APRA Speech: Legacy, Operational Risk & The Changing Consumer

Geoff Summerhayes Australian Coat of Arms and APRA Logo

On 22 May 2017, Geoff Summerhayes, APRA Executive Board Member delivered a speech to the Actuaries Institute, in which he reflected on legacy, operational risk and the changing consumer describing the part the financial services industry, must play, particularly where they maintain what is termed a ‘social license’ to operate.   As well as stability in the broader financial system, positive consumer outcomes would be a critical element in the future.  He stressed the idea that companies must maintain the trust of the communities in which they operate and this will require innovation.

Mr Summerhayes observed that “we operate in a market steeped in tradition and burdened by a legacy of outdated products, systems and business practices.”   The legacy issues heightens operational risk eroding consumer trust and confidence.  “We have seen too often how quickly the reputation of a company can be threatened when it fails to meet consumer expectations. Ultimately, this can threaten prudential soundness.” Alongside regulation, the term social license is now considered by APRA an essential element of financial stability.  Corporate responsibility is not just appreciated, it is expected.

Calling for a new, sharper ‘consumer focused thinking’, with a particular emphasis on how examples of legacy issues in the insurance industry, hamper and impede innovation,  Summerhayes referred to some negative connotations in parts of the insurance sector;  “decades of neglected investment in systems, outdated products, poor business processes and ways of working that are not responsive to the challenges of our time.” Referring to a generation of new consumers, who, rather than fitting into moulds of prefabricated products, take pride in individuality with expectations of customised and unique products which reflect their lifestyle.

Greater importance will be placed on behaviour, accountability and transparency of financial institutions.  Summerhayes cited 2 consumer surveys which reveal how changing customer trends will need to be taken into account by financial service providers.  The first, conducted by Nielsen found that “nearly three-out-of-four consumers aged 34 and under were willing to pay more for brands that showed commitment to positive social and environmental impact’.   Quoting a further PWC survey, it was found that “while 78 percent of Australians view life insurance as important, only 42 percent believe their life insurer will be there for them in their time of need”. Summehayes, referred to this as a ‘trust gap‘ and it will need to be improved.

In a call to arms, and asking the industry to envision a new future, Summerhayes described how APRA would be reviewing its licensing framework to see how it can be improved for both new entrants, and existing companies, providing new and innovative products to customers. APRA will also be paying close attention to what other regulators are doing, such as a sandbox approach being tested overseas and by ASIC.  Additonally analytics in new risk data is enabling APRA to become more adept at understanding financial risks which includes an expansion of the amount of General Insurance data the regulator will publish in the future.

Summerhayes acknowledged that many insurers have work underway to reduce operational risk that comes with organisational legacy. Examples include “entity consolidation, core systems rationalisation and business model changes.”  He concluded, by suggesting the digital revolution and the changing consumer will define the financial services landscape in the years ahead. The industry will either change with the consumer or be forced to change by disruption.




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