The release by APRA last Friday (27 April 2012) of its proposed prudential standards, in draft, presents the reality of how much the duties and responsibilities of trustees and their directors are being expanded and how much the regulatory bar is being raised in the oversight of trustees, their directors and related entities. The release also brings into sharp focus the enormous workload for those people, and APRA, over the coming 14 months to 1 July 2013.
The draft standards present a very detailed blueprint of regulatory requirements across a range of areas. In this Alert, we set out:
- the areas covered by the standards (which are the areas foreshadowed by APRA in its Discussion Paper released in September, 2011);
- the timetable proposed by APRA in relation to the standards and related Stronger Super reforms (e.g. MySuper authorisations); and
- some general and some specific observations.
Our observations are not comprehensive. Rather, they reflect preliminary thoughts on some more topical or interesting aspects of the draft standards. In the coming months, the detail of the draft standards will be scrutinised from every direction as interested parties liaise with APRA, either formally or informally.
The draft standards
The draft prudential standards released on 27 April 2012 include six standards covering matters common to other APRA-regulated industries:
- Risk Management;
- Business Continuity Management;
- Audit and Related Matters;
- Governance; and
- Fit and Proper
The remaining five prudential standards cover matters that are specific to superannuation:
- Operational Risk Financial Requirement;
- Defined Benefit Matters;
- Insurance in Superannuation;
- Conflicts of Interest; and
- Investment Governance.
As expressed by APRA, its key milestones for the draft standards and other Stronger Super reforms are:
Click here to view table.
As flagged above, even a cursory reading of the draft standards reveals that they are very detailed and set down a high level of prescription for trustees, directors and their related parties. The Discussion Paper gave a sense of this. The draft standards confirm it.
A consistent expression throughout the standards is “at a minimum”, which is generally followed by a list of things that must be done.
In this respect, there is a sense of “micro-management” about the standards; something that was, perhaps, inevitable and something that may well challenge many trustees. In any event, whatever the state of readiness or not of a trustee and its directors, every trustee and every board will need to work through the standards meticulously and develop or refine written policies and systems to comply. Every board will then have to “sign off” on the policies and systems, with the attendant responsibilities that go with doing so.
Information gathering by APRA
Under the standards, trustees will be required to notify and report to APRA on a much larger range of matters than they currently are. Indeed, trustees will be reporting to APRA very frequently. APRA will end up with very significant amounts of information about trustees and their funds and will be able to build up a very complex and complete picture of each organisation. Interestingly, this may turn out to be a double-edged sword for APRA because of the consequently heightened community expectations on it to (and be seen to) assess and take action based on the information it gathers.
Volume of work
Most of the standards will commence on 1 July 2013. Some will commence earlier e.g. outsourcing arrangements which commence after the standards have been registered as legislative instruments but before 1 July 2013 will need to comply with the standards.
The volume of work potentially associated with several of the standards is quite daunting e.g. operational risk, risk management, insurance, governance, fit and proper, conflicts and investment governance. While most trustees will not commence with a ‘blank sheet’ on these matters, each existing policy will need to be closely reviewed and amended to conform.
Couple that with the observation that the standards present, generally, the “minimum” required. Hence, boards will be challenged as to whether they can or should do more. APRA’s proposed Prudential Practice Guides may well fuel this challenge.
In addition to this work, trustees and their boards are busily developing their strategies in relation to MySuper and other StrongerSuper reforms. They are major events in themselves.
Of course, there is also “business as usual” work, which is often in itself complex and unrelenting.
It is game on for at least the next 14 months!
APRA is listening
With the release of the draft standards, APRA also released a paper entitled “Response to Submissions”. The paper works through propositions expressed by APRA in its Discussion Paper from last year, what the submissions were, what APRA’s responses are and why they are its responses. This is helpful transparency and, no doubt, will assist in submissions to, and liaison meetings with, APRA in relation to the draft standards.
Overlap of standards
It is evident that some of the standards partially overlap with each other. Risk management is an obvious example. APRA effectively acknowledges this by the way it has grouped the standards into governance related matters; risk management related matters; investment governance; defined benefits; and insurance.
Despite the overlap, most standards still require that there be discrete policies and systems that underpin compliance with the standard. Again, the work associated with achieving this outcome should not be underestimated.
Thus far, the proposed amendment to the SIS Act to include Part 3A, which confers the standards making power on APRA, does not contain express consequences within it for non-compliance by a relevant person of a prudential standard.
Of course, that is not to say that non-compliance is devoid of consequences. Some of the obvious consequences are:
- for trustees: non-compliance with a prudential standard will have express licensing consequences. Further, if the non-compliance relates to the conflicts covenant in proposed section 52(2)(d), there will be a breach of a civil covenant exposing the trustee to personal liability. It is also conceivable that non-compliance with any other standard might involve a failure to comply with the care, skill and diligence covenant, which also would expose the trustee to personal liability;
- for directors: as for trustees in relation to the conflicts covenant and the care, skill and diligence covenant. The spectre of personal liability is something that always attracts attention;
- for others such as “responsible persons” and service providers, the prospect of direct liability is more obscure but should not be ruled out.
Some specific observations
Some items that caught our attention include:
- “best interests”: there seems to be a deliberate move away from using the language of “best interests of beneficiaries” in favour of “protect the beneficiaries and meet the reasonable expectations of beneficiaries”. Given the uncertainty associated with the language of “best interests”, this seems like a good move although the retention of the expression in the statute, coupled with the new language in the standards, may promote another form of confusion;
- tendering: the prospect of tendering for outsourced providers will attract attention, particularly for retail funds and some industry funds;
- fit and proper: the fit and proper requirements for directors will attract attention from all quarters, coupled with APRA apparently retreating somewhat in relation to boards having independent directors. However, that retreat might be illusory given the requirements of “fit and proper”. APRA’s PPG on this may well be more revealing;
- whistleblowing: the fit and proper standard has express requirements that the trustee’s policy allows for, and protects, whistleblowers. Mercifully perhaps, APRA’s standard does not require trustees to impose an obligation on any person to “whistle blow”;
- remuneration policy: the requirement to develop a remuneration policy with annual reviews for all responsible persons will attract widespread attention, particularly as to who is covered and the fact that, if covered, all forms of remuneration are covered. Who may be covered extends well beyond directors and executive management of the trustee, and can extend to employees of other entities.