Commissioned by the Federal Government as a response to recommendations made by Commissioner Kenneth Hayne's Royal Commission Final Report (Report), the Capability Review made 24 recommendations, with 19 directed to APRA and the remaining five to the government.

Although many recommendations were levelled at the financial services sector and its regulators, the substance of Commissioner Hayne's recommendations were in fact lighter in their impact than was anticipated.

By contrast, the APRA Capability Review is much meatier, longer and highly critical of APRA. An overarching theme of the review was that cultural change within APRA is necessary to build its capability. The panel also commented that APRA needs to lift its effort on superannuation and shift its thinking and focus by:

• Developing its policy and supervision framework; and
• Building its skills and resources dedicated to the sector.

The reform journey

APRA's shortcomings first surfaced following the Productivity Commission's report on the A$2.7 trillion superannuation industry,²  which highlighted that the industry's regulators focused too much on the interests of funds and not members. A conclusion of that report was that APRA should be subject to a capability review to examine how efficiently and effectively it operates to achieve its strategic objectives in relation to superannuation.

The Productivity Commission's recommendations to undertake a capability review were reinforced by Commissioner Hayne's Report, which stated that ASIC and APRA should be subject to regular capability reviews, with the latter being more in need of a review given it has not previously been subject to an independent examination.

Commissioner Hayne further added that APRA (as well as ASIC) must change their culture and take a tougher approach to enforcement, as the many case studies of the Royal Commission showed a scarcity of action taken by Australia's regulators to address and punish wrongdoing.

One of the motives of the panel's Capability Review appears to have been ensuring that APRA does not slip back into its old habits now that the Royal Commission has wrapped up. In a recent article,3  Graeme Samuel foreshadowed the tone of the Capability Review by describing the role of APRA as 'ex ante', which in his words means:

"[APRA] is about acting to ensure the conduct of the financial services industry meets the necessary standards of governance, culture and accountability so misconduct becomes the expectation rather than the rule. The current Capability Review of APRA is directed to advising on how this objective can best be achieved."

A superannuation shake-up

In the context of superannuation, the panel found that APRA had largely regulated the superannuation system by focusing on the stability of funds and systemic risks. However, such an approach has been criticised for potentially under-resourcing the oversight of superannuation, and not appreciating that the supervisory tools for superannuation need to differ from those used for banking and insurance.

The panel has criticised APRA's progress on improving the superannuation system's efficiency, fees and transparency, citing "little focus on member outcomes and whether trustees had complied with legal requirements designed to protect members' savings, including the sole purpose test, MySuper obligations or fee requirements under the SIS Act".

Further, the panel also highlighted the fact that, "...while APRA looked at potential conflicts of interest between individual directors and the trustee, the supervisors paid little attention to the lack of conflict of interest between trustees and related parties in their broader group structures and the members of the fund".

Against this backdrop and a myriad of other issues, the panel made a number of sweeping recommendations-19 in total-including the creation of a new superannuation division within APRA.

1. Australian Prudential Regulation Authority Capability Review, June 2019.
2. Productivity Commission, Overview: Superannuation: Assessing Efficiency and Competitiveness - Inquiry Report.