ANZ's Risk Culture Overhaul: APRA's Capital Add-On and the Road Ahead

Ladies and gentlemen, buckle up! We've got a major development in the world of banking down under. The Australian Prudential Regulation Authority (APRA) has just accepted a court-enforceable undertaking from Australia and New Zealand Banking Group (ANZ) to fix its non-financial risk management practices and risk culture. But that's not all—APRA has also hiked the capital add-on for ANZ from $750 million to a whopping $1 billion. This is a game-changer, folks, and you need to pay attention!

APRA has been on ANZ's case for a while now, and for good reason. The regulator has had long-standing concerns about ANZ's non-financial risk management practices and risk culture. Weaknesses in operational risk and compliance management, along with a reactive risk culture, have been persistent issues. APRA has been pushing ANZ to clean up its act, but the problems just kept popping up like weeds in a garden.

In August 2024, APRA ordered ANZ to conduct an independent review to get to the root of the issues. The findings were not pretty. While there were some improvements in culture, conduct, and risk governance in ANZ's Global Markets business, the review identified root causes that have contributed to the emergence and persistence of risk governance shortcomings. And get this—these shortcomings may be present in other parts of the bank too!

APRA Chair John Lonsdale made it crystal clear: "ANZ remains financially sound with robust levels of capital and liquidity, however problems with the bank's management of non-financial risks are persistent and prevalent across the bank." APRA has seen how long-standing non-financial risk management weaknesses have manifested in material prudential issues at some of ANZ's peer banks. They're not messing around, folks. They want these issues addressed as a priority.

So, what's ANZ doing about it? They've accepted all recommendations of the independent review and are taking immediate actions. Here's the plan:

1. Independent Reviewer: ANZ will appoint an independent reviewer to complete a Group-wide review of root causes and behavioural drivers of the persistent weaknesses in non-financial risk management practices and risk culture. This reviewer will also conduct a gap analysis against current or planned remediation work.

2. Comprehensive Remediation Plan: Based on the findings of the independent reviewer, ANZ will develop a comprehensive remediation plan to address the root causes of the identified weaknesses. This plan will be Board approved and independently assessed and reported on a three-monthly basis.

3. Accountability: ANZ will provide a written attestation from the relevant Accountable Person, the Chair of the Board Risk Committee and/or the Chair of the Board Audit Committee to APRA once ANZ is satisfied that the remediation activities under the plan have been completed and the target states substantially achieved.

4. Remuneration Scorecards: ANZ will incorporate accountabilities for delivery of the remediation plan into the accountability statements for Accountable Persons required under the Financial Accountability Regime, and to reflect this accountability in the remuneration scorecards.

5. New Executive Role: ANZ is creating a new Executive role, Group Head, Non-Financial Risk Program Delivery, reporting to the Chief Executive Officer. This role will be responsible for strengthening non-financial risk management practices and risk culture across the Group.

6. Oliver Wyman Report: ANZ has accepted all recommendations of an independent culture and risk governance review into its Global Markets business, commissioned by the ANZ Group Board. The Board will hold management accountable for implementing these recommendations in a systematic and permanent manner.

ANZ Chairman Paul O'Sullivan had this to say: "We are disappointed that we have not met APRA's expectations about how the bank manages non-financial risk and its non-financial risk culture. A strong non-financial risk regime is critical to protecting our bank and our customers." He also noted that while APRA has recognised the bank has a significant agenda of non-financial risk work underway and has made some progress with improving their practices, they recognise they have more work to do to uplift their management of non-financial risk and to improve risk culture across the bank.



So, what does this mean for ANZ's financial stability and future investment decisions? The increased capital add-on means ANZ must keep more cash on hand, which reduces the amount of capital available for lending and other investment activities. This could impact ANZ's ability to compete with other banks that do not face the same regulatory scrutiny. It could also limit ANZ's ability to return capital to shareholders in the form of dividends or share buybacks.

But here's the thing, folks—this is a wake-up call for ANZ. They need to get their act together, and fast. The increased capital add-on is a clear signal from APRA that they mean business. ANZ needs to prioritize risk management and compliance over other strategic initiatives if they want to avoid similar issues in the future.

So, what's the bottom line? ANZ has a lot of work to do, but they're taking the right steps to address the issues. The increased capital add-on is a tough pill to swallow, but it's a necessary one. ANZ needs to focus on fixing their risk culture and non-financial risk management practices if they want to remain competitive in the banking industry. Stay tuned, folks—this is a story that's far from over!