An independent review is urging the overhaul of the Australian Prudential Regulation Authority (APRA), slamming it for a poor culture and variable leadership.

Key points: The review was ordered in the wake of the banking royal commission

The review was ordered in the wake of the banking royal commission It criticised APRA's dealings with regulated entities "behind the scenes"

It criticised APRA's dealings with regulated entities "behind the scenes" The panel made 24 recommendations, including five directed at the Federal Government

In a proposed shake-up of the often secretive regulator, a three member panel chaired by former ACCC chairman Graeme Samuel said change was needed.

"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 said.

"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."

The panel made 24 recommendations, with 19 directed to APRA and the remaining five directed to the Federal Government.

The capability review into APRA was initiated as a result of a recommendation from the Hayne Royal Commission final report released in February, which was also critical of the Australian Securities and Investments Commission (ASIC) for failing to detect and eliminate misconduct in financial services.

While the panel described APRA as an "impressive and forceful regulator", it observed that its tolerance for operating beyond quantifiable financial risks had been low.

It also urged change in the way APRA was run, noting a "variability in its leadership capability" at all management levels and the need for cultural change "that fosters internal debate and contestability".

APRA staff interviewed for the review said decision-making was slow "with issues being taken through various committees and sometimes 'parked' for long periods, before decisions are made".

The report criticised APRA's preference to keep a low profile and dealing with regulated entities "behind the scenes".

"The panel believes that this limits its impact and authority," the report concluded.

"APRA needs to shift the dial towards a more strategic and forceful use of communication to ensure that it maximises its impact with regulated entities."

In other key recommendations, the panel urged:

A review of current penalties available to APRA to determine if they are adequate

A review of current penalties available to APRA to determine if they are adequate Building on the Commonwealth Bank inquiry into culture, accountability and governance with a view to holding several similar inquiries over the next two years

Building on the Commonwealth Bank inquiry into culture, accountability and governance with a view to holding several similar inquiries over the next two years The creation of a new superannuation division to oversee the system for all members

The creation of a new superannuation division to oversee the system for all members That APRA has sufficient powers and flexibility to prevent inappropriate directors and senior executives from being appointed or re-appointed to regulated entities

Allan Fels, who used to run the Australian Competition and Consumer Commission, said APRA has historically been too cosy with the banking, superannuation and insurance industries it regulates.

"It is going to send a message to the finance sector that they can expect tougher regulation. Up until now regulation has not had them sufficiently scared or worried to do the right thing," Mr Fels argued.

"[APRA] needs to get rid of that old-style regulation of behind closed door deals that we don't hear about, being too close to the industry that is being regulated."

Professor Elizabeth Sheedy from Macquarie University's Applied Finance Centre said APRA suffers from similar cultural and accountability problems as the firms it is meant to regulate.

"That's a strong theme of the report and it has been part of APRA's modus operandi that it has tended to operate behind the scenes, closed door discussions and the strong push in this report is to be much more out in the open, much more naming and shaming."

Treasurer to take action

In a statement, APRA said it supported all of the recommendations describing the report as "fair and balanced, and appropriately forward-looking about necessary capabilities needed to stay successful into the future".

Treasurer Josh Frydenberg said he would take action on the five recommendations directed to the Government.

"An independent, robust and effective prudential regulator is essential for safeguarding the financial safety and the financial stability of the Australian economy," Mr Frydenberg said in a statement.

The APRA capability review was announced in February in the wake of the Royal Commission final report.

Mr Samuel headed the panel with company director Diane Smith-Gander and Grant Spencer, a former governor of the Reserve Bank of New Zealand.