Executive Board Member Margaret Cole - Inquiry into the Four Major Banks and other Financial Institutions
I have some brief opening remarks noting what I believe are some key points for this Committee, subject of course to your questions.
First, in APRA’s role as prudential regulator, our objective is the safety and stability of the financial system. In respect to superannuation, we are also focused on the critical topic of member outcomes.
It is important to recognise that APRA undertakes its supervision in the context of a large and complex system, with multiple layers of legislative, prudential, conduct and other obligations. To understand the mechanisms that protect member interests requires an understanding of a number of connected and important legal obligations applying to all trustees.
The prudential framework, supervision and enforcement are our tools to achieve our objectives.
As a public authority, we operate within the law and the boundaries of our powers, with propriety and observant of due process. Always mindful of these circumstances, we have a bias to action to protect members’ interests.
Statutory provisions are susceptible to interpretation by the Courts at the instigation of parties with a relevant interest. APRA cannot and should not prevent this legal process. It can, as it did in relation to this matter, seek to ensure the Courts are well appraised of all relevant considerations.
Following the passing of the Financial Sector Reform (Hayne Royal Commission Response) Act 2020, APRA and ASIC undertook significant engagement with registrable superannuation entity (RSE) licensees and industry associations to understand the options RSE licensees were exploring to respond to the amended provisions, and updated Treasury and Government as appropriate.
In late 2021, several RSE licensees applied to the various state Courts for advice and direction regarding amending their trust deeds to enable the charging of fees, with the view to building a financial contingency reserve on the trustee balance sheet. While some RSE licensees have had a fee charging power in their trust deeds for many years, this was not the case across all RSE licensees.
APRA does not have a ‘zero failure’ tolerance. It is not our position that we should protect trustees in all circumstances but consistent with our mandate, failure must be orderly in order to protect beneficiaries and financial system stability.
To be clear as to the significance of this issue, without the ability to build and maintain a risk reserve an otherwise well run and well performing trustee could be rendered insolvent by a minor operational administrative error, such as submitting data one day late, resulting in a maximum penalty of $11,100. The disorderly failure of an otherwise sound and sustainable RSE licensee would be likely to be severely detrimental to members as it would likely impose material costs and create significant operational risks.
In the case of insolvency, APRA would be required to appoint an acting trustee to prevent adverse impacts on members and ensure stability of the governance of the fund until a new long-term trustee could be identified and be ready to take over. The route to Acting Trustee is complex, requires a specific licence, and certain triggers to be satisfied.
Distinct from an Acting Trustee, to install a long-term future trustee to run the fund as a viable going concern takes considerable time. Given legal requirements, including ensuring its existing members are not disadvantaged, such a trustee will need to engage in due diligence. It will also need to be ready to harmonise operations, technology and platforms used for administration. It is not a quick or easy fix.
APRA actively sought involvement in the majority of the Court cases, appearing as amicus curiae, to ensure that the Courts were fully appraised of all relevant legal matters, including the new best financial interests duty, the context of the amended provisions and principles of prudent practice. APRA’s submissions also emphasised the importance of ensuring that the impact on best financial interests of members was appropriately contemplated by the Courts in giving their advice, particularly in the context of setting fees. APRA was also concerned to ensure that trustees explained in each case the other alternatives that had been explored and why they were not taken forward.
Based on the facts of the applications, their analysis of the wording of amended provisions and the relevant legal precedent, the Courts concluded that the charging of a fee of this nature is not inconsistent with the amendments to s. 56(2) and s. 57(2) of the SIS Act. Reasons provided for these decisions were consistent across the judgments.
So what is important now is to focus on safeguards to further protect members’ financial interests. APRA has published a recent discussion paper ‘Strengthening financial resilience in superannuation’ which is focused on prudent management of financial resources more broadly. Importantly, this paper clearly outlines fee charging principles to inform fee design and setting.
The outcomes from this consultation will lay the foundation for evolution in the prudential framework, reflecting both the introduction of APRA’s Prudential Standard SPS 515 Strategic Planning and Member Outcomes and the passage of a number of key legislative reforms directed at protecting member interests, including the new best financial interests duty.
In the meantime, APRA expects the fee setting principles to inform decisions around the setting, design and level of any fees and for consideration of these principles to be supported by appropriate documentary evidence. These are important principles that APRA will apply not just to RSE licensees who have sought court approval to amend their trust deeds, but to all RSE licensees across all manner of fees.
With these opening remarks, we are happy to take your questions.