Options for Improving the Safety of Superannuation

Issues Paper

Agenda

• Introduction

• Licensing regime

• Legislative structure

• Member participation

• Financial assistance

• Other issues

• Closing

Licensing

• 3 options– APRA licence– ASIC licence– Both

• Twin peaks model– APRA dealing with prudential issues– ASIC responsible for consumer protection and

market integrity

Current arrangements

• Funds offering to the public required to have APRA approved trustee

• Funds offering to the public required to have an ASIC dealers licence– under FSR funds will also be required to be

licensed to provide advice

• 50% of Approved trustees have both licences

ASIC licence

• Similar to the licence for managed investment schemes– to operate the fund– to deal in and advise on interests in the fund

• Licence criteria addressed at competence and consumer protection matters

• Individual trustees licensed as a group– outsource some licence obligations

APRA licence

• Extend licensing to all funds other than:– exempt public sector superannuation schemes– self managed superannuation funds

• Similar to approved trustee requirements

• Benefits of licensing– notice of funds– imposition of conditions– licensing sanctions

Dual licensing

• Both APRA and ASIC licence

• Under FSR many APRA regulated bodies will have dual licences

• Different regulatory purposes

• Overlaps dealt with– legislatively– administratively

Compliance plans

• Adjunct to licensing or separate requirement

• Required under Corporations Act for managed investments and AFSLs

• How the entity will ensure compliance with legislative requirements

• Subject to annual audit

• Transitional arrangements

Issues for discussion

• Is licensing necessary?

• Which kind of licence?

• What to licence - the fund or the trustees?

• Different licences for different funds or one?

• Are additional measures for reducing overlaps necessary?

Issues cont’d

• Mechanisms for addressing industry restructuring– possible changes to the self managed fund

threshold– portablility

• Appropriate transition

• How to fund?

Legislative Structure

• Prudential standards making power– content of standards

• Three-tiered structure– Act, prudential standards, guidance notes

• Separate retirement incomes and prudential provisions– longer term

Prudential standards power

• Aims– simplify legislation– enhance flexibility– harmonise with other prudential regimes

• Options– insert standards making power immediately and

move to three-tiered structure in medium term– Use existing powers in SIS to create standards

Issues for discussion• Are there already sufficient powers in SIS to

achieve desired goals?

• Is harmonisation with other prudential regulatory regimes necessary and/or appropriate for superannuation?

• Can simplicity be achieved with enforceable standards?

• Impact on existing legislation and regulations

Proposed standards

• Investment rules

• Capital adequacy

• Outsourcing

• Governance and operational risk

Investment rules• Aims

– consistent with members expectations– diversification– oversight of delegated activities– regular assessment

• Options– revise existing operating standards– prudential standard based on APRA’s circular– compliance plan

Issues for discussion

• Level of detail of guidance

• Members questioning trustees decisions

• Should APRA be dictating portfolio choices

• Trustee as single responsible entity

• Impact on retirement incomes

Capital adequacy

• Aims– financial substance– incentive to manage fund well– buffer against operational or governance risk

• Proposal– reform existing requirements for approved

trustees– apply these to other superannuation funds

Reforming existing requirements

• Need to be able to access capital in all cases

• Avoid inappropriate double dipping

• Clarify definitional inconsistencies

• Review guarantee provisions

• Examine all options including insurance

• Review level and composition of capital requirements

Bringing other funds in

• At least the same requirements as for managed investments

• No in principle difference with other approved trustee funds– except quantum

• Transitional period of two years

Issues for discussion• How would capital be funded?• Accumulation v defined benefit funds?• How would capital be held?• How to implement?• Compliance costs?• For each fund?• Risk mitigation factors?• Impact of risk profile and outsourcing?

Outsourcing

• Aim– to ensure risks clearly identified and managed– appropriate standards and scrutiny

• Proposal– requirements similar to those applying to ADIs– minimum requirements that contract should

address– could be done through standard or regulation

Issues for discussion

• Extent to which standards should be binding on third parties

• Implementation - standard or regulation

• Overlap with existing limited regulation of custodians and investment managers

• Compliance costs

Governance and operational risk• Aim

– systematic identification, assessment and management of risk

– more effective risk based supervision– better targeting of requirements

• Proposal– single standard to deal with operational risk and

governance issues– broader focus

Options

• Prudential standards power– remove existing provisions from SIS

• Bring all requirements together as operating standards under SIS

• Similar to Prudential Standard GPS 220 Risk Management for General Insurers

Issues for discussion

• Interrelationship with capital requirements and insurance

• Compliance costs

• Compliance audit

Member participation

• Annual general meetings– right to request a meeting– master funds– costs

• Public disclosure of annual returns– which regulator– what information– which funds to exclude

Member participation cont’d

• Related party transactions– different focus to in house asset provisions of

SIS– would voting requirements work for

superannuation– compliance costs

Financial assistance• Extend to losses from misleading and deceptive

conduct

• Issues– omissions– overlap with existing requirements– application to predictions– evidentiary requirements– how to know the mind of the member

Issues cont’d

– moral hazard issues– funding compensation arrangements

Other issues

• Productivity Commission expected to report next week

• Will consider prudential and governance issues from Productivity Commission Report and Watson Committee Reports

Where to from here

• SWG to put out more detailed paper next week canvassing the issues

• Focus group discussions towards end January

• Submissions close 1 February

• Report to Government by end March

• Any legislation early in second half of 2002