Australian Prudential Regulation Authority

[10:49]

CHAIR: Welcome to the officers of APRA. Welcome, Mr Byres. Do you have an opening statement for the committee?

Mr Byres : I do have an opening statement, but it's slightly longer than usual, so I was going to suggest, in the interests of time, if you'd allow me to table the full statement, I'll just mention a few quick highlights and perhaps point you to some of the key points in it, rather than give you full chapter and verse.

CHAIR: That would be terrific. Thank you, My Byres.

Mr Byres : Obviously, there are a range of issues on our agenda at present, but the fundamental and important task we have is always to make sure the system is financially sound and stable. That is the case, and, given all of the activity that is going on in the financial system and in the regulatory world, it is important that we don't lose sight of that.

The opening statement talks about a few things. Let me start with the report of the royal commission. We've said we think that's a fair and considered assessment of the failings in the system and a welcome road map for reform, including for regulators and many of the recommendations made within the report are consistent with submissions that we made to the commission. We have 10 recommendations specifically directed to us for action, and we published a week ago our planned response to those. Four we expect to complete this year, five will be completed by the following year, and the remaining item is addressed as a much more extensive program of supervision in relation to culture in the financial system. How we move ahead on this is primarily a matter of resourcing, on which we are in discussions with the government. We have 12 matters that have been referred to us for potential enforcement action. We already had, prior to the final report, commenced inquiries and investigations on these. I do note that none of the prudential breaches of the law or the prudential standards that have been referred to us carry civil or criminal penalty provisions directly, but there may be other avenues to impose sanctions, depending on the specific circumstances.

Further into my statement, I make some comments on superannuation, and I'll just quickly call out a couple of things. Clearly, further consolidation in the super industry, particularly to weed out underperformers, will undoubtedly be beneficial. There has actually been a considerable consolidation of the industry over the decade. There's a table in my statement that shows that the number of APRA regulated funds has more than halved in that period from more than 450 to under 200 now. That's obviously not entirely APRA's doing, but it is a product, at least in part, of a strengthened prudential regime and prudential supervision, which has consistently and persistently raised the bar on the way trustees look after savings. We've also been working further through our member outcomes project over the past year and identified a number of funds that we think were delivering poor outcomes for members. That scrutiny has led to a number of those funds exiting or planning to exit the industry. I also just want to say that we very much welcome what we hope will be the passage this morning through the parliament of the member outcomes bill. For us, that provides a much-needed and long-awaited strengthening of the legislative framework and will be an essential foundation for APRA to more forcefully pursue instances where trustees may not be delivering high-quality outcomes.

Then, I just wanted to make a couple of remarks on housing, which is over on the final page of my statement. There's obviously a lot of attention on housing markets around the country. As the RBA Governor has noted recently, a correction in prices in the major markets was probably inevitable after a period of such rapid increases. That it is happening at a time of solid economic growth and relatively low unemployment is helpful. Our focus in recent years has been ensuring that prudentially regulated lenders are well positioned in advance to manage the inevitable softening of the market. The sound lending standards and robust capital positions that have been put in place in recent years have positioned the banking system to withstand the adjustment process. Much of the heavy lifting on lending standards was done in the period from 2015 to 2017 as a stronger focus on serviceability assessments was built into the system, and, therefore, over the past year, two of the temporary benchmarks we put in place for interest-only lending and investor lending have been removed.

Let me stop there. They're the highlights. No doubt we'll talk about some of those issues in more detail.

CHAIR: You sound very busy indeed, Mr Byres. Thank you very much for that. I know that a number of senators have questions for you this morning, so I will try and be brief. I did want to ask you specifically about that legislation for protecting super member outcomes that we are hoping will pass through the House this morning. Can you give the committee some examples that you might have seen that came out of the royal commission where those new powers that APRA would have would allow you to take action faster and potentially with more consequences than you have been able to do before?

Mr Byres : I think there are two obvious ones. The first one is that, up until this point, in terms of breaches of the covenant, section 52 of the act—the best interests duty—has had no penalty provisions against it. That's been a major gap. So, while there has been a requirement there, there's been no obvious sanction that you could use where you felt there may have been a breach. So the introduction of penalty provisions against that particular section of the act is quite important. And the second issue, which again we asked for and have been seeking for some time, is the enhanced directions power. Many of the things that we would like to achieve require a bit of pre-emption. The existing directions power that was in the SI(S) Act was fairly limited in the circumstances in which it could be used and, in particular, limited the capacity to head off problems before they arose. The new directions power will obviously allow us to be much more pre-emptive, and certainly we intend to use that going forward.

CHAIR: There was one issue in the bill that was passed through the Senate about opt-in insurance for under-25s—changing it to opt in rather than opt out—and obviously the government has indicated that it's going to reintroduce legislation regarding opt-in insurance for under-25s and those with a balance below $6,000 in a separate bill, but there was an amendment that was proposed last week by Senator O'Neill that would apply to APRA. The funds would have to apply to APRA for a carve-out to ensure that they could continue to provide opt-in insurance for specific industries. Is there any advice that has been undertaken by the regulator on how that amendment would be or could be implemented?

Mr Byres : It's not appropriate that I talk about our advice. I think what we have said publicly is that we would obviously do whatever we're tasked to do by the parliament, but it would be a complex piece of legislation to administer.

CHAIR: Does complex mean that it would require additional resources?

Mr Byres : Possibly, but I think, as much as anything, there'd be some difficult judgements that would be required. I'm being deliberately a bit vague, because it would depend a little bit on what was the specific nature of the task that we were asked to do.

CHAIR: Has APRA, then, had any advice on what funds might apply for such a carve-out position?

Mr Byres : Sorry, is the question: have funds spoken to us about the potential for applying for a carve-out?

CHAIR: Yes.

Mr Byres : Not to my knowledge.

CHAIR: Do you have a sense of which funds might apply for a carve-out position?

Mr Byres : No, and I think, without understanding the precise nature of any proposal, it's difficult to answer that with any precision.

CHAIR: Yes, I understand that. Then, have you at any point engaged with any external stakeholders regarding that amendment?

Mr Byres : Only with Treasury, I would imagine.

CHAIR: You would imagine or you know?

Mr Byres : We have spoken with Treasury about it, yes. I'm not aware of any other stakeholders with whom it's been discussed.

CHAIR: In that engagement, was any concern expressed relating to the application of the amendment or any policy that would give effect to it?

Mr Byres : That probably goes to our advice.

CHAIR: Normal practice would be to engage widely with stakeholders before the application of an amendment like that would be considered; is that correct?

Mr Byres : It's a bit difficult for me to comment on government consultation processes. If we propose something, obviously, we have consultation obligations, but in this case it's the parliament that's deciding.

CHAIR: All right. So, of the funds that could potentially be affected and that might apply for a carve-out, has APRA received any advice on the profile of the customers that would be considered—

Mr Byres : Sorry, have we received advice from others?

CHAIR: This is quite a significant amendment, obviously, and while it doesn't apply to the bill that's before the House today, potentially it could be reintroduced with the new bill—and I'm trying to remember the name of the new bill that has been introduced. Senators Seselja, you might be able to remind me of that? I think it's something like the members' interests first bill. If such an amendment were introduced that would affect the members' interests first bill, has APRA considered what the profile of customer might look like who would be affected by those amendments?

Mr Byres : Not really, no.

CHAIR: Okay. Is there any potential scenario that APRA has been advised of, whether that be written or informal, where, as a result of such an amendment or policies that would give effect to what this amendment proposes, APRA may have to decline life-insurance applications, or applications by funds where vulnerable customers could be at risk? Is that an appropriate job for a regulator?

Mr Byres : I think that's at the heart of the complexity of these issues; whether it's a job for us is for the parliament to decide.

CHAIR: Potentially, that would put the regulator at some risk, wouldn't it? It would put the regulator in a position where it would have to decline life-insurance applications.

Mr Byres : Yes, well, we're starting to get into hypotheticals here.

CHAIR: Yes.

Mr Byres : I'm not sure I can offer too much more on that.

CHAIR: All right. Could you then assure the committee that APRA has received no advice, whether it be internal or external, that the proposed amendment would impact on any funding applications in a manner that could have adverse consequences for customers?

Mr Byres : APRA's funding, you said?

CHAIR: Yes.

Mr Byres : I think that if the proposal were to be passed by the parliament then, yes, we would have to look at what the resourcing implications were for that. But, again, it depends on the nature of the specific job we've been given and how widespread—how broad—we think it would be. Then we'd have to work through with the government what the resourcing needs would be.

CHAIR: What would happen if APRA rejected an application for opt-out insurance and then somebody died and couldn't claim that insurance? What are the implications of that?

Mr Byres : Very severe for the individual concerned.

CHAIR: What are they for APRA?

Mr Byres : We would have to demonstrate that we had made a decision in accordance with the law.

CHAIR: Okay. Do you think that sort of decision is outside APRA's authority, bailiwick or whatever it is you want to call it?

Mr Byres : The authority is the authority the parliament gives us. I know this sounds a bit circular, but we do the job we're tasked to do. If we were tasked to do a job, we'd have to look at the capabilities we need to do that job.

CHAIR: Do you think if something like that occurred it would potentially undermine the confidence that the public or the parliament have in APRA?

Mr Byres : That's speculative.

CHAIR: Okay.

Senator KETTER: Mr Byres, firstly, on the issue of the macroprudential work that's been done, we've heard that Treasury conducted no specific work to determine the impact of the macroprudential policies on house prices. Is the chairman aware of the existence of any modelling of the direct impact on housing prices from your macroprudential measures as they were being considered at the time?

Mr Byres : No.

Senator KETTER: Okay. Would this work be within APRA's expertise to carry out?

Mr Byres : Probably not. We're not the right agency to be doing macroeconomic modelling. If we wanted to do precise modelling on those things, we would more likely be relying on the expertise in Treasury and/or the RBA. I don't see there's value in us duplicating that.

Senator KETTER: Okay, so you think Treasury or the RBA would be capable of carrying out that type of work?

Mr Byres : I think they're certainly more equipped than we are because they come at things from a macro perspective.

Senator KETTER: And you think it's advisable that that type of modelling work be done?

Mr Byres : I have to say I sort of question the value and comfort you would get from trying to be too precise about the impact of the measures on housing, particularly because there are so many other drivers of house prices. The work that we were doing was not targeted at house prices. You've probably got sick of me saying that at these hearings. We were focussing on lending standards. There is a whole raft of issues beyond lending standards that impact on supply and demand for housing—for example, population growth, foreign investment. There have been changes to state government taxes, changes to interest rates. There is a whole raft of issues at play here, and any sort of modelling would probably have assumed all of those things away, but they have a big impact on house prices—I suspect more than we do.

Then you also have the problem that there isn't a single housing market in the country: Sydney and Melbourne have obviously had big run ups and are now having a correction; Adelaide has been pretty flat through the period; Perth is still feeling the after effects of the commodities boom, and prices have been declining; Hobart prices have been increasing. So there are very different market conditions. Regional Australia has a different set of conditions and experiences, so modelling all of those things at that level would be extremely difficult I think.

Senator KETTER: Okay. At the time that macroprudential measures were being considered, did anyone ask APRA about the impact that these measures might have on house prices?

Mr Byres : Did anyone?

Senator KETTER: Within government.

Mr Byres : To be definitive I would have to take that on notice, but I think the answer is no, although there have been a number of discussions in this forum where people have talked about house prices. Hence, I continue to say we weren't targeting house prices, but we were targeting lending standards.

Senator KETTER: So you think it's no?

Mr Byres : I think it's no, but I will take that on notice and confirm.

Senator KETTER: Given the fact you've said you had no modelling and probably no particular expertise to respond to that, that's—

Mr Byres : If you were looking for 'did someone ask for a forecast expressed in percentage points', the answer is definitively no. But we did think about, as we introduced these measures, what would be the impact on the supply of credit, what would be the impact on the average borrower, the average lender's loan size, how would LVRs adjust—those sorts of impacts. So we had a sense of what it might do to the supply of credit, but, as I said, there are many, many other factors other than the supply of credit that are driving house prices.

Senator KETTER: Okay; sure. Going back to before the macroprudential measures were introduced, did you think that they would lead to house prices falling by nine per cent in Melbourne and 12 per cent in Sydney over the past year? I acknowledge there are other factors, but perhaps this was in part as a response to your macroprudential measures.

Mr Byres : If your question is: in 2014, when we started this, did we forecast minus nine and minus 12 figures in 2019, the answer is, no, we did not. That's a precision that I don't think anyone would be capable of attempting.

Senator KETTER: Were you surprised by the falls in those two markets?

Mr Byres : No, not particularly. It was probably inevitable. I think that's the phrase the RBA Governor has used—it's been inevitable after such a sharp run-up that at some point the market has to pause. There has also been a delayed response from the supply of housing stock, so there's now a lot of housing stock coming on the market, particularly in Sydney. Population growth has slowed. So you have a number of big macro impacts that are playing out, and as the demand for housing softens and the supply of housing increases, it's not unreasonable to think that prices will soften and maybe drop back a bit.

Senator KETTER: Okay, well let's move on to the consumer data right issue. You have previously expressed concern publicly about systems readiness of the big financial institutions to respond to the rollout of reforms like CDR and CCR. Can you please outline to the committee your current view about that?

Mr Byres : Current view on readiness?

Senator KETTER: Systems readiness, yes.

Mr Byres : I think they are working very hard to be ready. They've obviously got an obligation, and all of the large banks are working very hard to make sure they can meet that obligation. At this stage I don't have any information that suggests they're not going to get there or be materially unprepared, but it's a relatively ambitious agenda and there's a lot of work to do.

Senator KETTER: Okay. So what considerations should government and parliament have in mind as we work through the legislative program? Let's start with the CDR.

Mr Byres : Yes. I think all of these things—it is difficult. I think the industry has some legitimate concerns—maybe if I step back. One of the issues that I think we all agree on is that we want this to go well. When it's rolled out, we all want it to go well. It's good for the community, it's good for competition and, if done well, from my perspective there are not really any material prudential concerns. In the interests of getting it right, if that means taking a little bit more time—some of the timetables have been adjusted—then I think that's probably a very sensible thing. I'd much rather get it right than have something go wrong in the early days that means the community's trust in the system is undermined.

Senator KETTER: There are major implications for competition, for consumers, innovation, big data flows, privacy, cybersecurity.

Mr Byres : Yes.

Senator KETTER: Do you think a more staged approach needs to happen for these reforms?

Mr Byres : I don't know that we would be advocating a more staged approach; I just think it's important. I think the ACCC is looking at this very carefully. I have no doubt at all that they're very actively engaged in thinking with the industry about making sure, as I said, that it's a success when rolled out. But they are in the driver's seat, in the sense of overseeing the rollout, and I'm happy to defer to their views on that.

Senator KETTER: But there is a lot happening as of 1 July this year, a lot to take into account. You don't think that's a factor that needs to be looked at?

Mr Byres : I think it's something we all have to be very conscious of. There is a raft of reforms that come from different arms of government. One of the things the industry often complains about is each individual proposal is very sensible on its own merits, but the collective or totality of the proposals is difficult to digest. But that's really something I think that probably Treasury is best placed to do, from the perspective of overseeing all the regulatory initiatives plus the legislative agenda of the government, and making a judgement about whether the timetables need to be adjusted.

Mr Lonsdale : If I could just add to that? I agree with Mr Byres that you always have to look at the totality of reform. That is an issue for the Treasury and the government. One point, though, on these sorts of measures is that they are not new. The ideas behind them presented themselves in the 2014 Financial System Inquiry. That's five years ago. There has been a lot of work done, particularly with the UK, to look at where they're going on things like open banking, so there has been a long gestation period to get to where we are.

Senator KETTER: But there's a balance to be struck between rolling out reforms and the institutions and the regulators getting the settings and systems right. Where should the emphasis be? Should it be on making sure we get it right, Mr Byres?

Mr Byres : I think we always want to get it right. I think, particularly for an issue like open banking, the danger of getting it wrong is significant. You do not want the community, in the early stages, to lose confidence. We should get it in as quickly as we can, because there's a lot of benefit to come from it, but no quicker than we can afford to make sure it's done properly.

CHAIR: Surely that's why the rollout would be deferred until February—

Mr Byres : As I said, there have been adjustments to the timetable. You always keep these things under review. But it's a balance and ultimately it's a balance for the Treasury, the government and the Parliament to decide which of the competing agendas we want to push forward with fastest and which ones we're prepared to take a slower pace on.

Senator KETTER: So it shouldn't be rushed. You'd agree with that?

Mr Byres : I don't think anything should be rushed; but we want to make sure it's done successfully, because there is a lot of benefit if the community comes to accept it.

Senator WHISH-WILSON: I was going to ask Mr Summerhayes, if he was here—

Mr Byres : I can answer for him.

Senator WHISH-WILSON: I'm sure you can, Mr Byres. Obviously, following the now famous speech that he gave to the Insurance Council about carbon risk, I note in a follow-up speech and evidence he gave to this Senate committee, he said:

I don't want to overstate APRA's view of the level of risk to the stability of Australia's financial system as a result of climate change and the transition to a low carbon economy. It's not been escalated to the top of any industry risk register, nor is that likely in the near future.

Has APRA reviewed the IPCC's October 2018 report on global warming?

Mr Byres : We don't have any particular view on the report, but we continue more generally to making sure the issue remains very visible and on the radar of regulated institutions. We've recently done a survey to try and get a good handle on the various ways in which people are thinking about the impact of climate risk on their business models, how they're thinking about the impact and what they might do in response. I think it's correct to say that the intent is to put out some kind of paper on that. I'm getting nods, so I'd say yes.

Senator WHISH-WILSON: That was going to be one my next questions. To be very simplistic, the IPCC's report was certainly the strongest report we've seen from them. It was quite dire and called for urgent and immediate action across the board, including economic measures. I was wondering if it had given you any cause to reconsider the level of risk, but it sounds like you might have addressed that.

Mr Byres : We're continuing to keep it up. As I think Mr Summerhayes mentioned last time, there's also a Council of Financial Regulators working group thinking about the issues from a cross-agency perspective. It's still very much on the agenda, yes.

Senator WHISH-WILSON: Great. There's also a report—I have a copy of it here and I'm happy to table it and give it to you, but I'm sure you can access it—by Market Forces, which was released earlier this week, that found that just 32 per cent of large Australian companies for whom climate change is considered a high risk is disclosing detailed information of specific climate risks and opportunities facing their businesses. Are you concerned that corporate Australia is still not adequately insuring itself, let alone the broader public, against the risk of climate change to their businesses?

Mr Byres : In a sense, part of our work is to make sure boards and senior executives in regulated institutions are thinking about the issues. One of the issues we've been exploring is the extent to which our institutions are taking up the TFCD—Task Force on Climate-Related Financial Disclosures—recommendations. ASIC is also looking at those issues from a disclosure perspective as well, and we're coordinating that work through the council working group.

Senator WHISH-WILSON: When do you think this report might be available, Mr Rees or anyone else?

Mr Byres : I hesitate to say next month, but in the next month or two it would be—

Senator WHISH-WILSON: I look forward to that with interest. I have a couple of quick questions on the bank levy. We had a lot of discussions on it in recent estimates after it had been implemented. Do you have any information you could provide us on, for example, how much of the bank levy has been passed on to customers since it's been implemented? Have you been doing any work to look at the effects of the bank levy?

Mr Byres : We haven't done any work. The ACCC was tasked with doing that work. They put out a report, which I hesitate to quote from off the top of my head, on that very issue.

Senator WHISH-WILSON: I'll go away and have a look at that. I think Senator Ketter has already asked a lot of the questions on lending standards that I wanted to focus on. The previous Treasury Secretary, Mr Fraser, used the word 'bubble' a few years ago, which was widely quoted in the media following that disclosure, but I did put it to the new Treasury Secretary yesterday whether they had elevated this issue at all at the Council of Financial Regulators meeting in November last year. Is that your understanding? Was this issue a key topic? Have lending standards and, for example, changing temporary measures like the interest-only measure that you put in place been discussed at the Council of Financial Regulators meeting?

Mr Byres : I've been on the Council of Financial Regulators since mid-2014, and at every meeting we have a discussion on housing because it is significant to financial stability. Every time we have done something—for example, the initial benchmark we put in on investor lending and the one we subsequently introduced on interest-only lending—before we make those decisions, we go to the council, and I get the views of the other members. There's a council working group below the council itself which thinks about various proposals and gives us feedback on what may or may not be a good idea. The answer to your question is yes, absolutely these things are discussed.

Senator WHISH-WILSON: Are you able to give us an indication as to whether it was one of the key issues discussed?

Mr Byres : It's never a cursory discussion, particularly at the last meeting, where we were seeking views on the removal of the interest-only benchmark, which we subsequently decided to do. Yes, there was a substantial discussion on that, as you would expect.

Senator WHISH-WILSON: Had you had correspondence or a formal or informal process with the Treasury prior to that about the removal of that particular temporary measure?

Mr Byres : The Treasury is a member of both the council and the council working group. It was aware of the papers we were going to put to the council in advance of the meeting so that it could come with its views. The short answer is yes, there's regular discussion with the Treasury.

Senator WHISH-WILSON: I know you are fiercely independent, Mr Byres. I'm not going to question your independence, but I think it's an obvious fact that this issue—lending standards versus the balance in the economy for keeping the money flowing—has become fairly political now. I'm not going to ask you for the advice you may have given to government or your opinion, but we have seen in these estimates this week a number of senior public servants express some concern around the politicisation of their portfolios. Are you concerned that on the issue of lending standards, for example, a day after you changed you interest-only short-term measure, Mr Frydenberg was in the national media saying he wanted to keep the money flowing? Are you frustrated that this issue has been politicised to the point that it has?

Mr Byres : No, and I say that because treasurers, quite rightly, can comment on the economy all they wish to; that is their job and one would expect them to. But, in terms of the decisions we've taken, we've taken them without any input, any discussion or any views being expressed by the government.

Senator WHISH-WILSON: So there has been no political pressure brought to bear on you to change these lending standards?

Mr Byres : No. I told the Treasurer. As you would expect, when we make an announcement we send up a minute, just as a courtesy to explain that we're going to make a decision.

Senator WHISH-WILSON: Do you accept for someone working in a bank—and I said this yesterday—I had a talk to a senior executive at a bank just last week. They have laws put in place they have to abide by, which is what you've talked about today. They either abide by those laws or they don't. Do you accept they are put in a difficult position when the Treasurer and others are out saying, 'The money needs to flow, we need to lend,' when they've got very strict criteria about what they can and can't do. And to be honest they are in a very difficult place at the moment, given the royal commission and the pressure on them. Do you see this as making life very difficult for banks that have to implement these laws?

Mr Byres : I think the challenge the banks have had is that the key responsible lending laws—which APRA doesn't administer; they're administered by ASIC, so everything I say comes with that caveat—are nonetheless principles-based laws. You will make reasonable inquiries, and what is reasonable is sometimes in the eye of the beholder. ASIC is obviously now trying to help clarify those issues a bit more so that all institutions understand better what is acceptable and what is not. There has been some concern over the past year—a combination of uncertainty as to whether the royal commission might recommend changes to responsible lending obligations but also uncertainty about the outcome of cases before courts that ASIC was pursuing—that meant, yes, I think the industry was quite uncertain as to where the boundary might be into the future and, therefore, it was being quite cautious about it. I think one of the bank CEOs in fact said something to that effect earlier this week. A combination of the royal commission being finalised, clarity that there isn't going to be a change to the legal framework and ASIC coming out with some updated guidance, I think all helps people understand exactly the boundaries within which they can operate and helps give them more confidence going forward.

Senator WHISH-WILSON: There's one must question from me, with the chair's indulgence. This is a question I put to ASIC last night. I understand Commissioner Hayne wrote to ASIC and to you on the issue of mortgage brokers, referring companies he believed had breached section 1041G. Can you say which companies they were and if you are doing any investigative processes around that?

Mr Byres : He didn't write to us. If it's a Corporations Law breach—

Senator WHISH-WILSON: He wrote to ASIC but I understand he also wrote to you. Is that not that case?

Mr Byres : Unless one of my colleagues knows of it—I'm sure I would have seen the letter if we got something from the commissioner. I will take it on notice to clarify, but I don't think we received any such letter.

Senator WHISH-WILSON: You're not aware of it. Okay. Thank you.

Senator KETTER: I want to go to the issue of superannuation and particularly the matter of so-called independent directors. The royal commission sets out a number of recommendations—and perhaps in relation to the behaviour of trustees. I'm not sure if you're aware, Mr Byres, but one of the comments made by Mr Hayne in his final port, on page 245, was—when it comes to the issue of independent directors, he said: 'I do not think that the matters of'—and I'm putting these words in—skilled or efficient management of the fund directors acting as best interests of the members—he said: 'I do not think that the matters I have mentioned about board composition and appointment are best dealt with by legislative change.' Does APRA agree with the views of Mr Hayne in that matter?

Mr Byres : I haven't got the quote in front of me, but I think our position has long been that whatever sort of fund it is—whether it is an industry fund, a retail fund, a corporate fund, whatever—it's important to have trustees who bring to the table independence of mind and are not representing particular stakeholders but are genuinely acting in the interests of their members. It is difficult to impose through legislation an independence of mind, so in that sense maybe I do agree with the quote that says you can't just legislate it into existence. But I still hold to the view, and APRA has long held to the view—not just in superannuation but also in the other sectors that we regulate—that independent directors play an important role on the board.

Senator KETTER: So what will APRA be doing in terms of its approach to supervising board composition and appointment post the royal commission? Are you conducting a review of how you deal with this matter?

Mr Byres : I will see if Heidi wants to add anything to what I have to say, but we have a range of recommendations coming from the royal commission that suggest some changes to the prudential framework in our prudential standards, as well as obviously changes that are coming through the member outcomes bill that will give us more powers to make sure trustees are performing in the interests of their members. So we are looking at the lessons that come from the royal commission, the recommendations that have been made, and some of our own supervisory experience, and thinking about how we can improve the performance of trustees. We obviously, though, recognise that we have to do that within the legislative framework that exists, and that allows for different trustee models and we have to work within that.

Senator KETTER: Is there some sort of review you are preparing? If it is a review, when will you be completing the work in relation to this new approach?

Ms H Richards : We did a review around board capabilities and composition in 2017-18, and we published some of the results of that last year. It outlined a range of areas where we thought the industry could do better, and we are following up with individual institutions on the results of that review. We are also undertaking a program now to review elements of our prudential framework and—

Senator KETTER: I am particularly focused on the recommendations from the royal commission in relation to trustees. I presume you've factored that into what you are doing, what Mr Byres was talking about earlier?

Ms H Richards : That's right. And we will be factoring that into our review of the prudential framework around board capabilities and those issues.

Senator KETTER: Right. Senator Seselja, given the comments of the royal commissioner that I've referred to where he indicated that legislative change is not the best approach when determining board composition, do you now want to take this opportunity to tell us what's happening with the government's position here in respect of the Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017, which goes to the issue of one third—

Senator Seselja: Sorry, I just missed some of the lead-up commentary. You will have to bring me back up to date with exactly where you were going.

Senator KETTER: As I indicated, Mr Hayne's view is that legislative change is not the best approach to determine board composition when it comes to superannuation. But the bill the government has sought to introduce during this course of parliament, the Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017, goes to exactly that point. Do you want to express regret that that that has happened, because it's inconsistent with the views of the royal commissioner?

Senator Seselja: I don't accept the premise.

Senator KETTER: All right. Let's move to the enforcement of the SI(S) Act. Given the royal commissioner's final report, Mr Byres, I want to continue my line of questioning from the last round of estimates, where there was already some criticism out there about APRA's actions, or lack of actions, particularly when it comes to superannuation supervision. On top of the royal commission report, we've now had the Productivity Commission report. I must confess I was a bit surprised that you didn't make reference to that in your opening statement—or I couldn't see any reference to it.

Mr Byres : No, it's not there, and it's not for lack of interest in that report or any lack of respect for that report; it was only that I was already fearing that my opening statement was way too long! I'm happy to talk about it.

Senator KETTER: Well, it was pretty scathing, not only about APRA. Some of the commentary was around regulators 'missing in action', lack of data—'yawning gaps in data'. Once again, I want to give you the opportunity, Mr Byres, to say: do you regret the actions that APRA has failed to take in the past? Do you want to apologise for the way in which APRA has been conducting its responsibilities under the SI(S) Act?

Mr Byres : I think we can show a very good track record of making significant improvements to the superannuation industry. I don't think there's any sense that there's been a lack of action. There are always things that you can do more of or do better, and, happily, we are very ready to take those on board and do so. But the proposition that there's been nothing done in the superannuation sector I don't think holds up to scrutiny. If you look in the opening statement, the considerable consolidation of the industry is in fact a reflection of the fact that we, with the support of the governments, have raised the bar considerably in super. There are a whole raft of funds that have exited the industry as a result.

In our member outcomes work that I referred to in the opening statement, we identified this group of funds, on a number of metrics, which looked like they were underperforming. Many of those have accepted that the writing was on the wall and either have exited or are exiting the industry. Others have made changes to pricing or other fees et cetera to recognise that they need to be more competitive and make a more compelling offer to their members. There is, I think, a lot of action we can point to that shows that we have been exercising our functions and really looking after the members within the super industry.

Senator KETTER: The Productivity Commission said:

The regulators—

and ASIC is included here as well—

appear focused on funds and their interests, and not on whether members' needs are being met and their interests unharmed.

That sounds like a pretty scathing criticism.

Mr Byres : All I can do is point to what we've been doing, which is all about member outcomes and improving member outcomes.

Senator KETTER: Is it also clear from the royal commission report that, while conduct regulation will become the remit of ASIC in super, none of your powers under the SI(S) Act would be diminished?

Mr Byres : Yes, that's an explicit recommendation. I can't remember the number offhand; I have it here. Essentially, what we had in superannuation was the 'twin peaks' regulatory architecture, but the SI(S) Act didn't really align with it. We submitted to the royal commission and ASIC submitted to the royal commission, as I think also did Treasury, that there was an opportunity here to realign responsibilities under the act to make them better fit the twin peaks—APRA, prudential; ASIC, conduct—regulation model. The royal commission agreed with that. That's the recommendation. But, importantly, the recommendation makes clear that it's really important that APRA can still do its prudential job, and therefore any changes are to be made without reducing APRA's powers to do its job.

Senator KETTER: So it's open to you to take stronger action against trustees who don't act in their members' best interests, using the existing provisions of the SI(S) Act?

Mr Byres : I think where we will really be able to up the ante is with the member outcomes bill, because we now have penalties that we didn't have before, and we have a directions power that we didn't have before. They're the two key pieces of armoury that have been missing in superannuation. For us, they are a game changer.

Senator KETTER: Ms Richards was talking about the review. What will change in APRA that will see us moving away from the sorry history—that's my description—so that we can guarantee that the best interests of members are looked after in superannuation?

Mr Byres : I might ask Mr Lonsdale to talk about this because he's doing our enforcement review at present, and it's part of a broader review of enforcement in APRA, not just in superannuation but also reflecting the responsibilities we have under the BEAR.

Senator KETTER: I'm interested in that, but, Mr Byres, I am interested in what can happen right now to lift the approach to ensure that there is stronger action taken to protect members.

Mr Lonsdale : If I can answer: there are two elements. If you want to come back to the enforcement review, I am happy to do that. The first element, though, goes directly to the royal commission. The royal commission have made 12 direct referrals to APRA, all related to super. In terms of what we're doing, we have now written to all those organisations, informing them that we are doing an investigation. We will be asking for information and indeed are asking for information. We will be seeking independent legal advice to APRA on whether or not, with this information, a case exists to prosecute and go to court, particularly in the light of the penalties that currently exist or the new ones that could well emerge that Mr Byres talked about. And we have established a new committee focused on resolution and enforcement. I am the member who will chair that committee. This evidence will come to the committee and it will be member led in terms of the action that will happen in these 12 cases.

I am happy to come back to the enforcement review, but it's relevant here because I think what you will find coming out of that review is an increased appetite to take on coercive tools and an APRA that is quite explicit about that. The two go together.

Senator KETTER: Chair, I do have further questions, so—

CHAIR: Can I just jump in. Yes, it did run out, and I won't be long. I want you to expand a little bit more on the enforcement review that you're doing, Mr Lonsdale. Specifically, I want to know who is doing it, when it will be finished, and who from outside APRA is assisting you with that review.

Mr Lonsdale : Shall I handle that now?

CHAIR: Yes.

Mr Lonsdale : We announced in November that APRA will be undertaking an enforcement review. I am leading that work. I'm the member doing that work. We've published the terms of reference on the website. We have a small secretariat that is assisting me in the work. We have appointed an independent committee of experts. It really is a sounding board to help us. It is not their report, but they will be helping us on the journey. We have Bob Austin, a former judge, a very senior judge; we have Dimity Kingsford Smith, an academic from UNSW with considerable experience on law and enforcement; and we have Sarah Court, who is currently on the ACCC, who is used to dealing with enforcement activity on a day-to-day basis. We have had two meetings. There's a third one tomorrow. They have been invaluable in our thinking about how to take this forward.

We commenced in November. The broad time frame is that the other members will see a draft of the report at the end of this month, and we will finish the report at the end of March. We are on track to do that. We've committed that we will publish the report after that, together with an APRA enforcement strategy, so you'll see that after March.

In terms of how we've been doing our work, it's premature to talk about the recommendations because obviously we haven't finished. We are more than halfway through. But I can give you the thrust. In terms of how we've been doing our work, we've done a very large survey throughout the organisation to really get to the bottom of how supervisors are doing their work in using coercive tools or not. We have benchmarked ourselves against international regulators like the PRA, OSFI and DNB; regulators not doing prudential work but working in the financial space—for example, ASIC and ACCC a little bit as well; and even other safety regulators outside the financial sector, really just to test our thinking. We've been doing that. We've looked at hundreds of supervisory decisions and 25 case studies within APRA. We have the royal commission report as well to benefit from, as well as the independent panel.

I think where we're getting to is that there are some gaps in how we think about enforcement. I think I mentioned that the last time we met. When you think about what other international prudential regulators are doing, we're a bit out of line there, and I think we can close that gap. Really the centrepiece of it is moving from the enforcement appetite that is last resort to one that is more constructively tough. That means that, where an entity is being uncooperative, we will move much earlier. We will pay particular attention to providing a public deterrent, and we will be operating on a broader range of issues, not just solvency issues but also some of the cultural issues that have been identified by the royal commission.

CHAIR: It's interesting that you say that. That's my next line of questioning, I think. Obviously, the royal commission—I'm just backing up what Senator Ketter said—made some quite strong comments about how APRA needs to change, and clearly APRA is responding to this. I get a sense from both your opening statement, Mr Byres, which I've just gone through, and the evidence we've heard today that there is a sense of urgency about those changes in the regulator, which is terrific. But I'm wondering whether you can speculate for me, Mr Byres, a little bit about what APRA might look like in three years time.

Mr Byres : That's a good question. I think the important thing to say, as John said, is that there is an opportunity, particularly because we have some new powers. We've asked for these powers for some time. The parliament is now, hopefully, giving them to us. And it is our intent to use them. We've wanted them for a reason, so it is our intent to use them. We will still be, though, at our heart a prudential regulator, so we will not be, all of a sudden, a police force. But I think we can do more, particularly if we're well equipped to do so, to use those powers and tackle issues more quickly than perhaps we've been able to do in the past.

CHAIR: The commission spoke specifically about the Banking Executive Accountability Regime, the BEAR, and how it should potentially be expanded, rolled out to broader industry. Commissioner Hayne also made a recommendation—I thought this was quite interesting—that the principles of the BEAR should apply to APRA. Do you have any issue with that?

Mr Byres : No, I don't have an issue with that. I think the experience in the UK, where they've had the BEAR-equivalent regime longer than we have, has been that the concept of having clear accountability statements and an accountability map is good governance, really. I don't have an issue with an obligation on us to produce our own statements of accountability and to have those published.

CHAIR: Let me ask about some of the little nuts and bolts to do with the BEAR. Obviously, it's been in place now for, I think, six months or so in the big four banks. What is APRA's role in oversight or implementation of the BEAR in those organisations?

Mr Byres : You are right: it's been in place since 1 July for the four major banks. For all other banks and deposit takers, it comes into effect from 1 July this year, 2019. As I said in my statement, when it's done, for all ADIs there'll be about 1½ thousand executives and directors who are subject to statutory accountability obligations.

CHAIR: If those statutory accountability obligations are breached, is it you or is it ASIC that have—

Mr Byres : Under the current arrangements—recognising that the government has accepted the royal commission's recommendation that they should be extended—yes, there are powers available to us that ultimately could lead to an individual being disqualified from the industry.

CHAIR: Can I ask then in that context—and this might be getting a little bit impertinent of me—did APRA have anything to do with the ousting of Dr Henry and Mr Thorburn from the National Australia Bank?

Mr Byres : I don't want to get into commenting on individual organisations.

Senator KETTER: I want to move to the Productivity Commission report, which I referred to earlier. It was pretty scathing, as I said, of APRA's lack of curiosity in using the data it collects to understand what's going on in the system. In particular, I would instance the comparison between retail funds and industry super funds. Over the last couple of years, I had the opportunity to ask questions of APRA and Mrs Rowell during the course of the bill I was referring to earlier. I asked Mrs Rowell:

Do you accept that the choice sector has underperformed the Mysuper sector by approximately 1.5 per cent since its inception?

She answered:

No, I don't. I disagree with that analysis as providing a meaningful comparison.

To me, it is indicative of something else going on, a lack of willingness to look at the data.

I note there has been a recommendation for a capability review. Given these recommendations about APRA, what will you be doing in the next 12 months to improve data capabilities in particular?

Mr Byres : I might start and, if Heidi wants to add anything, she can. The first thing I will say about data in super is that there are lots of generalisations made from high-level data and, inevitably when you dig into things—and I think this is the point: APRA does dig into things—it is much more complex and much more nuanced than the headline numbers. I think as Mrs Rowell has said on many occasions, there are some general statements but, when you drill down, there are some very good-performing industry funds and there are some less well-performing industry funds. There are good-performing retail funds and there are less-well-performing retail funds. The important thing is to not work with the generalities but to drill into the individual funds.

The member outcomes work that I mentioned earlier was an example of APRA using the data it has—and I accept that there are limitations on the data we collect at present—to produce a quite comprehensive set of metrics across a range of different measures, because there's no single measure of performance, based on net return, gross returns, fees, charges et cetera, and then identify the cohort of funds who seem to be underperforming across a number of different measures. We've used that to put pressure on those funds to lift their game in some shape or form. As I said, in about half of those cases, putting that data in that compelling way in front of trustees has meant that the trustees have decided that the best thing they can do for their members is hand them over to someone else and exit the industry. So I don't think there is any lack of curiosity about what's in the data. We can definitely improve the data. We've got a very big program of work underway to completely overhaul our data infrastructure. That includes the infrastructure through which we collect data from institutions and, ultimately, the ability to give much more meaningful data to the community and other stakeholders who are interested in analysing it.

The final point to make is that one of the other important features of the recent legislative amendments is a very important provision on look-through and the ability to collect data on fees and expenses on a look-through basis. That has been one of the big impediments we have had to being able to really identify performance. The new power will obviously help us close that gap. Heidi, is there anything else that you'd like to offer?

Ms H Richards : In the super area, we do have a program of work underway and we have been looking at the areas that the Productivity Commission called out and in particular, getting better data on investment options at the choice product level, which is very tricky. There are thousands of them. That's something that we've been working on with the industry for a little while.

The other one is expense data that actually looks at filling some of the gaps relating to definitional inconsistencies across the industry. So it's an important piece of work, and we're taking it pretty seriously and getting on with it.

Senator KETTER: Mr Byres, from what you just said about the analysis of industry versus retail or choice versus MySuper, it sounds to me as if you're not resiling from the comments that Ms Rowell made two years ago that it's not a meaningful comparison.

Mr Byres : I'm just making the point that I don't think it gets you very far. The average number is not particularly helpful.

Senator KETTER: Are you aware that the Productivity Commission, I think, conclusively demonstrated that industry funds outperform retail funds?

Mr Byres : That's an average outcome, and that's what the data shows. I'm not disputing the fact that that's what their analysis shows. The point is that, to deal with that, you have to do it fund by fund. There are some retail funds that outperform some industry funds and vice versa. You have to drill down into the data and look at it fund by fund. You have to also make sure that you're comparing like with like—that they have similar investment strategies and there are not other factors at play that are influencing the net returns. I'm not disagreeing with the proposition; I'm simply saying there is an issue that needs to be dealt with in terms of underperformance in the superannuation sector, but the high-level averages are not going to help us deal with that.

Senator KETTER: Okay, but I think what the Productivity Commission also found was that asset allocation differences didn't explain the outperformance issue, so there was something else going on.

Mr Byres : I think they found that there were a number of drivers at play, and asset allocation was one, but there was also a big unexplained component. That's really my point. There are a number of drivers of relative performance, and just comparing two averages across two large populations doesn't get us very far. We really want to weed out the underperformers, which is what we're trying to do. You have to go fund by fund.

Senator KETTER: Do you want to add anything to what you're going to be doing with your existing and new capabilities over the next 12 months or so in this area?

Mr Byres : I think we're very pleased with the success of the first go at the member outcomes project. It has proved that we can use the data more effectively, and the ability to utilise that data in a way that makes a compelling case to trustees is very useful. So the short answer to your question is that I think we want to intensify that work.

Senator KETTER: Will it include an assessment of industry, public sector, corporate and retail funds at the fund level?

Mr Byres : That's essentially what we're doing at present. In the work we did on member outcomes, we picked a bottom cohort, but we're essentially using all APRA funds, running them through on a range of metrics, ranking them and finding the ones that ranked performing across a number of dimensions. They were, if you like, our first hit list. Having worked through those, now we've got to come back and look at the next lot.

Senator KETTER: At the product level?

Mr Byres : If we've got the data, we can get to product level.

Senator KETTER: Thank you very much.

CHAIR: Thank you very much to the officers of APRA. We'll let you go. Thank you, Minister Seselja.