Australia
Financial Sector Assessment Program-Detailed Assessment of Observance-Basel Core Principles For Effective Banking Supervision

This Detailed Assessment of Observance report specifies Base Core Principles (BCP) for effective banking supervision in Australia. An assessment of the effectiveness of banking supervision requires a review of the legal framework, and a detailed examination of the policies and practices of the institution(s) responsible for banking regulation and supervision. In line with the BCP methodology, the assessment focused on banking supervision and regulation in Australia and did not cover the specificities of regulation and supervision of other financial institutions. The assessment has made use of five categories to determine compliance: compliant; largely compliant, materially noncompliant, noncompliant, and non-applicable. The report insists that Australian Prudential Regulation Authority (APRA) should put more focus on assessing the various components of firms’ Internal Capital Adequacy Assessment Process and other firm-wide stress testing practices. A periodic more comprehensive assessment of banks’ risk management and governance frameworks will further enhance APRA’s supervisory approach.

Abstract

This Detailed Assessment of Observance report specifies Base Core Principles (BCP) for effective banking supervision in Australia. An assessment of the effectiveness of banking supervision requires a review of the legal framework, and a detailed examination of the policies and practices of the institution(s) responsible for banking regulation and supervision. In line with the BCP methodology, the assessment focused on banking supervision and regulation in Australia and did not cover the specificities of regulation and supervision of other financial institutions. The assessment has made use of five categories to determine compliance: compliant; largely compliant, materially noncompliant, noncompliant, and non-applicable. The report insists that Australian Prudential Regulation Authority (APRA) should put more focus on assessing the various components of firms’ Internal Capital Adequacy Assessment Process and other firm-wide stress testing practices. A periodic more comprehensive assessment of banks’ risk management and governance frameworks will further enhance APRA’s supervisory approach.

Summary1

1. Since the last Financial Stability Assessment Program (FSAP), the Australian Prudential Regulation Authority (APRA) has kept an active pace in implementing reforms to enhance the resilience of the Australian financial system. APRA has implemented key elements of the international regulatory reform agenda, at times going beyond the agreed minimum standards to provide additional resilience. APRA has focused on strengthening the capital framework, implementing Basel III liquidity standards, reinforcing sound mortgage lending standards, improving governance and accountability, and strengthening crisis management and preparedness. Since some of these reforms have not been fully completed, they remain on APRA’s priority agenda. Other broad policy reforms have been also enacted, including: a cross-industry risk management standard, a governance and risk management framework for conglomerates, and a phased approach to licensing. In addition to these policy developments, APRA has also taken steps to align its resources to evolving market needs. It has restructured its specialist risk and supervision teams to develop a new risk and data analytics function, bringing together specialists in statistics, industry analysis, and risk, to best harness this collective expertise. In accordance with its risk-based approach, APRA has also focused its supervisory activities more on reviewing banks’ practices and underwriting standards in the area of residential mortgages and commercial real estate lending, in addition to other risk areas.

2. APRA has achieved a high degree of compliance with the Basel Core Principles for Effective Supervision (BCPs). Notwithstanding the revision to the BCP methodology, which raised the standards for achieving supervisory objectives, APRA has demonstrated clear progress in strengthening the effectiveness of supervision. This is most evident in the work of APRA on supervision of liquidity and credit risk, as well as the enhancement of banks’ capital adequacy requirements, including the planned implementation of an “unquestionably strong” capital framework in line with the recommendations of the 2014 Financial System Inquiry (FSI).

3. A periodic more comprehensive assessment of banks’ risk management and governance frameworks will further enhance APRA’s supervisory approach. Such an assessment would ensure that APRA’s risk-based supervisory processes remain focused on the key gaps in banks’ management and risk culture. These processes will be strengthened even further if APRA’s supervisory assessment incorporates banks’ management of nonfinancial risks, based on a closer engagement with the relevant domestic agencies, mainly the Australian Securities and Investments Commission (ASIC) and the Australian Transaction Reports and Analysis Centre (AUSTRAC).

4. One of the challenges that APRA faces and which is a global challenge for regulators is to continuously develop its resources and skillset to match the evolution in banking services and risks. This will be even more important as new players, with digitally-focused business models, enter the market under the new phased licensing regime, and as incumbent firms continue to advance the digitization of their business. APRA will need to develop its resources and skills, particularly in specialized areas such as IT, cyber risk and fintech. APRA will need to ensure that its resources remain adequate to discharge its increasing responsibilities, particularly the implementation of the new Banking Executive Accountability Regime (BEAR) and the work planned to introduce and implement a recovery and resolution planning framework. To successfully meet all these challenges and responsibilities, it is essential that APRA is granted sufficient autonomy and flexibility in its budgeting process and staffing conditions to enable it to attract and retain the skills needed for its evolving responsibilities.

Methodology

5. This assessment of the implementation of the BCP by APRA is part of the FSAP undertaken by the International Monetary Fund (IMF) in 2018. It reflects the regulatory and supervisory framework in place as of the date of the completion of the assessment. It is not intended to represent an analysis of the state of the banking sector or crisis management framework, which are addressed in the broader FSAP exercise.

6. An assessment of the effectiveness of banking supervision requires a review of the legal framework, and a detailed examination of the policies and practices of the institution(s) responsible for banking regulation and supervision. In line with the BCP methodology, the assessment focused on banking supervision and regulation in Australia and did not cover the specificities of regulation and supervision of other financial institutions. The assessors reviewed the framework of laws, regulations, manuals and other materials mainly provided by APRA and held extensive meetings with APRA officials. The assessors held also additional meetings with the Australian Treasury, the Reserve Bank of Australia (RBA), AUSTRAC, ASIC, banks, external audit firms, and the Australian Banking Association. The authorities provided a BCP self-assessment, responses to additional questionnaires, and access to supervisory documents and files, staff, and systems. In this respect, the assessors appreciate the excellent cooperation received from the authorities and extend their thanks to their staff who participated and facilitated this exercise.

7. The standards were evaluated in the context of the Australian banking system’s structure and complexity. The BCP must be capable of application to a wide range of jurisdictions whose banking sectors will inevitably include a broad spectrum of banks. To accommodate this breadth of application, according to the methodology, a proportionate approach is adopted, both in terms of the expectations on supervisors for the discharge of their own functions and in terms of the standards that supervisors impose on banks. An assessment of a country against the BCP must, therefore, recognize that its supervisory practices should be commensurate with the complexity, interconnectedness, size, risk profile, and cross-border operations of the banks being supervised. The assessment considers the context in which the supervisory practices are applied. The concept of proportionality underpins all assessment criteria. For these reasons, an assessment of one jurisdiction will not be directly comparable to that of another.

8. The current assessment is based on the 2012 version of BCPs issued by the Basel Committee on Banking Supervision (BCBS).2 Since the past assessment conducted in 2012, the BCP standard was revised and reflects the international consensus for minimum standards based on global experience. It is, therefore, important to note that this assessment cannot and should not be compared to the previous exercise, as the revised BCPs have a heightened focus on corporate governance and risk management, their practical application by the supervised institutions, and the assessment performed by the supervisory authority. The revised BCPs stress on the effectiveness of a supervisory framework not only through providing supervisors with the necessary powers to address safety and soundness concerns but also by heightening the focus on the actual use of those powers, in a forward-looking approach, and on the need for supervisors to ensure compliance with regulatory requirements and to thoroughly understand the risk profile of banks and the banking system.

9. Australia has opted to be assessed and graded against both the essential and additional criteria, the highest standards of supervision and regulation. To assess compliance, the BCP Methodology uses a set of essential and additional assessment criteria for each principle. The essential criteria (EC) were usually the only elements on which to gauge full compliance with a Core Principle (CP). The additional criteria (AC) are recommended best practices against which the authorities of some more complex financial systems may agree to be assessed and rated. The assessment of compliance with each principle is made on a qualitative basis, using a five-part rating system explained below. The assessment of compliance with each CP requires a judgment on whether the criteria are fulfilled in practice. Evidence of effective application of relevant laws and regulations is essential to confirm that the criteria are met.

10. The assessment has made use of five categories to determine compliance: compliant; largely compliant, materially noncompliant, noncompliant, and non-applicable. An assessment of “compliant” is given when all the essential and additional criteria are met without any significant deficiencies, including instances where the principle has been achieved by other means. A “largely compliant” assessment is given when only minor shortcomings are observed that do not raise any concerns about the authority’s ability and clear intent to achieve full compliance with the principle within a prescribed period of time. The assessment “largely compliant” can be used when the system does not meet all essential and additional criteria, but the overall effectiveness is sufficiently good, and no material risks are left unaddressed. A principle is considered to be “materially noncompliant” in case of severe shortcomings, despite the existence of formal rules and procedures and there is evidence that supervision has clearly been ineffective or that the shortcomings are sufficient to raise doubts about the authority’s ability to achieve compliance. A principle is assessed “noncompliant” if it is not substantially implemented, several essential criteria are not complied with, or supervision is manifestly ineffective. Finally, a category of “non-applicable” is reserved for those cases where the criteria do not relate the country’s circumstances.

11. An assessment of compliance with the BCP is not, and is not intended to be, an exact science. The assessment criteria should not be seen as a checklist approach to compliance but as a qualitative exercise involving judgement by the assessment team. While compliance with the BCP can be met in different ways, compliance with some criteria may be more critical for the effectiveness of supervision, depending on the situation and circumstances in a given jurisdiction. Hence, the number of criteria complied with is not always an indication of the overall compliance grade for any given principle. Nevertheless, by adhering to a common, agreed methodology, the assessment should provide the Australian authorities with an internationally consistent measure of the quality of their banking supervision framework in relation to the BCP, which are internationally acknowledged as minimum standards. Emphasis should be placed on the commentary that should accompany each principle grade, rather than on the grade itself.

The 2012 Revised Core Principles

The revised BCPs reflect market and regulatory developments since the last revision, taking account of the lessons learned from the financial crisis in 2008/2009. These have also been informed by the experiences gained from FSAP assessments as well as recommendations issued by the G-20 and FSB, and take into account the importance now attached to: (i) greater supervisory intensity and allocation of adequate resources to deal effectively with systemically important banks; (ii) application of a system-wide, macro perspective to the microprudential supervision of banks to assist in identifying, analyzing, and taking pre-emptive action to address systemic risk; (iii) the increasing focus on effective crisis preparation and management, recovery and resolution measures for reducing both the probability and impact of a bank failure; and (iv) fostering robust market discipline through sound supervisory practices in the areas of corporate governance, disclosure, and transparency.

The revised BCPs strengthen the requirements for supervisors, the approaches to supervision and supervisors’ expectations of banks. The supervisors are now required to assess the risk profile of the banks not only in terms of the risks they run and the efficacy of their risk management, but also the risks they pose to the banking and the financial systems. In addition, supervisors need to consider how the macroeconomic environment, business trends, and the build-up and concentration of risk inside and outside the banking sector may affect the risk to which individual banks are exposed. While the BCP set out the powers that supervisors should have to address safety and soundness concerns, there is a heightened focus on the actual use of the powers, in a forward-looking approach through early intervention.

The number of principles has increased from 25 to 29. The number of essential criteria has expanded from 196 to 231. This includes the amalgamation of previous criteria (which means the contents are the same), and the introduction of 35 new essential criteria. In addition, for countries that may choose to be assessed against the additional criteria, there are 16 additional criteria.

While raising the bar for banking supervision, the Core Principles must be capable of application to a wide range of jurisdictions. The new methodology reinforces the concept of proportionality, both in terms of the expectations on supervisors and in terms of the standards that supervisors impose on banks. The proportionate approach allows assessments of banking supervision that are commensurate with the risk profile and systemic importance of a wide range of banks and banking systems.

Institutional and Market Structure

A. Institutional Framework for Regulation and Supervision

12. APRA is responsible for the prudential regulation and supervision of Authorized Deposit-taking Institutions (ADIs) in Australia. In addition to ADIs, APRA is responsible for the prudential oversight of general, life, and private health insurance companies, and most of the superannuation industry. In performing and exercising its functions and powers, APRA is to balance the objectives of financial safety and efficiency, competition, contestability, and competitive neutrality and, in balancing these objectives, is to promote financial stability in Australia.

13. Australia’s financial regulatory framework include three other financial sector authorities responsible for financial regulation. These are as follows:

  • The Treasury has responsibility for advising the Government on financial stability issues and on the legislative and regulatory framework underpinning financial system infrastructure.

  • The RBA is Australia’s central bank responsible for monetary policy as well as the safety and efficiency of the payments system and for overall financial stability.

  • ASIC is responsible for the registration and supervision of corporations and, in the financial sector, for licensing of financial service providers, credit providers and market conduct.

14. In addition, the Council of Financial Regulators (CFR) is the primary coordinating body for Australia’s main financial sector agencies. It comprises the RBA (Chair), APRA, ASIC, and the Treasury. The CFR ensures a structured, multilateral coordination process across the relevant agencies. However, each member is fully responsible for discharging its own responsibilities within its statutory mandate. The CFR’s objectives are to promote stability of the Australian financial system and contribute to the efficiency and effectiveness of regulation.

15. AUSTRAC administers Australia’s anti-money laundering and counter-terrorism financing laws. It is Australia’s Financial Intelligence Unit to fight serious and organized crime and terrorism financing. It is also Australia’s regulator for anti-money laundering and countering the financing of terrorism (AML/CFT), overseeing the compliance of more than 14,000 Australian businesses ranging from major banks and casinos to single-operator businesses.

16. The FSI was established in late-2013 to assess how Australia’s financial system could most effectively help the economy be productive, grow, and meet the financial needs of Australians. The Inquiry (chaired by David Murray) highlighted that the financial system needed to satisfy three principles: to efficiently allocate resources and risks; to be stable and reliable; and to be fair and accessible. The Inquiry’s key recommendations were that Australia should: continue to align its prudential framework with internationally agreed standards; maintain efforts to encourage competition; focus on fostering innovation; and move beyond relying on disclosure to regulate fair outcomes for consumers interacting with the financial system. The FSI re-affirmed that the Australian financial system’s twin peaks architecture, with independent regulators responsible for each of consumer outcomes and prudential regulation, remained appropriate. It recommended further steps to ensure Australia’s banking sector is stable and resilient in times of future financial stress, such as the establishment of an ‘unquestionably strong’ capital framework, with a baseline target in the top quartile of internationally active banks.

B. Overview of the Banking Sector

17. Banks and other ADIs are the most significant component of the system. They currently represent nearly 67.6 percent of all APRA-regulated financial system assets, equal to around 2.3 times the level of nominal GDP. Banks account for 98.8 percent of ADI assets in March 2018. The general insurance, life insurance, and superannuation industries together account for around 32.4 percent of total APRA-regulated financial assets.

18. Australia’s four major domestic banks dominate the ADI sector, accounting for 76.4 percent of total ADI assets in March 2018. Each of the major banks has consolidated group assets that rank them among the top 50 banks worldwide, but their businesses are not global and generally focus on the domestic and New Zealand markets. The rest of the ADI sector comprises 4 mid-sized banks and a few other small Australian-owned banks (9.8 percent of total ADI assets), and 51 foreign-owned banks, 44 branches, and 7 subsidiaries (12.6 percent of total ADI assets). Building societies and credit unions account for the remaining 1.2 percent of total ADI assets in Australia with their share gradually declining over the last few decades.

19. Profitability of the Australian banking system remains strong. The banking sector reported aggregated after-tax profits of A$36.4 billion in the year ended March 2018, up 9.3 percent from the previous year. The return on equity was 12.3 percent compared to 11.7 percent for all ADIs. The return on assets reached 0.8 percent compared to 0.7 percent during the previous year. The ratio of nonperforming loans (NPLs) to gross loans and advances is also at near record lows, at just under 0.4 percent, and has been at around this level since 2015.

20. Banks carry high exposure to domestic real estate and to wholesale funding markets. Residential mortgages account for over half of banks’ loans portfolio, and about a quarter of these are interest-only mortgages. Many Australian financial institutions were downgraded by credit rating agencies in 2017, largely due to concerns about their exposure to high household debt. Banks’ dependence on wholesale funding has come down in recent years but still remains high at about one-third of total liabilities, of which nearly two-thirds is from international sources, representing a diverse range of countries. Australian-owned banks have reduced their international lending exposures since 2015, except for lending to New Zealand entities, mostly via Australian banks’ subsidiaries, which has increased faster than the banks’ total assets.

21. Australia’s banking system is well-capitalized. Australian ADIs have been increasing regulatory capital since 2012 in response to the implementation of Basel III, APRA’s raising of residential mortgage risk weights applied by banks using internal models to an average of at least 25 percent, and in preparation of APRA’s ‘unquestionably strong’ capital requirements. The banks have strengthened their capital positions through equity raisings, dividend reinvestment plans and retained earnings. As of March 2018, the aggregate Tier 1 capital ratio for locally-incorporated banks was 12.6 percent of risk-weighted assets, up from 10.5 percent in March 2013. The total capital ratio was 14.8 percent.

Preconditions for Effective Banking Supervision

A. Sound and Sustainable Macroeconomic Policies

22. The Australian economy is experiencing relatively benign macroeconomic conditions with growth trending upwards while inflation remains low. Australia has delivered 26 years of uninterrupted growth, supported in part by strong exports to a dynamic Asian region. While Australia has historically benefited from vast natural resources and a strong mining industry, the modest impact of the large commodity shock between mid-2014 and 2016 reflects the increasing diversification of the economy, prompt monetary policy easing, and the benefits of a floating exchange rate, flexible labor markets, relatively high population growth, and strong institutions. Nevertheless, as in many other advanced economies since the Global Financial Crisis, the adjustment to the demand shocks has been protracted, with persistent economic slack, and average growth has been lower. Nominal and real wage growth have declined, both reflecting and contributing to inflation being below the RBA’s target range of 2 to 3 percent since 2014.

23. A housing boom has supported the economy but has led to housing market imbalances and higher household debt. House prices in the major eastern capital cities of Melbourne and Sydney have risen sharply over the past few years, driven by demand fundamentals, including lower interest rates, high population growth, and foreign investor interest, and amplified by legacy supply constraints. Household debt ratios have risen significantly since the previous FSAP and are high by international comparison.

B. Framework for Financial Stability Policy Formulation

24. Both the RBA and APRA have mandates to promote financial system stability. In promoting financial system stability, APRA is required to balance the objectives of financial safety and efficiency, competition, contestability, and competitive neutrality. ASIC and the Treasury also have roles in promoting financial stability, both independently and through their involvement in the CFR.

25. CFR is the coordinating body of the main financial sector agencies involved in promoting financial stability. The CFR’s objectives are specified in its Charter and require it to promote the stability of the Australian financial system and to contribute to the efficiency and effectiveness of financial regulation. The CFR, chaired by the RBA, typically meets four times a year, where financial and regulatory developments are discussed, including those with a bearing on financial stability. The CFR will also meet out of session if necessary. Minutes of meetings are not published. However, the RBA reports on the CFR’s activities and issues it has discussed in its half-yearly Financial Stability Review. The CFR regularly forms working groups with agreed terms of reference to undertake more detailed policy development.

26. The CFR is not a statutory body and hence, does not have a legal personality, nor does it have powers separate from its member agencies. Its members share information and views on developments in the financial system, discuss regulatory reforms and other issues related to areas where responsibilities overlap, and coordinate responses to potential threats to financial system stability. These arrangements are underpinned by a Memorandum of Understanding (MoU), which reflects the CFR agencies’ strong commitment to exchange information openly and coordinate responses to potential threats to the stability of Australia’s financial system. The 2014 FSI examined the operation of the CFR (as part of considering Australia’s financial stability institutional arrangements) to consider alternative institutional approaches but did not see a strong case for change in this area.

C. A Well-developed Public Infrastructure

Judiciary System

27. There is a strict separation between the Judiciary on the one hand, and the Parliament and Executive on the other. Only a court can exercise the judicial power of the Commonwealth to decide whether a person has contravened a law of the Australian Parliament. In exercising this power, the Australian courts uphold the principle of judicial independence which ensures judges are free from legislative and executive interference in performing their judicial functions. Publicly available reports by different third parties (such as the World Economic Forum, World Bank, and Bertelsmann Stiftung) support the independence of the Australian judicial system.

28. Disputes in Australia can be settled through the judicial system. Chapter III of the Constitution vests the judicial power of the Commonwealth of Australia in the High Court of Australia, other federal courts created by the Commonwealth Parliament, and other courts invested with federal jurisdiction. Currently there are three other federal courts, namely, the Federal Court of Australia, the Family Court of Australia, and the Federal Circuit Court of Australia. The High Court decides disputes about the meaning of the Constitution and is also the final court of appeal.

A System of Business Laws and Standards

29. Australia’s legal system provides a secure framework for the operation of contracts between parties and offers a transparent and fair mechanism for resolving disputes about contracts. Australian contract law provides rules relating to the creation, performance, and termination of rights, duties, and liabilities that are voluntarily assumed by contracting parties. The law does not lay down a comprehensive set of rights, duties, and liabilities, but rather sets out parameters within which the parties’ agreement must fall for it to be enforceable.

30. Australia has a number of options available for resolving disputes without going to a court or tribunal. These include mediation, conciliation, conferencing, neutral evaluation, and arbitration. There is generally no requirement to undertake alternative dispute resolution before seeking to resolve a dispute through the courts. However, some courts (including the Federal Court) have the power to require parties to a dispute to participate in alternative dispute resolution. In Australia, it is generally a license condition that financial firms providing financial products or services to retail clients (including consumer credit and superannuation) must have internal and external dispute resolution mechanisms available. Recent reforms establish a new single external dispute resolution mechanism (EDR) scheme for consumer and small business complaints: the Australian Financial Complaints Authority (AFCA) which replaces the two ASIC approved EDR schemes and the statutory Superannuation Complaints Tribunal. Commencing on November 1, 2018, AFCA will be free of charge for consumers to access and able to deal with a broad range of complaints (including complaints from small businesses and primary producers) about banking, credit, loans, general insurance, life insurance, financial advice, investments, stock broking, managed funds, and superannuation.

31. Property rights in Australia enjoy strong protection under the law and through oversight of the courts. The law governing property in Australia recognizes two categories of property: real property (broadly, land and land-related property) and personal property (all other forms of property). Australian courts have given a broad interpretation to the concept of property and have been vigilant in protecting property rights. Well entrenched remedies are available to redress interference with property rights.

32. The Corporations Act sets down Australia’s corporate insolvency law. Australia’s insolvency law primarily aims to provide efficient procedures for winding up companies, realizing company assets in an orderly fashion, and equitably distributing the proceeds of company assets among the company’s creditors (including employees) and shareholders. Under Australian law, an insolvent company can enter into external administration or its assets can be subject to receivership. External administration includes liquidation, voluntary administration and deeds of company arrangement.

33. The starting point for regulating financial services and products in Australia is the requirement for entities to hold a license or authorization prior to providing a financial service or product. These licenses and authorizations include: Australian financial services (AFS) license—issued by ASIC and which is required to carry on a financial services business in Australia (unless exempt); Credit license—issued by ASIC and required to engage in consumer credit activities (unless exempt); and Authorization to carry out banking or insurance business and license to be a trustee of a registrable superannuation entity (RSE)—issued by APRA and required to operate in a prudentially regulated industry.

Accounting Principles and Auditing Standards

34. Australian accounting and auditing standards are aligned to international standards. Australia adopted Australian equivalents to International Financial Reporting Standards (A-IFRS) for reporting periods beginning on or after January 1, 2005. Accounting standards in Australia are made by the Australian Accounting Standards Board (AASB). The AASB is involved in the IFRS standard-setting process and reviews the IFRS text to ensure they are appropriate for Australia’s legal, economic, and institutional environment. Australian auditing standards are made by the Auditing and Assurance Standards Board (AUASB) and are based on the International Standards on Auditing. The AUASB reviews the international standards to ensure they fit with Australia’s regulatory environment before issuing them in Australia. The Financial Reporting Council, which is the body responsible for overseeing the effectiveness of the financial reporting framework in Australia, provides oversight of AASB and AUASB activities.

35. The Corporations Act contains comprehensive requirements for the independence of auditors. These include: a general requirement for auditor independence; restrictions on auditors’ employment and the financial relationships that can exist between auditors and their clients; a two-year ‘cooling-off’ period before an audit firm partner can become an officer of a client of the audit firm; a requirement for lead and review auditors of listed companies to rotate after five years; and extensive disclosure requirements for listed companies in relation to non-audit services provided by their auditors. ASIC’s role in surveillance and enforcement of the audit process and financial reporting requirements has recently been significantly enhanced. Auditors and audit firms must be registered with ASIC before they can conduct an audit for Corporations Act purposes. ASIC registration depends on the auditor having the necessary qualifications, satisfying the auditing competency standard, and being capable of performing their duties. ASIC is also responsible for auditor oversight. It has instituted an ongoing audit inspection program to ensure audit firms are complying with their auditor independence and audit quality obligations.

36. Reforms related to Comprehensive Credit Reporting (CCR) are currently being undertaken by the Government. While there are no public credit registries in operation in Australia, there are a number of providers of negative credit reporting. The CCR reforms will involve relevant amendments to the National Consumer Protection Act and the Privacy Act. Those reforms will require large Australian banks to provide comprehensive credit information (including positive credit information) to Australia’s major private credit bureaus. The four major banks are being mandated to provide CCR information on 50 percent of their active accounts to Australia’s three largest credit bureaus by end-September 2018. CCR data on the remaining accounts must be supplied by end-September 2019.3

Payments Clearing System

37. The RBA has primary regulatory responsibility for Australia’s payments system, including systemically important payment systems. The RBA also assumes responsibility for the day-to-day operation of the high value payments system RITS. The Payments System Board determines the RBA’s payments system policy in a way that best contributes to: controlling risk in the financial system; promoting the efficiency of the payments system; and promoting competition in the market for payment services, consistent with the overall stability of the financial system. The Payments System Board comprises the Governor as chair, one other RBA appointee, an appointee from APRA, and up to five other members.

38. Most of the powers of the Payments System Board derive from the Payment Systems (Regulation) Act 1998. This Act allows the RBA to obtain information from payments system participants, to designate a payment system and to set access regimes and standards for designated payment systems. To date, these powers have been used solely in the retail space, most notably in the regulation of card schemes’ interchange fees and regulation of surcharges added by merchants to card payment transactions. Separately, the RBA is able to provide additional legal certainty regarding settlement finality in approved RTGS systems and netting arrangements.

39. Launched in February 2018, the New Payments Platform provides an open access infrastructure for fast payments in Australia. It was developed via industry collaboration to enable households, businesses, and government agencies to make simply addressed payments, with near real-time funds availability to the recipient, on a 24/7 basis. The infrastructure of the new payments platform supports the independent development of ‘overlay’ services to offer innovative payment services to end-users. The RBA built the settlement component of this platform, known as the Fast Settlement Service, which allows transactions to be settled individually on a 24/7 basis, in close to real time.

40. Clearing and settlement (CS) facilities that operate in Australia are required to be licensed or exempted under Part 7.3 of the Corporations Act. The requirement to be licensed applies to both domestic and overseas facilities. The Corporations Act establishes conditions for the licensing and operation of CS facilities in Australia and gives ASIC and the RBA separate but complementary powers and regulatory responsibilities for the supervision of CS facilities. Given this, ASIC and the RBA have agreed a MoU, which is intended to promote transparency, help prevent unnecessary duplication of effort, and minimize the regulatory burden on CS facilities.

D. Framework for Crisis Management, Recovery and Resolution

41. The CFR has focused considerable attention on Australia’s financial crisis management arrangements with a view to further strengthening the framework and ensuring alignment with international standards and best practice. The CFR members entered into an MoU on Financial Distress Management in 2008. The MoU sets out the objectives, principles, and processes for managing distress in the Australian financial system. The circumstances to which the MoU relates include, but are not limited to, financial distress in an ADI, general insurer, life insurer, superannuation fund, as well as interruptions to the smooth functioning of FMIs.

42. APRA has a wide range of statutory powers to respond to distress in its regulated financial institutions. These include powers to enforce compliance with prudential requirements and to investigate and obtain information, as well as a range of resolution powers. APRA’s powers vary depending on the type of financial institution. These include powers to obtain an enforceable undertaking and to seek court injunctions. APRA can also give directions to regulated institutions. A direction issued by APRA is binding and can be used to enforce compliance with prudential requirements and to implement elements of a resolution.

43. The legislative reforms enacted through the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018 significantly expanded crisis resolution powers, and more clearly defined APRA’s mandate regarding resolution planning. These reforms also provide APRA with formal direction powers related to resolution planning and removing barriers to the resolvability of regulated entities or groups. Such a direction could require an ADI to address barriers to orderly resolution, such as making changes to their systems, business practices, or operations in order to make them more resolvable. Following this, APRA intends to develop its formal prudential framework for resolution planning, with a view to starting consultation on a prudential framework on recovery and resolution planning in 2019.

44. APRA is currently undertaking a recovery planning program for banks. In 2011, APRA initiated the pilot and focused on the 6 largest banks, including Australia’s four D-SIBs. This was followed by extending the requirement to 12 medium-sized banks (with assets greater than A$5 billion) in 2013, and later to three key service providers. In 2016, a thematic review of recovery planning was completed which involved the 9 largest banks further developing recovery plans and APRA providing feedback based on a benchmarking exercise. APRA is currently conducting the final phase of this thematic review, with entity-specific feedback due to be provided in 2018. APRA’s recovery planning program is also applied on a case-by-case basis for smaller banks and ADIs in a way that is proportionate for the size of the entity and the risk/impact of failure.

E. Public Safety Net

45. In October 2008, the Australian Government established the Financial Claims Scheme (FCS) for ADIs and general insurers. For ADIs, the FCS protects account-holders and provides prompt access to deposits if an ADI fails. The Treasurer can declare that the FCS is activated for an ADI when APRA has determined that the ADI is insolvent and has applied to the court to be wound up. From October 2008, the FCS applies to deposit balances up to A$1 million per account-holder per ADI. The A$1 million limit was established in the context of the global financial crisis and was intended to reinforce depositor confidence. In September 2011, on the CFR’s recommendation, the Government announced that the FCS limit would be reduced to A$250,000 from February 1, 2012.

46. The FCS is post-funded. Should it become necessary, initial funding is provided for the FCS via standing appropriations under the Banking Act 1959 and Insurance Act 1973, which provide assurance that funds will be available if the FCS is activated. APRA, on behalf of the Government, is entitled to recover payouts in the winding up of the entity. In the case of ADIs, but not general insurers, APRA enjoys a priority claim on the assets of the entity for such amounts. In respect of both ADIs and general insurers, any shortfall can be recovered through an industry levy.

F. Effective Market Discipline

47. Disclosure requirements are fundamental to Australia’s regulatory regime for protecting consumers and ensuring confidence in the securities market. Market participants and investors must be provided with information on specific occasions (for example, when securities are offered, in a takeover situation, and for short sales), at regular planned intervals (for example, in annual reports), and in response to continuous disclosure obligations. Disclosure requirements are contained in the Corporations Act, and listed companies must also comply with the supplementary requirements in the relevant listing rules. Each financial year, entities that are subject to disclosure requirements must prepare a financial report and a directors’ report (containing information about operations, activities, and a range of other matters). The timeframe within which these reports must be published is specified in the Corporations Act and the relevant listing rules. There are similar requirements for half-year financial and directors’ reports.

48. Australian competition law is contained in the Competition and Consumer Act which applies to all industries, including the financial sector. The object of the Act is to enhance the welfare of Australians by promoting competition and fair trading, and by protecting consumers. The Australian Competition and Consumer Commission (ACCC) is Australia’s competition regulator. Its responsibilities include enforcing the prohibitions on anti-competitive conduct contained in the Competition and Consumer Act, including provisions preventing corporations misusing substantial market power to substantially lessen competition.

Main Findings

A. Responsibilities, Objectives, Powers, Independence (CP1–2)

49. APRA has broad powers and clear responsibilities underpinned mainly in the Banking Act and the APRA Act. In addition to promoting financial stability, the APRA Act states that this objective is to be pursued while balancing other objectives such as financial safety, efficiency, competition, contestability and competitive neutrality. This can be a challenging balance to make but APRA seems focused on financial stability even as the banking sector is becoming more open to new types of activities and to more competition. Therefore, it may be useful to consider clarifying further the primary nature of APRA’s financial stability objective and that the other objectives are subordinate to the financial stability mandate.

50. APRA has clear powers to set and enforce prudential standards, but these can be disallowed by the Parliament. APRA has been tailoring the severity and the complexity of its requirements depending on the size, systemic importance, and risk profile of ADIs. This will allow a more proportionate approach to its regulation and supervision. However, the fact that its prudential standards can be disallowed by the Parliament weakens APRA’s prudential standard setting powers in supporting the achievement of its statutory mandate even if this case seems exceptional and has not taken place to date. Having said that, APRA has successfully introduced many regulatory reforms over the last few years to implement international standards and the recommendations of the 2014 FSI.

51. APRA performs its operations based on a robust governance framework and a solid accountability mechanism. APRA has set internal policies and processes that allow efficient decision making in normal and stressed times. Governance is strengthened by internal risk management and internal audit committees consisting of a majority of independent members. APRA is subject to a strong accountability framework to the Parliament, the government, and the general public. This framework requires APRA to prepare and publish a set of reports that transparently show what priorities APRA is aiming for and how it is discharging its duties in fulfillment of these priorities and objectives.

52. While APRA may currently have a reasonable degree of independence to meet its statutory goals, there are some constraints that could potentially impact this independence. The power granted to the Minister to issue directions to APRA about policies it should pursue is a matter of potential concern (since it could lead to direct or indirect interference in APRA’s prudential standard setting powers) even if this power has never been exercised so far. Since objectives can be misaligned at times, it is always better to remove any potential loopholes in the framework. In addition, the APRA Act should require public disclosure of the reasons for removal of an APRA Member, which is a sound practice based on the Basel Core principles. The statement of expectations (SOE) issued by the Government to APRA and APRA’s reply in its statement of intent (SOI) have served as a platform to publicly present (in a media release issued by the Treasurer) the government’s priorities and how APRA would respond to them. In 2014, the Treasurer used the media release to reiterate that it is imperative that regulators act independently and objectively, but wanted to ensure the regulators took account the broader policy framework.4 Notwithstanding, it may be useful to clarify the objective of the SOE and ensure that it does not direct APRA’s priorities in a way that could conflict with its primary mandate of financial stability.

53. A more flexible and autonomous budget process and a relaxation of the constraints on the framework for staff employment and remuneration would allow APRA to better discharge its increasing responsibilities to dynamically oversee the evolving nature of banking activities. While noting that APRA has received additional budgets over the recent years to implement new initiatives and projects, APRA is subject to “efficiency dividends,” and additional budget proposals (new policy proposals) need approval by the Government. While there is some forward view of expected funding, there is uncertainty over the medium-term budget which may present difficulties for APRA’s resource planning. Therefore, it is important to provide APRA with higher flexibility and more autonomy in its budget planning and approval processes. In addition, the constraints on APRA’s staff employment and remuneration framework, such as the Australian Public Service (APS) workplace bargaining policy, limit APRA’s potential to attract and retain high quality staff. While some remuneration levers and individual flexibility arrangements seem to be available under APRA’s current enterprise agreement, the policy is creating challenges for APRA to attract and retain the highly specialized skills that it currently needs to better oversee the evolving risks in Australia’s banking sector, including those related to digital business models and cyber risk.

B. Licensing, Change in Control, and Acquisitions (CP 4–7)

54. APRA has a very thorough licensing framework. In assessing licensing applications, APRA follows criteria that are consistent with ongoing supervision requirements. It also reviews the proposed ADI strategy and financial viability, its business plan, the suitability of its owners and management, its governance framework, and its risk management framework. The removal of the minimum initial capital for licensing ADI was a step made by the government to encourage the entry in the financial system. However, APRA seems aware of the associated potential risks and it ensures that the applicants show their ability to comply with the prudential capital adequacy requirements from the start of their operations and going forward.

55. APRA has recently introduced a phased licensing regime to open the way for new market entrants. The implementation of the phased (or restricted) licensing regime will encourage more competition in the banking sector and allow a more gradual approach to licensing that ensures closer follow-up by APRA throughout the licensing phase. The new ADIs are expected to have different business models that rely more on technological innovation. APRA has put limitations on the size and operations of these restricted licensees to reduce possible financial stability risks. It also requires them to have a two-year conversion strategy (to become full ADIs) and an exit strategy (with some resolution funds) to ensure they can smoothly exit the market if necessary without causing financial stability concerns. APRA is recommended to adopt prudence as it implements this new approach. Given the expected digitally-focused business models of these new banks, APRA should also step up its efforts and build further its capacity in relation to fintech developments and associated risks, including operational, IT and cyber risk issues, to ensure it is able to adequately oversee these new firms.

56. The regime for significant change in ownership is another area where APRA’s independence and powers warrant strengthening. The change in significant ownership of banks is governed by the Financial Sector Shareholdings Act (FSSA), which gives the Treasurer the power to decide on changes in ownership stakes of more than 15 percent. While the Treasurer has delegated APRA for approving changes in significant ownership for banks with assets of less than A$1 billion, this is only a partial delegation and can be withdrawn if the Treasurer decides so. In addition, the criteria for approval of a significant change in ownership are based on “national interest” considerations which are not defined in the FSSA. Therefore, it is not clear to which extent these considerations take into account the fitness, propriety and suitability of the significant shareholders. While in practice, the Treasurer would seek APRA’s advice as to whether there are any prudential concerns in relation to decisions affecting banks with assets exceeding A$1 billion, such advice from APRA is not binding in making the Treasurer’s decisions.

C. Supervisory Cooperation and Cross Border Supervision (CP3,12,13)

57. APRA has a good level of interaction with the various domestic authorities involved in regulating and supervising financial sector issues, but these relationships can be further enhanced with some agencies. APRA has a good level of cooperation with the RBA on various financial stability and systemic risk issues. This cooperation also takes place at the CFR which provides a platform for discussion of financial stability topics among the main financial regulators. Cooperation with ASIC has been intensifying over the recent period given the increasing topics of mutual interest on market conduct and governance issues as well as on responsible lending and serviceability assessments. Building a more thorough interaction with ASIC will help further enhance APRA’s understanding of risks in the financial sector and the implications for APRA’s risk assessment of ADIs, particularly with the new Banking Executive Accountability Regime (BEAR). On the other hand, cooperation between APRA and AUSTRAC has not been as extensive and is currently primarily focused on high-level issues. Both agencies seem to be aware of the importance of stepping up the frequency and thoroughness of their interaction. This relationship should, therefore, be brought to a new operational level involving different layers of the agencies’ hierarchies so that more substantive and entity-specific issues can be discussed on a much more frequent basis.

58. APRA has developed close working relationships with foreign regulators, particularly with the Reserve Bank of New Zealand (RBNZ), given the significance of banks’ cross-border operations in New Zealand. These relationships are supported by MoUs and other letters of understanding that set the foundation for supervisory cooperation and exchange of confidential information. APRA conducts onsite reviews, particularly for the major banks’ subsidiaries in New Zealand and contacts with other relevant regulators. APRA has conducted supervisory colleges for two of its banks, but the last one was about three years ago. While recognizing the shrinking global footprint of some Australian banks may not warrant the organization of supervisory colleges for them, there are still some Australian banks with a significant cross-border presence which may benefit from active supervisory colleges. In addition, APRA should implement its plan to develop a resolution planning framework and coordinate with foreign regulatory authorities to develop resolution plans for its major cross-border banking groups.

59. APRA consolidated supervisory approach is well integrated in its supervisory practices and activities. Prudential standards and financial data are collected on a consolidated basis. APRA also reviews the oversight of a bank’s foreign operations by management and ensures that the banking group risk management framework is applied on a consolidated basis. APRA has also introduced in 2017 a governance and risk management framework for conglomerates, covering issues such as risk management, fit and proper, and governance. While this a welcome move, APRA should enhance its understanding and review of the risks that banks and banking groups can be exposed to as a result of the nonbanking activities in the wider financial group and be prepared to take actions as needed.

D. Supervisory Approach (CP 8–11)

60. APRA’s strong supervisory approach is based upon the fundamental premise that it is the responsibility of banks’ boards and management teams to ensure the firm is operating in a prudent manner and in compliance with applicable laws and prudential standards. This is supported by a host of formal requirements placed on them to ensure that processes are effective given the size and complexity of a firm and that the firm has in place the practices it needs to operate in a manner that is in compliance with standards and requirements. In further support of this approach, APRA has a reasonably full set of effective supervisory processes and tools with which to assess the firms and an appropriate set of authorities with which to enforce compliance when that is necessary. APRA prefers to address issues at the firms in a less formal way, for example through consultation and recommendation, though it does have the necessary processes in place to identify and monitor situations that may be escalating toward the need to use its formal powers.

61. A key challenge of this approach is achieving the right balance between relying on firms’ attestations/reporting and supervisors verifying with a high degree of confidence that the most critical governance, risk management, and control processes are in place and effective. APRA carries out well executed supervisory reviews of key practices based on a solid risk-focused approach. Nonetheless, supervisory oversight may benefit from a greater focus at the largest firms on periodic ‘end-to-end’ reviews across the firms of an identified set of practices APRA deems of particular importance. This could strengthen the supervisors’ confidence that processes are in place to ensure compliance with prudential requirements and standards is effective and strengthen incentives for firms to ensure they have solid practices and undertake thorough reviews of them.

62. APRA’s well-conceived and well-executed risk-focused approach to supervising the banks is a good starting point from which to address that challenge. APRA supervisors appear to have a good understanding of the banks and the risks they face. APRA has solid, if still developing practices, for analyzing emerging risks and developments across the system, which are useful for informing considerations of supervision strategy and for planning specific supervisory activities. These analytical practices will benefit from further enhancements that will require APRA to continue to refine and likely increase its required reporting from the firms and to become increasingly proficient in gathering and analyzing large data sets from its supervised firms.

63. Another challenge in APRA’s approach is finding the right balance between a desire to maintain good working relationships with firms to keep communication flowing and being willing to take strong supervisory actions when needed. As noted above, APRA’s preferred approach is working with the firms to get them to address supervisory concerns and/or weak practices. This is often reasonable and not at all unique to APRA. To the extent it could lead to delayed identification or remediation of material weaknesses at large banks it could pose a potential problem. APRA would be well advised to consider consistently supporting its partial reliance on the firms self-identifying problems through the active and quick use of stronger and/or more formal actions when it discovers a firm has been reporting and attesting incorrectly to the effectiveness of its risk governance processes. Based on that, there seems to be scope for APRA to escalate the severity of the corrective actions in a quicker and more active way if the concerned bank is not effectively cooperating. This includes escalation from ‘recommendation’ to ‘requirement’ and also using formal corrective actions, such as directions, in a more active way.

E. Corporate Governance and Internal Audit (CP 14, 26)

64. APRA has appropriate requirements for governance structures and processes, but assessments of board and senior management effectiveness need to be better informed by weaknesses observed in reviews of risk management and controls and should be given greater consideration in the overall ratings of the firms. The assessment process, PAIRS, covers all the necessary areas. However, it may at times obscure the understanding of the root causes of, or ultimate accountability for, problems at a firm. For example, with respect to assessments of the board and senior management relative to their responsibilities for ensuring effective risk management and controls, this is primarily captured in the ‘risk governance’ assessment rather than the specific assessment categories to be used for boards and senior managers. This may weaken the articulation of expectations, particularly given APRA’s supervisory philosophy which puts a strong emphasis on the role of the board and senior management. Moreover, the PAIRS process puts a relatively low weight on the assessment of the board and senior management in the overall rating. This appears to be somewhat out of alignment with APRA’s supervision philosophy and the intention expressed through CPS 220 to create strong incentives for boards and management to focus intently on their responsibilities for ensuring compliance with prudential standards.

65. APRA should better incorporate into assessments of governance the findings from assessments carried out by AUSTRAC and ASIC on AML/CTF and conduct issues, respectively. As the supervisor with responsibility for assessing overall risk management and governance practices in the banks, including assessing those ultimately responsible for these practices, APRA’s supervision process for governance should incorporate assessment of conduct risk and AML/CTF practices where material. The increased cooperation with both agencies, as mentioned above, will foster the process of developing a more comprehensive assessment of banks’ risk profiles.

66. APRA assesses the effectiveness of internal audit in a general sense and has frequent contact through ongoing supervision but does not place a high emphasis on its ability to rely on the work of the internal audit function to inform APRA assessments of control processes. APRA does not collate the conclusions from its supervisory activities into a formal risk assessment of the internal audit function. Supervisors have not done an in-depth evaluation of the overall effectiveness of internal audit functions across the major banks for a number of years. Given the responsibilities and expectations placed on boards of directors, which are expected to be informed by internal audit of weaknesses in their firms’ processes, a greater emphasis on all aspects of internal audit effectiveness as an important element of governance by the board is warranted. In addition, the prudential standards can better and more comprehensively outline the main criteria and requirements for an effective internal control environment and internal audit function.

F. Capital (CP 16)

67. APRA has a conservative regulatory capital regime and ADIs exhibit relatively strong regulatory capital ratios. APRA could increase the focus on the processes that support and inform the largest firms’ decision making around capital planning. For example, it could undertake more in- depth reviews of the inputs into and controls around ICAAPs and stress testing programs associated with assessing capital needs. The recent move towards putting in place ‘unquestionably strong’ capital benchmarks on top of the full and conservative use of Basel risk-based standards is a positive step in strengthening capital in the industry. APRA should also continue to focus on processes that help to identify risks that may emerge under stress but not be well captured in the regulatory framework. This is an important element of understanding capital at firms relative to their risks, and their capacity to continue to function under a stressful environment.

G. Risk Management (CP 17–25)

68. Supervision for risk management places a strong emphasis on the responsibilities of the board. This is well supported by a solid, if understaffed in some areas, supervision program for assessing risk management across the major risk categories. Supervisors are knowledgeable about the risks and risk management practices in the areas they cover and are well supported by detailed policies, procedures and guidance for executing supervisory reviews.

69. The increased use of ‘thematic reviews’ looking at the same set of risks and risk management practices across groups of firms is a good practice. The assessors are recommending that this practice be utilized to the greatest extent possible for the largest firms. Not only does it provide for better knowledge about the range of practices across the firms, it supports consistency of assessments.

70. Since the last FSAP assessment in 2012, APRA has issued an integrated risk management standard (CPS 220). The standard requires regular attestations and reporting of its effectiveness by the board and management relative to the size and risk profiles of the firms. This has been a positive development as firms are more focused on the importance of complying with prudential standards around risk governance, including risk management and controls requirements.

71. APRA should put more focus on assessing the various components of firms’ ICAAP and other firm-wide stress testing practices. With a heightened focus on firms achieving ‘unquestionably strong’ capital thresholds, the focus on ICAAP assessments has been reduced for the time being. Given the importance of firm-wide stress testing as a tool to identify potential risks and consider capital needs related to risks that may not be well captured in regulatory capital regimes, APRA should dedicate more time to assessing the underlying risk measurement, management, and control practices around firms use of firm-wide stress testing. This should include reviewing key inputs into these processes (including the methods and models adopted) and the governance and controls around them.

72. APRA’s supervisors have been increasingly assessing banks’ credit risk management framework and practices, particularly focusing on assessing banks’ underwriting practices and serviceability assessments. These activities were mostly performed in the form of thematically planned reviews and assessments for the major banks, focusing on residential mortgages and commercial real estate exposures. These reviews should be continued to ensure credit risk management gaps are being addressed. APRA should also consider performing more thorough periodic analysis of banks’ credit risk management frameworks, particularly for major banks. In addition, APRA should enhance its current risk reviews related to credit and concentration risk to examine the impact of concentration in common forms of collateral, particularly real estate. APRA should also go ahead with its plan to revise its prudential standards on credit quality (particularly in relation to treatment of problem assets) and related parties to be further aligned with international standards.5

73. Since the last FSAP, APRA has taken many actions to strengthen its capacity, tools, and prudential framework in relation to oversight of liquidity risk. It has established a team of risk specialists dedicated to oversight of liquidity risk. It has also implemented the LCR and the NSFR requirements for major banks. The October 2017 RCAP confirmed that Australia’s Basel III LCR is overall compliant with Basel requirements. In addition, the prudential framework provides a thorough set of requirements and guidance in relation to liquidity risk management. In addition to the regular supervisory activities on liquidity risk management, APRA’s risk specialist team produces quarterly liquidity risk review reports and dashboards showing the evolution of key liquidity risk metrics and funding metrics.

H. Disclosures and Transparency (CP 27–28)

74. APRA regulations and the Corporations Act both require significant disclosures that allow for the public to understand the conditions of and risks in the banks and banking industry. APRA requires a wide range of Pillar 3 disclosures including quantitative and qualitative elements. Banking statistics are made available to the public on a monthly and quarterly basis. All Australian incorporated banks are required to issue audited financial reports to the public on an annual and half-yearly basis. ASIC reviews external audits, including with respect to asset valuations, and carries out ongoing surveillance of financial reporting.

I. Abuse of Financial Services (CP 29)

75. While AUSTRAC has the authorities by law and rule, and the supporting processes needed to oversee money laundering and anti-terrorism financing, the significant reliance on firms self-identifying and reporting weaknesses has not always proved effective. AUSTRAC requires firms to have a senior officer responsible for ensuring compliance with all rules and laws that reports to the board on the effectiveness of all control processes. The review of these reports along with a risk-focused approach to specific supervisory reviews is a key part of the supervisory approach. Recent events have revealed that some banks processes for ensuring compliance were not working as reported, which resulted in failures to comply with rules and laws. AUSTRAC should consider steps it can take to increase the confidence it can get from firm’s internal reporting, including taking swift and formal action when it discovers banks’ control processes for ensuring compliance are missing key areas. This would likely require an end-to-end thematic review of these processes at the major banks on a periodic basis.

Detailed Assessment

76. Table 1 below provides a detailed principle-by-principle assessment of the BCP. The table is structured as follows:

  • The “description and findings” sections provide information on the legal and regulatory framework, and evidence of implementation and enforcement.

  • The “assessment” sections contain only one line, stating whether the system is “compliant,” “largely compliant,” “materially non-compliant,” “non-compliant,” or “not applicable” as described above.

  • The “comments” sections explain why a particular grading is given. These sections are judgmental and also reflect the assessment team’s views regarding strengths and areas for further improvement in each principle. Since, the primary goal of the exercise is to identify areas that would benefit from additional attention, emphasis should be placed on the comments that accompany each principle, rather than on the individual grades mentioned before.

Table 1.

Australia: Detailed Assessment

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