NEED TO KNOW

New capital adequacy standards for conglomerate groups have been proposed by the Australian Prudential Regulations Authority (APRA) as part of draft reporting requirements which are proposed to commence from 1 July 2015.

BACKGROUND

The proposed requirements relate to the supervision of conglomerate groups operating in the financial services industry. APRA categorises these as "Level 3 groups", which are corporate groups with entities operating in more than one APRA-regulated industry.

APRA is currently responsible for the prudential supervision of what it refers to as "Level 1 institutions", which are entities authorised to operate within a single APRA-regulated industry (ie ADls, general insurers, life insurers, RSE licensees) and, where relevant, "Level 2 groups", which are consolidated groups operating within a single APRA-regulated industry (headed by an APRA-regulated institution or a non-operating holding company, or NOHC).

APRA proposes to extend prudential requirements to Level 3 groups whose operations span multiple APRA-regulated industries (or include material non-APRA-regulated operations). This is a further step in APRA's desire to harmonise prudential standards across the financial services industry and to adequately supervise aggregate exposure across Level 3 groups as well as intra-group transactions and risks.

Click here for a copy of our earlier In Brief which outlines the background to the consultations.

SUMMARY OF NEW REPORTING STANDARDS

The "Supervision of conglomerate groups proposed Level 3 reporting requirements discussion paper" outlines proposed reporting standards that will apply to "Level 3" groups.

The purpose of the data collection is to assist APRA in supervising and ensuring the Level 3 groups are capitalised in accordance with the proposed capital adequacy prudential standards that were released for consultation in May 2013.

APRA does not expect the proposals to be controversial as general insurance Level 2 groups and RSE licensees in the superannuation industry are already required to actively monitor their respective capital adequacy requirements.

A summary of the key features of the two draft reporting standards is set out in the table below:

Standard Title Summary of significant items
3RS 110.0 Level 3 Prescribed Capital Amount
  • Must be read in conjunction with Prudential Standard 3PS 110 Capital Adequacy.
  • Includes Form 3RF 110.0 Level 3 Prescribed Capital Amount and associated instructions.
  • Applies to each Level 3 Head.
  • Applies for reporting periods ending on or after 1 July 2015.
  • Level 3 Heads must use form 3RF 110 to report the Level 3 prescribed capital amount, which together with the Level 3 supervisory adjustment (if any), determines the Level 3 Prudential Capital Requirement.
  • A Level 3 group is required to report the ten largest intra-group transactions and exposures for the ADI, General Insurance and Life Insurance blocks.
  • A Level 3 group is also required to report its eligible capital held by a Level 3 group that APRA recognises for capital adequacy purposes in accordance with 3RF 111, in order to derive the group's capital in excess of its Level 3 prescribed capital amount.
3RS 111.0 Level 3 Eligible Capital
  • Must be read in conjunction with Prudential Standard 3PS 111 Capital Adequacy: Measurement of Capital.
  • Includes Form 3RF 111.0 Level 3 Eligible Capital and associated instructions. This form is similar to reporting forms ARF 110 Capital Adequacy, GRF 112 Determination of Capital Base and LRF 112 Determination of Capital Base.
  • Applies to each Level 3 Head.
  • Applies for reporting periods ending on or after 1 July 2015.
  • Level 3 Heads will be required to report their Eligible capital held by the Level 3 group that APRA recognises for capital adequacy purposes.

The draft reporting standards do not propose to prescribe any public disclosure in relation to Level 3 capital adequacy at this time.

TIMING

The Level 3 framework is proposed to take effect from 1 January 2015.

NEXT STEPS

Only a small window for consultation on the draft reporting standards has been allowed as submissions are due by 31 October 2013.

APRA indicates it expects to publish the final Level 3 prudential standards in the last quarter of 2013. APRA intends to release final reporting standards, forms and instructions during the first quarter of 2014.

To facilitate the successful implementation of the Level 3 framework, APRA indicates it will require groups to submit an unaudited trial return based on 31 December 2014 data.

We are available to assist you or provide you with further information on any of the aspects of the Level 3 framework or APRA's consultation package. Please contact a member of our team listed in this publication.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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