The prudential regulator has identified conflicts of interest as a key area where superannuation providers are falling short of their regulatory obligations.
A review of APRA’s 2013 superannuation prudential framework has found it met its original objectives but must keep evolving to ensure members’ interests are protected.
APRA commenced a post-implementation review of the framework introduced as part of 2013’s Stronger Super reforms in May last year, to assess how it had performed in the five years since it was introduced. Until the package of 13 prudential standards, supporting guidance and reporting standards came into force, registrable superannuation entity (RSE) licensees were not subject to legally binding prudential standards in the same way as other APRA-regulated entities.
The review found the prudential framework had materially lifted industry practices in key areas such as governance, risk management and outsourcing. But it also highlighted the need for APRA to continue strengthening prudential requirements in several areas, including board appointment processes, management of conflicts of interest and life insurance in superannuation.
APRA’s review stated that appropriately managing conflicts of duty and interest is critical to ensuring that RSE licensees comply with their overarching obligation to act in the best interests of members.
“However, the royal commission noted a number of areas where RSE licensees appeared not to have managed their conflicts of interest appropriately, particularly with respect to related party arrangements,” the regulator said.
While APRA’s review found that the key procedural requirements of its conflicts management framework (SPS 521) have “generally been met at an industry-wide level”, the regulator said it is not clear that the importance of effectively managing all potential conflicts of interest through a member’s best interests lens is embedded within the culture of all RSE licensees.
APRA’s proposed enhancements to mitigate conflicts of interest in superannuation include requiring RSE licensees to explicitly assess the impact of conflicts of interest on member outcomes and introducing a two-stage process for the consideration of conflicts of interest.
“First establish interests held, then establish whether those interests give rise to a conflict,” the regulator said.
APRA’s thematic review noted that policies underlying the conflicts management framework were in some instances too narrowly focused on conflicts arising in relation to responsible persons and did not cover conflicts arising for the RSE licensee as a whole.
“This narrow approach undertaken by some RSE licensees tended to be characterised by a lack of consideration of how these conflicts might be perceived by external stakeholders,” the regulator said.
“The thematic review also noted that, in many cases, the conflict identification process relied solely on self-identification by directors or responsible persons, with no independent review undertaken. It also found a lack of consistency across the industry in the identification and management of conflicts when dealing with intra-group services and product providers and other related parties. These inconsistencies arose, in part, due to inadequacies in the conflicts management framework for these types of RSE licensees.”
APRA deputy chair Helen Rowell said it was important that the prudential framework continued to evolve as the industry developed and regulatory priorities changed.
“The Stronger Super reforms deliberately focused on ensuring superannuation trustees, [which] often manage billions of dollars on behalf of members, had the necessary frameworks in place to effectively administer the fundamentals of operating their business,” Mrs Rowell said.
“As the industry has matured and lifted its practices, we have shifted our emphasis to ensuring trustees are focused on enhancing member outcomes, especially with last December’s package of reforms.
“We are already taking steps to strengthen the prudential framework in many of the areas highlighted by the review, and we will look to make further changes to incorporate its findings as we progress our superannuation policy priorities. This will include consideration of measures to address relevant recommendations in the financial services royal commission report and the report on the Productivity Commission’s superannuation review.”
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