The new-look regulatory landscape has APRA primarily responsible for the safety and stability of the super system and the Australian Securities and Investments Commission leading enforcement.
The significant regulatory reform to come out of the Hayne inquiry was giving APRA enforcement powers for the Superannuation Industry (Supervision) Act. Hayne did not recommend changes to the central legal obligation on trustees to act in the best interest of members.
That leaves it open to ASIC to launch some civil actions against trustees. While these will probably cost about $2.5 million to $3 million each it will provide welcome clarification of a law that has laid dormant for years.
Chanticleer’s two best examples of APRA being asleep at the wheel were its failure to do anything about the rip off that occurred at the NSW Bookmakers’ Super Fund and the hundreds of millions lost by members of various industry super funds in a technology company called Superpartners.
Promising more assertive stance
In the Bookmakers’ Super Fund case, trustees were allowed to walk away scot-free despite reckless investment management decisions that destroyed the life savings of scores of people. In the Superpartners case, industry funds blew up more than $250 million on an IT project that should have been killed off years earlier.
APRA’s secrecy obligations make it difficult to know exactly when it last showed any supervisory aggression toward a badly managed super fund. Chanticleer reckons it was about 10 years ago when, in the wake of the global financial crisis, it forced several funds experiencing liquidity problems to confront their problems.
It removed several super trustees and worked behind the scenes to force several mergers.
Over the past three years it has worked behind closed doors to quietly encourage the trustees of 28 “outlier” super funds with assets of about $1 billion to lift their game. This was light-touch regulation taken to an extreme given that three funds did not “responded adequately” to APRA’s entreaties.
Rowell, who has been in charge of APRA’s oversight of super funds since 2015, is now ready to take a more hands-on approach in relation to these three poor-performing funds. Her tenure was extended for five years from July last year.
“In addition to taking a more assertive supervisory stance, APRA will deliver greater transparency; on the industry’s operations, performance and delivery of outcomes, and also on the actions we are taking to lift behaviour and practices across the industry and within individual trustees,” she said on Wednesday at the AIST Conference of Major Super Funds.
“Although there are good reasons why we can’t and don’t disclose every supervisory action we take, the royal commission has made clear that it’s not enough for us to only act behind the scenes; the public needs to have greater confidence that action is being taken to hold trustees and directors to account and to address underperformance and poor outcomes.
“We will therefore start providing, to the extent feasible, more information on the steps we are taking to ensure trustees address weaknesses and rectify breaches, including instances of formal enforcement action.”
Major review of data looms
It does not make sense for APRA to name the “outliers”, which are really the country’s worst-performing super funds. Disclosure of the identity of these funds could cause a run on these funds and harm the interests of all members.
But the sooner members have the information they need to make informed decisions about where to direct their compulsory super savings, the sooner the industry’s Hayne-tarnished reputation will improve.
Rowell admitted APRA’s supervisory efforts have been hampered by the collection of “insufficient, inconsistent and inaccurate data”. The data black hole at APRA was uncovered by the Productivity Commission, which spent about 18 months building a reliable data set of the performance and asset allocation of MySuper funds and about 20 per cent of funds chosen by members.
The Productivity Commission used a combination of public data and data from private firm SuperRatings. One hopes APRA has picked up this methodology for its own purposes.
Rowell announced APRA would be undertaking a major review of the superannuation data reporting regime. “This review aims to provide greater coverage, enhanced consistency and better quality data through clarifying and revising definitions, and increased granularity in some areas, such as expenses,” she said.
Knowing where funds are spending money, including on loss-making enterprises with no prospect of making a profit, should help restore confidence in the forced saving system.
The outlier funds will be closely monitored and the list will be updated regularly. But the “worst in show” will not be made public by APRA.
“The trustees of these funds will be targeted with intensified supervision, with APRA seeking prompt action to address areas of weakness or concern,” she said.
“If trustees are unable or unwilling to respond appropriately, we will be urging them to seriously consider whether restructuring or exiting the industry is in their members’ best interests.”
APRA expects improvements
Rowell lamented the lack of political support for granting APRA increased powers. It is true that politicians have dragged the chain on important legislative reforms. But that ought not to be an excuse for APRA’s failure to use the powers it has to act against trustees and poorly run funds.
Rowell will send out a letter next week to all licensed super trustees setting out the regulators focus of attention and where it expects improvements. That is an important first step in the strengthening of APRA’s supervisory approach.
Another broader issue yet to be addressed by the federal government is the lack of certainty in APRA’s medium-term budget outlook, which the International Monetary Fund highlighted as an area of concern in its financial sector assessment published last month.
The IMF said the budgetary constraints may prevent APRA and ASIC from attracting and retaining sufficient staff with requisite specialised skills.
“Areas of increasing risks, such as cyber, group, conduct, and cross-border, warrant an expansion of resources in certain key functions at ASIC and APRA, such as in enforcement, and the supervision of IT and operational risks, as well as to support strengthened monitoring of foreign activities and co-operation with international regulators,” the IMF said.