Overview
The Financial Regulation Assessment Authority (FRAA) has released its report into the effectiveness and capability of the Australian Prudential Regulation Authority's (APRA) supervision and resolution of the superannuation industry.
Broadly, FRAA concludes (in line with APRA's own self-assessment) that APRA's supervision function within superannuation is generally effective, and that its resolution function is less mature.
Having said this, the FRAA considers there is scope for improvement in both areas.
Accordingly, the five recommendations in the report are focussed on improving both APRA's effectiveness and capability in both its supervision and resolution functions (with the bulk of the recommendations focussed on supervision). A key aim is to 'make APRA's regulation of the superannuation industry more forward looking' in order to ensure it is resilient to future shocks.
APRA has indicated its support for all five recommendations, and confirmed it will act on all five (noting that the recommendations reinforce and 'build on' many of the initiatives already on foot).
Five Recommendations
Improving APRA's approach to supervision
Recommendations 1-4 focus on strengthening APRA's approach to supervision through increasing its focus on emerging/systemic risks; lifting internal staff capability; continuing to invest in data and technology capabilities; and increase transparency around its supervisory work.
Increase focus on identifying and understanding emerging/systemic risks
The report expresses concerns that APRA has:
'at times, been reactive and focused on a limited number of risks facing the sector, which may have significant implications for how trustees are delivering outcomes for members and the broader financial system'.
To address this, Recommendation 1 recommends that:
'APRA should increase its efforts to identify risks in superannuation, including emerging and systemic risks, and their potential consequences'
More specifically, FRAA suggests that APRA should 'direct greater attention to proactively identifying and comprehensively understanding' risks such as:
- 'conversion of unlisted or illiquid assets to cash
- unlisted asset valuation practices
- more members moving to the retirement phase
- increasingly complex investment strategies undertaken by trustees (who are increasingly sourcing investment strategies in-house), and the development of complex income-stream products
- severe market downturn, exacerbation by financial instability and member switching requests
- failure or industry exit of administration service providers'.
In its response to the report, APRA states that it is already strengthening its approach in this area including through sharpening its focus on
'risks that have particular application within superannuation – such as valuation of unlisted and illiquid asset classes; movement of members to the retirement phase; and evolving investment strategies and product complexity. And more broadly, those risks relevant on a cross-industry basis including market downturn scenarios; availability of service providers; and cyber-risks'.
Lift internal capability
Recommendation 2 recommends that APRA
'should prioritise and invest in initiatives to recruit, train, retain and develop its staff to build appropriate skills and industry knowledge, to drive deeper understanding and build stronger capability to manage and respond to emerging and systemic risks'.
Again, APRA has indicated it is already acting on the recommendation including through conducting a review into its supervisory training program and more broadly through 'strengthening workforce planning' to ensure staff have the skills, capability and experience needed to both deliver on APRA's Corporate Plan and respond to emerging and systemic risks.
Continued investment in data and technology
Recommendation 3 recommends that APRA should:
'continue to invest in its data and technology capabilities and processes to provide timely insights, allow effective internal collaboration, and to the extent appropriate, minimise regulatory burden associated with data and information requests'.
APRA has indicated that it already acting on the recommendation, in line with its corporate plan. For example through the establishment of APRA's new Technology and Data Division and the continued data and technology investment (including the delivery of the Superannuation Data Transformation program).
Increased transparency around supervisory activity/expectations
Recommendation 4 recommends that APRA should:
- 'provide trustees with annual plans of proposed supervisory activity. APRA should keep trustees informed of the status of reviews, information requests and other supervisory activities'.
- 'consider publishing its methodologies' for thematic reviews and provide 'more detailed insights to build public awareness and enable interested parties to comment'.
- 'consider communicating more timely and detailed insights across industry to increase awareness of risks and promote better practices'.
APRA has indicated that its 2023-224 Corporate Plan (set to be released next month) will 'provide enhanced visibility regarding APRA's strategic priorities and key supervisory and policy activities'.
APRA has also said it will 'review and increase the visibility provided to entities on planned and ongoing supervisory activity and thematic insights'.
Delivery of recovery and resolution plans
FRAA recommends (Recommendation 5) that APRA:
'should prioritise developing its resolution capability and work closely with industry to lift awareness of recovery and resolution planning requirements, to ensure APRA is able to support recovery and exit, and resolve failing superannuation trustees'.
This recommendation aims to ensure the regulator is 'equipped to resolve more complex or large trustees, or simultaneous failures in the event of a systemic superannuation crisis'.
Responding to the report, APRA said it intends to:
'drive a step-change in superannuation industry recovery and resolution planning, consistent with APRA’s new prudential standards'.
APRA also flagged its intention to:
- 'communicate better practices to industry following pilot reviews of selected superannuation trustee recovery and exit plans;
- progress superannuation pilot resolution planning, including to enhance APRA's resolution capability in superannuation; and
- engage with Treasury and provide advice to government on options to enhance APRA’s statutory crisis response toolkit in superannuation'.
Looking ahead: Moving to five year review cycle
In the 2023/4 Federal budget, the government announced it would reduce the frequency of the FRAA review cycle to five years (with the FRAA secretariat function continuing to operate within Treasury between reviews).
The next FRAA review will focus on the effectiveness and capability of the Australian Securities and Investments Commission (ASIC) and will commence in 2026. The next review of APRA will commence in 2027.
FRAA panel changes
The Assistant Treasurer has announced that in light of the longer review cycles, the three current members of the FRAA panel Nicolas Moore (Chair), Fiona Crosbie and Craig Drummond have tendered their resignation.
[Sources: Assistant Treasurer Stephen Jones media release 13/06/2023; 2023 Report: Effectiveness and Capability Reviews of the Australian Prudential Regulation Authority; APRA media release (including APRA's response) 13/07/2023]
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