2016 – An APRA Year in Review

Not the most breath-takingly interesting year in regulation, but after a few really busy ones that’s no bad thing I guess. Here’s what happened…

In early April APRA released their report on the investigation into the TRIO affair, which resulted in 13 individuals being banned from acting as directors for various periods of time. The issues arose around 6 related party transactions totalling $150m, all of which was lost or unrecoverable. The report outlines the causal effects, and notes that since the affair new prudential standards have been issued, the statutory duties of trustees have been reviewed and enhanced, and new guidance has been issued on Fraud Risk Management. Given the time that has passed since the incident, and the public dialogue that has taken place, the report mostly represents official closure of APRA’s work on the investigation.

Later in April, on the eighteenth, APRA and the ATO wrote jointly to Trustees about upgraded responsibilities resulting from changes to the Superstream standard, outlining compliance dates for error-messaging and changes to rollover standards. This was a very technical letter for operations managers and the like and not significant from a prudential or governance perspective.
In June APRA issued proposed changes to the role of the Appointed Actuary (AA) for Insurers, to streamline and sharpen the role of the AA. The main proposals were to:

  • Introduce a purpose statement for the AA,
  • Implement a clear actuarial advice framework,
  • Manage potential conflicts of interest,
  • Improve reporting requirements, and
  • Simplify prudential standards.

This proposal is made to improve the degree of general governance around management of life offices, to clarify the powers and responsibilities of the AA, and make things more transparent to the regulator.

October 12 saw the release of a letter sent by APRA to Life Offices and Superannuation Trustees on their expectations for claims handling improvements. In May 2016 APRA conducted a survey of 25 (mostly larger) funds seeking information on oversight and management of insurance claims. Based on this APRA believe there are 4 areas where improvement is possible:

  • Closer cooperation between Trustee, Life Office and Reinsurer,
  • Clarifying the Fund’s Claim Philosophy,
  • Better information sharing between Trustees and Insurers, and
  • Redesigning insurance benefits so that they are sustainable and meet member needs at appropriate cost.

There has been widespread debate over several years about claims management in particular, and the sustainability of many group life programs in general. It’s probably fair to say no large life office has not had a claims remediation project underway at some point in the last 3 years, so APRA’s interest should not come as a surprise. What is implied by this release is an expectation on the part of the regulator for better information processing and storage technology at life offices, and better system integration with third parties. IN fact, APRA member Geoff Summerhayes told a parliamentary inquiry on the life insurance industry that insurers have not invested enough in “systems and processes capable of fairly and accurately administering their book of legacy business” less than a month ago.

October also saw APRA release a Snapshot of Industry Practice in Risk Management in Banking, Insurance and Super. The key points made were that approaches to understand and manage risk culture are at an early stage of development, and that many institutions are grappling with how best to:

  • Clearly articulate what risk culture they aspire to,
  • Identify specific weaknesses in current risk cultures, and
  • Effectively address those weaknesses.

The multiple failures at some of our larger insurance, advice and banking institutions have demanded that APRA address risk culture. The findings above are hardly surprising. Expect a lot more effort from the regulator on risk culture in 2017 and beyond.
On Oaks Day in November, APRA released Enhanced Governance Requirements for Trustees, in the form of updates to Prudential Standard SPS510 Governance, and Prudential Practice Guide SPG510 Governance.

Changes to SPS510 require trustees to have a governance framework with policies and procedures to support effective governance, and a requirement for these to address nomination, appointment and removal of directors, board renewal, tenure limits and board size. This new standard will be effective 1 July 2017.

Changes to SPG510 clarify APRA’s expectations regarding governance practices, and APRA expects these to be considered by trustees immediately.

For years now there have been many in the industry who have been concerned that sinecure-like positions on superannuation boards, and at the apparent lack of rationalisation of member numbers when funds and boards merge. These changes are directly aimed at these kinds issues and are, in my view, overdue. After all, all approved deposit-taking institutions, life and general insurers have had to have a majority of independent directors and an independent chair for over 10 years now. Why are super funds special?

Finally on 24 November APRA issued Draft Prudential Practice Guide SPG227 Successor Fund Transfers (SFTs) and Wind-ups. This will replace and enhance previous guidance on the subject, the key enhancements being:

  • Guidance on the concept of ”Equivalent Rights” when conducting an SFT,
  • MySuper to MySuper transfers, given the enhanced obligations of MySuper licensees and noting MySuper did not exist at the time of the current guidance’s release, and
  • Considerations for merging Operational Risk Finance Reserves when conducting an SFT.

This guidance is somewhat helpful and provides a lot more definition in the areas above, but whether it will drive mergers of funds is questionable, if that is what it was meant to do. The biggest obstacle to fund mergers is not a lack of understanding of process. It is inertia.
At this stage only MySuper trustees are explicitly required to conduct this annual test, but any trustee that feels it is not meeting the “member outcomes” standard should be asking serious questions, so it can be argued it applies across the board.

In my view, APRA is going to have to get much more prescriptive if it wants serious consideration of the “scale” test to take place, and lead to mergers when trustees are not delivering to the “member outcome” standard. Helen Rowell spoke of this in October 2015 in a speech to the AIST, in which she linked the “scale” test with the requirement that “business and strategic plans are sustainable in the long run”. I’d be surprised if there is no movement on this front in 2017.