Westpac issues. I'm wondering what you think that we might be learning for the structure of executive remuneration, both at Westpac and elsewhere?

Mr Byres : I might start and then John can talk a little more on that as well because he's been overseeing our project on remuneration more generally. I think that is definitely one of the issues that we are looking at. One of the questions that we would ask as we look at this issue, recognising, as I've said, we're not really looking or qualified to judge AML issues, is: what were the circumstances that allowed this particular case to develop? What does it tell us about governance, culture, remuneration and accountability within the bank? To what extent were there incentives or otherwise within the remuneration framework that might have elicited certain behaviours that led to this particular case that might more broadly be prevalent in the bank? It's a good question and one that we're actively thinking about and will certainly be part of the work that we are doing.

Mr Lonsdale : That's correct. As part of the investigation, remuneration will form part of that because there are remunerations obligations under the BEAR. More broadly, as you will be aware, we have issued a discussion paper looking at how we will amend our prudential standard in relation to remuneration. It's a very important piece of work, we think. It is important because one of the issues coming out of the royal commission, in our own assessment, is that if you can get better alignments within institutions in terms of the incentives that will produce better outcomes ultimately for communities. So that's what we're trying to do. There are bits to it.

Essentially, it's a large consultation paper. There are three parts to it. Firstly, we are putting more obligations on boards; secondly, we have proposed the use of financial metrics to determine individual's variable pay be capped at 50 per cent, as opposed to entirely profit driven; and, thirdly, longer vesting periods, up to seven years for CEOs, with clawback and malice. We have had a lot of interest, to say the least. We've had over 70 submissions. That's a large number of submissions for a set of proposals. We have spoken to a lot of people from shareholders to bank executives, to the community to try to get alignment on where we might land and we are assessing what the proposals are saying. We will come back with results of the consultation in 2020.

Dr LEIGH: The other personnel issue that has troubled me is the report that the Westpac compliance officer who reported the breach has been stood aside. Will APRA be looking at how those who raise issues within organisations are treated? I am thinking not only of whistleblowers but also of those who tell management things they don't want to hear.

Mr Byres : We would certainly be interested in cases like that as part of understanding how these events have been allowed to evolve and the extent to which information was known in one part of the bank but didn't filter up or where warnings were not listened to.

Dr LEIGH: If a bank is standing aside somebody who is flagging problems, is that something that you look into? Is there another organisation that you think ought to take some responsibility for that?

Mr Byres : It depends on the nature of the issue and the nature of the complaint. It may be something that ASIC is better placed to look into. But, in these particular circumstances, we are interested in what these cases say about the risk culture of the organisation. The risk culture is really about the extent to which risk is properly and openly addressed and that there is a capacity for people to raise concerns and have those concerns listened to. I am not aware of the specific details. I've seen that article. Obviously I don't know the specific details of the case, but it would be of interest to us, yes.

Dr LEIGH: Many big firms in the United States reinvest the majority of their profits back into the business, but our big banks reinvest only about a quarter of their profits, so the rest goes back to shareholders. Do you think there's a risk that the high dividend payout culture in Australia has led to underinvestment in issues like regulatory compliance?

Mr Byres : It could play a role. There are differences in our taxation framework. I'm wary of going to issues around franking credits and other things. The way our tax system works is different to the US. There is a propensity for more dividend payouts here due to the tax treatment of dividends. For banks there is a trade-off to be had between how much they retain to grow the business and how much they can afford to pay out to shareholders. When returns have been very high, as they have been historically, it is easy to both grow the business, grow the balance sheet, and pay out returns to shareholders.

We are entering into an environment now where that's no longer going to be the case, and there will be a much, much harsher choice for bank boards to make about how much of their reduced returns they need to retain to grow their balance sheets and fund balance sheet growth and how much they can afford to pay to shareholders.

Dr LEIGH: Moody's has been said that the Westpac money-laundering scandal would be credit-negative for the bank. Do you anticipate that this may affect Westpac's funding costs?

Mr Byres : Not at this point—not to a material extent.

Dr LEIGH: Are you concerned that if there were further scandals of this kind that that could affect the funding costs for financial institutions?

Mr Byres : These sorts of events are not good for brand Australia—full stop. They are not good for the reputation of the banking system, so it would be much preferable if they didn't occur. If a perception existed in the international community that the Australian banks were poorly run or there was going to be substantial additional costs imposed on the system, it may be. But at this point I don't think that we are close to that threshold.

Dr LEIGH: A lot of low-income Australian migrants send money overseas. I'm thinking of the Fijian taxi driver doing extra shifts in order to send money bank home. In part, the Westpac scandal has to do with the misuse of a remittance channel. What is APRA doing to ensure that those who are legitimately sending money home to friends and family don't face higher transaction costs—in other words, to ensure that we tackle nefarious transactions while keeping overall transaction costs low?

Mr Byres : It's one that's not really within our mandate or scope, but we are alert to the issue, because this issue is very prominent in many international forums we attend. John and I were at the Council of Financial Regulators last week, and this issue came up because the Governor of the RBA had been meeting with South Pacific governors of central banks, and they were very concerned about this issue. I think the challenge will be that, unfortunately, the events at Westpac may well make organisations more risk-averse.

Dr LEIGH: Do you think there's an argument to be had that more transparency could help in both regimes? That is that not only was greater transparency at the core of AUSTRAC's case against Westpac but also the opaque nature of fees—customers not being told the true transaction costs—impedes competition in that market. Typically anyone wanting to send money overseas through a big bank is told about the flat flee but not the exchange rate mark-up, essentially turning it into a confusing market for anyone seeking to identify the best deal for remittances.

Mr Byres : Yes. This is something the ACCC has recently been looking at. Their evidence is that there are clearly better deals around for consumers in perhaps many new channels, but there are also some new players into the system. To the extent that those players have the opportunity to get more prominence and that that becomes more widely known amongst consumers, that can only be a good thing.

Dr LEIGH: You said before you weren't money laundering experts, but there is an interesting debate occurring as to the extent to which big data analytics can powerfully help to catch nefarious transactions. TransferWise, for example, has been in the press arguing that better analytics is necessary. Do you see that as an area in which the big Australian banks need to invest more in order to catch money laundering?

Mr Byres : Their task is obviously to detect and report. To that extent, they are better at doing it through analytics. It's pretty clear that the power of technology will deliver a lot more capacity to do that than has been the case in the past. AUSTRAC itself is a very advanced agency in terms of its data analytics capability, and they obviously have the capacity to look at the data across the system, not just at each individual bank. In both cases, technology will be a powerful benefit here.

Dr LEIGH: Do you not think Australian banks need to invest more in this?

Mr Byres : I think it is probably pretty clear they do.

Dr LEIGH: Thank you.

CHAIR: We're going to deal with the first part of the hearing thematically and get all of the Westpac questions out of the way so we can focus on some other matters.

Mr CRAIG KELLY: Can you give us a brief rundown of what your mandate and scope is when it comes to foreign remittances?

Mr Byres : I would say we have none; that is the short answer. Our job is to make sure that Westpac and other banks, insurers and superannuation funds are well run and well managed, but, when it comes to the specific issue of obligations around foreign remittances, we have none.

Mr CRAIG KELLY: Theoretically, if a bank was doing completely the wrong thing in the foreign remittance space, that's something you say you wouldn't have any jurisdiction over.

Mr Byres : Our issue is if a bank—or insurer or anyone—is doing something clearly wrong in one part of its business, what has allowed that to happen and what is the potential that a whole raft of other things could be wrong across that bank? So our interest is in what we learn from it for broader risk management, governance and accountability within the financial institution in that particular case. That is an AUSTRAC matter. We're trying to learn what the broader lessons are from it.

Mr CRAIG KELLY: Is there some way your mandate could be altered or changed to give you some greater oversight of this—something to at least checking whether they have the systems in place?

Mr Byres : As I said, that's really quite clearly AUSTRAC's responsibilities, and I think—

Mr CRAIG KELLY: Isn't AUSTRAC to check that they are actually obeying the letter of the law and, if they breach the law, AUSTRAC then jump on them?

Mr Byres : AUSTRAC does surveillance and supervision activities. They're set up to look at that albeit narrow part of an organisation's activities.

Mr CRAIG KELLY: I'm just asking whether you are comfortable with the way that government has the mandates and the rules of who looks after what at the moment. Basically you are saying that, as far as foreign transfers are concerned, it is really not APRA's job to—

Mr Byres : I think the respective responsibilities are clear. I would actually worry about a blurring of responsibilities if two regulators were both spending too much time looking at individual transactions.

Mr CRAIG KELLY: Thanks.

CHAIR: Dr Aly?

Dr ALY: Thank you so much, Chair. I just want to continue this line of questioning here. I understand fully the remit of AUSTRAC in terms of investigating the financial side of things. But your remit is culture, governance and, under the BEAR, accountability. I want to go back to the case that Dr Leigh spoke about within Westpac and the report that the person who raised the issue has been stood down by the bank. This person, according to reports, has a history in money laundering and has a level of skill and knowledge in money laundering and came to Westpac specifically around the money-laundering space. We understand the separation of remits, with AUSTRAC being the investigator around the financial crime issues but your remit is governance, accountability and culture. So where do you see your responsibility or your oversight in this space, particularly given this case?

Mr Byres : I just want to clarify a little bit of your starting proposition and then I'll answer your question. Our remit, our mandate, is financial safety and financial stability. That's our mandate. We are very interested in issues of governance, culture, remuneration and accountability, as you talk about. To the extent that they play to our mandate—and they all are very important for our mandate—those issues are also of interest to other regulators, including ASIC. So we don't have the sole responsibility for those issues. I just wanted to clarify that. We are very interested in them because they go to our mandate of financial safety.

As I said before, when a case like this comes up, case studies are very powerful tools in illustrating issues. As we go about thinking about what do we can learn from this particular case, about the culture and the way the bank responds to risks that have been identified and escalated, clearly we would look at whether this issue has been handled appropriately. I didn't mean to imply in my previous answer that there was any disinterest in the issue. There's not. But at this stage, there's a newspaper story and I'm wary of commenting on just a newspaper story.

Dr ALY: This isn't the first case. We had the Commonwealth Bank case. I don't know the extent of similarities between the Commonwealth Bank case and this case with Westpac. What did we learn from the Commonwealth Bank case?

Mr Byres : We learnt a lot from the Commonwealth Bank case more generally. We put out our prudential inquiry report, which actively looked into the lessons of the Commonwealth Bank, not just from the AML issue they had with AUSTRAC, but also the range of other issues that had emerged from the Commonwealth Bank in a number of areas. I think that everyone has accepted that that report, which was put out following that prudential inquiry, identified a range of issues across the bank. There probably wasn't any individual issue that was the root cause of the problem but, rather, a combination of failings and weaknesses that compounded in a way that meant risks were not being appropriately managed.

Dr ALY: Did you make any recommendations as a result of the Commonwealth Bank case? What did you implement as a result of the Commonwealth Bank case?

Mr Byres : In the Commonwealth Bank case, there were 36 recommendations made to the Commonwealth Bank, and each of those is in the process of being implemented. There is quarterly reporting, independently verified, that tracks the bank's progress against each of those recommendations.

Dr ALY: Sorry, can I just clarify: those recommendations were only for the Commonwealth Bank?

Mr Byres : Yes.

Dr ALY: They weren't recommendations that could be implemented across the sector?

Mr Byres : That's a very good question, because the next part of my answer was going to be that we then said, 'This is a really good report that everyone else in the financial system should benchmark themselves against,' and we asked 36 large and complex entities of various types—banks, insurers and super funds—to assess themselves against that report and give us their self-assessment. It's fair to say that many of the issues that existed in the Commonwealth Bank around complexity and lack of accountability were not unique to the Commonwealth Bank. For each of those 36 self-assessments we have got, which probably cover the vast bulk of the financial system assets, there's a remediation plan in place to make sure all of those issues are properly addressed.

Dr ALY: When this happened and there was a self-assessment, was there any indication at that point that there were other institutions, like Westpac, who were at risk within the AML/CTF space?

Mr Byres : Yes, there were, because, as I said, it's known that a number of institutions have public statements saying that they have issues that they are dealing with with AUSTRAC. That's on the public record. Those institutions are on the public record. One of the challenges that institutions have—whether it's AML or whether it's another aspect of their compliance—is that, particularly in large organisations, whether it be a bank, an insurer or even a big super fund, they are complex organisations. They have complex systems, and they are constantly changing. To the outside world they might seem like big monoliths, but they are constantly changing inside. There are new systems being updated. There are new products being added. There are old products being removed. Sadly and unfortunately, even with the best will in the world, there will be things that go wrong. That's not to excuse them in any way; it's just to recognise that, if it were simple and easy to build, set and then forget, many of us regulators wouldn't be required anymore.

Dr ALY: I understand that there's complexity, and I understand that things will go wrong. My interest is in how things go wrong 23 million times and how people who raise the issue that things are going wrong, through the culture of the bank and, I guess, their approach to these issues, get stood down or moved aside and not listened to. I'm trying to figure out where your remit lies in terms of that cultural stuff—not so much the structural stuff, because, yes, things are going to go wrong structurally, but not 23 million times.

Mr Byres : In this particular case, as I said, I'm wary of commenting on something that I don't have any more information on, at this point, than a newspaper report. But rest assured it's the sort of thing that we would take an interest in and will take an interest in as we look at what's happened here.

Dr ALY: So that's something you would investigate?

Mr Byres : It would be part of the things that we will be looking at as we get to the bottom of how these sorts of things happen.

Dr ALY: Would you also look at why, after what happened with the Commonwealth Bank and the kinds of things that were put in place after that, those things failed to prevent the case with Westpac?

Mr Byres : I think in this particular case in one sense the Commonwealth Bank may have well helped bring this issue out, because, following the Commonwealth Bank issue, all institutions clearly went back and looked much harder. As I said, the Commonwealth Bank issue was in late 2017. It was brought to the public's attention by AUSTRAC. Part of the flurry of activity of investigation within Westpac was saying, 'Gee, whiz, could we have these same problems?' In the first half of 2018, they self-reported to AUSTRAC that they had some problems. So I don't think it's right to suggest that people haven't learnt from the previous examples. Also, we need to remember that the problems were in existence for some time. They were self-reported in 2018. At that stage, they hadn't really had time to digest the CBA lessons et cetera. But I think there were clearly repercussions, and the CBA exercise helped bring this one to light.

The final point I'd make—you clearly have an interest in our work—is we published a paper last month, which set out for us a comprehensive work plan on the broad issue of governance, culture, remuneration and accountability. We were told by the capability review that we needed to get much more active in this space. We entirely agree with that. We had previously asked the government for some more funding to resource us in this area. We got that in the previous budget, and we've been actively building our team, intensifying our supervisory effort. As I said, we published a plan which talks about how we are going to strengthen the prudential framework, and have a stronger focus on governance and accountability. We're doing the work on remuneration that John talked about. We are obviously working with the government on the expansion of the BEAR regime to other industries, and then we're building up the expertise on the hardest one to tackle, which is the cultural side. But we're actively pursuing those issues.

Dr ALY: Thank you, Chair.

CHAIR: Nobody on the coalition side on Westpac?

Mr TED O'BRIEN: I have just one follow-up question. Where does leadership fit into that? If you have done a review on governance and you recognise the need for cultural change—and I apologise for being late, I have just scanned your opening statement where that was addressed—I don't see even the word 'leadership' coming out?

Mr Byres : No. I think in our language it would be captured within the 'governance and accountability' pieces. Are the leaders, from the board down, setting the right tone from the top, setting the right incentives for people, leading in the right way, encouraging the right behaviours? And then: are they holding people to account; rewarding good behaviour but also making sure there are consequences for poor outcomes?

Mr TED O'BRIEN: Where does APRA actually come in on that? If you establish the framework—this is just for my own education—what role do you play in terms of ensuring that it's exercised and enforced?

Mr Lonsdale : Just to follow on from Mr Byres's comments, this is a major piece of work for us. This is one of our key priorities, one of our top four. One of the key things we want to achieve is transforming governance, culture, remuneration and accountability within institutions, making the system better and to have better outcomes for consumers. That's one of the top four things that we're about.

Last month, we published a paper with a very extensive work program. It's a multiyear work program. In terms of your question, 'Where does APRA come out?'—what you'll see APRA doing is talking to boards more. We will be asking, we will be probing, about the risk culture. We'll be making sure that they have a risk appetite and that they have thought about risk. It's the institutions operating within those boundaries. It's about making sure, where they are outside those boundaries, they have a mitigation plan, and people are held to account. So the BEAR is part of that story. The new legislated program that the government is working on—the extension of the BEAR—is a part of that and we're consulting. We are part of that process with government and ASIC—as well as the remuneration proposals that we've got, which will seek to make sure that where there is poor conduct, that is reflected in the executives' variable pay going forward. So APRA have, I think, a very expansive work program over the next few years to make sure that we can lift GCRA leadership outcomes in the institutions to produce better outcomes. That's what I would say.

Mr TED O'BRIEN: Okay. Can I just say I encourage you very much on that. I'm personally of the view, particularly with large organisations—which I was part of in a former life—that 'a fish rots from the head down' is true. No matter what systems you put in place, no matter what rules you put in place, the only thing I believe that ever, ever changes culture is leadership. So I encourage you very much to focus on that. It a hard gig. It's a very hard job. But, if leadership does not lead with those values, then good luck with the rest of it. That's my view. Thanks, Chair.

CHAIR: I couldn't agree more, Mr O'Brien. There is some contestability apparently about where fish does start to rot, according to the Deputy Chair. But we will leave that perhaps to a natural resources committee. Dr Mulino.

Dr MULINO: Thanks. Organisations like Westpac are currently regulated by a number of regulators at the moment, and that's appropriate. I suppose my question is—and this was reflected in the care that you had to take earlier in answering questions around what your current examination of issues is and possibly investigation of issues—what are the current protocols for the different regulators talking to each other? The particular context here is, let's say, we're dealing with an issue like the one that Dr Aly raised of somebody being stood aside. You could imagine each of the regulators in a sense saying, 'We're very interested in that, but it's not quite in our bailiwick'. There is a risk that some of these kinds of things might fall between the cracks. I just want to see that there is a constant discussion going on so that all the regulators are aware of what each other's activities are.

Mr Byres : I might ask Mr Lonsdale to pick that one up.

Mr Lonsdale : There is extensive collaboration and engagement with regulators, both domestically and internationally. I make that point. And it is longstanding. One of the observations, if I can start with the royal commission, was the support for the twin peaks model, APRA and ASIC, but for those peaks to be brought closer together in the way they administer programs. Co-regulation of super and the BEAR are examples. We have, I think, around 18 memorandums of understanding in place with different regulatory agencies, domestically. The key ones are obviously ASIC, ACCC and AUSTRAC. They are the key ones. We have reworked the longstanding MOU with ASIC. The previous one was dated 2010. We've just published on Friday an updated MOU with ASIC that will set out how we will work more closely with ASIC going forward. That will start from the top. So we will have commissioners and members meeting quarterly. We've set up subgroups on different industry lines that will carry work forward—and report, if necessary. That forum has strategic discussions about things like remittances and other things that we worry about jointly. As well as that, we have the Council of Financial Regulators, which is a bigger forum that the chair talked about. So there is extensive discussion, collaboration and engagement.

Dr MULINO: Are you confident that those arrangements ensure that issues aren't falling between the cracks, between the regulators?

Mr Lonsdale : Yes.

Dr MULINO: I imagine there's a combination—so, regular meetings, maybe quarterly, or whatever the frequency is—but then when there's a large time-sensitive issue like Westpac, you would have then more frequent meetings arising in relation to that?

Mr Lonsdale : On an issue like that, there would be daily communication between the regulators on who is doing what. As Mr Byres outlined, in the lead-up to Westpac there is collaboration so that we know what's going on and other interested regulators know what's going on. But you're right: as it reaches a pinch point, there is much regular engagement, particularly not only to make sure that we know what each other's doing but also so that we don't tread on each other's toes, which is particularly important where there are legal obligations.

Mrs Rowell : There's a particular standing committee on enforcement matters between APRA and ASIC, where matters like this would be discussed—not just the Westpac case but any enforcement matters that ASIC is pursuing or APRA may be pursuing in relation to the same conduct. Similarly, they're case-specific engagements with AUSTRAC and other regulators as needed.

Dr MULINO: Regulators like AUSTRAC or the ACCC can feed into that committee?

Mrs Rowell : As needed.

Mr Summerhayes : Another important consideration is data and the gathering of data—how we collect, store and analyse that data, and how we share that data between the agencies that my colleagues have just mentioned and what techniques we use in terms of collecting that data, including natural language processing, artificial intelligence et cetera for analysing information. As was mentioned by the committee earlier, there are, in many cases, millions of transactions, and there's a big investment in APRA, ASIC and other agencies into the way we collect, store and analyse data so that we can pick up outlier issues and share those between the agencies.

Dr MULINO: Are there any restrictions on what information APRA, ASIC and AUSTRAC, for example, or even the ACCC, could share with each other at the moment?

Mr Summerhayes : Our default position is to share where possible, and that has been a significant change, which Mr Lonsdale could talk to, in the memorandum of understanding. That hasn't always been the case. We are sharing more information than we have previously shared, unless there are legal implications with cases afoot where that might prejudice.

Mr Lonsdale : Just to add to that, I refer you to the MOU. It's on the website as of Friday, but there's a specific part in there about how we would share information. To Mr Summerhayes's point: we would lean into that. There might be some very, very narrow cases that might go to stability where we would need to be very careful, but, by and large, for the vast bulk of information, we will be sharing. And we'll be doing that proactively, I should say.

Dr MULINO: Other than that, the main restriction on sharing would be legal restrictions where an organisation has obtained information with certain limitations on who it can give it to?

Mr Lonsdale : Warren, could you just reflect on that?

Mr Scott : There are when some documents are considered confidential or they're covered by legal professional privilege. We have worked quite actively with our regulated entities. Because of a couple of decisions from the High Court, they can share legally privileged documents with us if we keep it confidential, and we can't release it to anybody else without their consent. That does raise some issues because, if we get it on that basis, we can't use it in court, but we pretty much have complete access to information from regulated entities so that we know what's happening. We had a meeting with AUSTRAC on Friday to go over the Westpac case, so the information moves a lot quicker today than it did five or 10 years ago.

Dr MULINO: I have just one last question. We might drill into this in a bit more depth later on, but you have flagged the idea of APRA having a seat on boards. Is the Westpac example one where it's an example of an emerging risk and an emerging issue where a regulator presence on the board might have helped deal with that more prudently?

Mr Byres : I want to respond to this one—

CHAIR: I think clarification—

Mr Byres : We didn't actually propose to sit on boards. In the information paper that we put out a couple of weeks ago regarding our range of activities in relation to governance, culture, remuneration and accountability, one of the things we did was benchmark ourselves against our international peers, because the capability review felt that other regulators were doing more in this space. So we did look at what we were proposing to do, and we did examine whether we were at the forefront of international practice or not. Many peer regulators in other jurisdictions do put observers into boardrooms. ASIC has tried it here. We didn't commit to doing that. We simply said we'd look at the evidence—

Dr MULINO: My understanding was that you're were just exploring the idea.

Mr Byres : Sorry?

CHAIR: I think Mr Byres is taking the chance to clarify the public record.

Mr Byres : Yes, just to make very clear that we have no current proposal to do that. Others have tried it. The evidence is inconclusive. So, for the time being, it's not our proposal to do that.

Mrs Rowell : Just for clarity, we engage a lot with boards. We have a lot of regular meetings and discussions, both at a strategic level and to delve into details with boards. That will continue and is a very important part of what we do, but that's very different to sitting there and observing how the boards actually conduct their business on a day-to-day basis, which is something that, as Wayne said, we are not considering.

Dr MULINO: Sure, but obviously in some other jurisdictions, it does occur.

Mr Byres : It does.

Dr MULINO: I was just trying to explore whether, in the case of a long-running and emerging risk like AML, it could potentially be helpful to have somebody observing an issue like that.

Mr Summerhayes : On the board issue, one of the great advantages of the position that we have is that we sit with many boards. While we don't sit on boards per se, we meet with the boards and the board chairs, and we do that across a range of institutions. So you do pick up very easily the threads and the culture within those organisations and get a sense of how those boards are operating and engaging with management on a whole range of issues, including the ones this conversation is about. So, again, reinforcing Mrs Rowell's point, I wouldn't want it to be interpreted that we don't have a very good insight into those issues.

Mr Lonsdale : Just to turn around in terms of what we are doing, the reporting has, I think, overshadowed the 30-page document that we have put out on a what I think is an extraordinarily broad and ambitious work plan to show leadership in entities on GCRA issues—and that's exactly what we've tried to do. On the sitting in on boards issue, just to reinforce Mr Byres' comments, we have no plans to do that, but we do have plans to uplift the governance, risk culture, accountability and, as we have talked about, remuneration arrangements.

Dr MULINO: Thanks.

CHAIR: Just for clarity, does anyone have any other questions on the Westpac issue?

Dr ALY: Can I just ask one more question, if I can?

CHAIR: Yes, very briefly.

Dr ALY: You mentioned before that you don't have any expertise in AML. Would it be beneficial to have some expertise in APRA on AML—say, an individual or even a group of individuals who would be that kind of contact with AUSTRAC and the banks?

Mr Byres : I think we need to be a bit careful stepping into another regulator's space. We obviously do have arrangements, and Mr Scott is part of those—a group of people whose task is to build and then maintain the relationship with AUSTRAC and make sure there's a good flow of information, and that the two agencies are communicating with each other and understand the issues they are grappling with. But I'd be concerned if APRA people started opining on organisations' AML arrangements. We are not the experts, and we don't have the authority. In the same way that AUSTRAC probably wouldn't want to opine on whether an organisation has the appropriate capital or not, we shouldn't be opining on whether arrangements are appropriate or adequate. AUSTRAC can make those judgements; we take those on board and see what we can learn from them.

Mr Lonsdale : But we do leverage off each other. In this particular case, as we've mentioned, one question we'll be asking is: in terms of the extensive remediation plan that we have in place for Westpac following the CBA inquiry, what do the AML issues tell us about how they think about governance, culture, remuneration and accountability, and is there any need to change that in any way? So, in coming to a view on that, we will be leaning on AUSTRAC, on the facts of the matter, and that will formulate our views.

CHAIR: Thank you. We're going to continue thematically and deal with super next. Ms Smith, you're earning your keep on your first day in the new job. Is today your first day in the new job?

Ms Smith : It's my first day in the new job as executive director, but I've been at APRA since March.

CHAIR: Ms Smith, just for clarity: how many people are working in this new super division?

Ms Smith : We've currently got 111 right across. That includes the specific Superannuation Division, plus what I'd call the key expert functions that sit around it, which is our policy, legal, and data and analytics teams. Within the super division we have currently got about 62 frontline supervisors out with institutions.

CHAIR: Have you done a skills analysis or skills matrix around the skills you need within APRA to deal with issues around super, and then against the staff you currently have?

Ms Smith : Yes, we have.

CHAIR: Are there any deficiencies?

Ms Smith : I think we still need to build capability in our policy, data and analytics, and front line. I think we've got coverage across all of the areas of the skills that we need, but in terms of depth and the capacity to go further we need to continue to grow.

Mrs Rowell : So it's not so much a case of particular gaps in expertise; it's more numbers. We want to add resources in the various areas.

CHAIR: Sure, but this was a theme that came up in the capability review, particularly along the establishment of a new division and whether you had the internal capacity. I think Mr Byres or somebody else—it might have been Mr Lonsdale—remarked at the last hearing that there were questions about whether there is the full complement of staff needed to be able to do that role and, therefore, to secure the skills and number of people you need to address that.

Ms Smith : We have an extensive recruitment plan happening right across APRA, so looking specifically for super. What's really key is that we have a program of work that is outlined in both the corporate plan and the superannuation industry plan. It's really important to look at where we're going to spend our time. That will be around more intensive supervision, the work we're doing around the member outcomes, our culture, remuneration and governance work. Then we're looking at then mapping back to say: what do we need in terms of actually more supervisors on the front line and where do we need to beef up the support so that as we do more thematic work—so looking right across the industry, not just looking at all the individual entities each time—we see what we can learn and apply that. It's really looking both at frontline and the support functions in line with the strategy to see where we need to grow.

Mrs Rowell : We've probably added 20 per cent of staff, so we've uplifted from about 80 to 110 in the super area over the last six months, and that will continue to add some more.

Mr Byres : Flowing from the capability review, which identified a range of areas where we were tasked to expand, we are in discussions with the government about resourcing, and super is part of that discussion.

CHAIR: I'm sure. Just for clarity: Ms Smith do you report directly to Mr Byres?

Ms Smith : I report to Mrs Rowell.

CHAIR: And Mrs Rowell reports to Mr Byres; is that correct?

Mr Byres : The members are a collective board for APRA.

CHAIR: I remember this at the Human Rights Commission.

Mr Byres : Ultimately, though I guess the buck stops with me.

CHAIR: It does.

Mr Byres : But the four of us have collective responsibility for APRA.

CHAIR: So who is responsible for the heat maps?

Mrs Rowell : Me and Suzanne.

CHAIR: I don't want to prejudice it by asking the wrong person the wrong question, so I'll throw these questions collectively at both of you. At what stage are the heat maps at? You put out a paper on 19 November, if I'm not mistaken, outlining the approach that you're going to take to heat maps. Where does it go from here?

Mrs Rowell : We've done a lot of work. The information paper released on 15 November was really to explain the methodology. We had already done a lot of work on getting the actual data ready to publish. Over the last couple of weeks we've been engaging with a number of institutions specifically about their outcomes in the heat map and we've also conducted some webinars to answer questions industry has on the heat maps. We are in a position to publish the actual heat map for MySuper products next week, and that's our intention. With that we will also be publishing a short kind of insights paper that draws some observations on what the heat map is showing.

CHAIR: An Insight paper against the MySuper product?

Mrs Rowell : Yes.

CHAIR: Just for clarity in terms of the heat maps, a number of people have raised concerns with me about the approach that APRA is taking and how they deal with issues around appetite for risk et cetera. Is it correct that some fee data is sourced from PDSs, or where does the fee data come from?

Mrs Rowell : The fee data is the data that is reported to us as part of our regular reporting collection, but it draws on and should be consistent with the information that is set out in the PDS. We have done some work to validate that to make sure that the data that we have and will be recording and using is consistent with the PDS information.

CHAIR: Does it include fee discounts or exclusions?

Mrs Rowell : It doesn't include fee discounts. It's the standard fee that an ordinary MySuper member would pay in that product.

CHAIR: I'll leave that and come back to it. Is it correct that some funds report fees net of tax while others report gross?

Mrs Rowell : That is correct and we have adjusted that in the information that we publish to make it all gross.

CHAIR: How have you adjusted that?

Mrs Rowell : We know which ones report net and we've adjusted their numbers so that the number that is reported will be the gross number, so that it's comparable with the others that report gross.

CHAIR: Do the fee figures cover implicit fees?

Mrs Rowell : We are going to use two different fee measures in the heat maps. There's an administration cost measure and there's a total cost measure, and the total cost measure includes indirect costs.

CHAIR: Okay. Is it correct that the performance of life cycle funds is the weighted average of the performance of individual stages?

Mrs Rowell : Again, we will be publishing information at an aggregated basis, which is that weighted number based on the time that members would spend in the different stages. But we are also separately publishing information for each life cycle stage.

CHAIR: So there'll be separate data around the accumulation versus the retirement?

Mrs Rowell : MySuper is only up to retirement.

CHAIR: Yes.

Mrs Rowell : It's only the accumulation stage.

CHAIR: When you say accumulation stage, how will that be disaggregated?

Mrs Rowell : Each life cycle product has different stages that have different risk return profiles and sometimes different fees, so we will have a separate line in the heat map for each of those separate stages—for, say, the 25- to 35-year-old, the 36- to 45-year-old et cetera—and then we'll also be rolling that up into an overall life cycle product number.

CHAIR: Okay. In terms of the heat maps, was that entirely developed internally?

Mrs Rowell : Yes, but we did do—

CHAIR: And reviewed externally?

Mrs Rowell : It was reviewed externally. We engaged with a number of external experts to look at different aspects of the heat map and provide us advice and input. We also engaged informally with various stakeholders to test ideas and thoughts as to how we would approach that.

CHAIR: Who would be included in the informal? Would that include the Financial Services Council or—

Mrs Rowell : We talked to the industry bodies, to some individual entities and to some of the advisers and consultants in the industry. We also did a lot of research across what's published and what we know about how investment managers assess performance and the like to draw our views on what we thought was the most appropriate measures and metrics to use.

CHAIR: Who was consulted formally, since you said you consulted informally?

Mrs Rowell : We engaged some external experts to assist us with providing review and validation of the approaches in particular areas.

CHAIR: Who were they?

Mrs Rowell : We haven't got agreement from all of them to name them and we don't propose to name some and not others.

CHAIR: Sorry, I'm confused. You have actually got a position that has been put forward by APRA. You have used external parties to inform your decision making and presumably they have been contracted by APRA.

Mrs Rowell : That's correct.

CHAIR: But you're not prepared to disclose who has been contracted by APRA to do so?

Mrs Rowell : We specifically asked—

CHAIR: An FOI surely would be legitimate on this basis and least of all a parliamentary committee when we are reviewing your annual report.

Mr Scott : They would be, but I think the point that Helen's making is that we went to get their consent to release all the names of all the advisers at the same time and not all of them have come back with that consent, so we're not releasing just some of the advisers and not others.

CHAIR: Can we expect a full list? What happens if some are recalcitrant and never provide it—we'll never know?

Mrs Rowell : I can't give you an answer on that—

Mr Byres : We'll have to cross that bridge when we come to it.

CHAIR: I know, but what's the time frame for releasing that information? You've basically now put something out in the public domain. People are rightly questioning and scrutinising the approach that APRA is taking. It's an entirely legitimate thing to do for a government entity. There are lots of people who have different views, for good reasons or bad reasons and self-interest reasons, about why they question a heat map. The approach that APRA is taking is obviously the thinking within the organisation, which people can understand, but then there's thinking behind the organisation, which you've contracted in. And then you're not prepared to release the information about who's involved with that, considering their objectives or engagement are actually completely different from those who sit within APRA. What is the time frame for clarification?

Mrs Rowell : We haven't got a specific time frame. Our position at this stage is we publish the information; we've said what we're doing. We will be publishing the heat maps and I think—

CHAIR: I'm sure you can accept that the consequences of what comes out of the heat maps actually could have very significant impacts on how people see different funds. This is obviously a highly contested space at the moment and includes members on this committee and includes the public domain, and there are different views between different types of funds. So this is important.

Mrs Rowell : We are happy to take it on notice and come back and confirm, having spoken to the particular firms.

CHAIR: I would appreciate that, but I don't see it as an unreasonable request from this committee that that information should be provided in the public domain. I suspect by the time you get back to your office, you'll have FOIs on this, if you haven't already, including one from the chair if you don't provide clarity around answers.

Mr Byres : We will come back to you on that one. But let me be really clear too: we take ownership of the heat maps. We're not saying someone else told us this is the good result.

CHAIR: No, I get that.

Mr Byres : We own it; we're responsible for it. We take full ownership for the decisions we took. We took advice, but ultimately it's our decision. We're not deciding because others told us it's a good idea.

Mrs Rowell : It's also important to understand that the different experts that we engaged looked at different elements of the heat map. So it needs to be very clear that none of them validated and reviewed the whole thing; they all looked at different elements of it.

CHAIR: What would be helpful is if you came back with the names of the organisations/consultants who dealt with these areas, and then go through which areas they looked at and how the methodology and the heat map was influenced ultimately by each of the different arms that APRA engaged with. I am putting that on notice. I fully accept that you take ownership of the heat map, and I'm not suggesting that you wouldn't do anything otherwise. Because of the contestability around it, scrutiny is justified because of the implications it can have across the entire financial services system.

Mr Byres : We will come back to you on that.

CHAIR: I look forward to it.

Dr LEIGH: Just continuing on with heat maps, I want to give you an opportunity to respond to some of the criticism that's been put forward. Martin Fahy of ASFA has said that it's an ill-advised plan which is based on short-term performance and risks that would spark a run on superannuation funds. How do you respond to that?

Mrs Rowell : We respectfully disagree with Mr Fahy, and we've had that conversation many times. I think his evidence before this committee, even just a week ago, was probably a little more measured than that initial reaction. As people have come to understand the approach and what we are doing and what the purpose is and how we expect them to be used and what they are not intended to achieve, I think there has been more acceptance of the approach that we have been taking.

Dr LEIGH: Do you have any concerns about a run on super funds? To some extent, I'm not sure how worried we should be if people are taking their money out of low-performing funds and putting it into high-performing fund. Do you have any concerns over liquidity risk of that occurring?

Mrs Rowell : It's something that we have considered but we do think it's manageable. We're going through the process with the entities in terms of engagement and making sure they have action plans in place and are ready to communicate with their members and any concern about members switching from one fund to another is manageable. We've also made it very clear in our communication, and will continue to make it very clear in our communication, that the heat maps are one source of information; they are not meant to be used as the only source of information for making decisions about which product or which entity to be in from a superannuation perspective. So, again, whilst having members choose to move to a different fund that gives better performance is a good thing, I don't think we need to be concerned about significant liquidity issues as a result.

Dr LEIGH: Has the proposal changed in any material extent since you put out your information paper?

Mrs Rowell : No, it has not.

Dr LEIGH: Have you done any work with third-party brokers who'll presumably be important in terms of helping customers use the heat map? Optimistic as we might be that 25 million Australians will immediately log on, download your Excel file and use to it make a critically important decision for their lives, we know in other contexts people don't do this. There's huge inertia and default bias. How are you going to make sure that you interact well with third-party brokers and also that those third-party brokers are offering people a balanced representation of your scorecard information?

Mrs Rowell : I think that's an area where we'll potentially be coordinating more with ASIC. We have made available our information paper to the public at large. We have made efforts through webinars and the like to encourage people to learn and understand. We are not proposing to proactively engage with advisers or third-party brokers as you refer to them. I think our focus is around putting the information out in as clear and as understandable a way as it can be, with communication around it that helps people understand it and use it effectively. The provision of advice and ongoing advice to consumers is not APRA's remit.

Dr LEIGH: How will it be put up on your website? Would you have it in an API format so that, say, a third-party broker who wanted their website to automatically update as the heat map updated was able to do it; or will it be in a kind of 20th century spreadsheet format?

Mrs Rowell : So, at the moment, it is going to be in a 20th century spreadsheet format but it's going to be readily accessible on our website and on a separate web page under the member outcomes banner. It will be linked also to the ASIC MoneySmart website, so there'll be ways for people to get the information.

Part of what we are doing over time is enhancing our data collection, publication tools and processes, as Geoff referred to earlier, so down the track, we may well be able to present information in more flexible and different forms and improve accessibility but in the short term—

Dr LEIGH: Which seems sensible. I take your point about wanting to have a somewhat hands-off approach to third-party brokers, but their life would be simplified and you may well get more honest brokers if you were to make the data available in that form. We had a conversation last time this committee met, Mrs Rowell, around the correlation between fees and returns. You took on notice the question as to whether there was any research suggesting a positive correlation between fees and returns, and then came back to me and said that you hadn't discovered any, which is consistent with the Productivity Commission's finding that high-fee funds tend to be low-return funds. On the heat map, I see there's 'total fees disclosed'. Tell me what 'total fees disclosed' are as distinct from just total fees?

Mrs Rowell : So, because it is based on the PDS information, which is what do members in the fund pay in terms of fees, and so the total fees disclosed is that number. We are showing it on the heat map for representative members with different account balances so that you can get an understanding of the impact that asset based fees, for example, as part of that total fees disclosed might have. So, in a way, there isn't necessarily a difference between what you might call total fees and total fees disclosed, although there may be some marginal transaction and other costs that are not captured in that PDS-type information. It's meant to represent the fee that the member would pay in the product.

ACTING CHAIR ( Dr Leigh ): If it's missing transaction costs, a fund with high churn could potentially be incurring more substantial fees which the member isn't being told about.

Mrs Rowell : One of the things that we're doing over time, too, is obviously uplifting our data collection in super and getting more consistency and comparability about the fees that are being disclosed. The other point I would make is that, to the degree that there are those costs that aren't separately reported, they would be reflected in the net return information that is disclosed to the member, so the member—or stakeholders, because we're not targeting consumers and individual members—will be able to get a sense of the net outcome being provided through the net return number.

ACTING CHAIR: You've got three-year and five-year returns. Mr Fahy, when he was appearing before us, talked about seven- and 10-year returns. Is there some anticipation of having those longer-term returns, or do we get into problems at that stage because funds change character too frequently for there to be enough seven- and 10-year returns?

Mrs Rowell : Our objective would be to extend the heat map to include longer time periods as longer data becomes available. There is a challenge about what you do about material changes that occur over that time frame. At this stage, our inclination is not to adjust for that, but that will be something that we'll need to think about over time as to when you would perhaps want to do a break in the time series because it's no longer valid.

Mr Byres : The other point, though, is that these are MySuper products. MySuper hasn't been around for 10 years, so there's a limit to what we can accurately produce.

ACTING CHAIR: Absolutely.

Mrs Rowell : I would just like to go back to the first question you asked me, about the correlation between fees and returns. I think there is a correlation, and our data certainly shows a correlation, between higher-risk investment strategies and delivering higher returns, and often those higher-risk investment strategies involve higher investment costs. I think where the debate comes is around administration costs, and there's no clear correlation between higher administration costs and higher net outcomes. So, just for clarification, we are distinguishing between administration costs and investment costs in terms of the pattern of outcomes that are delivered.

Dr LEIGH: Thank you. I have one more question, on superannuation, but I might return to that a little later if that's all right, Chair.

CHAIR: Of course.

Mr TED O'BRIEN: I might just ask one question, just to get your feedback. There is a criticism that I think came from the Financial Services Council. I'll read from a newspaper article:

… the regulator should be cautious about extending the heatmaps to "Choice" options as they are "significantly more difficult to accurately compare than My Super options".

Can I just have your response to that.

Mrs Rowell : We are proposing to extend the heat map to choice products and options.

Mr TED O'BRIEN: I understand that, but can you just educate me: where is the additional complexity, and how are you going to be dealing with that?

Mrs Rowell : The range and number of choice options that are out there and how they're constructed is far more complex than we see in the MySuper space. You have everything from single asset class to mixed asset class to even individual share options and platforms. So how you construct or collect all of that data and then how you construct appropriate benchmarks for measuring the performance of all of those different options does create some complexity that we will need to work through, but we think it's achievable. It's as much a case of actually having the right data and the right information and doing the work. We think it's really important to do.

Mr TED O'BRIEN: Has that work begun?

Mrs Rowell : We have just commenced our consultation on the data collection. We released a consultation paper a couple of weeks ago to kick that off, and we'll be releasing another consultation paper in the coming weeks. We're doing a phased consultation and collection over the next 12 to 18 months. We're going to collect pilot data as we do that data collection so that we can, hopefully, be in a position to publish data based on the new data collection for choice products relatively quickly towards the end of 2020. We also propose to collect some historical data so that we'll be able to already have a time series of returns to give us a reasonable period of performance to use for the heat map.

Mr TED O'BRIEN: Thank you.

Dr ALY: I just want to follow up on that question, because that was a part of the question that I wanted to ask in relation to the heat map going live in December and the continuing data collection which, my understanding is, will inform the development of the heat map.

Mrs Rowell : We already had quite extensive data on MySuper products, and that MySuper product data is what underpins the heat maps that we will be publishing in December. We will be refining and improving our MySuper data collection as part of our review of the data collection, but that's more to get better consistency and comparability in areas like fees than we currently have. So we think the data we've got at the moment for MySuper is quite reasonable, but it could be improved, and we will do that.

Dr ALY: I'm sorry—have you got a time line for the review of the MySuper data?

Mrs Rowell : Well, that's out for consultation now, and we will be looking to have that finalised and the new reporting in place from 1 July 2020—that's our goal—so in six months. Then, as to the choice data collection, we are progressing that at the same time.

Dr MULINO: I think more transparency is, in general, a good thing, and, from my limited look at what you've done on the website as an indicator, it looks like there is some interesting data on there which should help. I've got a couple of questions, though, around some of the inherent complexity of what we're actually trying to provide more guidance on. My initial look suggested that there was something in the order of 20 columns in the spreadsheet. I think the expectation is that it'll be a combination of advisers and some consumers looking at this. I'm just interested in your thoughts on the recent ASIC research paper on the limits of disclosure and some of the empirical studies in different contexts. There are limits on people's capacity to comprehend a lot of data and many different dimensions of products. And here, of course, we have risk versus return, as you've alluded to, Mrs Rowell. What are your thoughts on the findings out of that research paper and some of the challenges in trying to usefully convey so much complex information to people?

Mrs Rowell : It is a challenge, and so the presentation of the heat map is going to be such that the default view will actually not show all of the columns; it will only show a subset of the columns, and those are the eight columns that we think are the most important to focus on. So that gives a clearer, simpler snapshot, and then those who want to look at the other information can expand it out to look at more information—to look at the life cycle rows, for example. There is a balance to be struck here, I think. We are targeting this at informed stakeholders, and we want to make sure that the view that they get of the performance of MySuper products, or choice products, when we get to it, and the outcomes that are being delivered takes into account the elements that we think are important. It is risk-adjusted performance, it's peer relative performance, it's looking at fees and costs in a number of ways, and it's also having a forward-looking view around: 'Is the entity going to be able to sustainably deliver this? Is it a healthy, sound entity, going forward?' So we think those dimensions are important. The consumer-facing information needs to be presented in a different way and in a simpler way and often will need advisers to interpret and guide, but our information is about informed stakeholders and allowing us and other stakeholders in the industry to understand: 'Are the trustees doing the job that they've been entrusted to do in managing their product?'

Mr Byres : Sorry—can I just jump in there? I think that one of the key stakeholders we haven't actually talked about is the trustees themselves.

Mrs Rowell : That's true.

Mr Byres : The key readers of the heat map, the most avid readers of the heat map, should be trustees. They're the ones with the statutory obligation to act in the best interests of their members. And, if they are looking at themselves glowing red, then they've really got to be asking themselves some serious questions about: 'Are we doing our job well enough?'

So, yes, advisors, yes, consumers, maybe with some help, but I think actually our core audience is the trustees themselves because this really ups the ante on trustees.

Dr MULINO: That is very useful. It was interesting that, when we had public hearings of super funds and started to question them on their performance, every time we questioned them on one ranking, they'd just say, 'Oh yeah, but we were second quartile on this other ranking.' You'll carry more weight, I think. It's an interesting area, and this will be particularly influential with choice products, I suspect. It strikes me the multiplicity of ways in which you can compare: our demographics are different, our life cycle's different—it's going to be an interesting challenge.

Mr Byres : The thing I've said—and I know Helen's said on a number of occasions—is you can quibble with any particular metric. Nothing is perfect. No particular measure gives you the answer. But, if across a range of metrics, you're red, you've got some serious issues to think about. If you have one metric that's looking a bit odd, okay, and the rest look pretty good, that's fine. But the ones we're targeting are the ones for whom—and it doesn't matter which metric you are looking at—it doesn't look great.

Dr MULINO: I agree, and that will be interesting to see how many end up with a number of red metrics. Do you have a sense yet as to roughly what proportion of funds will be multiple reds, so to speak?

Mrs Rowell : When we've looked at the outcomes of what will be published, we've looked at two main groups of what we might call underperformers—those that are looking really quite poor across a number of dimensions, and there are probably about 20 in that group; then there's another group that sits a little bit above that, but still has some issues, which is around a similar size. The ones that are pale yellow to white are the other half of the MySuper population.

Dr MULINO: Because it's an interesting, I suppose, philosophical question as to whether the emphasis of regulation and protection should be about addressing the worst—whatever it is—five per cent decile. Again, we had a bit of a discussion with various stakeholders around how many you would expect to be in that bottom performing group versus helping people navigate the top half and trying to get the very best outcome they can. My sense is that most stakeholders probably feel that it's a more achievable task to try to identify the very worst performing funds and then think about: do we facilitate people getting out of them or force mergers at some point? By the sound of it, the group right at the bottom is not going to be a significant proportion.

Mrs Rowell : It's larger than we would like and it's certainly a group that we think—

Dr MULINO: So 20 out of how many?

Mrs Rowell : There are 96.

Dr MULINO: Right, so about a fifth—that is quite a big group.

Mrs Rowell : So, it's clearly important that that gets addressed and dealt with in a very timely way. And this is not the start of the process from our point of view. There aren't many surprises—I don't think there are any surprises—in this list from our perspective. We've been engaging with these entities to try and get them to improve over some time.

I think it's also important to note that we see this very much as informing all trustees, and we want all trustees to use this. Coupled with our member outcomes, standard and the implementation of the outcomes legislative assessment and the business performance review, all the trustees need to be looking at how they do better. So, yes, we will particularly emphasise the underperformers and get them to lift or exit, but we're also very keen to see all trustees look at whether they can improve their fees, whether they can improve their investment performance and whether they can improve their insurance et cetera to deliver better outcomes for members.

Dr MULINO: In terms of taking that next step down the track of looking at funds potentially being closed or merging, have you undertaken analysis around some of the logistics of that and some of the challenges, particularly, for example, around unlisted assets or all the various things that might be challenges around achieving that?

Mrs Rowell : We obviously engage with industry around this a lot and try to understand where they see some of the impediments or barriers to mergers. I think most of them are manageable. There are some that probably need a little bit more thought. I'll give a plug for legislating the extension of the capital gains tax exemption for SFTs as being a key priority to make sure that, post-June 2020, mergers can happen without capital gains tax implications. That's probably one of the key ones that gets raised with us as a concern, if mergers don't happen in the next six months.

The issue of illiquid and problem assets does get raised with us, but we don't see that as being a particularly material issue. From our understanding of the data and the investments that have been made, no-one has been able to give us a clear view or point us to where the big problem is. A lot of the underperformance is just poor execution of a sensible investment strategy or not having enough scale to be able to get the good outcomes in illiquid infrastructure and other investments. So it's not so much a case of problem assets; it's a case of poor implementation or poor strategic decision-making by the entities.

Ms Smith : The conversation we're having with trustees now is to look at merger opportunities and starting to think about it before they get into challenging times with scale. If they are too small or their performance is waning, they become less attractive merger partners, whereas if you're looking to find an opportunity to SFT while you're still in good shape—we're finding that those conversations are more effective when they happen before underperformance kicks in. A lot of funds will say: I don't want to merge with another fund, because the performance isn't as attractive and that may detract from the longer-term performance.

Mrs Rowell : We think many of the funds that do want to exit will be able to achieve that in a reasonable and orderly way. If there are problems that arise in those conversations, there are ways to manage through that process in a way that won't disadvantage members. We're very open to working with trustees to come up with a strategy that allows them to exit, if that's what they decide to do or if that's what we think they need to do.

Dr MULINO: Returning briefly to the issue of the limits of disclosure—I think some of these challenges relate to consumers, but some, I think, relate to experts as well. There's quite an extensive literature showing that experts in the financial services sector often make a lot of the same errors as consumers. In fact, when academics run tests on each other they often fail a lot of the basic tests too. I'm curious: you've run webinars and you've had a lot of interaction in developing the heat map; do you plan on running any tests of the degree to which users are actually understanding the material that they're processing?

Mrs Rowell : I'd have to say we have not specifically thought about that, but we'll take that suggestion on board.

Dr MULINO: I remember in a previous life being involved in having developed some simple product-disclosure mechanisms—one-page statements, for example. We found that different mechanisms for conveying the information had very different comprehension rates, and it strikes me that this would be an area where randomised trials, for example, could be used. We know they're used by a lot of the big social media companies to try different ways of conveying information.

Mrs Rowell : That's a useful area where we can engage with ASIC, because they do a lot of that work with their behavioural teams and the like.

Dr ALY: Can you please talk me through this. Let's say Dr Mulino or Mr Wilson were a trustee and they came up on the heat map as being red hot—that's a compliment to you!

CHAIR: I didn't know you felt that way, Dr Aly!

Dr ALY: Either red hot or really pale! But let's say they came up as red hot, what would be the follow-on from that? Would you use that information in any particular way? How would you expect the trustee to use that information? Where does the responsibility lie in following that up?

Ms Smith : We've been having those conversations, as well as them happening now with the heat map. A lot of the information that's in the heat map is not new news to us. We have been working on that with trustees for a while. It's about understanding where the underperformance is coming from. If it's on the investment side, it's what's happening in their investment strategy, how that aligns to the investment strategy and what they are actually doing about it. If it's on the fees, it's understanding whether it's on the admin side, whether it's on total costs and what the proposals are. In those conversations, we expect to go in and understand where the underperformance is coming from and then understand what action plans are going to be put in place over what time frame. So doing nothing isn't acceptable; it's very clear that they need to have a plan to improve. On the basis of that, we will be adjusting our supervision intensity to deal into the particular issues. It depends on how responsive they are; some trustees are very responsive, understand the issues themselves and are currently working to them, and some less so. The intensity of the work we will do and the expectations and requirements that we will have of those trustees will be very clear and measured, with time frames for response.

Dr ALY: What are the consequences if someone doesn't improve?

Mrs Rowell : Ultimately, we can remove them as a trustee or take other enforcement action.

CHAIR: Just for clarity: what process would you follow in order to remove them as a trustee?

Mrs Rowell : There is a process of show cause and going through due process, and having the evidence to do that. We would hope we wouldn't get to that point.

CHAIR: But on what time frame would it be necessary for the heat map to show a poor outcome in order to justify such an action?

Mrs Rowell : The time frame for addressing the issues will depend on what the nature of the issues is. Fees can be changed relatively quickly. For investment performance, you need to allow some time for a revised strategy. We're talking about a pretty limited time. It's more about the nature of the response: do they get it? Are they acting? Are they committed?

CHAIR: And, presumably, against general market conditions? If someone has a poor performance in a singular year, but everybody has it, therefore—

Mrs Rowell : Yes. We are looking to see meaningful improvement in a period of six to 12 months. If that's not the case, we need to revisit it and decide what the appropriate next step is.

Dr ALY: Is that communicated to the trustees? Are the trustees given a process that says, 'If you're red-hot three times in a row and you fail to improve, these are the actions we can take'?

Mrs Rowell : It's not that prescriptive. The clear message is around delivery of the action plan. If it's not delivered, we will escalate our action. That's very clearly communicated.

Dr ALY: But you don't have a prescriptive process with time frames and so forth? Would you consider having that?

Mrs Rowell : Because of the nature of the issue underlying the performance and the outcomes, it can be quite varied. It's hard to be too prescriptive about what time frame we expect when we're dealing with different issues and how readily those issues can be dealt with.

CHAIR: I'm mindful that we need to move on. Do you have anything further, Dr Aly?

Dr ALY: No, I'm good.

CHAIR: I know Dr Leigh has more questions about super; I do as well. I asked before about different parts of consultation, around the approach of the heat maps. Just for clarity: did you consult on the methodology or just the final product?

Mrs Rowell : We haven't consulted, in the formal sense, on our policy consultations on the heat map methodology.

CHAIR: Why is that?

Mrs Rowell : Because it's a statistical publication of information that is already in the public domain. All we're really doing is establishing some benchmarks and presenting it in a colour-coded, simple way. We see that as very different. But we wanted to be sure that our approach and our process stood up to scrutiny, so we engaged some external experts to review and validate and give us their thoughts on the approach we were adopting.

CHAIR: That's the one you're going to come back to me on, around who did what?

Mrs Rowell : Yes.

CHAIR: One of the super funds, UniSuper, has been brought to my attention. It has issued a paper on climate risk in investments; I'm sure it's not alone in this, by the way. Essentially APRA expects funds to assess climate risk as part of their consideration around their future conduct. Would that be a fair assessment?

Mrs Rowell : Yes.

CHAIR: And that comes off the back of your information paper, Climate change: awareness to action; is that correct?

Mrs Rowell : That's correct. This is probably one for Geoff.

CHAIR: Right, okay. I went through APRA's information paper. How on earth is APRA assessing climate risk? I see that it identifies potential risks and risk profiles; I'm not disputing those. But APRA really doesn't have that internal capacity, does it?

Mr Summerhayes : As I've said in these forums before, we are not a scientific body and we don't profess to be. We are interested in financial risk to those institutions and the implications for their members. We are asking those institutions, as we do with a whole range of risks, to make sure that the board is aware of those risks and how they might materialise in, in this case, their investment strategies; that they have appropriate risk governance around that; and that they are making appropriate analysis of that. If they satisfy themselves that that is the case, then we don't have a particular issue with any investments those firms are making. We just ask that the risk be considered.

CHAIR: Just for clarity: unlike with traditional prudential risk, you don't have the internal capacity; you merely bring to it the attention of those boards and ask them to consider it. If they have considered it, you are satisfied; is that correct?

Mr Summerhayes : Broadly.

CHAIR: Broadly?

Mr Summerhayes : There could be a range of issues. There could be some firms that have not got the risk on their radar full stop. We would be concerned about that, because that would say that that firm is clearly deficient as it relates to this growing and material risk to all sectors of the economy. But it might also be a pointer to, more broadly, what other risks they are missing as well—the risks materialising in transition risks, the repricing of assets, physical risks and liability risks. Those risks materialise in different time horizons, given different policy responses and different warming scenarios that are before us.

CHAIR: That basically means it's a tick-a-box approach.

Mr Summerhayes : We are not looking for tick-a-box compliance. We're looking for thorough, diligent risk assessment.

CHAIR: I know, but you have acknowledged that you basically don't have the internal capacity to assess whether they are able to successfully manage those risks. You're asking them to consider it as part of a range of risk concerns. If they have done so they have effectively ticked the box, so long as they haven't just written on a piece of paper 'We understand climate risk' and left it at that.

Mr Summerhayes : I wouldn't characterise it like that; I think that would make light of the firm's assessment and the role that we and regulators take both domestically and globally. There are 50 central banks globally. There are a number of pension and insurance regulators globally. Both work here with the Council of Financial Regulators. Between ASIC, the RBA and APRA, we are now starting to think about scenario analysis and stress testing of firms on different warming trajectories. There are three broad models emerging: a hothouse world, where there is no discernible change to the warming profile; an orderly adjustment to a lower-carbon future, which would envisage a significant amount of transition risk, albeit smooth; and a late adjustment where the world continues to warm and there is a realisation from a policy sense much later in the piece which requires a very rapid adjustment to a lower-carbon future. Each of those scenarios has implications for the pricing of assets, for business models and for physical impacts and liability impacts to a range of firms' investments—both provision of credit insurance and, in your case, investments that firms are making in trustees from a superannuation perspective. We are looking for models, rigour and understanding on those issues. There is a range of expertise which firms can engage on those particular areas, but APRA is not prescribing the expertise.

CHAIR: So how will do you do the stress test?

Mr Summerhayes : We do stress testing at the moment, and so—

CHAIR: But in traditional prudential risk or in climate risk?

Mr Summerhayes : We have done some stress testing in insurance in climate risk. But the emerging discipline of central banks and regulators globally is to project a zero carbon 2050 scenario, and then to model the transitions that would have to occur within economies to hit that and what the implications would be for assets and business models going forward. That would lead to repricing of assets and have implications for the values of investments that firms hold.

CHAIR: Just while we're still touching on super, have there been any investigations—I'm not sure how far ahead your new division is—into superannuation misconduct at all?

Mr Lonsdale : We've established—if I could answer the question more broadly—a resolution and enforcement committee, which has been running in APRA this year. I chair that committee. Members come along to that committee. It meets fortnightly—fortnightly or monthly, depending on the number of issues—and we consider a whole range of issues to do with how or whether we might use formal enforcement powers. Those formal enforcement powers may well go to court based activities, but more usually they go to more intensive supervision, or licence conditions, or pillar 2 adjustments or directions. We have banks, credit unions and superannuation funds that would come to the attention of that committee.

Mrs Rowell : The royal commission referrals, in particular, are well progressed, and many of those are superannuation related.

CHAIR: In looking at super, has there been any discussion within APRA about super funds entering into the mortgage market?

Mr Byres : There's an awareness of plans.

CHAIR: Sorry, 'an awareness of plans' meaning some super funds are considering it?

Mr Byres : Some super funds are thinking about it. Many of them would already be in the mortgage market, in a sense, because they buy mortgage-backed securities of one sort or another as part of their investment portfolio. They would presumably understand what those securities entail and that they involve mortgage risks. So it's not a radical leap forward for super funds to get more active in that area.

Mrs Rowell : And some are actually engaging in more direct lending as well, but it's at a very low level.

CHAIR: Sure. But in your job as a regulator have you looked at regulation around super funds entering into the mortgage market?

Mr Byres : It's not obvious to me that there's a regulatory change needed.

CHAIR: Okay. So the answer is: there's no obvious conclusion around the need for change, so you're just using the standard—

Mr Byres : Our position today, recognising that it is a relatively small part of super portfolios, is that the existing regulatory framework—both in terms of APRA but also if people want to get into mortgage lending and they have to adhere to responsible lending obligations and other things, in the same way that others to—is capable of coping with that.

CHAIR: What about in terms of super funds engaging in the purchase of unlisted assets, and the risks associated with pricing structures around unlisted assets?

Mrs Rowell : We have a prudential standard on investment governance, which sets minimum expectations around setting investment strategy, implementation of investment strategy, management of risks, diversification and valuation et cetera. So there's a prudential standard and there's guidance. We expect trustees to understand and follow those standards and that guidance. We review that activity as part of our ongoing supervision engagement. We have market and investment risk specialists, which forms part of our expertise that we take out on site, to look at valuation practices and approaches to managing material, illiquid and infrastructure investments. So, yes, that's very much on our radar. We have requirements and we monitor to make sure those requirements are being followed.

CHAIR: So if somebody has a concern about the pricing around an unlisted asset in a super fund, what does APRA do if a complaint or concern is raised?

Mrs Rowell : We would engage with the particular entity to understand the process they'd followed, who was involved, what external validation or other expertise was applied to it, et cetera. Again, this wouldn't be for everyone; it would only be if there was a material investment, because you need to look at these things in the materiality of the overall investments of the fund.

CHAIR: Do you mean if somebody bought a high-rise tower and claimed it was worth $2 billion and there was a concern it may only be worth $1 billion, rather than, someone in an SMSF—

Mrs Rowell : Well, we don't look after SMSF. From our point of view, it's more about the frameworks, processes and procedures that are followed.

CHAIR: Do you ever do any proactive investigations on these matters?

Mrs Rowell : Periodically, if something catches our attention—say, if we saw a media article about a large writedown on a particular infrastructure investment that we knew someone had a large exposure to.

CHAIR: What are the most recent investigations you've done—say, over the last five years?

Mrs Rowell : I couldn't tell you off the top of my head.

CHAIR: But you could take it on notice.

Mrs Rowell : Yes.

Mr Byres : May I just clarify a point here. For APRA, the word 'investigation' means something very special under the act. It's a legal activity that we do very rarely, in circumstances like the one we touched on earlier this morning. There is a whole raft of supervision activity that happens all the time—an examination, or a review of an area.

CHAIR: How about I reword the question: can you provide, for the last five years, as part of your supervision inquiry, an investigation on pricing around unlisted assets?

Mr Byres : We can give you a description of what we have done.

CHAIR: Over the past five years?

Mr Byres : Yes.

CHAIR: That would be helpful. I'll hand to the deputy chair.

Dr LEIGH: APRA had recently lost a case relating to the use of members' funds to compensate other members for fund errors. Justice Jagot said in that case that there was no prudential rule saying trustees can't compensate members for errors out of their own pocket. Do you agree with that?

Mr Lonsdale : The short answer to your question is that we are having a very, very close examination of the judgement by the judge. As you are aware, we commenced action in December 2018 on IOOF—that's the case you're referring to. It followed a very lengthy set of interactions between us and the group itself that went primarily to the issue that you raised. We were concerned that the structure of the IOOF group presented inherent conflicts. We were also concerned that the directors and executives failed to prioritise the interests of superannuation members, and we were also concerned that IOOF, at the time, preferred the interests of other entities in the group over member beneficiaries. So that was the reason we took action. The result of the case is a matter for public record, as you point out. We have decided not to appeal the case on the conflict issue. One of the issues that we are looking at very closely is a very detailed part of the law and, in terms of our response, we are looking closely at whether we need legislative change, if we can handle that through prudential standards in some way, or if we can provide more industry guidance on that. So that is our approach to how we're thinking about that.

Mrs Rowell : Specifically on the use of reserves, the operational risk reserve requirement was established with a view to having some funds available to compensate members when needed. Our expectation, though, is that those reserves are called on only after other avenues have been reasonably explored. The case has highlighted some issues and some different interpretations of what we think the expectations and requirements are; we need to look at that and decide whether we need to change our prudential standards or clarify those expectations more formally.

Dr LEIGH: It sounds as though, at this stage, your inclination is still to hold to the view that super trustees should first try to recover losses from the people that caused them rather than dipping into the reserves.

Mrs Rowell : Correct.

Dr LEIGH: On what basis was the decision made not to appeal that judgement, given that the Hayne royal commission was critical of the regulators not only taking up cases but also following them all the way through?

Mr Lonsdale : We looked very closely at that. The four members in particular were intimately involved in that decision. We looked at it closely together with the counsel that took forward the case but more importantly with independent advice that we sought in making that judgement not to appeal.

Dr LEIGH: Do you anticipate that that would be the norm? Do you have a default inclination to appeal unless there is a good case for not doing it or is your default inclination not to appeal in general unless there is a good case for taking it up a level?

Mr Lonsdale : It is case by case. We look at every case very closely. In this particular case, there were a number of very complex issues. Despite what was in the press, it was not a straightforward case. The conflict issue in particular was complex. The case, as you know, was run on the documents, which had an additional level of complexity, as was the length of time involved. Some of the issues, as I said, went for years before we actually took action. So all of those things made the case a very complicated one to run and, as we mentioned, there are other avenues that we are examining quite apart from appealing the case.

Dr LEIGH: We had a conversation last time about APRA's enforcements activity, following the firm words from the royal commission about APRA needing to take a more robust approach on enforcement. You took on notice questions about APRA's enforcement-type activities. What I was really after were some statistics on how APRA's enforcement activity's changed. I draw your attention to ASIC's statement that:

… since February 2018 … ASIC had seen a 24 per cent increase in enforcement investigations, 130 per cent increase in enforcement investigations involving the big six financial firms and a 241 per cent increase in wealth management investigations.

I wonder whether you might either supply to me now or undertake to supply to the committee those same statistics for APRA.

Mr Lonsdale : We are of course very happy to supply any statistics we can. We are happy to take that on notice. The first point to make clear, which I think I mentioned in August, is APRA is not an enforcement based agency. We're not like the ASIC, the tax office or the ACCC; we are a safety-led organisation. We have had a very close look at our enforcement approach, published a report, published an approach and updated that approach to add more transparency to that as late as September. What I would say to you is: we have demonstrably increased our appetite to be what I would term 'constructively tough' since April, which is when the enforcement review and approach came out. What does that mean? That means taking action on a broader range of issues—not just financial issues but non-financial ones of the sorts that we talked about before. We are happy to set deterrents and we will act quickly. We will not write a letter and then another letter. If we are not seeing action, we'll take enforcement action. I would refer you to the half-a-dozen or so press releases and issues that we've taken on enforcement since April, including the group funding activity for Macquarie, Rabobank and HSBC. We took action on Westpac on a data breach. We've issued directions for our new directions power that the parliament has provided on IOOF and taken action on AMP, as well as put pillar 2 surcharges on the three remaining major banks in addition to the Commonwealth Bank. All of that I would say is evidence that our enforcement appetite is working.

Mr CRAIG KELLY: Mr Summerhayes, you were talking about the requirement that companies have some parameters or settings for assessing climate risk, which APRA then looks at. From what you were saying, I thought you applied some qualitative judgement to the climate risk statement a company makes?

Mr Summerhayes : We have had a strategy since a board sanctioned decision in 2016 to raise awareness of climate related financial risk in the entities that we regulate. For the last three years, certainly going back the first two of those three years, our strategy was around raising awareness to the risk and how that risk would materialise for the firms. Last year, in 2018, we surveyed the 38 largest super funds, banks and insurers to see how they had progressed against that. We found that the firms' awareness had increased, they had embedded into their risk management and they had improved the upskilling within those firms. In many cases, firms also saw some opportunities as well as risk in terms of working with their customers around mitigation and indeed new industries that are emerging as a result of climate risk. The two areas—and I'm coming to your question—that were less evolved were in scenario analysis and stress testing and disclosure about how the risks would materialise over time.

For both APRA and ASIC, and for regulators globally, this is now the area of focus. There are areas in there around the taxonomy which different risks are referred to, the modelling and the scenarios of which you would model against and then how stressed financial assets would respond. That is the area that not only APRA but regulators globally are now shifting to to increase their understanding and the requirements of firms.

Mr CRAIG KELLY: Say, a super fund decided to invest heavily in a company that was involved in the coalmining industry and that company thought: 'We can see an opportunity here in years to come through exporting more thermal coal to China and India and other places. We have looked at the International Energy Agency's forecasts. We have looked at all the coal-fired power stations that are being built. These are likely to have coal and we're going to bet our money that these countries are going to continue to want to buy Australian coal.' Now, that might be contrary to what is the common wisdom but, in those circumstances, what would APRA do?

Mr Summerhayes : APRA has no prohibition on any particular investment, if that is your question.

Mr CRAIG KELLY: Yes. But what if someone fails the qualitative test? Another example might be if a company wants to invest heavily in tourism in the Maldives and wants to build a lot of new resorts there on low-lying islands. Some with the climate orthodoxy may say that these islands are all going to go under water, but this company thinks: 'No, we've looked at what Professor Alex Morner has said and we don't think the sea level is going to affect the resorts in the Maldives. Therefore, this is a good investment.' In those circumstances, would APRA then have to make a qualitative judgement or would you say, 'We've looked at it—

Mr Summerhayes : In excess of 95 per cent of scientists globally have coalesced around the factors that are leading to sea-level rise. We would expect that if you are providing credit to such an investment, your hypothetical investment, you would have considered that risk and considered over what time periods the sea-level rise would occur, and that you would need to make an assessment about the impact of that on the useful life of the assets and priced it into the risk that you were taking. But, we wouldn't have—

Mr CRAIG KELLY: What about if a company decides to look at what you say the five per cent of scientists decide? If they make that decision and say, 'Look, these new tourism resorts in the Maldives look like pretty good value; because all the markets are going the other way, these are good investments'—

Mrs Rowell : If you think about superannuation, particularly, and our prudential requirements in relation to superannuation, we don't get into second-guessing or determining trustees' decisions on individual investments. We require them to have a strategy and an approach to investment. We require that to be developed in an informed way. We require it to involve diversification across different assets et cetera. The questions about individual assets and investments are for the trustees, taking into account the risk and the materiality and how it will impact the outcomes of the investments overall in delivering returns to members.

Mr CRAIG KELLY: So there's no qualitative assessment that APRA makes, other than that it's been done. If a company thought that tourism resorts in the Maldives were a good investment and the superannuation fund thought, 'We'd invest in that,' and in their statement said, 'We've looked at the evidence and the data, and we believe these island resorts will last for many decades,' that would be acceptable to APRA?

Mrs Rowell : If it is within the concept of a properly constructed investment strategy that involves appropriate diversification across different investments and doesn't involve undue concentration in any particular segment, asset class or type of investment—if that were the case, that would be a different conversation, and we would be very concerned about the ability of the trustee to deliver good returns for members over the long term. But, assuming it's part of a diversified strategy—

Mr CRAIG KELLY: So there is some qualitative assessment by APRA?

Mrs Rowell : I would liken it to any conversation we would have with a trustee about being overly concentrated in any particular type or individual investment. We had issues pre-GFC, for example, with one super fund that was very heavily invested in illiquid assets, which caused a problem in terms of being able to make payments to members. That is something we would very much engage on, but it would need to be quite material for us to engage on individual cases. The work we do in a supervisory sense is understanding the strategy, understanding how that strategy is implemented and being comfortable that the trustees have fully considered the nature and size of the risks that they're taking on.

Mr CRAIG KELLY: So if the trustees had invested in a company that was a thermal coal miner and the trustees had sat down and considered, 'Look, we believe there's still a strong market for thermal coal for many decades to come, for reasons X, Y and Z'—and that may be contrary to the more standard run of the mill; other people may have different opinions—that would be acceptable to APRA?

Mr Byres : Maybe I can answer that. There will be trustees now that have investments in coal or other things. We are not asking anyone to reduce their investments, to divest or to do anything. All we're asking them to do is make sure they've got a well-diversified portfolio, they've thought about the risks and they've thought about how the assets are consistent with delivering good retirement outcomes for the members. If they've done that, if all of the assets—whatever they might be—are well diversified and they've thought deeply about it, we have no prohibition and there is no instruction to get out of particular sorts of assets.

Mr CRAIG KELLY: Okay. Thank you, Chair.

CHAIR: Thank you very much. We're now moving on from super to any other question—the rats and mice, as it were—but there's still a lot to get through. A key part of the capability review by Mr Samuel was essentially saying that transparency is the basis on which you can resolve a lot of issues, particularly drawing reference to the CBA prudential inquiry. Isn't it now time, in light of the circumstances, to revisit that approach and consider whether it should apply to other banks, obviously the chief one being Westpac?

Mr Byres : The broad issue of transparency is one where we've accepted the general premise. We operate under statutory confidentiality provisions, which we obviously adhere to, but we have accepted the premise and have taken action to increase the transparency of what we're doing. I don't think our approach is now any different to that of any of our peers; maybe in some areas it's at the forefront. The transparency about the results of the CBA inquiry—there's no obligation on us to publish that report. Around the world you won't find another report produced by our peer regulators of a similar type. But we did publish it because we thought it was important, in the circumstances, to be transparent.

CHAIR: Just coming back to the point which I'm asking about: if you chose that approach on that one, why wouldn't you do it on Westpac?

Mr Byres : We're thinking about the right way to investigate the issues at hand in Westpac.

CHAIR: But there are a number of issues. One is around prudential risk, but another one is now, frankly, about public confidence, and that absolutely is in that space.

Mr Byres : Yes.

CHAIR: So wouldn't it be prudent on your part to consider an equivalent approach with clarity at the end?

Mr Byres : We will obviously think about that as one of the options. We did the prudential inquiry partly because we almost didn't have a choice. Our powers were much weaker than they are today, and we didn't have the BEAR in those days. We've had a strengthening of our investigation powers, and we now have the BEAR, which we need to uphold but which also hangs over the heads of institutions. We need to think about how best to proceed here, and we have to be seen to cooperate, and make sure we do cooperate, with the activities of the other regulators. So these are tricky issues. The prudential inquiry was done the way it was done because it fitted the powers we had at the time—or, in some cases, the lack of powers we had at the time. We fully accept the point about transparency, and clearly that will be factored into our thinking. But at this stage we haven't reached a view about whether that particular approach is the optimal one to use in this case.

CHAIR: In terms of house prices, in fact there was a report literally only a few minutes ago in the AFR and, I think, in other papers today about the growth in house prices. Is APRA concerned about the rate, and has it considered revisiting some of the discussions around macroprudential policy?

Mr Byres : I always start these conversations by saying we don't target house prices. Our goal is not to set house prices. We don't have any particular mandate to drive, direct, limit or impact house prices. What we're interested in is stability of the system, so therefore we are much more interested in the volume and terms on which credit is being granted by the banks. That's our primary focus, because that's where things will come back onto bank balance sheets. From our perspective, credit growth is still very low, and the standards by which banks are lending are still in reasonable shape. So, from a prudential perspective, the need for immediate action doesn't seem very obvious to me.

CHAIR: How much are you spending on enforcement mechanisms in terms of your overall budget?

Mr Byres : I would have to take that on notice. It obviously varies depending on particular cases, but we could give you some numbers for different periods.

CHAIR: If you take that on notice, that would be good. I'd appreciate that. On 31 May, you issued a report on the health insurance industry saying the industry wasn't prepared to deal with declining affordability, shrinking membership base and growing risk. You said:

APRA observed a heavy reliance on lobbying politicians and other industry stakeholders due to a concerning assumption by many insurers that Government would provide solutions.

So what is the nature of the lobbying APRA has observed? Is there any penalty on companies for failing to prepare for these challenges around the changing structure of who is a member and whether they have sufficient capital? Is the industry expecting taxpayers to rescue the industry?

Mr Summerhayes : I will take that one. A broader point is that insurance is blamed for a lot of things, and sometimes with some justification, but, more often than not, all an insurance premium is is a risk signal. In the case of the private health insurance sector, it is, like any insurance, a transfer pricing mechanism for funding costs. The costs in the health system, both public and private, are going up at between five and six per cent a year, and they have been doing so for some years. Then there's an added issue that the people that are in health funds are typically older people, and the utilisation is also going up. Premiums have, over recent years, been increasing at half the rate. So there is a mismatch between the cost structure and the premiums going up. The private health system is not the only sector of the economy where there is pressure.

Within in our prudential framework, we have focused on risk assessment and governance, and now we are focusing on capital in the private health sector to ensure that the sector is appropriately resilient. In some cases, firms are pursuing new business models, looking at their cost structures and looking at innovative ways to provide clinical services to policy holders; in others, unfortunately a large group of the 35 health insurers are looking for others to solve the problems. APRA's mandate has been—as per our public statements—about resilience in this sector. In fact, this week we will be releasing a consultation paper on the third and last of our three-phased review of the sector, which deals with capital, to ensure that those firms are resilient to—

CHAIR: So that will be the benchmark by which funds are then judged against?

Mr Summerhayes : It will be the basis on which we can more accurately compare the capital structures of the firms. We are bringing it into line with other insurance sectors, so that we are making like-with-like judgements on those firms' resilience.

CHAIR: Are you satisfied with the approach the private health insurance companies are taking around their sustainability?

Mr Summerhayes : There are certainly some good examples where firms are changing their business models, lowering their cost structures and looking at innovative ways of providing care, which is changing their cost structure. But, if we are to live in an environment where the premiums are set by the government of the day, and those premiums are at half what the costs are, and we have the utilisation increasing factor as well, that is going to put pressure on the sector in relation to things like capital and resolution planning, and thinking about what your plan B is if that environment continues become critical.

CHAIR: Clearly one of the things about private health insurance is that people consume a large amount of their overall health expenditure in the latter stages of their life—not dissimilar to superannuation. What would be APRA's attitude towards people being able to fund their private health insurance out of their superannuation?

Mr Summerhayes : That is a matter for government policy. More widely with insurance—and we have this in other classes of insurance—going back to my earlier point that insurance is just a risk signal, we would be worried if the risk signal was being masked. We are advocating that the underlying cause of the cost structures which are driving premiums and cost to consumers are mitigated or adapted over time.

Dr LEIGH: The government announced the Small Business Growth Fund last year and one of the live questions around that is the extent to which banks receive capital concessions for their contribution to it. To what extent have you had conversations with the government about the risk loading for money going into the fund?

Mr Lonsdale : We have, and we've had discussions with industry as well, about what the capital treatment would be. We've consulted on a capital treatment that is concessional relative to a full deduction for equity—so 250 per cent risk weight—but tightly constrained as well. So there are a number of conditions that would attach to that.

Dr LEIGH: How did you arrive at the figure of 250 per cent?

Mr Lonsdale : That's balancing, if you like, looking at our mandate and thinking about whether there is a case to have some diversity of funding, particularly for small business, that can add to stability in the system. We think that's a good thing, but we don't want at the same time too much concentration of funding.

Mr Byres : There's also a 250 per cent risk weight category within the Basel framework, which is the international capital framework, so to your questions: 'Why 250? Why not 200 or 300?' we drew from what we thought was still reasonably aligned with the internationally agreed capital framework.

Dr LEIGH: Did the government pressure you to soften the capital requirement?

Mr Byres : No.

Dr LEIGH: To what extent should Australians be concerned, given that we know very little about the risk of this fund, that you've gotten the capital requirements wrong and, therefore, it might induce systematic risk?

Mr Byres : To what extent should Australians worry about it as a source of systemic risk? I would say zero. As John said, there are particular constraints around this fund that mean it will not be a big part of bank exposures. It's very clear that there are caps on the amount of exposure of the individual banks who are contributing to the fund. It will be a diversified portfolio of investments, so the risk to the stability of the system from this particular fund is zero.

Dr LEIGH: You're not concerned that we know very little about the potential risks that arise out of this fund? For example, it might be subject to considerable adverse selection and, therefore, have higher default rates than typical small business lending.

Mr Byres : The model that's being adopted here is one that has been very successful in the UK. It has been borrowed. Indeed, some of the architects of the UK framework have been instrumental in the set-up of the framework here. That has proven to be successful in not only generating equity investment in small business enterprises but also delivering profits for the fund.

Dr LEIGH: So you're confident that this will be a profitable fund in Australia?

Mr Byres : I don't know whether it will or it won't, but I'm quite confident that it's not in any way going to jeopardise the stability of the system.

Dr LEIGH: The government's $500 million home loan deposit scheme will apply to one per cent of new home loans. One of the questions arising in that is in some sense parallel—the capital risk weight for banks that are providing those loans. I understand APRA has proposed a 35 per cent risk weight, which would be normal for loans with a loan-to-value ratio of 90 per cent but more lenient than the risk weight you would normally apply to loans with a five to 10 per cent deposit. Why have you made that decision? Wouldn't a 50 per cent risk weight be more appropriate to the riskiness of the loans in that pool?

Mr Byres : I think the credit quality of the federal government is pretty good, so we don't think that there is risk. The government is covering the risk above that 80 per cent number. We don't see any risk of that defaulting, not being provided, so we're comfortable with that.

Dr LEIGH: So those loans should essentially just be treated as though they're 20 per cent deposit down rather than five to 10 per cent deposit down?

Mr Byres : Within the constraints of the standardised approach, which is the approach that applies to most banks, there are only some broad buckets—it's not particularly granular; it's not particularly sophisticated—and we think that's the appropriate bucket.

Dr LEIGH: A couple of hours after we heard from the Australian Banking Association last Friday the Banking Code Compliance Committee handed down a report saying that code-subscribing banks have reported over 15,500 breaches of the code, affecting at least nine million consumers. That was a 54 per cent increase in the number of breaches reported. To what extent is that plethora of reportable breaches of concern to you as the prudential regulator?

Mr Byres : Unfortunately, I would say it's probably good and bad. It's obviously bad that there have been that many breaches, but it is good that they are now being reported. If, in fact, they have occurred, then it's very good that they're being reported. That reflects the fact that banks are facing up to these issues and properly investigating them. Obviously you wish they wouldn't happen in the first place, but they have been brought to light and reported and the code itself is being—I've forgotten the precise term—certified by ASIC. It allows both regulators to have a look at those issues and see what the implications are.

Dr LEIGH: In terms of staff morale within APRA, I couldn't see any data on your annual report reflecting staff morale or internal attitudes to APRA's mission or culture. Do you collect that kind of information through staff surveys?

Mr Byres : We periodically do them. It is sometimes a deep dive for staff engagement surveys, sometimes it's a narrower pulse check, and sometimes we will test the individual parts of the organisations more locally. We haven't redone one this year, largely because staff were surveyed quite extensively as part of the capability review and we didn't see value in doing another one on top of that.

Dr LEIGH: Could you undertake to provide to the committee the de-identified data from the most recent staff survey?

Mr Byres : It would be quite old. I can't give you—

Dr LEIGH: When you say 'quite old'?

Mr Byres : It can't be the capability review one, because it wasn't shared in full with us.

Dr LEIGH: Can you give me the part that was shared?

Ms Rowell : We did a pulse survey—

Mr Byres : It's in the report.

Dr LEIGH: You have nothing more than what's in the report in terms of—

Mr Byres : I'd have to have a look at whether there is one or two other metrics. We will take on board what we have done in the last 12 months and come back to you.

Dr LEIGH: How would you characterise staff morale since the royal commission?

Mr Byres : It's been a tough year for APRA, because people have been under a lot of pressure. There's been a lot of work. People have been tasked to work under very tight time frames, not just responding to the royal commission, but also the capability review, way back to the APRA prudential inquiry. A lot of people were working under a lot of pressure, and they gave up in a sense their day jobs to respond to those and that work spilled over on to other people. So APRA people, I would say, have worked very hard over the last little while. It has tested a number of people. The thing I take most comfort from is when we last did an engagement pulse check, actually our engagement scores had held up. I expected that might have gone lower, given the tough environment. Some of our leaders were a bit disappointed because they put a lot of effort into trying to lift staff engagement and they didn't necessarily see an improvement. But I think it was reflective of—I regard it as a positive that it held up in a very tough environment. There's always more to do. But I would say we're looking to the year ahead with a great deal of confidence.

Dr LEIGH: Do you publish staff turnover statistics?

Mr Byres : Yes. They are in the annual report.

Dr LEIGH: Do you disaggregate that by sections of APRA? I'm thinking particularly of rates of staff turnover within the units responsible for banking culture?

Mr Byres : The numbers that are in the annual report are just whole-of-APRA numbers. The numbers we have internally tend to be at divisional level because I think if you're getting down into small teams, you can have a lot of noise in a number if one or two people go. Broadly speaking, over the last year the APRA level of turnover has hovered around 10 per cent, somewhere between eight and 12. Some divisions have been a little bit higher, some lower, some are moving lower, some are moving higher—so that's as you would expect. Over the course of the year, turnover has been around that 10 or 11 per cent number. At different points in the year, it has been a touch higher, a touch lower. At this point it's not particularly trending in any direction.

Ms Rowell : It is also important to note that we have been recruiting, and with the additional funding to recruit, we have been quite successful in growing our numbers across all areas of APRA. That is indicative that people want to work at APRA and view APRA as a good place to be. You couple that with the stable turnover and I think that's a positive story.

Dr LEIGH: One of my concerns at a staffing level was an APRA staffer who told the recent inquiry: 'When institutions are consistently able to get a different result by appealing to general manager levels and above, line supervisors become demoralised and institutions become emboldened to push the limits.' How do you ensure that doesn't happen, Mr Byres? How do you ensure that it's not possible for powerful firms under investigation to simply go in at the top and avoid scrutiny?

Mr Byres : Your specific question was about powerful firms under investigation. Partly, the way you deal with that is that you manage the investigation very carefully and have good senior-level engagement and a range of people involved in decision-making so that it's not my decision or John's decision or Suzanne's decision but there's a collective group of people involved in making sure that you make the right decision for the right reasons and that, if there is complaining about particular activity, it's considered properly and by a diverse group of people.

Dr LEIGH: Speaking of diversity, how do you regard APRA's performance on gender diversity compared to other regulators, and what plans do you have in place to improve gender diversity within the upper echelons of APRA?

Mr Byres : Our gender diversity story in the senior executive ranks is one of very positive achievements. If you go back to, say, 2016, we'd never really got above 20 per cent females in the senior executive, by which I mean the top 30 people in the organisation. As we sit here today, we've revamped our recruitment processes, we've revamped our performance processes and we've given a much stronger focus to inclusion and diversity in all the aspects of the way we manage the organisation, and we're now pretty much fifty-fifty. So I see that as a great success. Suzanne is a great example.

Mrs Rowell : The other point I'd note is that we monitor other indicators of gender diversity too, so we're looking at promotions, rotations and other opportunities and also at remuneration and bonus outcomes. We always analyse that with a gender lens, and the outcomes are pretty equitable.

Dr LEIGH: Thank you. I have some other questions I will put on notice.

CHAIR: Finally, I'm just going to ask a couple of quick questions; I'm not sure if they're for Mrs Rowell or Ms Smith. Will the new super area be looking at payments or sponsorship arrangements—we're looking at this in another inquiry—that super funds engage in and whether they're actually value for members?

Ms Smith : That will come through with our new standard on disclosing expenditure arrangements and how they're actually benefiting members, so that will get captured in part of our supervisory work.

CHAIR: Just for clarity, what will that disclosure arrangement cover?

Ms Smith : That would cover any expenditure arrangements that they have in place and then look at how they will benefit. I think, in the event, marketing would get captured in that.

CHAIR: Currently, we have a lot of super funds that refuse to disclose this information to this committee and/or say they're only going to provide it on a confidential basis. The expectation I have from that remark, then, is that that argument will dissipate and transparency will exist across the whole sector.

Mrs Rowell : I think that's one of the areas of the revised data collection that we're looking at. There are two elements to this: there's the prudential standard which is in place, which requires trustees to have in place an expense management decision-making framework, if you like, and some heightened expectations around what we've called significant expenditure—

CHAIR: What's significant?

Mrs Rowell : There's a materiality threshold. We haven't specified that. But there's also anything that would be kind of unusual or that warrants particularly robust decision-making. Implementation of that standard is in its early stages. We will review that and see how trustees are approaching that and decide whether we need to be more explicit. But certainly, in the guidance around that, we have called out areas like sponsorship, marketing and the like as areas where we would expect to have good policy frameworks in place and effective monitoring and oversight of those. Then there's the data collection piece, which is where we want to get more granular information on expenditure and have that reported to us and then published. We're still determining how granular that will be, but certainly we would want to capture those key buckets of expenditure like marketing, sponsorship et cetera and have that out in the public domain.

CHAIR: So not just aggregated numbers but disaggregated data.

Mrs Rowell : Yes.

CHAIR: For instance, we've had funds who spend large amounts of money on marketing. There's contestability about whether there's value for that. But no-one at this point, as far as I can see, has provided any evidence that they've done any analysis on return on investment, which, considering some are spending tens of millions of dollars, seems kind of odd to me.

Mrs Rowell : That will also get, as Suzanne said, captured in our member outcomes assessment. Again, we expect trustees to be going through a robust process of testing value and outcomes for expenditure.

CHAIR: We've also had funds that spend tens, if not hundreds, of thousands of dollars on payments to the ACTU. There doesn't seem to be any clarity beyond that they occasionally get invited to a knees-up and a have few drinks with a few officials. I'm not convinced, by the way, that that is in the best interests of the fund members. Are those the sorts of things that will also be captured?

Mrs Rowell : Again, there is question of the level of materiality and granularity. We would expect the trustees to have good processes in place to understand what the services are and whether those services are actually delivering value and outcomes ultimately for members.

CHAIR: I am sure, Mrs Rowell, but you can imagine if you set, say, materiality of $100,000, then all of a sudden you could see a lot of sponsorship arrangements appear at $99,000.

Mrs Rowell : We haven't set a materiality threshold and we have also worded the standard—I'm sorry, I can't remember the exact words—to say it's not just about materiality; it is about the nature of the relationship. I think we actually use the word 'extraordinary'. I think this is where we need to see how this is implemented. We have made clear our intent and if we think we need to tighten it over time to get what we're looking for, we will.

CHAIR: I suggest we revisit this at our next hearing, if it that is suitable to you.

Mrs Rowell : Sure, it is up to you.

CHAIR: Clarity, we will be because it is acceptable to me! We have been advised that we need to get out of this room by 10:45. I thank you for your attendance here today. It is most valuable to have you here in the flesh. It has been a much more constructive discussion than trying to follow it over the phone. I am sure you can appreciate that. Unfortunately, I am sure that probably means most of you had in come in last night. I'm sorry about that, but that's the reality. I had to come in last night too. If you have been asked to provide additional material, would you please forward it to the committee secretariat. You will be sent a copy of the transcript of your evidence to which you can make corrections of grammar and fact. Just a caution, in addition to the deputy chair other members may also have questions on notice.

Resolved that these proceedings be published.

Committee adjourned at 10:47