Recently, the Australian Prudential Regulation Authority (APRA) updated its policy priorities for Q4 2021 that included deferring consultation and planned commencement for some changes in order to focus on the completion of key reforms designed to strengthen financial resilience. This change in priority is a welcome change given the increasing impact of the global pandemic and climate change on financial institutions.
APRAs focus on resilience is not new
There are already many prudential standards and guidelines that address different elements of operational resilience and financial resilience. They include:
- CPG 110 Internal Capital Adequacy Assessment Process and Supervisory Review
- CPS 232 Business Continuity Management
- CPS 234 Information Security
- CPG 233 Pandemic Planning
- CPG 229 Climate Change Financial Risks
- CPS 231 Outsourcing
In recent years, APRA has also worked directly with major banks, general, life and health insurers to ensure they develop Recovery Plans (despite not having a formal standard). APRA have provided some good guidance in the Discussion Paper – Strengthen Crisis Preparedness.
APRA has now begun consulting on 2 new proposed prudential standards to help strengthen the preparedness of financial institutions to respond to future financial crises.
The two proposed standards are aimed at ensuring entities are prepared to deal with the threats to their financial viability, thereby reducing the negative consequences resulting from failure. Remember, APRA has zero appetite for a disorderly failure of a financial entity that can have a significant impact on financial system stability and the broader economy. APRA and the federal government have no appetite to use taxpayer funds to stabilise the financial systems, thereby creating a moral hazard and pressures on federal government finances.
CPS 190 Financial Contingency Planning
CPS 190 Financial Contingency Planning (CPS 190) seeks to minimise the risk of entity failure by ensuring all APRA-regulated entities have plans for responding to severe financial stress. CPS 190 will require all APRA-regulated entities to:
- Develop and maintain credible financial contingency plans for managing stress that may threaten their financial viability; this includes plans for rebuilding financial resilience or effecting an orderly exit. These plans would set out actions they would take in stress to restore financial resilience or exit the industry safely, while protecting depositors, insurance policyholders and superannuation fund members.
- Monitor indicators of potential stress and be ready to trigger activation of the contingency plan or the specific actions within it.
- Being able to effect an orderly exit from the industry, if recovery actions are not effective. This is achieved through a credible plan, appropriate governance arrangements, maintaining sufficient resources to support the implementation of recovery and exit and periodic review and testing.
The proposed CPS 190 will apply to an entity whilst it is still a going concern to reduce the likelihood of entity failure.
CPS 190 will apply to smaller entities, but will be subject to less onerous requirements, in line with their size, complexity and business models. Entities determined to be significant financial institutions (SFIs) would be subject to higher requirements. APRA have defined the thresholds for significant financial institutions subject to higher requirements as follows:
Industry |
Assets |
| Authorised deposit-taking institutions | >$20 billion |
| General and life insurers | >$10 billion |
| Private health insurers | >$3 billion |
| Combined total assets of RSEs within the RSE licensee | >$30 billion |
Source: APRA
CPS 900 Resolution Planning
CPS 900 Resolution Planning (CPS 900) aims to minimise the impact of entity failure. CPS 900 would require large or complex APRA-regulated entities to take pre-emptive actions so that, in the event of their failure, APRA can resolve them with limited adverse impacts on the community and the financial system.
Key requirements of CPS 900 will include:
- Conduct a resolvability assessment to identify any barriers to resolution. The resolvability assessment will typically assess any legal, structural, operational or regulatory barriers to implementation, timelines for implementation and any execution risks to effectively execute the options.
- Develop and implement a pre-positioning plan to remove any barriers to resolution. The Board must provide oversight of and approve the resolvability assessment and the pre-positioning plan.
- Maintain capabilities to support APRA in effecting a resolution so that critical financial services can continue to be provided with minimal disruption. This may include the identification of all material business activities of the entity, and an assessment of whether any of these activities are critical functions based on their systemic impact, customer impact and the substitutability by other providers if they were to cease.
- Review and update the resolvability assessment at least every three years.
CPS 900 will only apply to an entity as a gone concern (after failure) to minimise the adverse impact of the entity failure.
As CPS 900 would only apply to large or complex APRA-regulated entities, APRA has sought to minimise any adverse impacts on smaller and/or less complex entities such as Australian branches of larger international financial entities.
Planned implementation
There will be a 5 month consultation period on CPS 190 and CPS 900. The consultation closes on 29 April 2022.
Following the initial consultation period, APRA will also consult on the supporting guidance material in 2022.
For banking and insurance entities, APRA proposes that the new prudential standards would come into force from 1 January 2024.
How we can help you on your resilience and crisis preparedness journey
InConsult previously published The Recovery Plan – A Guideline for Insurers which explained regulatory expectations and how it was intended to integrate and align with the ICAAP, Business Continuity Plan and other aspects of the risk management framework. It is pleasing to see that APRA has now relabelled the Recovery Plan as Financial Contingency Plan to avoid confusion with a type of Business Continuity Plan.
Aspects of CPS 190 will apply to all financial institutions. In order to support preparation for CPS 190, all insurers should as part of their annual review of their ICAAP Summary Statement consider conduct a benchmarking exercise against GPS 110 Capital Adequacy and CPG 110 ICAAP and Supervisory Review. Remember, the ICAAP Summary Statement is intended to be a high-level document that summarises processes therefore documentation of detailed processes (business planning, capital monitoring and reporting and recovery action) is important to ensure conducted in a timely, consistent manner.
We are here to help strengthen crisis preparedness and resilience. Our resilience support capabilities include:
- Helping you prepare a contingency plan (recovery 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.