The Australian Prudential Regulation Authority — the country’s key regulator of financial groups, such as banks, building societies, big super funds and activity such as home lending — has made an unprecedented series of criticisms of past Labor and Coalition governments over funding policies, which it warns could place the integrity of the regulation of the country’s financial system in jeopardy.

In its submission to the Financial System Inquiry, chaired by former Commonwealth Bank CEO David Murray, APRA warned that efficiency dividends, the preferred method of forcing cost cuts on the public service, “is not well-suited to an organisation such as APRA, and can constrain APRA’s strategic planning and the pursuit of its statutory objectives”. The sustained level of complaints and fears about the level of future funding and resources dominates the APRA submission. By contrast, the submissions from the Reserve Bank and Treasury do not discus resources or funding of their supervisory roles and powers.

And the regulator saw dangers in the efficiency dividend approach, which it warned:

“… would require APRA to reduce current levels of supervisory intensity, for example, by cutting back on the frequency or depth of routine activities and thematic risk reviews, to recruit staff of reduced experience or to de-prioritise prudential policy and operational projects. These would not be APRA’s preferred choices if current levels of safety in the Australian financial system are to be maintained.”

The regulator argues it now falls short of international best practice because it is subject to government funding decisions that could potentially be politically influenced.

APRA’s criticisms range from the historical — the impact of funding cuts in the years of prime minister John Howard and treasurer Peter Costello after its creation in the late 1990s in the wake of the Wallis Inquiry into the financial system — through to the present day:

“At the time of APRA’s establishment in 1998, around 550 staff were engaged in prudential supervision and associated corporate functions in its 11 predecessor agencies. By eliminating duplicate functions, integration was expected to produce an efficiency dividend in terms of staff positions, and it did. Staff positions in the corporate areas particularly were reduced. However, integration and the movement of the majority of functions to Sydney also saw APRA lose experienced staff in frontline supervision and specialist risk areas. By the time of HIH Insurance’s collapse, APRA staff numbers were below 400. At these levels, APRA was exposed as being substantially under-resourced.”

And the former ALP government of prime minister Julia Gillard and treasurer Wayne Swan comes in for criticism for their demand for efficiency dividends over the last three budgets, and as projected by the 2013-14 forward estimates:

“Over recent years, APRA has been subject to general ‘efficiency dividend’ requirements under which the Government has reduced agency funding with the objective of driving efficiency savings and improving its overall budget position. APRA acknowledges that it is for Government to determine the quantum of community resources it wishes to have devoted to prudential regulation. However, the mechanism of efficiency dividends is not well-suited to an industry- funded regulatory agency. Continued efficiency dividends will ultimately compromise financial safety but make no contribution to the Government’s budgetary objectives.”

Instead, the regulator would support:

“… a transparent process of consultation on its funding needs with interested stakeholders as part of the normal pre-budget submissions process, before Government approval of APRA’s budget, rather than afterwards through the levies determination process. This would ensure that APRA’s funding has full regard to the Government’s expectations for beneficiary protection and financial system stability, rather than budgetary objectives to which, as an industry-funded agency, APRA cannot contribute.”

And on the future direction of the financial system, APRA has offered the same lack of enthusiasm for the inquiry as the Reserve Bank:

“Looking ahead, APRA has a range of macroprudential tools and would use them if and when necessary. APRA’s legal powers to respond to situations of financial stress have been materially strengthened since the crisis began. Nonetheless, there are some areas where these powers could be further strengthened to align them more closely with international standards and best practice and enable APRA to respond more effectively to financial distress. The performance of Australia’s financial regulatory arrangements, and of APRA’s role in particular, have been subject to a number of reviews by global bodies, particularly since the crisis began … Overall, the reviews have provided strong endorsement of Australia’s financial regulatory arrangements and of the effectiveness of APRA’s supervision.”

Treasury agrees, saying in its submission:

“Australia’s regulatory framework is sound. The framework — shaped by the Wallis Inquiry and the response to the collapse of HIH — contributed significantly to the stability of the financial system through the global financial crisis, although additional government intervention at the onset of the crisis also supported investor and depositor confidence. While there is no need for fundamental reforms to the regulatory framework, improvements at the margin would foster greater competitiveness across the financial system without endangering stability.”

Treasury does suggest:

“… there is room to better position the financial system to respond to the structural changes facing Australia — in particular, the ageing of Australia’s population — and to ensure its continued effectiveness in funding Australia’s future growth and in providing businesses and households with the tools to manage risk.”

But rarely has there been such an underwhelming response to a supposedly systemic major inquiry.