Determination and Collection of Financial Industry Levies
The objective of the audit was to assess the effectiveness of the administration of the Australian Prudential Regulation Authority (APRA) financial industry levies.
1. The Australian Prudential Regulation Authority (APRA) was established on 1 July 1998 by the Australian Prudential Regulation Authority Act 1998, and is the prudential regulator of the Australian financial services industry. Its role is to develop and enforce a robust framework of legislation, prudential standards and guidance that promotes prudent behaviour by authorised deposit-taking institutions (such as banks), superannuation funds, general insurers, and life insurers and friendly societies. The key aim is to protect the interests of financial institutions’ depositors, policyholders and members.1 In June 2012, APRA regulated 4265 financial institutions holding over $4.2 trillion in assets.
2. APRA is funded through Commonwealth Budget appropriations, which are largely recovered from levies on those institutions it regulates, on a cost recovery basis. The underlying principle of cost recovery is that agencies can set charges to recover all the costs of a product or service where it is efficient and effective to do so, where the beneficiaries are a narrow and identifiable group and where charging is consistent with government policy objectives.
3. The costs of prudential regulation differ each year, subject to government priorities and initiatives as well as the cost pressures and savings involving APRA’s operations. In 2012–13, APRA had a budgeted cost of $125.2 million to cover the activities required to prudentially regulate financial institutions. Of this amount, APRA aimed to recover $112.9 million (or 90 per cent of its total estimated budgeted cost) through the imposition of industry levies, after allowing for various cost offsets, and the return to industry of $3.1 million in levies that were over-collected in 2011–12.
4. As well as collecting levies to recover the costs of its own prudential regulation services, APRA administers levies that cover costs incurred by other Australian Government agencies that provide consumer protection and other functions in respect of prudentially regulated entities.2 The total value of levies to be collected by APRA for all agencies in 2012–13 was $266.4 million. A major proportion of the levies in 2012–13 (46 per cent) was as a consequence of the SuperStream package of reforms that aim to make the superannuation system easier to use for members, employers and funds.
Methodology for calculating levies
5. The methodology used by APRA to calculate the levies is based on a single, volume-based driver: hours worked by staff in APRA’s four ‘frontline’ operating divisions3 are used to allocate all indirect and capital costs pro rata to the four financial industry sectors. This methodology is designed to fully recover costs from each industry sector and minimise cross‑subsidisation4 across sectors. The estimated asset value of each institution is used as the basis for allocating the quantum of the sectoral levy to each regulated institution.
6. Under the levy methodology, APRA’s activities, and staff time spent on these activities, are also allocated into one of the following two levy components:
- the restricted levy component: based on a ‘cost of supervision’ rationale, is structured as a percentage rate on assets subject to minimum and maximum amounts.5 Activities covered by this component include the costs associated with APRA’s onsite and offsite supervision of individual institutions, and its legal and enforcement activities; and
- the unrestricted levy component: based on a rationale that involves ‘system impact’ (for example, the larger a financial institution, the greater its likely impact on the financial system) and ‘vertical equity’ (the notion that levies should reflect, as far as practicable, the effort incurred in supervision, determined by the size and complexity of the individual entity). This component is structured as a low percentage rate on assets with no minimum or maximum amounts. Activities covered by this component include the development of APRA’s prudential framework for the industries it supervises, as well as costs associated with its role as the national financial statistical data collection and publications agency.6
7. The same methodology is applied to levies collected for other agencies, including with respect to SuperStream. However, the introduction of SuperStream and other initiatives in recent years has changed the composition of the financial industry supervisory levies. By way of illustration, in 2006–07, 83 per cent of total levy funding was related to APRA’s responsibilities; in 2012–13, the proportion was 42 per cent.
8. Annually, the Department of the Treasury (the Treasury), supported by APRA, consults with stakeholders on the proposed levies calculations for the coming year. Stakeholders are also consulted periodically on the design and operation of the levies framework. The responsible Minister determines the final levies rates and the maximum and minimum caps that will apply. APRA then calculates the levy amounts, based on the lodgement of financial entity annual returns. The levies are calculated by an automated billing system unless entities become regulated part way through the financial year—in which case the levies are manually calculated on a pro rata basis. APRA has a framework for collecting levies that are due and payable, and also for following up any unpaid debts (or for waiver or write-off as appropriate).
Audit objective, criteria and scope
9. The objective of the audit was to assess the effectiveness of the administration of the APRA financial industry levies.
10. The audit examined:
- the Treasury’s consultation practices, and APRA’s support, in relation to the formulation of levies, and the extent to which they were appropriate and effective;
- APRA’s policies, procedures and resources in place to effectively support the implementation of the financial levies legislation, consistent with the Australian Government Cost Recovery Guidelines; and
- APRA’s processes for calculating and collecting levies, including minimising the risk of cross-subsidisation between industry sectors and entities.
11. The audit did not examine the levies raised by APRA on behalf of other agencies, although the report makes reference to these levies where they influence the administration of the APRA financial industry levies.
12. APRA was established in 1998 as part of a package of measures to strengthen consumer protection functions in the financial system. To meet APRA’s resourcing needs, the Government decided to ‘establish an administratively simple and uniform funding scheme based on the principle of full cost recovery’7 from those industries it would prudentially regulate. APRA is subject to the Australian Government Cost Recovery Guidelines(the Guidelines)and, in 2011–12, was the fifth largest cost recovery agency in the Commonwealth, raising $101.3 million in levies. The Guidelines require, among other things, that APRA recovers only those costs that are integral to prudential regulation and are the minimum necessary to deliver services, and that industry is consulted about the levy methodology and its application.
13. APRA’s administration of financial industry levies has been generally effective. The methodology developed to apply the levies has met the Government’s intent of recovering the full costs of APRA’s administration, and been administratively simple and uniform. APRA, and the Treasury, have continued to apply the principles of equity and competitive neutrality when imposing levies on financial entities. This has been an ongoing process, involving review of the levy methodology and its application, stakeholder consultation and feedback. In an environment where it is difficult to set levies precisely to reflect the cost of regulation and equity considerations, the ANAO has identified three aspects of the levy methodology that would benefit from further analysis and could be considered as part of the levy methodology review being conducted by the Treasury and APRA throughout 2013:
- the levy methodology is based on the activities of staff from four of APRA’s five divisions and excludes many indirect costs (such as property and information technology) as inputs to the model. While the approach adopted over the past 15 years of allocating these indirect costs to industry sectors according to the allocation of staff activities may be reasonable, there is some risk of cross-subsidisation between sectors;
- the methodology includes ‘restricted’ and ‘unrestricted’ components, which respectively relate to prudential supervision and ‘system impact and vertical equity’. However, as the model is currently specified, some activities included in the unrestricted component do not always bear a close relationship with functions addressing system impact and vertical equity8; and
- the significant increase in levies funding for other Australian Government agencies dealing with financial institutions in recent years9 has introduced additional complexities in setting the APRA levies according to the cost of its prudential regulation. It has also brought into question whether the methodology for setting the APRA levies is an appropriate approach for calculating these other levies.10
14. APRA advised the ANAO that all activities funded through the financial industry levies relate to its regulatory role. It provided information about a range of activities to contain costs, noting that the cost of industry regulation has declined in recent years when measured with regard to the cost of assets regulated. There is scope, however, for APRA to provide more information to stakeholders to demonstrate that it is charging the minimum costs necessary and that these are directly related to prudential regulation.
15. More broadly, the majority of stakeholders consulted by the ANAO raised some concern about the level of information provided about APRA’s costs and activities and the specification of the levy methodology. Also raised was the short time frames to respond to the annual processes and the methodology reviews. One option to address these shortcomings could be to establish an industry consultative committee or panel, which could meet periodically outside the levies determination cycle to broadly consider and discuss levies and resourcing matters.11 Stakeholders did not raise any concerns about APRA’s billing and collection arrangements, which the ANAO found to be effective.
16. The ANAO has made two recommendations to improve the administration of the APRA financial industry levies. The first recommendation is aimed at the Treasury and APRA improving consultation with stakeholders about the levy methodology and its application. The second recommendation involves the two agencies’ further considering aspects of the levy methodology as part of their current review.
Key findings by chapter
Industry consultation (Chapter 2)
17. The Treasury, supported by APRA, has long-standing processes to consult with stakeholders about the financial industry levies. These processes are based on the release of an annual paper seeking industry views on the proposed financial sector levies to apply for the following financial year, supplemented by periodic reviews of the levy methodology. Periodic reviews were undertaken in 1999, 2003 and 2009, and one is underway in 2013.
18. The annual consultation paper is made available to a broad range of financial industry stakeholders affected by the proposed changes to levies parameters. With consistent timing each year, stakeholders are generally well aware of the annual process. Since 2005, the content of the paper has remained relatively stable, providing stakeholders with a sound understanding of the context and purpose of the discussions, and of the main parameters of the levy methodology.
19. Nevertheless, stakeholders have raised concerns about having insufficient time to provide considered responses to the annual consultation paper. In the last five financial years, the average length of time given for industry to provide feedback and comment on the proposed financial levies paper has been 10 working days. While the timeframe for annual consultation is constrained by the Budget process and legislative framework, there would be merit in the Treasury and APRA considering ways to increase the level of consultation with industry about the annual levies process. Options that could be considered that do not require legislative change include:
- under existing arrangements, releasing the consultation paper closer to the date of the Budget if there are no major changes to the levy methodology from the previous year—although this would allow only an additional week or so for the consultation period; and
- creating a formal opportunity at an early stage in the financial year for APRA and relevant stakeholders to discuss issues relating to the levies processes. This could involve the establishment of a stakeholder panel, potentially led by the Treasury, and including all Australian Government agencies with responsibilities for financial industry levies.12
20. Seven of the nine stakeholders consulted by the ANAO considered that there was not sufficiently detailed information about APRA’s activities and expenditure to inform discussions on proposed industry levies. This feedback indicates scope for more detailed explanation of APRA’s costing approach and its activities and expenditure—either in the methodology review papers, annual consultation papers or through a Cost Recovery Impact Statement (CRIS). Similarly, stakeholders considered there could be a greater level of disclosure about the levy methodology.
21. A CRIS (which is often prepared as a draft in the first instance) is the normal means for cost recovery agencies to inform stakeholders about their adherence to cost recovery principles.13 While APRA has adhered to many requirements of the Australian Government Cost Recovery Guidelines in the annual consultation papers14, it has not prepared a CRIS since 2006–07. APRA has undertaken to prepare a CRIS regarding its financial industry levies following completion of the levies methodology review, which is likely to occur in 2014. The CRIS will provide APRA with the opportunity to demonstrate that it is recovering only those costs that are ‘efficient’ (that is, based on the minimum cost necessary to deliver services and still maintain quality over time) and integral to its core activities.
APRA’s levy methodology (Chapter 3)
22. The levy methodology is consistent with the Government’s policy intent of an ‘administratively simple and uniform funding scheme based on the principle of full cost recovery’. However, as it excludes many indirect costs15 as inputs to the model, there is a risk of misallocation of costs between industry sectors. One way to mitigate this risk is to examine the major indirect costs excluded as inputs to the levy methodology to determine whether any industry sector is incurring a disproportionate share of these costs. The results of such an exercise could then be analysed to assess the benefits and costs of adopting alternative cost allocation approaches.16
23. Rather than focussing on types of prudential regulation activities, the levy methodology includes ‘restricted’ and ‘unrestricted’ components, which relate to supervision and ‘system impact and vertical equity’. The activities being included in the system impact component mainly cover indirect aspects of entity regulation, such as policy development and international relations. However, some of these activities do not bear a close relationship with functions addressing system impact and vertical equity.
24. The Treasury has considered aspects of vertical equity in past methodology reviews, including in 2005 where it examined whether the profile of levies associated with the caps had a clear relationship to the cost of regulation. In recent years, the significant increase in levies funding for other agencies dealing with financial institutions (such as the ATO through SuperStream) has in one instance broken the nexus between the application of the maximum caps and the cost of prudential regulation. While the Treasury did attempt to take into account equity considerations, the limited time available for implementing the levies funding arrangements for the SuperStream initiative17 did not allow for a full consideration of vertical equity issues. The Treasury has advised that it is subsequently examining vertical equity from the perspective of the levies impost per fund member, according to the size of funds.
25. As an agency that is recovering a large portion of its costs in levies, it is important that APRA be able to demonstrate that it is only charging for functions that are integral to prudential regulation and that these are being conducted efficiently. As previously discussed, APRA advised that it is only imposing levies in relation to functions that are directly related to prudential regulation, and that it is undertaking these functions efficiently (that is, based on the minimum cost necessary to deliver services and still maintain quality over time). However, APRA could provide more information to stakeholders about its costs, for example through benchmarking and/or market testing, and explain in its forthcoming CRIS how it is only charging for the efficient costs of activities that are integral to its regulatory functions.
Calculating and collecting levies (Chapter 4)
26. APRA’s processes for applying the levy methodology are sound. Through the use of regularly updated registers of regulated entities, APRA has a high degree of confidence of capturing all leviable entities, and has developed extensive processes for ensuring the quality of asset data.
27. The ANAO examined APRA’s levy model and found that it was operating correctly. While the model had been largely replicated in APRA’s management accounting system, providing a high degree of assurance, spreadsheets are still used for entering data and for calculating the applicable levy rates. To provide greater assurance of calculation accuracy, there would be benefit in APRA considering the benefits and costs of a fully automated levy modelling system.18
28. APRA’s processes for collecting levies are effective. The ANAO’s testing, which covered both automated and manual calculation procedures, found no errors in the operation of APRA’s levies calculation and billing systems. The levies collection process is also sound, with a strong legislative framework leading to high levels of compliance, and effective policies for late payment penalties, waivers and write-offs.
Summary of agencies’ responses
29. The proposed audit report issued under section 19 of the Auditor‑General Act 1997 was provided to the Treasury and APRA. The agencies’ responses to each recommendation are included in the body of the report, directly following each recommendation. Agencies’ general comments on the audit report are below; the full responses are at Appendix 1.
Australian Prudential Regulation Authority
APRA welcomes the ANAO’s findings that the methodology is consistent with the Government’s intent of recovering the full costs of APRA’s administration, and that the levy methodology is administratively simple and uniform. APRA notes the finding that APRA and the Treasury have continued to apply the principles of equity and competitive neutrality in imposing the levies on financial entities.
In conjunction with the Treasury, APRA supports further work to investigate and implement the recommendations of the report, subject to time and resourcing constraints.
The Department of the Treasury
The Treasury agrees there is scope to improve the consultation process used to determine allocation of the Financial Industry Levies. We also agree stakeholders would benefit from more transparency around the determination of the levies, including a clearer explanation of how the various elements of the levies are allocated. These issues are being considered by the Treasury and APRA as part of the 2013 Financial Industry Supervisory Levies Methodology Review.
Recommendation No. 1
To improve the effectiveness of consultation with stakeholders about proposed levy parameters and the financial industry levy methodology encompassing APRA's costs, the ANAO recommends that the Treasury, supported by APRA:
(a) provide additional time and opportunities for stakeholders to participate in the annual levies consultation process; and
(b) increase the extent of public information available about the levy methodology, and how APRA’s prudential regulation activities are linked to its costs.
Treasury response: Agreed.
APRA response: Agreed.
Recommendation No. 2
To help ensure that the levies imposed on financial entities reflect the costs of efficient prudential regulation, the ANAO recommends that the Department of the Treasury and APRA review the financial industry levy methodology and consider the:
(a) impact on levy distribution between industry sectors of more fully allocating APRA’s indirect costs;
(b) application of the restricted and unrestricted components, including with reference to the activities being allocated to them and the minimum and maximum caps; and
(c) appropriateness of applying the APRA financial levy methodology to calculate the levies collected by APRA on behalf of other Australian Government agencies.
Treasury response: Agreed.
APRA response: Agreed.
 APRA has one outcome which is: ‘enhanced public confidence in Australia’s financial institutions through a framework of prudential regulation which balances financial safety and efficiency, competition, contestability and competitive neutrality.’ Department of the Treasury, Portfolio Budget Statements 2013–14, Budget Related Paper No. 1.18, p. 137, available from <http://www.treasury.gov.au/PublicationsAndMedia/Publications/2013/PBS-2013-14> [accessed 19 August 2013].
 These agencies include the Australian Securities and Investments Commission (ASIC), Australian Taxation Office (ATO), and the Department of Human Services (DHS).
 Direct supervision of regulated financial entities is mostly undertaken by APRA’s Diversified Institutions Division and Specialised Institutions Division. Staff in these divisions are supported by staff in the Supervisory Support Division and the Policy, Statistics and International Division. Activities undertaken by staff from the Corporate Services Division are generally not apportioned to industry segments and are not included as inputs to the model.
 Cross-subsidisation is the practice of charging one group of users more than the costs of the services (or products) they receive, and using the ‘surplus’ to offset the costs of services provided to other users.
 Levy ceilings prevent the costs to large institutions greatly exceeding the costs incurred by regulators in supervising them. Minimum levy amounts are set at a sufficiently high level to cover the costs of supervising small institutions so that the cost of supervision does not rise disproportionately with the value of assets held by an institution.
 Department of the Treasury, Financial Industry Supervisory Levy Methodology, <http://www.treasury.gov.au/ConsultationsandReviews/Submissions/2013/Financial-Industry-Supervisory-Levy-Methodology> [accessed 16 May 2013].
 Explanatory Memorandum, Financial Sector Levy Bills (Cth), paragraph 1.5, available from <http://www.aph.gov.au/binaries/library/pubs/explanmem/docs/1998authoriseddeposittakinginstitutionssupervisorylevyimpositionem.pdf> [accessed 24 September 2012].
 For example, cost centres relating to the administration of the Supervisory Support Division and the Policy, Statistics and International Division are allocated to the unrestricted component but do not relate to either system impact or vertical equity.
 The share of levy funding for other agencies dealing with financial institutions in recent years increased from 17 per cent of total funding collected by APRA in 2006–07 to 58 per cent in 2012–13.
 Notably, to recover the costs of the ATO administering SuperStream in 2012–13, the maximum levy for the superannuation sector increased from around $1 million to $2 million. This maximum cap was applied to the APRA financial industry levies and all other levies administered by APRA, including on behalf of ASIC, the ATO and DHS.
 A number of cost recovery agencies have well established industry consultative committees or panels. An example is the Therapeutic Goods Administration, which has an Industry Consultative Committee that meets twice yearly to examine progress against key projects, agreed targets and financial performance.
 A further option is to move the setting of levies to another time of year to enable a longer consultation period. Such a decision would be a matter for the Government, however, and require public consultation and legislative change.
 Although there is no formal requirement to do so, the Department of Finance and Deregulation has advised that most agencies initially prepare a draft CRIS, which they subsequently finalise having received and considered consultation feedback.
 APRA has considered suggestions provided by Finance when preparing annual consultation papers in recent years to better incorporate the requirements of a CRIS.
 In 2011–12, around $65.3 million or 56 per cent of APRA’s costs were used as direct inputs in the levy methodology, for the purpose of allocating across industry sectors all of APRA’s costs to be recovered through the financial industry levies.
 For example, the Australian Government Cost Recovery Guidelines state that a form of fully distributed costing, known as Activity Based Costing, is more accurate in how it allocates indirect costs.
 While the Government announced the levy in the May 2012 Budget, there were delays in finalising the funding arrangements due in part to consideration of the SuperStream legislation by the Parliamentary Joint Committee on Corporations and Financial Services in June 2012.
 APRA has an internal policy governing spreadsheets, databases and other end user developed applications. The policy states that spreadsheets used for ‘business-critical’ functions or processes must be moved to an IT-managed system over the life of the spreadsheet, wherever possible.