The Australian Prudential Regulation Authority
(APRA) has announced it will take a “supervisory approach” to build a stronger risk culture and promote better risk management practices in the banking industry.
In a new information paper on risk culture released yesterday (19 October), the regulator says it will pilot more intensive risk culture reviews to anticipate potential risk issues and prevent problems before they occur.
A key aspect of this approach will be reviewing remuneration practices within the industry, conducting a stocktake of current practices and gauging how well they encourage support of proper risk management frameworks.
“This will include reviewing the remuneration arrangements and outcomes for some senior executives, risk and control staff, and material risk-takers at a sample of institutions,” APRA said.
The review will commence this year and continue into 2017 as APRA engages with industry participants and experts.
Steven Münchenberg, chief executive of the Australian Bankers’ Association (ABA), praised APRA’s focus on senior directors and executives within the industry.
“We welcome initiatives that help banks understand and manage their own risk culture, and we are pleased that APRA has noted an improvement in how directors focus on the risk culture in their organisation,” he said.
“It is important that the tone is set from the top and employees have a clear framework to make decisions that appropriately balance the potential gain with any potential loss.”
The Customer Owned Banking Association (COBA) also welcomed APRA’s decision to refine and hone its risk management approach.
“APRA’s information paper on risk culture correctly points out that certain behaviours impede risk management, and these include pursuing short-term financial interests, including personal interests, with little or no consideration of customer interests,” said Mark Degotardi, CEO of COBA.
“APRA’s intention to conduct a stocktake of current industry remuneration practices looks like a good place to start in its new approach to assessing risk culture. As APRA notes, remuneration frameworks, and the outcomes they produce, are important barometers and influencers of risk culture.”