Determination and collection of financial industry levies

Taxation Policy Australia
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This audit assessed the effectiveness of the administration of the Australian Prudential Regulation Authority (ARPA)'s financial industry levies.

Overall conclusion

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’ 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.

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 equity; and
  • the significant increase in levies funding for other Australian Government agencies dealing with financial institutions in recent years 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.

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.

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. Stakeholders did not raise any concerns about APRA’s billing and collection arrangements, which the ANAO found to be effective.

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.

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