Ms Sue Vroombout
Superannuation Working Group
Treasury Building
Langton Crescent
Canberra ACT 2600
Dear Sue
Superannuation Working Group: Background Issues Paper
Options for Improving the Safety of Superannuation
CPA Australia and its Superannuation Centre of Excellence (SCOE) welcome the opportunity to provide a submission on the Government issues paper 'Options for Improving the Safety of Superannuation'.
Introduction
CPA Australia generally supports the assessment of the regulatory framework governing superannuation funds. However, it is imperative that any associated reforms should give careful consideration to the benefits derived in comparison to the costs imposed on the industry.
Since the inception of the Superannuation Industry Supervision Act 1993 (SIS Act) there has been a raft of legislative amendments. APRA has recently acquired enhanced regulatory tools, including the further tightening of the 'In-House Asset rules', and also stronger enforcement powers.
CPA Australia considers that to improve the safety and security of superannuation, the short-term focus should be on improving APRA's supervision practices. In achieving a longer-term objective of evaluating the overall superannuation regulatory framework, sufficient time should be allowed for APRA to use and adequately assess the regulatory tools at its disposal.
Universal licensing regime
CPA Australia generally supports reforms designed to improve the standard of industry participants. Should a universal licencing regime be adopted, CPA Australia considers Option 2 trustees to hold an APRA licence only to be the most appropriate model.
CPA Australia does not consider there is justification for the requirement for non-public offer funds to hold an Australian Financial Services Licence (AFSL) in addition to an APRA licence. However, if licensing is seen as a critical prudential regulatory tool in respect of nonpublic offer funds, consideration should be given to imposing up front licence requirements on new nonpublic offer fund entrants only. This would alleviate the APRA concern that it is possible for funds to establish and commence operations without being subject to a level of prudential assessment.
CPA Australia considers that existing nonpublic offer funds should not have the additional compliance burden of obtaining an APRA licence, as each existing fund is already subject to a regular supervision program that usually has been in place for years. APRA should be able to, after satisfactory compliance checks as part of it's ongoing supervision program, grant existing nonpublic offer funds with an APRA licence and impose specific conditions if necessary. This gives recognition to well run funds, minimises costs, while achieving an increase in operational and governance standards.
In relation to public offer funds, CPA Australia considers it may be appropriate for funds to hold both AFSL and APRA licences. CPA Australia notes the legislative and administrative provisions currently in place to deal with a dual licencing regime, and also that more than 50 per cent of relevant funds currently have both and APRA and AFSL (ASIC) licence.
As a necessary part of an effective licencing regime, entry standards should be sufficient to ensure trustees are competent and have adequate skills to perform their duties. CPA Australia would question what more stringent entry standards would mean for member representative trustees and equal representation more generally.
Prudential standards
CPA Australia would have no objection to APRA being provided with a standards making power under the SIS Act. To be a successful risk based supervisor, APRA must be given the ability to react quickly to industry and market developments, to improve regulatory tools where they are viewed inadequate and to effectively deal with any inconsistencies as they arise.
The prudential standards should be 'disallowable instruments', therefore providing a safeguard that they are subject to necessary parliamentary scrutiny. As a further point, it should be mandatory for APRA to consult with industry before the date of effect of a proposed prudential standard.
Amendment of the SIS Act to a three tier structure
The SIS Act is necessarily complex due to the trust law principles involved with superannuation, and the interaction with tax law. It may be that this complexity would not actually be reduced with a 'three tier' structure. Due to the unique nature of superannuation, full harmonisation with other prudentially regulated institutions may not be desirable. In addition, it is important to note that there would be a significant cost burden for industry in restructuring to a new legislative framework.
CPA Australia contends that in the short-term the existing framework is adequate to support the supervision activities of APRA. Any restructure to a 'three tier' structure should be a longer-term measure. This would allow recent legislative amendments such as the increased investment restrictions and enforcement powers to be utilised and assessed for their effectiveness.
Proposed prudential standard investment rules
CPA Australia notes that the covenants in the SIS Act require trustees to formulate and give effect to an investment strategy. The SIS Act also contains specific investment restrictions designed particularly to limit the risks associated with related party investments. APRA currently has a circular regarding trustees duties in managing investments, and this clearly outlines the fundamentals of a well formulated investment strategy. As such, CPA Australia considers the current legislative requirements to be adequate, and would be concerned with any regime that purported to dictate investment strategies to trustees.
In the first instance, APRA annual returns should require disclosure of the investment strategy. The annual return format should be improved to collect better quality financial information to enable APRA to obtain a clear understanding of the risk profile of the investment portfolio.
In the cases of inappropriate investment strategies or recalcitrant trustees being encountered in the supervision program, APRA currently has a number options available to it.
These include:
- significant event reporting to members;
- direction to trustee to not to accept employer contributions;
- ability to accept enforceable undertakings;
- power to replace trustees;
- power to commence an investigation; and
- ability to attach specific conditions to Instruments of Approval (in the case of approved trustees).
These powers, in addition to the frequency of the supervision program of APRA, (and perhaps the requirement for a compliance plan) are considered adequate. CPA Australia considers the current legislative requirements could be translated into a prudential standard without further investment restrictions imposed on trustees. Any further investment restrictions, such as portfolio limits, is at odds with the principles of trust law which include the ability of trustees to invest as they see fit having regard to the best interests of beneficiaries.
Proposed prudential standard capital adequacy
CPA Australia would question the merit of imposing capital requirements on trustees that are not offering superannuation interests to the public (ie nonpublic offer funds or not-for-profit funds). The imposition of a capital requirement could be viewed as unnecessary, as the assets of the fund are the members' money, and all gains and losses of the fund fall directly on the members. Any arrangement to set aside members money to cover potential operational losses, would give rise to a number of issues not least the ownership of the surplus on a fund winding up.
The current across the board minimum capital requirement in respect of public offer funds (Approved Trustees) would not appear appropriate. CPA Australia consider that flexible capital requirements should be imposed on a case by case basis reflecting the size, revenue and risk profile of the particular entity.
Proposed prudential standard outsourcing
A prudential standard on outsourcing would serve to identify the risks and to outline the responsibilities of trustees in engaging service providers. CPA Australia would support such a prudential standard that would offer greater protection for trustees in entering contracts with service providers.
It is important to note that the predecessor Regulator issued a 'Good Practice Guide' for trustees, however this booklet has not been updated for several years. Nevertheless, this booklet has provided useful guidance to trustees on engaging service providers.
Governance requirements
CPA Australia supports the principle that Governance, particularly in the context of operational risk, is a fundamental part of a risk management program. CPA Australia considers moves to clarify Governance standards currently contained in the SIS legislation as positive for trustees, and trustees should develop and regularly review Governance plans as part of an overall compliance plan which is subject to regular audit sign off. CPA Australia notes that APRA currently does not have a superannuation circular on Governance, however the previous 'Good Practice Guide' outlined key Governance practices. It would appear appropriate for APRA to consolidate Governance issues by way of a superannuation circular in the first instance, or by prudential standard.
Annual meetings
CPA Australia believes imposing the requirement for annual general meetings would be costly and impractical, and provide only marginal benefits to members. General meetings on request by members would be a preferable option. A possible alternative would be for a general meeting to be required where certain conditions are met, for example a significant event, or where a trustee is directed to by the regulator.
Annual returns
CPA Australia agrees with the proposition that increased disclosure should result in enhanced transparency and accountability. However, the key concerns with this proposal include funds being required to disclose commercially sensitive information, and also the imposition of additional costs on funds. CPA Australia would question the level of public utilisation of this information, and suggests that adequate information may already be available in the marketplace. Should this initiative be adopted, CPA Australia considers the option of a publicly searchable database, disclosing limited information designed in consultation with industry would be appropriate.
Compliance plans
CPA Australia supports the principle that trustees develop and regularly review compliance plans that are also subject to regular audit sign off. CPA Australia agrees that new entrants be required to lodge a compliance plan with the Regulator on establishment, and existing trustees have the benefit of a one year transition period to lodge their compliance plans.
If a compliance plan was required by legislation it would be appropriate for APRA to provide similar guidance to the previous 'Good Practice Guide' for trustees. However, such guidance should not necessitate trustees to overhaul existing compliance plans where they are reasonable.
In terms of the disclosure of the compliance plan, members should be informed that they can obtain compliance plans on request, similar to the current requirement for the audited financial statements.
Related parties
Under section 109 of the SIS Act, Trustees must make and maintain investments on an arms length basis. CPA Australia queries whether the proposal that member approval be obtained is a necessary addition to section 109 and other investment restrictions contained in Part 8 of the SIS Act. It would appear that a proposal for member approval is impractical and costly.
Financial Assistance
CPA Australia questions the rationale of imposing levies on the superannuation industry in the case of failed superannuation funds. Due to the compulsory nature of superannuation arrangements, it would appear more appropriate that the Government diverts a percentage of tax revenue from superannuation contributions to fund a compensation scheme.
Longer term options for reforming the regulatory framework
The superannuation industry is currently required to adhere to a large number of Acts. CPA Australia is concerned that while this separation may result in a simple prudential Act, it may make a complex system increasingly more complex and difficult to deal with.
As a further point, consideration should also be given to the role of APRA in ensuring compliance with retirement income provisions. The separation of prudential and retirement income provisions will not be an easy exercise in any case, but would prove more problematic if this role was not clearly defined.
Should you have any queries, or require further information please contact CPA Australia's Superannuation Policy Adviser, Jane Barrett.
Greg Larsen, FCPA
Chief Executive
CPA Australia
