The Australian Prudential Regulation Authority (APRA) has called for greater focus by superannuation licensees on administering outsourcing arrangements with related parties to effectively manage conflicts of interest.
The recommendation is contained in the findings of APRA’s thematic review of related party arrangements for registrable superannuation entity (RSE) licensees, which has been released to industry today.
APRA’s review of 14 licensees, representing a cross-section fund type, size and ownership structure, took place over 2016 and 2017. It was prompted by concerns that some licensees’ management of commercial relationships with related parties could detract from the outcomes delivered to their members.
While RSE licensees had improved their handling of related party arrangements since APRA’s 2014 conflicts of interest thematic review, APRA found room for improvement, including:
ensuring related party contracts are for a set period and contain clear termination provisions;
having contracts that contain clear and measurable performance indicators that the RSE licensee regularly monitors;
conducting rigorous market-based benchmarking when engaging or renewing contracts with related party providers to ensure terms and prices are commensurate with others available in the market; and
proactively considering and documenting how decisions to use related party service providers are in the best interests of superannuation members.
APRA Deputy Chairman Helen Rowell said the prevalence of outsourcing in the superannuation industry to deliver key services made robust oversight of service provider relationships essential to deliver appropriate member outcomes.
"APRA supports RSE licensees outsourcing services where they lack skills or expertise, but using related parties increases the risk of a conflict of interest. APRA's thematic review noted wide variation in how licensees managed this challenge, including weaknesses in some licensees' approach.
"RSE licensees employing better practices rigorously tested the market before agreeing or renewing contracts with related parties. They assessed the contract's materiality in line with APRA's prudential requirements and documented their decision-making process that concluded the arrangement was in their members' best interests.
"Implementing the better practices outlined in this thematic review will help RSE licensees effectively manage potential conflicts of interest and optimise outcomes for their members," Mrs Rowell said.
The thematic review of related party arrangements was carried out in conjunction with the thematic review of board governance, which was released last week.
APRA's letter to RSE licensees on the related party thematic review is available below:
The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $6.5 trillion in assets for Australian depositors, policyholders and superannuation fund members.
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