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Strengthening Financial Contingency Planning and Resilience

Financial Contingency Planning

To help banks, insurers, and superannuation trustees better respond to an impending financial crisis, the Australian Prudential Regulation Authority (APRA) has begun consulting on guidance to accompany its two new prudential standards on financial contingency planning and resolution planning.

According to APRA, the disorderly failure of an APRA-regulated business might have serious consequences for the economy and society.  Crisis preparedness and resolution planning gets to the very heart of APRA’s purpose to protect the financial interests of bank depositors, insurance policyholders and superannuation members.

APRA recognises that although Australia has one of the strongest and most stable financial systems in the world, and failures are extremely rare, businesses in any competitive market can face financial difficulties. Should that happen, APRA want to be sure each entity has the capability to either recover, or manage an ‘orderly exit’ with the smallest possible impact on the community and the financial system as a whole.

Two New Prudential Practice Guides Released

It is important to note that prudential practice guides (PPGs) aim to provide guidance on APRA’s view of what is sound practice in the specific areas they address. PPGs can address the various legal requirements e.g. legislation, regulations or APRA’s prudential standards, but the PPGs do not create enforceable requirements.  Regulators will often ask the question, “if you do not follow the PPG, why not?”

The new Prudential Practice Guides CPG 190 Financial Contingency Planning and CPG 900 Resolution Planning set out principles and examples of better practice to assist entities meet their requirements under the proposed new standards, CPS 190 Financial Contingency Planning and CPS 900 Resolution Planning.

In developing the draft guidance, APRA has addressed areas where entities have requested greater clarity on the prudential standards.

Both CPS 190 and CPS 900 are intended to ensure that APRA-regulated entities are ready to handle challenges to their viability while minimising the repercussions of failing.  They aim to improve financial resilience and preparedness.

APRA have provided 2 versions of each CPG to download.

contingency planning apra

Source: APRA

We recommend downloading the ‘integrated version’ of each CPG as this includes references back to the relevant prudential standard for context.

Draft CPG 190 Financial Contingency Planning

CPG 190 is intended to assist entities in meeting the key requirements of the proposed new prudential standard CPS 190. It provides further explanation of the outcomes that APRA expects, so that entities can meet these expectations through their actions. It is principles-based, rather than prescriptive, and includes examples of better practice.

This CPG sets out the key areas that APRA supervisors will consider when assessing an entity’s financial contingency planning. The CPG provides specific guidance in 4 areas:

  • Contingency planning in general including the indicative contingency planning lifecycle and key elements of the contingency plan.
  • The role  and expectations of the Board when preparing for and responding to stress that could threaten financial viability.
  • Guidance when developing the contingency plan including the purpose of the trigger framework and credible recovery and exit actions.
  • Guidance on maintaining the plan and organisational capabilities to execute the plan.

Draft CPG 900 Resolution Planning

CPG 900 sets out a framework for how APRA expects to engage with entities in developing and implementing a resolution plan. The proposed draft guidance explains what is expected of entities in the resolution planning process and sets out the factors that APRA will have regard to in developing resolution plans for individual entities.

Resolution is the process of dealing with a failed regulated entity, led by APRA as the resolution authority.  It aims to minimise any adverse impact on depositors, insurance policyholders and superannuation fund members, i.e. APRA is looking for an ‘orderly failure’ rather than the HIH Insurance type of disorderly failure.

This CPG sets out the key areas that APRA supervisors will consider when assessing an entity’s resolution planning. This CPG also provides specific guidance in 4 areas:

  • Resolution planning in general and the indicative resolution lifecycle.
  • The process of developing a resolution plan including the role of the Board, the indicators of critical functions, resolvability assessment and potential resolution options.
  • The need to develop and implement a pre-positioning plan for the measures identified in the resolvability assessment and consideration of the resolution capabilities.
  • Expectations in respect to the review and notification requirements as APRA recognises that new strategic decisions can have a significant impact on the effectiveness of resolution planning.

APRA’s draft prudential practice guides, CPG 190 Financial Contingency Planning (CPG 190) and CPG 900 Resolution Planning (CPG 900), will undergo a three-month consultation process.

Update on CPS 190 and CPS 900

APRA is currently reviewing the issues raised by stakeholders through the consultation process on CPS 190 and CPS 900, and is preparing a response to submissions.

APRA’s initial analysis of stakeholder comments led APRA to the conclusion that no significant changes would be made to the draft recommendations for CPS 190. The proposed CPG 190 will take into account the fact that respondents predominantly sought clarification on a few elements while generally supporting the intent of CPS 190. Later this year, CPS 190 will be finalised by APRA.

The response from stakeholders to APRA on CPS 900 was more detailed, and in general, entities were less familiar with how resolution planning would actually work in practise. To ensure that resolution plans are suitable for each entity’s unique circumstances, APRA expects for CPS 900 to be implemented on an entity-by-entity basis. This would guarantee a more balanced approach and lessen overall burden, but it also means that it is impossible to predict in advance how the standard will affect particular entities. APRA plans to finalise CPS 900 in the first half of 2023, after reviewing feedback on the proposed draft guidance.

Can We Help?

The InConsult team has a deep understanding of insurance and the APRA prudential standards including CPS 190 Financial Contingency Planning and CPS 900 Resolution Planning. Since the implementation of the revised APRA Prudential Framework in 2001, we have helped APRA-regulated clients navigate through the myriad of regulatory compliance requirements.

We are here to help strengthen crisis preparedness and resilience.  Our resilience support capabilities include:

  • Helping you prepare a contingency plan that is appropriate to your business environment and risk profile based on the APRA guidelines, CPS 190 and better practice guidelines.
  • Helping you remediate any concerns or gaps identified by the regulator.
  • Perform a comprehensive review of  the ICAAP and various response plans including BCP, IT-disaster recovery plan, incident response plan, contingency plan, recovery plan and pandemic plan to ensure it is in line with the APRA standards, guidelines and better practice.
  • Conduct operational testing of the various response plans to identify opportunities for improvement.

Be more resilient to a crisis and financial stress and contact us to discuss your risk and resilience needs.