The Australian Prudential Regulation Authority (APRA) today emphasised the need for financial institutions to address legacy issues as part of their normal planning cycle and strongly advised, in particular life insurers and superannuation funds, to develop strategies to deal with superseded products and systems.
Speaking at a Conference on Rationalising Legacy Products in Sydney, Mr Ramani Venkatramani, APRAs General Manager Diversified Institutions Division, said that the regulator recognises that ongoing changes to products, technology and legislation have rendered inadequate some existing mechanisms for managing legacy issues.
However, APRA has a mandate to protect the interests of beneficiaries, he said. While we are keen to identify relevant issues and cooperate with the industry to improve the situation, we do not accept that commercial considerations set aside beneficiary entitlements or expectations.
Mr Venkatramani specifically advocated greater focus by trustees in ensuring equivalent rights for superannuation members following the implementation of successor fund transfers.
According to APRA, whereas product legacy issues are largely confined to life insurance and superannuation, obsolete systems are an endemic element of operational risk found across the financial services industry, most commonly as a result of mergers and acquisitions.
Mr Venkatramani said that integration risks are always under-estimated and, in some instances, APRA has mandated additional capital to rectify legacy-related problems arising from integration.
Unit pricing errors are a case in point, Mr Venkatramai said. There is scope for significant accounting and reporting reform in relation to the legacy aspects of acquisitions, so that material underestimation does not corrupt subsequent financial results.
APRA will be identifying institutional legacy issues within the context of its PAIRS and SOARS rating and supervisory systems.
Our frontline supervisors and operation risk experts will be looking to see that the processes are robust in relation to legacy issues. The way these risks are managed will influence our overall risk assessment and supervisory stance, Mr Venkatramani said.
