- a review of its enforcement strategy to date (Review); and
- a description of the approach to enforcement that APRA intends to take in future (Approach).
The MinterEllison Australia newsletter covering these can be found here, while the APRA Review and Approach can be found here and here respectively.
A key question here is what flow-on effect we can expect to see in New Zealand.
Who needs to read it? Why?
This will be relevant to any New Zealand businesses operating under APRA, either directly or via an Australian parent. It will also be relevant to other New Zealand financial institutions, to the extent the Reserve Bank of New Zealand (RBNZ) or the Financial Markets Authority (FMA) are influenced by the Australian approach. A key issue is whether RBNZ or FMA will be.
What does it cover?
The APRA Review and Approach can be seen as part of APRA’s response to the significant criticisms made of the Australian regulators in the recent Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Australian Royal Commission).
The Review concludes that APRA’s historical appetite to use enforcement ‘primarily … as a last resort and mainly where financial promises or stability are at risk’ has been too low, and makes a series of recommendations. APRA has confirmed that those recommendations will be implemented, and that it is adopting a ‘constructively tough’ approach to enforcement in future. APRA describes this as an incremental shift in its approach to enforcement, rather than a more substantive change. However, as explained in the MinterEllison Australia newsletter, there is no doubt it is a significant change.
Frequent use of informal tools of enforcement will still be made, but this will be reinforced by a greater willingness to exercise its formal powers where appropriate. Its interaction with the industry will also become more forceful in dealing with uncooperative parties, as well as more prepared to make visible examples of them.
In New Zealand, we expect that all of our regulators will be considering whether to take a stronger approach to enforcement, to ensure they are not subject to similar criticisms to their Australian counterparts. It is likely that, to some extent at least, they will do so.
The Ministry of Business, Innovation and Employment has also just released the Conduct of Financial Institutions Options paper contemplating firmer regulation (our discussion of which can be found here). One option raised in that paper is further resourcing for the FMA, which could fund that stronger approach. There is not a comparable proposal to increase RBNZ resources, though RBNZ is the corresponding New Zealand regulator to APRA.
However, it is important that, in New Zealand, we do not lose the constructive supervisory engagement which our regulators and institutions have taken to date. An unintended consequence of the more litigation-based approach which the Australian Royal Commission recommended is that industry participants are more inclined to defend existing conduct, rather than quickly adapt as willing compliers. Financial institutions which discover errors may be less willing to voluntarily raise them with the regulator and seek guidance on the best solution if they expect prosecution. Further, if litigation is the tool chosen by the regulator, it will likely be years before Courts finally determine the outcome.
Even before the proposed changes, Australia already had a more aggressive enforcement culture than we do, and a lower level of dialogue with industry than in New Zealand. For example, in the implementation of recent changes such as the Financial Markets Conduct Act 2013, there was frequent, and constructive, back and forth discussions which Australian clients found to be very different to the relationship in their home market. This facilitated smooth implementation of the new regime and better compliance and customer outcomes.
If you have any questions in relation to this shift in Australia or what it might mean for New Zealand, please contact one of our experts.