The Australian Prudential Regulation Authority (APRA) has released draft proposals relating to its supervision of Level 3 conglomerates for consultation.
APRA defines Level 3 groups as groups "that perform material activities across more than one APRA-regulated industry and/or in one or more non-APRA-regulated industries."
This is the first stage of a two-part consultation, focusing on requirements for group governance and risk exposures, and is open until 31 March 2013. The second stage will cover risk management and capital adequacy, and will be released in the first half of 2013, APRA stated.
APRA is also currently seeking comments on eight draft prudential standards detailing proposed Level 3 requirements for these components of the framework. All changes are due to be implemented on 1 January 2014.
The overarching requirements of the current consultation are that a Level 3 group:
- must have a robust governance framework that is applied appropriately throughout the group; and
- the intra-group exposures and external aggregate exposures of a Level 3 group must be transparent and prudently managed
The 2010 discussion paper had proposed to extend existing standards for Level 1 groups (such as general insurers, life insurers and authorised deposit-taking institutions) to the Level 3 head (the parent institution of any Level 3 group).
APRA proposed that Level 3 Heads maintain group-wide governance arrangements, including that they ensure directors and senior management of the group, collectively, have the full range of skills needed for the effective and prudent management of the group; and they establish and maintain a documented remuneration policy outlining the remuneration objectives and structures of the group.
It must also ensure employees are not constrained from providing information to APRA.
APRA also proposed the Level 3 head's board audit committee must assist the board by providing an objective review of the effectiveness of the group's financial reporting and risk framework.
The proposals also required Level 3 heads to maintain a group-wide outsourcing policy and a group-wide business continuity management policy, in both cases ensuring that non-APRA-regulated institutions engaging in activities material to the group also conform to the standards outlined in the paper.
APRA said its key proposed aggregate risk exposure requirements had not changed since the 2010 discussion paper, which largely revolved around having appropriate systems and controls in place.
However the new proposals required aggregate risk exposure policies to "articulate limits across a number of parameters such as counterparties, industry sectors and geographical locations."
Such limits would appropriately reflect the risk appetite of the board of the Level 3 head, APRA stated. APRA also proposed to be able to impose limits on aggregate risk exposures where a Level 3 group's aggregate risk exposures were viewed to be excessive.
Proposals around intra-group transactions and exposures had also not materially changed from the 2010 discussion paper, which included requirements around adequate systems and controls. APRA said it was likely that potential Level 3 groups would need to enhance any relevant systems to ensure new requirements were met.
