The Australian Prudential Regulation Authority has committed to implementing its new prudential standard covering resolution planning on an entity-by-entity basis, to ensure that plans are appropriate for the particular circumstances of each entity.
It said this would ensure a “proportionate approach” and reduce the overall regulatory burden, but it also means that the precise outcomes of the standard for individual entities will not be known in advance.
What the regulator has also made clear is that it will exercise almost complete control of a failed entity, including decisions about recapitalisation, wind-down or the transfer of operations.
APRA yesterday released drafts of practice guide that will accompany two new prudential standards, covering financial contingency (CPS 190) and resolution planning (CPS 900), and will consult on the drafts over the next few months.
The new standards will take effect from the beginning of 2024. CPS 190 is designed to ensure that APRA-regulated entities have plans for responding to severe financial stress.
CPS 900 will require large or complex entities to take pre-emptive action, where necessary, so that in the event of their failure APRA can resolve them with limited negative impacts on the community and the financial system.
The practice guides (CPG 190 and CPG 900) are designed to provide greater clarity about the standards. They will be finalised in the first half of next year.
APRA said CPS 190 is principles-based, rather than prescriptive, and the practice guide will include examples of best practice.
CPG 190 sets out the key components of a contingency plan, which are triggers for early identification of stress, governance arrangements, recovery actions, scenario analysis, assessment of recovery capacity and a communications strategy.
Plans must be reviewed and updated regularly.
CPG 900 sets out a framework for how APRA expects to engage with entities in developing and implementing a resolution plan, and the outcomes APRA is seeking to achieve.
It makes clear that the development and implementation of a resolution plan will be a process that the entity will undertake with the regulator in control. It talks about entities meeting information requests, having the opportunity to provide feedback to APRA and regular assessments of the progress of a plan.
And it says: “Under CPS 900, an entity must notify APRA if it intends to make changes to its business or operations that would create a material barrier to executing the resolution plan.”