APRA Prudential Standard APS 222 - Associations with Related Entities: Overview and Summary of Requirements

• By: Staff Editor
• Date: June 14, 2013

• The standard applies to all ADIs except Purchased Payment Faculty (PPF) Providers. Only a section of the standard applies to Foreign ADIs
• The APRA can approve an Extended Licensed Entity (ELE) in relation to specific ADIs

• Financial Strength of the Group or Conglomerate
• Nature of business of the group companies
• Quality of risk management in the group
• Financial and operational interdependence between regulated and unregulated entities and across the group
• Status and quality of regulation of the member companies (regulated by the APRA or similar foreign prudential regulatory authority)
• Ratings of unregulated entities in the group
• Badging and product distribution that link the ADI and the financial state of the group companies

• Reputational and Legal Risk – Common Brand Name
• Cross Selling of Product
• Perception of interdependence
• Operational risk from common services between ADI and group companies

• The Board of Directors of the ADI is completely responsible for ensuring that the contagion risks are monitored and managed. To ensure this, the Board of Directors must provide the APRA with the following information from time to time:
  • Details of group members
  • Structure of the group’s top management
  • Intra-group support and exposures
  • Any breach of the standards as per section 62A of the Banking Act
  • Advanced information of any proposed changes in operations or structure
  • Approval request for setting up new presence locally or overseas.
  • Group risk management policies and procedures used to measure and control overall risk
  • Declaration signed by CEO and approved by Board on Level 2 group’s risk management systems

• Related entities are the entities controlled directly or indirectly by an ADI or the ultimate domestic parent of the ADI
• Foreign parents of overseas based subsidiaries are not considered related entities
• Dealings-related Board policies must include:
  • A requirement that the ADI addresses risk arising out of dealing with related entities as strictly as it would those risk exposures to unrelated entities
  • Prudential limits on exposures to related entities at individual and aggregate level
  • Procedures for resolving conflict of interest arising out of these dealings
  • Requirements relating to transparency of third party dealings with related entities
• The ADI must not
  • Have unlimited exposures to unrelated entities
  • Agree to cross-default provisions – where a related entity’s default triggers a default by the ADI
• Exposure limits must be considered keeping the level of exposures and the impact on the ADI’s stand-alone capital and liquidity positions in mind
• The ADI must satisfy the APRA that it has the systems in place to monitor and control risks arising out of such dealings. A high Prudential Capital Requirement (PCR) may be required to be maintained as required by the APRA
• An ADI can support a related entity provided the rules regarding dealings are complied with
• A foreign ADI can support a subsidiary in Australia provided there are formal legal arrangements in place for such a support
• Dealings with ADI-Group and Non ADI–Group entities must be clearly distinguished in writing
• The ADI and the group members can have a common brand name provided they comply with the section 66 of the Banking Act governing restricted use of name and also clearly define the roles and responsibilities of each member entity

• Distribution of products by the group members must clearly communicate the role of the ADI to prevent any confusion in the minds of the customers
• The ADI must satisfy the APRA that any such group operation will not hamper its financial stability
• The Board of the ADI must establish management policies for risks arising out of the group operations and must approve each of the group activities

• Any exposures exceeding the limits mentioned here must be approved by the APRA in written prior to activation

1. The ADI must consult with the APRA before establishing or acquiring a subsidiary or committing to any proposal to acquire more than 20% of the equity interests in any entity
2. The ADI must notify the APRA as per section 62A of the Banking Act for any breach of prudential limits on exposures and mention remedial actions planned

Additional Resources

Read the APRA Prudential Standard APS 222 - Associations with Related Entities in full.