The Australian Prudential Regulation Authority (APRA) today told the Senate Select Committee on Superannuation in Sydney, supervision without law reform is inadequate for the degree of protection the community demands.

APRA General Manager, Mr Ramani Venkatramani, said that APRA could see around 300 small and problematic funds exiting the industry as a result of tighter licensing requirements recommended by APRA as part of its superannuation reform agenda.

"The benefits of expanded supervision activity are limited by major gaps in the regulatory framework, in particular the lack of standards-making and licensing power," he said.

In order to meet the communitys desire to safeguard superannuation, APRA has made recommendations to the Superannuation Reform working group lead by Don Mercer. The two key recommendations involve the granting of licensing and standards-making powers, which would bring superannuation regulation in line with other financial institutions like banks.

A licensing power will bar unsuitable parties from the industry in the first instance, and appropriately constrain industry players with the use of formal conditions in the second.

Currently, the SIS Act requires licensing for Approved Trustees offering retail superannuation to the general public, but not for Trustees managing standard employer-sponsored superannuation for particular workplace and industry groups.

A standards-making power will give APRA the flexibility to adjust the prudential requirements to reflect industry developments and regulatory trends, without the need to undertake the complex and slow process currently required to amend the legislation. It will still be subject to industry consultation and parliamentary review.

APRA believes that at any one time about 150 small to medium funds have serious weaknesses warranting close surveillance and possibly active enforcement. Another 150 or so funds managing less than $1 million would be arguably too small to satisfy the minimum requirements of a prudent licensing test.

While any loss is not trivial and comes at a cost to the community, the cost of losses due to fraud or theft is estimated to be relatively small - $90million in the last 16 years or 0.018 per cent of the current level of assets in the superannuation industry. However, the community is more likely to experience greater loss through the bad management of funds, usually the result of either incompetence or greed, than from criminal behaviour. This trend applies to all funds regardless of size.

APRA currently regulates around 2,500 employer-sponsored superannuation funds, including some 1,700 small to medium funds with assets under $10 million each, of which around 800 funds would have assets under $1 million each. This segment has been contracting steadily as a result of market pressures and regulatory requirements, with members shifting to larger funds or self-managed funds. Another 200 funds are currently scheduled to exit.

Note to editors
A copy of Mr Venkatramanis address to the Senate Select Committee on Superannuation can be found on the APRA website at http://www.apra.gov.au/Superannuation/Senate080802.pdf