Navigating CPS 230: Impact on Australian Banks and Insurance Companies and Strategies for Compliance

The Australian Prudential Regulation Authority (APRA) has introduced CPS 230, a new standard that transforms how banks and insurance companies manage risks. This regulation emphasizes risk management practices, third-party risk, and business continuity to bolster financial institutions' resilience to operational disruptions. CPS 230 presents both challenges and opportunities for these sectors. All APRA-regulated companies must comply with CPS 230 by 1st July 2025.

This document examines CPS 230's effects and offers strategies for organisations to reduce risks and create robust compliance frameworks. It underscores the Board's responsibility in ensuring an APRA-regulated entity is resilient, ready for business disruptions, and manages risks effectively to deliver essential services to customers.

Understanding CPS 230

CPS 230 is part of APRA's broader initiative to strengthen the resilience of the financial system, focusing on operational risk management. The regulation mandates that financial institutions develop, implement, and maintain comprehensive risk management frameworks that address various operational risks, including those posed by third-party service providers. The standard applies to all APRA-regulated entities, including banks, insurers, and superannuation funds, emphasizing the importance of:

• Operational and Third-Party Risk Management
• Business Continuity Planning
• Board Oversight?????? ?

Business Impacts of CPS 230

Numerous tier-one financial organisations have pinpointed these top five business impacts resulting from the revised standard.

1.???????? Enhanced Accountability for Operational Risk Boards and senior management are held more accountable for ensuring robust operational risk management frameworks. This requires improved oversight and reporting structures, driving a stronger focus on risk culture and governance across the organisation.

2.???????? Increased Compliance and Administrative Burden Firms must enhance risk management processes, documentation, and reporting, which may lead to higher compliance costs. This includes maintaining comprehensive risk management frameworks, performing regular audits, and adhering to stricter operational requirements.

3.???????? Greater Focus on Outsourcing and Third-Party Risk Management CPS 230 imposes stricter guidelines on outsourcing, requiring more rigorous oversight of service providers. This will likely result in restructuring vendor contracts, increasing due diligence, and emphasizing third-party risk management.

4.???????? Increased Operational Resilience Requirements Businesses must now ensure they are more resilient to disruptions, with specific requirements on managing operational incidents and recovery. This could necessitate investments in IT infrastructure, business continuity planning, and cybersecurity to meet the expectations of the new standard.

5.???????? Financial and Reputational Implications of Non-Compliance Non-compliance with CPS 230 could result in regulatory action or fines, damaging a company's financial standing and reputation. Increased scrutiny from regulators and stakeholders may also lead to loss of investor confidence or market position.??????? ?

Key Actions for Compliance

At the heart of it all, the revised CPS 230 raises the bar on risk management practices, demanding stronger operational resilience and governance while adding layers of accountability and scrutiny. To address the business impacts associated with the revised CPS 230, organisations can implement several key actions to ensure compliance, mitigate risks, and maintain operational resilience.

Many tier-one financial organisations have a unified view that these five identified actions could be taken to alter their risk posture:

1.?? Strengthen Governance and Accountability Structures Organisations should ensure that their board and senior management are fully engaged in operational risk management. This can be done by:

o?? Establishing clear governance frameworks with defined roles and responsibilities for overseeing risk.

o?? Enhancing board-level reporting to provide insights into operational risks, incident management, and risk appetite.

o?? Conducting regular training and awareness sessions to ensure leadership understands their obligations under CPS 230.

2.????????Enhance Risk Management Frameworks A robust operational risk management framework is essential. Businesses should:

o?? Conduct a comprehensive review and update of their existing risk management policies and procedures.

o?? Develop a clear risk appetite statement that aligns with the requirements of CPS 230.

o?? Implement continuous monitoring and improvement mechanisms for operational risks, including cybersecurity, fraud, and business continuity.

3.????????Improve Third-Party Risk Management The revised CPS 230 increases the focus on outsourcing and third-party risks. Organisations should:

o?? Perform a thorough assessment of all third-party providers, especially those involved in critical services.

o?? Strengthen due diligence processes, renegotiate contracts, and ensure vendors meet higher resilience and compliance standards.

o?? Develop contingency plans for third-party failures and maintain regular communication with vendors on risk issues.

4.????????Invest in Operational Resilience and Incident Management Organisations must bolster their ability to withstand and recover from disruptions. To do this, they should:

o?? Invest in business continuity and disaster recovery plans; gamification of testing using “war games scenarios” have proven to be invaluable, and ensure all plans are regularly tested and updated.

o?? Implement a strong incident management process that includes detailed reporting, root cause analysis, and timely remediation.

o?? Focus on improving IT infrastructure, cybersecurity measures, and data recovery systems to meet resilience requirements.

5.??????Embed a Culture of Compliance and Risk Awareness Compliance with CPS 230 requires a cultural shift that promotes risk awareness across all levels of the organisation. To foster this culture, organisations should:

o?? Conduct organisation-wide mandatory cyber training to increase awareness of operational risk and compliance requirements.

o?? Establish a transparent communication channel for reporting risks and incidents, ensuring that all employees understand the importance of timely reporting.

o?? Align performance incentives with risk management goals, encouraging proactive risk identification and mitigation efforts

Risks of Non-Compliance

By taking these actions, organisations can not only address the business impacts of the revised CPS 230 but also strengthen their overall operational resilience and governance frameworks. On the flipside, ignoring or failing to address the business and technical imperatives outlined in the revised CPS 230 poses significant risks to organisations, particularly in the financial services sector.

Here are the top five risks associated with non-compliance:

1.???????? Regulatory Penalties and Sanctions Non-compliance with the revised CPS 230 can lead to severe financial penalties, enforcement actions, or sanctions imposed by APRA. This could include fines, restrictions on business activities, or even revocation of licenses. These actions would result in immediate financial losses and could severely disrupt business operations.

2.???????? Reputational Damage A failure to meet CPS 230 requirements, particularly in managing operational risks or responding to incidents, could harm an organisation’s reputation. Customers, investors, and stakeholders may lose confidence in the organisation’s ability to safeguard their interests, leading to loss of business, negative media coverage, and long-term brand damage.

3.???????? Increased Vulnerability to Operational Failures Ignoring the technical imperatives around operational resilience—such as incident management, IT security, and business continuity—leaves organisations vulnerable to disruptions such as cyberattacks, system failures, and supply chain breakdowns. Without a robust framework in place, these incidents could result in prolonged downtime, financial losses, and damage to critical infrastructure.

4.???????? Weak Third-Party Risk Management The revised CPS 230 emphasizes the importance of managing outsourcing risks. Failing to address third-party risk management could expose organisations to service provider failures or breaches that affect critical operations. This lack of oversight could lead to non-compliance, data breaches, or operational disruptions due to vendor mismanagement, which could then impact the entire business ecosystem.

5.???????? Deterioration in Operational Governance and Risk Culture Not prioritising operational risk management and governance could lead to an organisation-wide decline in risk awareness and accountability. This can result in poor decision-making, missed risks, and an inability to respond effectively to crises. A weak risk culture often leads to systemic issues that could escalate, ultimately affecting the organisation’s long-term stability and performance.

Key Leaders in CPS 230 Compliance

Ensuring compliance with CPS 230 involves several key leadership roles:

1.???????? Board of Directors: Tasked with establishing a strong organisational culture and ensuring the presence of an effective risk management framework. They must oversee compliance with CPS 230 and hold senior management accountable for their actions.

2.???????? CEO and Executive Leadership: Ultimately responsible for implementing CPS 230 throughout the organisation, ensuring that the strategic direction integrates operational risk management effectively.

3.???????? Chief Risk Officer (CRO): This critical role under CPS 230 involves direct oversight and management of operational risks, ensuring that risk management frameworks, policies, and practices meet CPS 230 standards.

4.???????? Chief Compliance Officer (CCO): Responsible for the organisation's adherence to all regulatory requirements, including CPS 230. The CCO manages and reports on compliance risks and collaborates with other leaders to ensure adequate controls are in place.

5.???????? Chief Operating Officer (COO): Ensures that daily operational processes align with CPS 230 through appropriate controls and risk management practices.

6.???????? Chief Information Security Officer (CISO): Given the focus on risk in CPS 230, particularly cyber and operational risks, the CISO is essential for maintaining IT systems' resilience and robust cybersecurity measures.

7.???????? Internal Audit: Although not directly accountable for implementation, internal audit is crucial for reviewing and evaluating adherence to CPS 230, reporting their findings to the board and senior management.

Preparing for 1 July 2025

With the deadline approaching, organisations should prioritise the following steps:

1.???????? Develop a compliance plan: Create a strategy well before July 2025 to meet CPS 230’s requirements, addressing operational risk, third-party risk management, and business continuity.

2.???????? Engage with APRA: Show progress on risk management frameworks through updates or meetings with APRA before 2025.

3.???????? Be ready by 1 July 2025: Ensure full compliance with the standards, including governance, risk management, and operational resilience.

Conclusion

The good news is that many of the companies in this industry are already preparing to ensure full compliance ahead of the deadline. It is not a trivial undertaking; however early start has mitigated some of the risks in adherence.

Non-compliance with CPS 230 poses significant risks to financial institutions, including regulatory penalties, reputational damage, and operational disruptions. To ensure robust operational resilience and maintain regulatory confidence, prioritising adherence to CPS 230 is essential. Many organisations are already preparing for full compliance, mitigating risks and strengthening their risk management frameworks well ahead of the deadline.