APRA needs to work harder on superannuation: Capability Review

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APRA needs to lift its efforts on regulating the superannuation sector, particularity when it comes to member outcomes, says a capability review of the regulator.

One of the recommendations of the Banking and Financial Services Royal Commission was a capability review of APRA. The – in parts scathing – report of this review has now been publicly released, after being given to the government in June.

“The main conclusion of this Review is that APRA’s internal culture and regulatory approach need to change,” says the APRA Capability Review report.

“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.”

In terms of APRA’s role in regulating the superannuation sector, it’s the view of the review panel that APRA has “under-resourced superannuation and not approached it with an appropriate regulatory focus”. Super fund member outcomes have taken a ‘back seat’ to the stability of banks and insurers.

The report says that APRA “needs to lift its effort on superannuation and shift its thinking and focus by developing its policy and supervision framework and by building its skills and resources dedicated to the sector”.

The review panel finds that APRA has largely regulated the superannuation system from a prudential perspective – it is the prudential regulator – focusing on the stability of funds and systemic risks. However this prudential approach “may have led it to under-resource its oversight of superannuation”.

“Generally, APRA has taken an industry-neutral approach to supervision of superannuation: many of its policies and supervisory tools are broadly the same as those used for banking and insurance.”

“APRA has not sufficiently acknowledged that differences in the superannuation industry require a different approach to supervision.”

The panel says that APRA needs to “give more priority and tailor its approach to superannuation”.

“It needs to refocus its attention to regulating trustees to deliver good retirement outcomes, while still ensuring that trustees carefully and diligently manage member funds.”

“Despite an increasing focus on member outcomes, APRA’s progress has been insufficient, especially in relation to system efficiency, fees and transparency.”

A sample of internal APRA documents showed “little focus on member outcomes and whether trustees had complied with legal requirements designed to protect members’ savings, including the sole purpose test, MySuper obligations or fee requirements under the SIS Act.”

“Additionally, sampled documents showed that while APRA looked at potential conflicts of interest between individual directors and the trustee, the supervisors paid little attention to the risk of conflict of interests between trustees and related parties in their broader group structures and the members of the fund.”

The report finds that APRA has been improving, but there is still a ways to go.

“While APRA is taking action on member outcomes, the Panel questions whether APRA has yet sufficiently embedded this focus into its frameworks.”

The panel believes APRA is heading the right direction on member outcomes and fund underperformance, pointing to draft prudential standard SPS 515 and advocacy for the Member Outcomes Act. But more is needed.

“APRA needs to shift its focus, develop its policy and supervision framework and build its skills and resources to improve its work on superannuation. This will be more difficult to achieve in APRA’s existing structure.”

The recommendations of the capability review are meant to address these issues in APRA. They include the creation of a new Superannuation Division, headed by an Executive General Manager, within APRA. The panel also recommended APRA “embed and reinforce its increasing focus on member outcomes, and continue to ensure that trustees prudently manage member funds”, with specific reporting changes recommended.

The panel also recommended the Government legislate to make APRA’s member outcomes mandate “more explicit”, and to also “clearly outline its expectations for APRA on superannuation in its next Statement of Expectations”.

Government ‘taking action’ on APRA Capability Review recommendations

As with the Royal Commission, Treasurer Josh Frydenberg says the Government will “take action” on all the recommendations the panel directed to it. But this doesn’t mean adopting the recommendations in full – the Government’s response agrees with the Statement of Expectations part of the recommendation, but makes no mention of legislation.

APRA says it “supports” both of the superannuation recommendations directed at it.

Frydenberg said: “An independent, robust and effective prudential regulator is essential for safeguarding the financial safety and the financial stability of the Australian economy. The Government is confident that the response it has announced today, alongside action from APRA, will ensure that APRA is in a position to effectively respond to these new challenges and deliver on its mandate.”

Superannuation industry cautiously optimistic

The superannuation industry has generally welcomed the recommendations of the capability review, though there are concerns about the implementation.

Industry Super Australia says the recommendations must be acted on quickly, or else fund members will be exposed to more of the misconduct uncovered by the Royal Commission.

“This review has exposed a culture of under-reporting, poor regulation and enforcement and a failure to adequately protect consumers from exploitation and misconduct,” said ISA Acting Chief Executive Matthew Linden.

“This review and its recommendations must give APRA the impetus it needs to go after those parts of the sector that exploit vulnerable members for their own financial gain.”

“The Government and APRA have an obligation to members to act quickly on these recommendations, and put in place the necessary capability, regulatory and enforcement frameworks to take action against those who have committed wrong-doing.”

Though Linden also said that it was important that APRA use its powers fairly, and prioritise areas where harm to super fund members is highest.

“We expect any new powers to be applied by APRA in an even-handed way, with appropriate checks and balances, with members’ best interests at its heart.”

The Association of Superannuation Funds of Australia (ASFA) takes a more cautions approach to the recommendations. While saying that member outcomes is the “top priority”, it also says that care should be taken in implementing the recommendations to “avoid long term risks, costs and poorer outcomes for superannuation members”.

ASFA CEO Dr Martin Fahy said: “The recommendations to raise capability and deploy a more effective operating model for APRA have considerable merit but the superannuation specific recommendations need careful consideration.”

ASFA warns that shifting the focus of APRA from stability to member outcomes is a “significant” change, which could harm member interests if not carefully implemented.

The Australian Institute of Superannuation Trustees (AIST) meanwhile particularly welcomed the recommendation for APRA to publish data on all APRA-regulated super products, saying this could have “real and long-lasting” impact on retirement outcomes.

“A lack of comparable performance data, notably for non-default ‘choice’ super products where more than $1 trillion of super savings is invested, has been the Achilles heel of our super system,” said AIST head of advocacy Ailsa Goodwin.

“For too long, members of these high fee, poorly performing funds–most of which are retail funds -have been kept in the dark.”

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