Banking, Insurance, Life Insurance and Health Insurance (prudential standard) determination No. 1 of 2026

Banking, Insurance, Life Insurance and Health Insurance (prudential standard) determination No. 1 of 2026

EXPLANATORY STATEMENT

Prepared by the Australian Prudential Regulation Authority (APRA)

Banking Act 1959, section 11AF

Insurance Act 1973, section 32

Life Insurance Act 1995, section 230A

Private Health Insurance (Prudential Supervision) Act 2015, section 92

Under the above provisions, APRA may, in writing, determine, vary or revoke a prudential standard that applies to an APRA-regulated entity.

On 19 May 2026, APRA made Banking, Insurance, Life Insurance and Health Insurance (prudential standard) determination No. 1 of 2026 (the instrument) which revokes Prudential Standard CPS 001 Defined terms made under Banking, Insurance, Life Insurance and Health Insurance (prudential standard) determination No. 1 of 2025 (the previous CPS 001) and determines a new Prudential Standard CPS 001 Defined Terms (the new CPS 001).

The instrument commences on 1 July 2026.

1.         Background

APRA’s mandate is to ensure the safety and soundness of prudentially regulated financial institutions so that they can meet their financial promises to depositors, policyholders and fund members within a stable, efficient and competitive financial system. APRA carries out this mandate through a multi-layered prudential framework that encompasses licensing and supervision of institutions.

APRA regularly reviews its prudential framework and amends its prudential requirements as a result of a number of factors, including: 

• international developments; 
• changes in financial market conditions;
• changes in risk management practices, in response to identified weaknesses in the prudential framework; and 
• to reduce potential negative impacts of emerging industry issues. 

When amending its prudential requirements APRA has regard to, amongst other things, the impact on industry in terms of both industry burden and matters of proportionality.

The previous CPS 001 was a legally binding prudential standard that came into effect on 1 January 2026. It supported the interpretation of APRA’s prudential framework.

In June 2025, APRA commenced a review of its capital framework for longevity products (including annuities), to support better retirement outcomes for Australians by fostering a more vibrant and competitive annuity market.

The review was consistent with the Government’s objective of expanding options for retirees to manage longevity risk and was a key contribution to APRA’s strategic objective of ‘getting the balance right’ by ensuring its regulation is efficient and proportionate. The initiative was designed to support the market for retirement income products, with the better alignment of APRA’s capital settings with the long-term nature of longevity liabilities supporting greater innovation and competition in the market for longevity products and allowing life companies to offer retirees better retirement income solutions.

Separately, in late 2025, APRA consulted on changes to the tiering framework for banks, under which certain prudential requirements are applied on the basis of the size and complexity of individual banks. The proposed changes were to give effect to undertakings by APRA to increase proportionality and reduce regulatory burden for banks as part of the Council of Financial Regulators’ (CFR) and the Australian Competition and Consumer Commission’s (ACCC) Review into Small and Medium-sized Banks (CFR review).

In May 2026, CPS 001 was remade to incorporate amendments stemming from the review.

1.         Purpose and operation of the instrument

The purpose of the instrument is to revoke the previous CPS 001 and replace it with the new CPS 001.  The new CPS 001 amends the previous CPS 001 by incorporating certain definitional changes arising out of APRA’s review of its capital framework for longevity products as well as changes to enhance proportionality for banks arising from the CFR review and commitments by APRA in response to the review.

The previous CPS 001 and the new CPS 001 relevantly centralise defined terms used in the banking and insurance prudential frameworks within one prudential standard. They also explicitly link each defined term to one or more industries, making it easier to understand and apply the prudential framework. The defined terms are read with other prudential standards which impose prudential requirements.

A description of the provisions of the new CPS 001 is set out in Attachment A to this Explanatory Statement.

1.         Scope of administrative powers

Exercise of discretion by APRA

The new CPS 001 provides for APRA to exercise various discretions. Decisions made by APRA in exercising the discretions are not subject to merits review. This is because these decisions are preliminary decisions that may facilitate or lead to substantive decisions which are subject to merits review.

Under the Banking Act 1959 (Banking Act), Insurance Act 1973 (Insurance Act), Life Insurance Act 1995 (Life Insurance Act) and Private Health Insurance (Prudential Supervision) Act 2015 (PHIPS Act), a breach of a prudential standard is a breach of the enabling legislation, as each enabling Act provides that regulated entities must comply with the requirements of a standard. However, there are no penalties prescribed for breach of the prudential standards under any of these Acts. Instead, an entity’s breach of the enabling legislation is grounds for APRA to make further, substantive decisions under the relevant enabling legislation in relation to the entity. Those decisions may include the decision:

1.           to issue a direction to the regulated entity, including a direction to comply with the whole or part of a prudential standard (section 11CA of the Banking Act, section 104 of the Insurance Act and section 230B of the Life Insurance Act) and a direction to comply with all or specified obligations, which includes prudential standards (section 96 of the PHIPS Act);
2.           to impose conditions on the entity’s registration (sections 9AA and 11AAA of the Banking Act, sections 13 and 19 of the Insurance Act, sections 22 and 28B of the Life Insurance Act and section 15 of the PHIPS Act);
3.           to conduct an investigation into the regulated entity (section 61 of the Banking Act, section 52 of the Insurance Act, section 137 of the Life Insurance Act and section 130 of the PHIPS Act); and
4.           to revoke an authority to carry on banking business (section 9A of the Banking Act), a banking non-operating holding company (NOHC) authorisation (section 11AB of the Banking Act), an authority to carry on insurance business if APRA is satisfied that the insurer has no liabilities in respect of insurance business carried on by it in Australia (section 15 of the Insurance Act), an insurance NOHC authorisation (section 21 of the Insurance Act), a life company’s registration under section 21 if APRA is satisfied that the company has no liabilities in respect of life insurance business carried on by it in Australia (section 26 of the Life Insurance Act) or a registered NOHC’s registration under section 28A (section 28C of the Life Insurance Act).

A decision of APRA to give a direction or impose a condition is subject to merits review (section 11CA of the Banking Act, section 104 of the Insurance Act, section 236 of the Life Insurance Act and section 168 of the PHIPS Act). Before exercising such a power, APRA will give an affected body corporate an opportunity to comment on the whether the exercise is warranted or not.

All decisions to revoke authorisations/registrations under the Banking Act, Insurance Act and Life Insurance Act are subject to merits review, unless specifically excluded by the enabling legislation.

Revocation of an authorisation to carry on banking business or a banking NOHC authorisation is subject to merits review unless:

1.           APRA has determined that access to natural justice and merits review is contrary to the national interest or contrary to the interests of depositors with the body corporate; or
2.           (in the case of authorised deposit-taking institutions (ADIs) only) the authority is an authority that is to cease to have effect on a day specified in the authority (subsection 9A(8) of the Banking Act).

Revocation of an authorisation to carry on insurance business or an insurance NOHC authorisation is subject to merits review (sections 15 and 21 of the Insurance Act).

Revocation of a life company’s registration or a life NOHC’s registration is subject to merits review (section 236 of the Life Insurance Act).

Decisions relating to the cancellation of registration for private health insurers are governed under the PHIPS Act.

1.         Documents incorporated by reference

Under paragraph 14(1)(a) of the Legislation Act 2003, the prudential standard incorporates by reference as in force from time to time:

• Acts of Parliament and associated delegated laws;
• Prudential Standards determined by APRA under:
  • subsection 11AF(1) of the Banking Act;
  • subsection 32(1) of the Insurance Act;
  • subsection 230A(1) of the Life Insurance Act; and
  • subsection 92(1) of the PHIPS Act;
• Reporting Standards determined by APRA under subsection 13(1) of the Financial Sector (Collection of Data) Act 2001;
• the Australian Accounting Standards determined by the Australian Accounting Standards Board under section 334 of the Corporations Act 2001 (Cth); and
• the Australian Auditing Standards determined by the Auditing and Assurance Standards Board under section 336 of the Corporations Act 2001 (Cth).

These documents may be freely obtained on the Federal Register of Legislation at www.legislation.gov.au (all documents listed above except for Australian Accounting and Auditing Standards), https://www.aasb.gov.au/pronouncements/accounting-standards/ (Australian Accounting Standards) and https://auasb.gov.au/standards-guidance/auasb-standards/auditing-standards/ (Australian Auditing Standards).

1.         Consultation

Capital settings for longevity products

APRA undertook two separate rounds of public consultation on proposed changes to its capital settings for longevity products (including annuities).

In June 2025, APRA released a consultation paper inviting industry feedback on certain proposed changes to the life insurance capital framework for longevity products. In response, APRA received 11 submissions from entities and industry bodies. APRA also undertook additional engagements with several stakeholders. Submissions were generally supportive of APRA’s direction and included a range of suggestions to refine the proposal. The main suggestion was that the proposed capital benefit should be better aligned with the level of risk controls proposed. This feedback was accepted and informed the development of draft revised prudential standards.

In October 2025, APRA undertook a second round of consultation inviting further feedback on APRA’s refined proposal, including a draft version of the new CPS 001. APRA received nine submissions, primarily from entities and industry bodies. Industry feedback strongly supported the reforms, with it being noted that the changes represent a significant improvement to the current framework by reducing procyclical risks to life insurers’ capital positions. Stakeholders noted APRA’s reforms represent an important step towards developing Australia’s retirement income market by promoting innovation and expanding options for retirees to manage longevity risk. Respondents indicated that they largely expect the reforms to improve capital efficiency and stimulate greater market participation.

While overall feedback was positive, many submissions suggested some further refinements to specific parameters of the proposed ‘advanced illiquidity premium’ (AILP) calculation, notably in relation to the proposed floor for the risk allowance and treatment of the AILP in the credit spread stress charge under Prudential Standard LPS 114 Capital Adequacy: Asset Risk Charge. Mixed views were received in relation to proposed restrictions on assets backing longevity products, ranging from recommending the removal of restrictions to advocating for greater flexibility and higher asset limits. APRA acknowledged the feedback received but determined that the proposed settings for the AILP remain sound and strike the right balance in providing capital efficiency in return for appropriate risk controls.

In March 2026, APRA released a response paper finalising the changes to its capital settings for longevity products, including the new CPS 001. All relevant consultations and non-confidential submissions are available on APRA’s website.

APRA is satisfied that the consultation undertaken for the proposed changes to APRA’s capital settings for longevity products was appropriate and reasonably practicable.

Enhanced proportionality for ADIs[1]

In July 2024, the Treasurer asked the CFR, in consultation with the Australian Competition and Consumer Commission (ACCC), to examine the state of the small and medium-sized banking sector, with a focus on competition and to report to the Government on options and approaches to improving competition in the small and medium-sized banking sector. The CFR issued its Report to Government in July 2025. Action 1 of the report was that ‘APRA will formalise a three-tiered approach to proportionality in its prudential framework for banks’. In August 2025, APRA announced that it would make changes to its banking framework to increase proportionality and reduce regulatory burden in response to the CFR review.

APRA undertook formal consultation with the banking industry and other interested stakeholders, commencing in December 2025 with release of a consultation paper which outlined proposals to increase proportionality. These changes included:

• introducing a new third tier — most significant financial institutions (MSFIs) — into the existing two-tier approach to proportionality for ADIs;
• lifting the threshold at which ADIs are automatically classified as significant financial institutions (SFIs) and subject to enhanced prudential requirements;
• routinely providing banks a minimum of 12 months to transition to new requirements when crossing a tiering threshold; and
• providing smaller ADIs (non-SFIs) additional time to comply with new prudential requirements.

Eleven submissions were received in response to the consultation. APRA also engaged with industry bodies representing ADIs on these matters.  While differing views were received on some proposals in the 11 submissions received, there was broad support for APRA’s proposed positions.

Some submissions on the proposal to increase the SFI threshold, being the threshold at which an ADI is automatically classified as an SFI, from AUD 20 billion to AUD 30 billion, while supportive, suggested the threshold could be set higher to make clearer the distinction between smaller and medium-sized ADIs. Alternative suggestions were for a threshold in the order of AUD 50-60 billion. APRA considered where the threshold should be set in formulating its proposal, and considered a range of options, including a higher dollar threshold or setting the threshold as a percentage of banking system assets. APRA is of the view that the increase to $30 billion is appropriate and that a bank with AUD 30 billion is significant in the context of the broader banking system. At this level, several existing banks classified as SFIs will fall below the new threshold, leaving approximately 10 ADIs classified as SFIs (or MSFIs) out of a population of 126 ADIs.  On using a percentage of system assets versus a dollar threshold level, APRA considers a dollar threshold is the simplest, transparent way to convey the threshold.

For the MSFI setting, all submissions commenting were supportive of the introduction of the new tier and the threshold level, though some alternatives were suggested in terms of level or using a percentage. Similar to suggestions for alternative measures for the SFI threshold, APRA considers the dollar threshold to be the simplest, most transparent approach.

All submissions commenting on transition to a higher threshold and routinely giving more time to non-SFIs to comply with new prudential requirements were supportive of the proposals. Some submissions argued that APRA should provide more time. On the 12-month transition, APRA’s proposal was to provide a minimum 12-month transition when an ADI moves to a higher tier. There is therefore discretion for APRA to provide additional time should an individual ADI’s circumstances warrant it.

In May 2026, APRA released a response letter finalising the changes to its enhanced proportionality settings, including the new CPS 001, which includes new and revised definitions for this purpose. All consultation documents and non-confidential submissions are available on APRA’s website.

APRA is satisfied that the consultation undertaken for enhanced proportionality for ADIs was appropriate and reasonably practicable.

1.         Impact Analysis

The Office of Impact Analysis confirmed that a Regulation Impact Statement was not required for capital settings for longevity products or enhanced proportionality for banks.

1.         Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

A statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 is included in Attachment B to this Explanatory Statement.

ATTACHMENT A

Description of provisions of the new CPS 001

The new CPS 001 defines key terms that are used in APRA’s prudential framework. It applies to ADIs, general insurers, life companies and private health insurers, NOHCs and subsidiaries (collectively, relevant APRA-regulated institutions).

Paragraphs 1 to 5 state APRA’s authority to make the prudential standard, the application of the prudential standard to other relevant prudential standards and to the relevant APRA-regulated institutions and certain matters of interpretation.

Paragraphs 6 and 7 set out how references to an Act, Regulation, Prudential Standard, Australian Accounting Standard or Australian Auditing and Assurance Standard and the indicators in square brackets appearing before a defined term should be interpreted.

Paragraph 8 states the definitions of key terms that are used in APRA’s prudential framework.

Paragraph 9 states what a relevant APRA-regulated institution must do if it seeks to place reliance on an exemption or other exercise of discretion by APRA made under a previous version of CPS 001.

Attachment A of CPS 001 sets out definitions relevant to ADI conglomerate groups, consolidation and non-consolidation of ADI subsidiaries and Level 2 insurance groups for general insurers.

Attachment B of CPS 001 set outs the different classes of business for a general insurer.

Attachment C of CPS 001 sets out the requirements for general insurers, Level 2 insurance groups, life companies and private health insurers in applying counterparty grades to assets subject to credit risk.

ATTACHMENT B

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Banking, Insurance, Life Insurance and Health Insurance (prudential standard) determination No. 1 of 2026

This legislative instrument is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (HRPS Act).

Overview of the Legislative Instrument

The purpose of this legislative instrument is to revoke Prudential Standard CPS 001 Defined terms (CPS 001) and replace it with a new version of CPS 001 to incorporate certain changes arising out of APRA’s review of its capital framework for longevity products and to enhance proportionality in the banking prudential framework.

CPS 001 centralises defined terms used in the banking and insurance prudential frameworks within one prudential standard to improve consistency. The standard also explicitly links each defined term to one or more industries, making it easier to understand and apply the prudential framework.

Human rights implications

APRA has assessed this legislative instrument and is of the view that it does not engage any of the applicable rights or freedoms recognised or declared in the international instruments listed in section 3 of the HRPS Act.

Conclusion

Accordingly, in APRA’s assessment, this legislative instrument is compatible with human rights as it does not raise any human rights issues.

[1] Authorised deposit-taking institutions include banks (Australian-owned, foreign subsidiary and branches of foreign banks), credit unions, building societies and providers of purchased payment facilities.