Roles of APRA and ASIC ‘merit attention’, says PC

On Thursday (10 January), the Productivity Commission’s (PC) Superannuation: Assessing Efficiency and Competitiveness report was publicly released after having been handed to the government on 21 December.

The 700-page report scrutinised Australia’s superannuation (super) system and suggested that while the system delivers “good outcomes for many members”, there were several structural flaws and inadequate competition leading to an erosion of members’ balances and “yawning gaps” in data on the actual outcomes individual members are experiencing.

The inquiry found that a third of accounts (about 10 million) are “unintended multiple accounts”, which are eroding members’ balances by $2.6 billion a year in “unnecessary fees and insurance”.

Further, the PC said that some members are not seeing value from their insurance in super, which likewise erode their balance.

“Structural flaws — unintended multiple accounts and entrenched underperformers — are harming millions of members, and regressively so,” the report reads.

“Fixing these twin problems could benefit members to the tune of $3.8 billion each year.”

ASIC and APRA in the spotlight

While the PC put forward 31 recommendations to improve the super system, one notable recommendation was for the Australian government to “immediately initiate the independent capability review of APRA”.

In its report, the PC warned that both regulations (and regulators) focus “too much on the interests of funds and not members” and that the “overlapping” jurisdictions of the financial and prudential regulators, the Australian Prudential Regulation Authoirty (APRA) and the Australian Securities and Investments Commission (ASIC), had become “confusing and opaque” when it came to their superannuation mandates.

Some examples of the potential areas of overlap included “failures on the part of trustees to exercise care, or to enable beneficiaries to receive information (an APRA responsibility) — both contained in the general covenants — which could in part relate to disclosure or record-keeping (thus potentially also falling into ASIC’s area of responsibility)”.

According to the commission, the “blurring of responsibilities also inevitably detracts from the accountability of the respective regulators”.

The report reads: “Confident regulators that champion the member are essential in a compulsory super system. Regulatory arrangements need to support this.

“A clearer articulation of the roles of APRA and ASIC is needed to more closely align these roles with each agency’s ‘regulatory DNA’.”

The PC recommended that APRA would be best placed to focus on “licensing and authorisation to promote high standards of system and fund performance”, with the “elevated outcomes tests” being central to its regulatory approach as it would help detect poor performance  and help inform how APRA prioritises its supervisory effort.

“The government should provide APRA with a more explicit ‘member outcomes’ mandate to replace its traditional (and here misplaced) prudential mandate, and clarify that ‘outcomes’ should be synonymous with actual member outcomes, not adherence with processes,” the PC said.

“APRA will also need an exponential uptick in dedicated expertise and resources to deliver on what is expected of it.”

Meanwhile, the PC suggested that ASIC would be best placed to regulate the misconduct and conduct of trustees and advisers, and to oversee the appropriateness of products (including to particular target markets) and disclosure.

“In principle, it should be the primary strategic conduct regulator for the super system. This entails both the detection and deterrence of misconduct,” the PC said.

“ASIC will need to work closely with APRA to share data and identify areas for closer scrutiny (with the elevated outcomes tests thus also assisting ASIC).

“They will also need to coordinate enforcement action. ASIC is well suited to undertaking public enforcement activities that provide a strong deterrent effect to all trustees.”

Capability review needed

The PC therefore recommended that a capability review should be “immediately” initiated to review the capability of APRA and examine how efficiently and effectively APRA operates to achieve its strategic objectives in relation to superannuation.

This could include, the PC said:

• the capability of APRA to adequately supervise and regulate the superannuation system in line with its current responsibilities and those proposed in draft legislation (as well as future responsibilities arising from the implementation of recommendations in this inquiry), including a focus on capability in enforcement
• identification and analysis of immediate and forward-looking priorities and risks
• the use of legal powers and enforcement tools, including the pursuit of test cases and effective coordination with ASIC and other regulators in this regard
• the skills, capability and culture of the organisation, including the number of staff dedicated to regulating superannuation and their capabilities
• internal governance and accountability mechanisms
• engagement and information sharing with other regulators, especially ASIC
• the use of data collection and analytics
• future resourcing needs

“The review should be completed and published during 2019,” it said.

APRA deputy chair Helen Rowell welcomed the Productivity Commission’s final report into superannuation efficiency and competitiveness, including the recommendation for a capability review.

“APRA is committed to enhancing the focus of Australia’s superannuation sector on delivering optimum member outcomes. New and enhanced prudential requirements we announced last month included strengthened member outcomes assessment obligations for all superannuation products, and APRA has continued its progress in getting trustees to take action on underperforming funds,” Mrs Rowell said.

She continued: “APRA has intensified our scrutiny of board governance practices and conflicts of interest management. Further, we have significantly stepped up our efforts to improve coordination with other regulators, including the Australian Securities and Investments Commission, and are well progressed with a review of APRA’s enforcement strategy.

“APRA has previously indicated its willingness to take part in a capability review led by appropriately experienced and qualified experts.”

Mrs Rowell said APRA was already addressing many of the areas where the report indicated the organisation could make changes or improvements.

[Related: New ASIC deputy chair appointed]