When RSE licensing came in, APRA issued a number of ‘Superannuation Guidance Notes’ (SGNs) which were intended to help trustees understand APRA’s views on sound practice and on how trustees may comply with requirements under the Superannuation Industry (Supervision) Act 1993 (SIS Act) and Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations). Now, four of those key SGNs have been replaced by ‘Superannuation Prudential Practice Guides’ (SPGs) on these topics:

  • Capital – SGN 150.1 (July 2004) now SPG 1101
  • Risk Management – SGN 120.1 (July 2004) now SPG 2002
  • Adequacy of resources – SGN 140.1 (July 2004) now SPG 2303
  • Fitness and Propriety – SGN 110.1 (July 2008) now SPG 5204  

These SPGs were released in draft form in August 2009 and a year later, following industry consultation, they were finalised on 10 August 2010. There were also draft SPGs released on conflicts and reserving practices, but these have not yet been issued in final form.

This summary outlines the key differences between each SPG and the now-superseded SGN that it replaces.

Superannuation Prudential Practice Guide SPG 110 — Capital

Key differences between the old SGN and the new SPG:

  • Emphasis on capital requirements as a licence condition: SPG 110 now emphasises that capital requirements form part of a trustee’s licence conditions and, as such, breach of the capital requirement may constitute a ‘significant’ breach of a licence condition necessitating a breach report to APRA.
  • Interaction with the adequacy of resources operating standard: References to the interaction of the net tangible assets (NTA) requirements with the operating standard requiring trustees to have adequate financial resources have been updated to refer to the new SPG 230 — Adequacy of Resources (see below). In particular, SPG 110 now notes that APRA would not routinely impose, as a licence condition, a minimum level of financial resources to be held by a trustee. However, it is open to APRA to do so on a case-by-case basis.
  • Definition of NTAs: SPG 110 provides less detail as to the calculation of NTAs under SIS Regulation 3A.04. Calculation of NTAs has occurred on this basis since 30 June 2006 and perhaps it is now expected that trustees would be familiar with the requirements.
  • Satisfaction of capital requirements through custodian: SPG 110 inserts significant detail regarding the use of custodians by trustees in order to satisfy the capital requirements. Where a trustee relies upon a custodian, APRA may set an additional licence condition requiring the trustee itself to hold a minimum level of liquid assets (cash or cash equivalents). Flexible arrangements may be available where, for example, an existing not-for-profit trustee applies to use a custodian. Further, APRA notes that it would be inconsistent with a trustee’s fiduciary obligation to simply impose a one-off administration levy to obtain the minimum level of liquid assets.
  • Policies and procedures to identify and avoid breaches of the NTA requirement: SPG 110 includes a new statement as to APRA’s expectation that trustee policies and procedures should demonstrate how potential breaches of the minimum NTA requirement could be identified and how remedial action could be taken to avoid breaches (rather than reacting to the breaches after their occurrence).
  • Additional information regarding approved guarantees: SPG 110 inserts new information regarding the use of approved guarantees by custodians and provides a link to determinations made by APRA regarding requirements for approved guarantees (for both licensees and custodians).  

Superannuation Prudential Practice Guide SPG 200 – Risk Management

Key differences between the old SGN and the new SPG:

  • Less detail regarding legislative requirements for Risk Management Statements (RMSs) and Risk Management Plans (RMPs): Much of the detail contained in SGN 120.1 regarding the RMS and RMP content requirements has been removed by SPG 200. SPG 200 now simply refers readers to the relevant sections of the SIS Act.
  • RMS and RMP as licence conditions: SPG 200 now emphasises that the RMS and RMP requirements form part of the trustee’s licence conditions and as such, failure to comply with either will result in breach of a licence condition.
  • Replacement of Superannuation Circular II.D.7 (Derivatives): This was a long circular, and seems to have disappeared now, with very little substance brought across into the SPG.
  • RMS and business plan: In the context of the risk management framework being aligned to the trustee’s business plan, SGN 120.1 stated that APRA expected to be notified of changes to the business plan that would affect the RMS pursuant to section 29C(8) of the SIS Act. This expectation is not stated in SPG 200.
  • Risk identification for RMS and RMP: SPG 200 contains new suggestions for techniques that a trustee may rely on when identifying, assessing and quantifying risks—being self assessment, risk mapping and risk indicators. Further, APRA has expanded its non-exhaustive list of typical areas of risk to now include risks associated with remuneration structures, risks associated with member-take up of certain investment options and solvency risk at the trustee and fund levels. Interestingly, APRA no longer refers to trustees needing to engage in a ‘continuous process of identification and assessment of all material risks’. Since this was viewed as onerous and inconsistent with other APRA guidance, SPG 200 now states that it is necessary for the trustee to update and reassess risks and/or identify new risks on an ongoing basis.
  • Greater focus on risk mitigation and control: SPG 200 places a greater emphasis on the role of control mechanisms to mitigate risks and ensure compliance with the risk management framework. Examples of mechanisms to mitigate risks are given, including clearly defined management responsibilities and accountabilities and policies and procedures for the treatment and resolution of non-compliance issues.
  • Monitoring of risk profiles and material exposures: SPG 200 now includes an express expectation that the trustee will document a process to regularly monitor risk profiles and material exposures to losses.
  • Information systems: SPG 200 places greater emphasis on the need for trustees to establish, maintain and document effective information systems ‘commensurate with the size and complexity’ of the relevant trustee’s operations.
  • Audit: SPG 200 provides detail as to the methodology and purpose of internal audits. No such information was provided by SGN 120.1.
  • Trustee attestation: SPG 200 notes the new requirement for trustees to provide APRA with a signed attestation as to the existence and efficiency of the risk management framework. SGN 120.1 previously noted that this was ‘likely to become a requirement’.  

Superannuation Prudential Practice Guide SPG 230 – Adequacy of Resources

Key differences between the old SGN and the new SPG:

  • Risk Management Strategy: SPG 230 now expressly states that APRA expects a trustee’s RMS to set out how the trustee will monitor and maintain the adequacy of resources.
  • What amounts to ‘complexity’ in the trustee’s superannuation offerings: Although the suggestion that the trustee consider the complexity of its superannuation offerings when determining whether it has adequate financial resources is not new, the new SPG provides detail as to what factors would fall for consideration under the category of ‘complexity’. It is suggested that complexity be considered by reference to the number and structure of funds under trusteeship, number and nature of investment strategies, arrangements for unit pricing or setting crediting rates, number of members and geographic spread of operations.
  • Substantiation and evidence of due diligence: On the issue of APRA seeking to substantiate trustee statements as to the adequacy of its resources, SGN 140.1 noted that ‘APRA may seek substantiation…’. SPG 230 is now phrased differently, noting that ‘APRA would normally seek substantiation …’.

When substantiating a trustee’s statements as to the adequacy of its financial resources, SPG 230 suggests APRA may seek evidence of ‘appropriate due diligence that supports the trustee’s satisfaction with the capacity of material service providers, including satisfaction with their financial capacity to remedy any failings in providing the contracted services’. Similarly, APRA may also seek a copy of any agreement under which an employer-sponsor or other party commits to providing ongoing material support to the trustee.

  • Minimum level of financial resources: As noted above, SPG 230 now states that APRA would not routinely impose, as a licence condition, a minimum level of financial resources to be held by a trustee. However, it is open to APRA to do so on a case-by-case basis.
  • Human resources: In the context of adequacy of human resources, SPG 230 now notes that APRA would expect to see measures in place to ensure appropriate recruitment and induction processes, as well as succession planning for key roles.  

Superannuation Prudential Practice Guide SPG 520 – Fitness and Propriety

Key differences between the old SGN and the new SPG:

  • Expanded guidance on contents of the trustee’s fit and proper policy: SPG 520 contains expanded guidance regarding APRA’s expectations as to the minimum contents of a trustee’s fit and proper policy. APRA now expects the policy to identify necessary skills and competencies of the trustee and each responsible officer, include a process for identifying skill gaps, and identify someone responsible for conducting the fit and proper assessments on behalf of the trustee (among other things).
  • Extension of trustee’s fitness and propriety assessment process: SPG 520 suggests that a trustee ‘may consider’ extending its assessment process for fitness and propriety to a wider range of people than is presently required under the SIS Act. This was not previously mentioned in SGN 110.1.
  • APRA’s assessment of trustee’s compliance with fit and proper standard: SPG 520 now suggests that APRA may seek access to the trustee’s own reports or assessments regarding its continual satisfaction of the fit and proper standard. Alternatively, APRA may on occasion seek access to an independent review of the trustee’s processes for ensuring fitness and propriety.

(This can be contrasted to the Draft SPG 520 released in August 2009, which suggested that APRA would ‘be likely’ to seek access to these reports. The final requirement has been toned down in response to comments that it would have led to ‘less forthright self-assessments’.)

  • Whistleblowing: SPG 520 inserts new guidance in relation to whistleblowers. Specifically, APRA suggests that it would be prudent for trustees to permit whistleblowing under the trustee’s fit and proper policy if a person believes that a responsible officer or the trustee has not met the criteria of the fit and proper policy.
  • Extension of guidance regarding persons who are not fit and proper: SPG 520 includes additional guidance on the contents of the fit and proper policy in relation to persons who are not fit and proper. APRA now suggests that the trustee’s policy should include a process for removing such persons and a requirement to obtain legal advice, having regard to the entity’s structure and individual arrangements with responsible officers.
  • Extension of guidance regarding responsible officers: SPG 520 contains additional guidance as to who is considered a responsible officer of a trustee under the SIS Act.
  • Determining whether a person is fit and proper: SPG 520 now notes that whether a person has been reprimanded, disqualified or removed by a professional or regulatory body in relation to the person’s professional competence will be a factor in determining whether the person is fit and proper. Previously, such disciplinary action was only a consideration where it related to the person’s honesty, integrity or business conduct (note that these considerations still apply in addition to professional competence under SPG 520).  
  • Minimum fitness requirements for responsible officers: In SGN 110.1, APRA noted that the RSE licensee should maintain, at a minimum, a working knowledge of SIS, basic investment knowledge and basic knowledge of elements of RSE licensee and trust law. It was, according to SGN 110.1, acceptable for this knowledge to reside in only one person.

Under the new SPG 520, APRA now requires all responsible officers to satisfy minimum requirements of skills, knowledge and qualifications in order to meet the ‘fitness’ limb. This would include an understanding of section 52 of the SIS Act, a working knowledge of the SIS Act, accounting, auditing and operational processes, basic investment knowledge, basic knowledge of the elements of RSE licensee and trust law and awareness of other areas where technical, professional or expert advice could be sought. Expanded guidance is also given as to the minimum training and induction requirements for responsible officers.

Having applied the minimum individual fitness requirements, APRA continues to expect that the fitness requirements would also be applied on a collective basis at the trustee level.

  • Suspension of trustees: SPG 520 now notes that it is possible for APRA to suspend a trustee who fails to promptly remove a responsible officer who is known or reasonably suspected of being a disqualified person (pending resolution of that person’s status).  

Conclusion

In conclusion, quite a number of changes have been made to the old SGNs, although there was nothing entirely new or unexpected. Rather, the revised notes represent a moderate extension of the principles and guidance which were already in place.

As a practical comment, however, it is frustrating that regulators often do not release revised publications in the form of a mark-up to indicate the changes nor any comprehensive explanatory guidance to accompany the release of revised materials. Instead it seems that regulated entities and their advisers are required to do a manual comparison of the old against the new.