CPS 220 and CPS 510 Implications for Directors...‘Response to Submissions’ January 2014 noted...
Transcript of CPS 220 and CPS 510 Implications for Directors...‘Response to Submissions’ January 2014 noted...
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© 2014 Finity Consulting Pty Limited
CPS 220 and CPS 510
Implications for Directors
Presented by Steve Curley | May 2014
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APRA baseline
More rigorous governance requirements
Consistency across financial institutions
“APRA’s integrated structure and approach have been one of its main
strengths” APRA submission to Financial System Inquiry
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Build on GFC learnings in
restraining excessive risk taking
Market discipline not effective
Global regulation inadequate
Light-touch prudential
supervision found wanting
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APRA supervision
APRA: Assisted Australia in dodging the “Global Financial
Crisis” bullet
“enduring contribution to the resilience of institutions in the (GFC) crisis
came from its ‘close touch’ efforts” APRA submission to Financial System Inquiry
APRA: “Australia punches above its weight internationally in
influencing supervisory regulation”
Has this added confidence fostered APRA thinking
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General Insurance importance
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APRA’s submission to the Financial System Inquiry uses
‘financial system assets’ as the measure of importance
General Insurance accounts for 3% of assets (4% in 1996)
Assets
ADIs
Superannuation
Life Insurance
Managed Funds
GeneralInsurance
Other
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Why CPS 220 and CPS 510?
It completes the picture in upgrading financial institution
supervision with the rounding out of the risk component, post
the GFC
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Focus on risk
APRA recently introduced:
More risk sensitive capital measures (LAGIC)
Internal Capital Adequacy Assessment Process (ICAAP)
Formal Risk Appetite
More intensive supervision, e.g. meeting regularly with
Boards
Now with CPS 220 and CPS 510
Chief Risk Officer
Board Risk Committee
Risk culture
Tighter Board oversight of risk framework
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Stronger risk management
Benefits that can be achieved
Improved resilience to internal and external shocks
Improved communication and information flows lead to better
decision making
Reduced volatility of results through better understanding and
treatment of risks
Improved risk-return profile
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The detail of CPS 220 and CPS 510
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When “oversight” becomes “ensure”
“The Board must ensure that:…..” CPS 220 Para 13
Requires more Board involvement in the business
operations
Has been gradually softened following strong feedback
‘Response to Submissions’ January 2014 noted “ensure”
was not to be read in isolation…to be practically applied.
last Thursday APRA note to all CEOs that they will
insert a definition in the standards
that defines ‘ensure’ to mean ‘all reasonable steps
and make all appropriate enquiries… to determine, to
the best of its knowledge’
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When “dedicate becomes “designate”
“Double hatting” is a new term in the
risk vocabulary
Another example where APRA
has softened it’s stance
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APRA have partly accepted the industry feedback and now DO
NOT require a dedicated CRO.
Insurers will need to “Designate” a person as CRO but that
person can have other responsibilities. That is wear two hats!
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Three lines of defence model
Is a useful structured approach for looking at your RMF
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3rd Line
Independent assurance
2nd line
Independent review
1st line
Embedded risk owners
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‘Three lines of defence’ model
The challenge is that it doesn’t become a straightjacket
A good alternative way for Boards to look at the structure the
company has in place to implement a strong RMF
Board oversight of systems, structures and operations could be
helped by asking the CRO designate to brief the Board on how the
3LOD applies to them
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Could Board’s role in risk governance
improve? Don’t be passive
Obviously there is always room for improvement
Importantly APRA think there is room for material
improvement
Information pamphlet for directors to be issued
APRA’s comment that strong Board engagement with
management lays a solid foundation for risk governance
makes good sense
The takeaway for Boards is that a passive approach is
not appropriate
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Don’t be passive
- stay in control
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Boards can take a contrary position
Don’t be passive with engaging with APRA
APRA are looking at insurers on a case by case basis
for an acceptable RMF and operating model and will
consider “alternative arrangements”
Where this makes good business sense but still
complies with the prudential standard principles make
a case
We understand that many insurers are asking for
some form of alternative arrangement
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In summary, don’t be passive and focus
on what make good business sense
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3rd
2nd
1st
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Some questions for Boards
Have you had a holistic look at your risk management
framework now that all the pieces of the puzzle have been
finalised?
Are the risk management accountabilities clear throughout the
business and reporting to the Board effective?
Are you comfortable that the business understands the firm’s
risk appetite?
What testing of risk culture would give the Board comfort?
Do you feel that you have provided the appropriate level of
challenge to management?
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Contact
Steve Curley
Tel: +61 2 8252 3326
Mobile: +61 424 182 802
www.finity.com.au