Taming the behemoth: APRA seeks consultation on supervising
On 18 March 2010, the Australian Prudential Regulation
Regulation Authority (APRA) released a discussion paper containing
proposals for a new 'level 3 supervision framework'
(Framework). The Framework builds on APRA's existing capital
requirements to ensure that conglomerate groups hold
adequate capital. APRA aims to protect regulated entities within
conglomerates from troublesome risks within the group.
The proposed Framework contains proposals on a range of
principles based risk management and governance standards that will
apply to the parent company of the conglomerate group
In general, APRA will apply the Framework to conglomerate groups
containing two or more material entities that are either
APRA-regulated entities operating in different industries, or a
combination of at least one APRA-regulated entity and at least one
material unregulated entity.
Under the Framework a conglomerate group must hold a surplus of
eligible capital over required capital, net of any adjustments, to
ensure adequate capital is held to cover risks within the group. A
sufficient portion of the surplus must be readily transferable
among group entities so that capital shortfalls within the group
can be adequately addressed.
APRA is considering two methods for measuring eligible capital
at conglomerate level. One is a top-down method and the other, in
parallel with the determination of required capital, is a building
block approach. Both methods are expected to arrive at the same
result, although this may not always be the case. APRA will be
collecting data on both proposed methods and evaluating them before
finalising how eligible capital is to be calculated.
Through the Framework, APRA is proposing to apply a number of
existing prudential standards in respect of governance and risk
management to the Level 3 Head. The standards will also cover
business continuity management, outsourcing, fit and proper tests,
audit and related matters, risk concentrations, intra-group
transactions and intra-group exposure.
The proposed Framework will involve not only assessing both
capital adequacy and compliance with governance and risk management
requirements, but also ensuring that the structure of the group
does not give rise to excessive unmitigated risks. Supervision will
take into account the individual structure and character of each
Where there are prudential reasons, the proposal is to allow
APRA to impose, on a case-by-case basis, additional requirements on
the Level 3 Head or on an APRA-regulated entity within the group.
These include additional capital, risk management or reporting
What this means?
Although APRA is already supervising banking and general
insurance entities on a group basis, the changes should better
protect policyholders by ensuring there are adequate governance
procedures over capital in respect of various different entities
that make up a conglomerate group. The practical implication is
that it gives APRA regulated entities that are part of a
conglomerate added protection against one of their own fellow
'conglomerate members' becoming a risk to their
For general insurers, the proposals may result in additional
obligations and some uncertainty surrounds the
'discretionary' powers accorded to APRA.
Written submissions are due in by 18 June 2010 and the proposed
Framework is expected to be finalised during 2011 with a view to
commencement during 2012.
 Industry based supervision of stand-alone entities
(Level 1 supervision) and supervision of single industry groups
(Level 2 supervision)
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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