The Australian Prudential Regulation Authority (APRA) today said that the regulated financial sector faces substantial challenges in achieving good standards of corporate governance and ethically managing conflicts of interest is critical to the process.

Speaking at the Sustainable Governance Conference 2002 in Melbourne, APRAs Executive General Manager, Mr Charles Littrell, said life insurance and superannuation entities were in an unusual position in that trustees and board members have a statutory duty to look first to the interest of policy holders and members.

"Normally, a boards first duty is to shareholders," he said. "The super fund member assumes both the traditional customer role and something akin to a shareholder role, but trustees have other competing interests to manage, notably employer sponsor expectations, and in for profit funds, the corporate manager expectations."

Focussing on life insurance and superannuation, Mr Littrell said that ethical risk in these industries starts with a fundamental conflict in distribution: the use of financial advisers who are largely commission-based.

"Their remuneration ultimately comes from the investor, but is filtered through one or more product providers. This filter raises the question: who is the adviser working for?"

Mr Littrell said APRA had concerns about the effect financial advice from commission-driven advisers had on a regulated entity.

"There is potential for advisers to vet inadequately the risks of the investments they are selling. If enough investors buy enough risky product from the same super fund, life company or other regulated entity, then in short order that entitys balance sheet will be concentrated in overly risky business and APRA may be forced to intervene."

Also noting that cost inefficiency could erode the retirement lifestyle of accumulation fund members and the corporate sponsors contributions into defined benefit funds, Mr Littrell said that while APRAs research on the position was far from definitive, there appeared to be no positive relationship between returns and expenses among the larger super funds.

"We are currently looking more closely at such issues via our research department," he said.

APRA is the prudential regulator of the financial services industry including banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry. It currently regulates $1.5 trillion in assets for 20 million Australians.