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CPS 220 and CPS 510

Implications for Directors

Presented by Steve Curley | May 2014

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

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

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!

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

‘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

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

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