The Australian Prudential Regulation Authority (APRA) is set to create an insurance division as part of a proposed overhaul that will also sharpen its focus on governance and cultural issues.

An independent review, recommended by the Hayne royal commission, says APRA is an impressive and forceful regulator on traditional financial risk, but its approach needs to change on failings elsewhere.

“APRA appears to have developed a culture that is unwilling to challenge itself, slow to respond and tentative in addressing issues that do not entail traditional financial risks,” the review report released today says.

“In combination with APRA’s organisational structure, these factors limit its ability to deliver on the breadth of its mandate and adapt to new challenges.”

Insurance supervision is currently split between the Diversified Institutions Division and Specialised Institutions Division.

The proposed restructure would create separate banking, insurance and superannuation divisions, bolstering frontline empowerment.

“This will increase senior management’s focus and accountability for dealing with industry-specific issues. It will also strengthen the development of industry skills,” the report says.

Under the changes APRA’s Chairman would relinquish his oversight of authorised deposit-taking institutions (ADI) and adopt a broader organisation-wide role.

The remaining members would then each have roles that combine a mix of industry, policy and functional responsibilities.

The report calls for more prudential inquiries along the lines of the Commonwealth Bank of Australia investigation following financial advice scandals.

It says similar inquiries should take place over the next two years involving superannuation, insurance and deposit-taking institutions and the approach should become part of the toolkit for addressing governance, culture and accountability.

Company self-assessments and issues identified during APRA supervision would determine which entities are targeted for inquiries.

The review is critical of APRA’s strong preference to “do things behind the scenes” in tackling issues with companies and says it should “shift the dial” towards a more strategic and forceful use of communication.

“Some things need to be kept confidential, but APRA should consider what is appropriate to be communicated to the public,” it says.

“Its expectations of entities should be made public as should any failure by entities to meet those expectations, including responses by APRA to those failures.”

Treasurer Josh Frydenberg announced the APRA capability review earlier this year following the Hayne royal commission final report.

Former Australian Competition and Consumer Commission Chairman Graeme Samuel chaired the review and Diane Smith-Gander and Grant Spencer sat on the panel. They made a total of 24 recommendations.

The Federal Government says it will introduce or further examine five recommendations directed its way, including around APRA workplace bargaining and remuneration structures. It will also consider the need for any additional funding as part of next financial year’s Budget process.

APRA says it supports all 19 recommendations within its mandate, with many changes in progress, while some will depend on the Government’s response.

“The report highlights the increasingly complex industry dynamics in which APRA operates and that the expectations of its role and mandate have increased,” Chairman Wayne Byres said.