Summary

  • Prudential Standard SPS 231 came into force on 1 July 2013 imposing new obligations in relation to outsourcing of material business activity.
  • We consider what a trustee should do to satisfy APRA that it has appropriately assessed the outsourcing of a material business activity.

Background and context        

Superannuation Prudential Standard 231 (SPS 231) is a mandatory prudential standard released by the Australian Prudential Regulation Authority (APRA).

SPS 231 applies to the outsourcing of a material business activity by a trustee under the Superannuation Industry (Supervision) Act1993.

Timing           

SPS 231 applies to the following arrangements for outsourcing of material business activities by trustees:

  • arrangements entered into on or before 23 November 2012 which are anticipated to end on or after 1 January 2014 - with these arrangements, the trustee must take all reasonable steps to adjust the terms of the arrangement to the extent necessary to comply with the requirements in paragraphs 20 to 28 of SPS 231 (such as the legal form and content of the documentation governing the arrangement and consultation with and notification to APRA),
  • arrangements entered into after 23 November 2012 but before 1 July 2013 - with these arrangements, the trustee must comply with the requirements in paragraphs 20 to 28 of SPS 231, or
  • arrangements entered into on or after 1 July 2013 – with these arrangements, the trustee must comply with all of the requirements in SPS 231.

Outsourcing

Outsourcing involves a trustee entering into an arrangement with another party to perform, on a continuing basis, a business activity that is or could be undertaken by the trustee itself.

APRA has previously given guidance in a set of frequently asked questions as to types of activities that may or may not constitute outsourcing. For example, APRA considers that the following would constitute outsourcing:

  • investment management activities where the investment manager has discretion to make investments on behalf of the trustee, and
  • asset consulting activities where the asset consultant has discretion to select investment managers on behalf of the trustee.

Under those guidelines, APRA is of the view that the issue of an investment product (such as an interest in a private equity or debt fund) to a trustee is not an outsourcing.

APRA has recently released updated guidance on outsourcing (see Prudential Practice Guide 231), which also discusses activities that may not be covered by SPS 231. Importantly, where there is some uncertainty as to whether a particular business activity may be ‘material’. APRA expects trustees to treat the activity as such and comply with the Standard.

Material business activity

A material business activity is one that has the potential, if disrupted, to have a significant impact on:

  • the activities of the trustee or any of its registrable superannuation entities,
  • the ability of the trustee to manage risks effectively,
  • the interests or reasonable expectations of members of registrable superannuation entities of the trustee, or
  • the financial position of the trustee, any of its registrable superannuation entities or its subsidiaries (or other entities which may be prescribed by the regulations as connected entities of the trustee).

Material business activity

A material business activity is one that has the potential, if disrupted, to have a significant impact on:

  • the activities of the trustee or any of its registrable superannuation entities,
  • the ability of the trustee to manage risks effectively,
  • the interests or reasonable expectations of members of registrable superannuation entities of the trustee, or
  • the financial position of the trustee, any of its registrable superannuation entities or its subsidiaries (or other entities which may be prescribed by the regulations as connected entities of the trustee).

Steps to be taken    

In order to satisfy APRA that a trustee has appropriately assessed the outsourcing of a material business activity, the trustee must be able to show that it has, among other things:

  • prepared a business case for the outsourcing,
  • undertaken a tender or other selection process for selecting the service provider,
  • undertaken a due diligence review of the service provider,
  • taken into account the changes to the risk profile of the business activity that arise from outsourcing the activity,
  • established procedures for monitoring performance under the outsourcing agreement on a continuing basis,
  • addressed the renewal process for the outsourcing agreement and how the renewal will be conducted, and
  • developed contingency plans that would enable the outsourced activity to be provided in-house by the trustee or by an alternative service provider.

Legal form and content

An outsourcing of a material business activity by a trustee must be contained in a legally enforceable document signed by all parties to it before the outsourcing commences.

The document must cover a range of matters as required by SPS 231. These include:

  • the scope of the arrangement and services to be provided,
  • commencement and end dates,
  • review provisions,
  • service levels and performance requirements,
  • reporting requirements,
  • audit and monitoring procedures,
  • business continuity management,
  • default arrangements and termination provisions,
  • dispute resolution arrangements,
  • allocation of risk and liability,
  • indemnities for loss suffered by the trustee and to the effect that the service provider will be liable for any failure by its sub-contractors,
  • insurance, and
  • requirements that the service provider must allow APRA to conduct on-site visits to the service provider and to have access to documentation and information related to the outsourcing.

Consulting with and notifying APRA   

A trustee is required to:

  • consult with APRA before entering into an outsourcing arrangement for a material business activity if the activity will be conducted outside Australia,
  • notify APRA as soon as possible within 20 business days after entering into outsourcing arrangement for a material business activity (whether or not the activity will be conducted in Australia), and
  • notify APRA if there is a significant problem that has the potential to materially affect an outsourcing arrangement entered into by the trustee.

Relief

APRA has power to relieve a trustee from some or all of the requirements in SPS 231.

Updated Guidance

As discussed above, APRA has now released outsourcing guidance in final form to support SPS 231 (see Prudential Practice Guide 231). Although compliance with the guidance is not mandatory, trustees should be aware that:

  • the guidance now clarifies that investments in pooled investment vehicles would not typically be considered ‘outsourcing’ for the purposes of SPS 231,
  • APRA has said it will ‘take a practical approach’ to its requirement for consultation prior to ‘offshoring’, particularly where consultation on a high-frequency basis is needed. For trustees appointing offshore investment managers, an alternative process may ultimately be made available to reduce the level of consultation required, and
  • although advisory or professional services are unlikely to be considered ‘outsourcing’, if the service extends beyond the recognised role (e.g. in the form of  additional consulting services) this may constitute an outsourcing.

Kristyn Mealing