APRA DiscPaper SuperPrudStds 2011-09-29

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Discussion PaperPrudential standards or superannuation28 September 2011

www.apra.gov.au

Australian Prudential Regulation Authority


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Australian Prudential Regulation Authority 2

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Australian Prudential Regulation Authority (APRA)

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This discussion paper describes APRAs proposedapproach to introducing prudential standards or thesuperannuation industry to implement those elementso the Governments Stronger Super reorms thatcome within APRAs mandate.1

The Assistant Treasurer and Minister or FinancialServices and Superannuation announced on 21September 2011 that APRA is to be given prudentialstandards-making power or prudentially regulatedsuperannuation entities.

APRA is inviting comments on the proposals in

this paper. Following consideration o submissionsreceived, APRA will release or consultation, early in2012, drat prudential standards and drat reportingstandards, reporting orms and instructions.

The prudential standards or superannuation areexpected to be nalised during 2012 with a view tocommencement during 2013.

APRA expects to commence the authorisation processin the second hal o 2012 or RSE licensees wishingto oer MySuper products. This will allow these

products to be made available to beneciaries rom1 July 2013 onwards. It is expected APRA will havepower to authorise MySuper products rom 1 January2013, eective 1 July 2013.

This discussion paper is available onAPRAs website at www.apra.gov.au. Writtensubmissions on the paper should be orwarded [email protected] December 2011 and addressed to:

Helen RowellGeneral Manager, Policy Development

Policy, Research and StatisticsAustralian Prudential Regulation AuthorityGPO Box 9836SYDNEY NSW 2001

ImportantSubmissions will be treated as public unless clearlymarked as condential and the condentialinormation contained in the submission isidentied.

Submissions may be the subject o a request oraccess made under the Freedom of Information Act1982 (FOIA). APRA will determine such requests, iany, in accordance with the provisions o the FOIA.

Inormation in the submission about the regulated

entity which is not in the public domain will beprotected by section 56 o theAustralian PrudentialRegulation Authority Act 1998 and thereore willordinarily be exempt rom production under theFOIA.

Preamble

1 http://strongersuper.treasury.gov.au/content/Content.aspx?doc=home.htm
http://www.apra.gov.au/mailto:[email protected]://strongersuper.treasury.gov.au/content/Content.aspx?doc=home.htmhttp://strongersuper.treasury.gov.au/content/Content.aspx?doc=home.htmhttp://strongersuper.treasury.gov.au/content/Content.aspx?doc=home.htmhttp://strongersuper.treasury.gov.au/content/Content.aspx?doc=home.htmmailto:[email protected]://www.apra.gov.au/


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Contents

Executive summary 7 Governance-related prudential standards 7

Risk management-related prudential standards 8

Investment governance prudential standard 8

Other prudential standards 9

Next steps 9

Glossary 10

Proposed prudential standards 11

Chapter 1 Introduction 12

1.1 Prudential standards and associated guidance material or superannuation 12

1.2 Other reorms 12

1.3 Structure o this paper 14

Chapter 2 Prudential standards 15

2.1 Objectives o prudential standards 15

2.2 Stronger Super: Prudential standards-making power 15 2.3 Current ramework 15

2.4 Proposed ramework 16

2.5 Suite o prudential standards 16

Chapter 3 Governance 18

3.1 Objectives o governance prudential requirements 18

3.2 Existing requirements 18

3.3 Stronger Super 18

3.4 Proposed Prudential Standard SPS 510 Governance 19

Chapter 4 Conicts o interest 24

4.1 Objectives o prudential requirements on conficts o interest 24



4.4 Proposed Prudential Standard SPS 521 Conicts o Interest 24

4.5 Interaction with ASIC obligations 27


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Chapter 5 Fitness and propriety 28 5.1 Objectives o prudential requirements on tness and propriety 28



5.4 Proposed Prudential Standard SPS 520 Fit and Proper 29

Chapter 6 Risk management 31

6.1 Objectives o risk management prudential requirements 31



6.4 Proposed Prudential Standard SPS 220 Risk Management 31

Chapter 7 Outsourcing 35

7.1 Objectives o outsourcing prudential requirements 35



7.4 Proposed Prudential Standard SPS 231 Outsourcing 36

Chapter 8 Investment governance 38

8.1 Objectives o prudential requirements on investment governance 38



8.4 Proposed Prudential Standard SPS 530 Investment Governance 39

Chapter 9 Operational risk fnancial requirement 43

9.1 Objectives o a prudential operational risk nancial requirement 43

9.2 Existing requirements 43 9.3 Stronger Super 43

9.4 Purpose o APRAs operational risk nancial requirement 44

9.5 Proposed structure o APRAs operational risk nancial requirement 44

9.6 Proposed Prudential Standard SPS 114 Operational Risk Financial Requirement 45


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Chapter 10 Funding and solvency or defned beneft unds 48 10.1 Objectives o dened benet prudential requirements 48



10.4 Proposed Prudential Standard SPS 160 Defned Beneft Funding and Solvency 48

Chapter 11 Audit requirements 50

11.1 Objectives o audit prudential requirements 50



11.4 Proposed Prudential Standard SPS 310 Audit and Related Matters 50

Chapter 12 Business continuity management 52

12.1 Objectives o business continuity management prudential requirements 52



12.4 Proposed Prudential Standard SPS 232 Business Continuity Management 52

Chapter 13 Insurance in superannuation 54

13.1 Objectives o insurance prudential requirements in superannuation 54



13.4 Proposed Prudential Standard SPS 250 Insurance in Superannuation 55

Chapter 14 Cost-beneft analysis inormation 57

Attachment A APRAs prudential standards 58


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Executive summary

The Government has announced that it will releasedrat legislation to establish APRAs ability to makeprudential standards in relation to superannuation intheSuperannuation Industry (Supervision) Act 1993 (SISAct).2 This discussion paper outlines APRAs proposalsor prudential standards in superannuation.

APRA intends to introduce prudential standardscovering topics common to other APRA-regulatedindustries as well as superannuation-specic topics.

Prudential standards extended to thesuperannuation industry rom current banking andinsurance prudential standards:

Governance

Fit and proper

Outsourcing

Business continuity management

Risk management

Audit and related matters

Prudential standards specically or superannuation:

Investment governance

Conficts o interest

Dened benet unding and solvency

Operational risk nancial requirement

Insurance in superannuation

Transition to MySuper

The proposals contained in this discussion paper

include the Stronger Super reorms that theGovernment has recommended APRA implementin prudential standards. The proposals also includerelocating some current requirements and guidanceinto the new prudential standards. APRA intends toharmonise the requirements or superannuation withthose applying to other APRA-regulated industries,where appropriate.

2 http://ministers.treasury.gov.au/DisplayDocs.

aspx?doc=pressreleases/2011/131.htm&pageID=003&min=brs&Year=&DocType

APRA recognises that the nature, size and complexityo entities vary across any industry. Determinationo prudential requirements in the orm o prudentialstandards allows APRA to apply appropriate fexibilityto refect that variation, avoiding a one-size-ts allapproach. APRAs emphasis is on achieving soundprudential outcomes, without speciying or prescribingthe exact manner in which those outcomes areachieved. This approach should result in prudentialrequirements that are more likely to eectivelyaddress the risks aced by participants in the industryand avoid unnecessary compliance costs.

APRAs practice is to issue guidance material inprudential practice guides (PPGs) to accompanyprudential standards. Details o some key areas oproposed guidance are outlined in this paper. APRAwill consult on the detail o the drat prudentialstandards and PPGs in due course.

Governance-related prudentialstandards

Chapters 3, 4, 5 and 11 o this discussion paper outline

APRAs proposals or governance-related matters.

Stronger Super highlights that registrablesuperannuation entity licensees (RSE licensees) shouldbe required to meet heightened obligations relative tocurrent requirements. This refects both the duciaryobligation owed to beneciaries and the mandatorycharacter o superannuation. APRAs proposals ocuson minimum requirements or the processes andpolicies that RSE licensees should have in place asrobust governance arrangements. These include aboard renewal policy, a board perormance assessment

process, a conficts management ramework, a t andproper policy and an internal audit unction.
http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/131.htm&pageID=003&min=brs&Year=&DocTypehttp://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/131.htm&pageID=003&min=brs&Year=&DocTypehttp://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/131.htm&pageID=003&min=brs&Year=&DocTypehttp://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/131.htm&pageID=003&min=brs&Year=&DocTypehttp://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/131.htm&pageID=003&min=brs&Year=&DocTypehttp://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/131.htm&pageID=003&min=brs&Year=&DocType


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Risk management-relatedprudential standards

Eective risk management is a cornerstone o APRAsprudential requirements across all APRA-regulatedindustries.

Chapters 6, 7, 9 and 12 o this discussion paperprovide proposals or risk management, outsourcing,the operational risk nancial requirement and businesscontinuity management respectively. The existingrequirements or risk management and outsourcing

in the SIS Act andSuperannuation Industry (Supervision)Regulations 1994 provide a basis or prudentialrequirements in these areas. Stronger Super recognisesthat the requirements inadequately refect industryrisks as they have evolved over time, and so needupdating and strengthening.

APRAs proposals or risk management shit theemphasis rom documenting risk managementstrategies and plans to implementation o a holisticrisk management ramework. The ramework includescomprehensive documents but would also require

RSE licensees to articulate their risk appetite, alignbusiness planning with risk management and maintaina dedicated risk management unction. Theserequirements will assist RSE licensees in achievingbetter identication, management and monitoring otheir risks.

Superannuation is a highly outsourced industry.Stronger Super supports heightened requirementsor RSE licensees that rely upon outsourced serviceproviders. APRA proposes a prudential standard onoutsourcing that will apply to RSE licensees dealing

with outsourced providers o material services. Inaddition to the existing outsourcing requirements,which ocus on the content o the outsourcingagreement or material business activities, APRAsproposals include broader requirements or duediligence, approval and ongoing monitoring o serviceproviders by RSE licensees.

Stronger Super includes a risk-based nancialrequirement or managing operational risk. Chapter 9o this discussion paper provides APRAs proposalsto support this new obligation. In particular,APRA proposes that RSE licensees determine theappropriate level o nancial resources to addressthe operational risks in registrable superannuationentities (RSEs) under their trusteeship. This is to betterensure that the costs o resolution, i and when theserisks eventuate, are not entirely borne by the currentmembers o an RSE.

Under Stronger Super, RSE licensees will be requiredto develop and implement a strategy or managingand maintaining these nancial resources. APRAsproposals or this strategy require RSE licensees todocument the processes and policies that they adoptor identiying operational risks and assessing theamount o operational risk nancial resources to beheld in relation to those risks. The strategy will alsoneed to outline the policy or maintaining the targetamount o operational risk nancial resources anddetermining the manner and circumstances in whichthey may be applied to meet operational risk losses.

Investment governance prudentialstandard

Managing the investments o an RSE is a coreresponsibility o RSE licensees. Stronger Super includesheightened requirements or RSE licensees whenmanaging all investment options and provides orhigher obligations or RSE licensees that manageMySuper investments.

APRAs proposed prudential requirements or

investment governance complement the StrongerSuper reorms. As Chapter 8 o this discussion paperdescribes, the investment governance standard willrequire RSE licensees to document clear investmentobjectives or all investment options, the processes andcriteria used when ormulating an investment strategy,including the selection o investment managers, andthe processes or monitoring investments in eachinvestment option. These requirements supportlegislative obligations o RSE licensees to ormulate andgive eect to investment strategies.


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Stronger Super places a greater emphasis on liquiditymanagement and the accuracy and timeliness ovaluations. APRAs proposals require RSE licenseesto consider liquidity risks and the independence andintegrity o valuation inormation when selectinginvestments, and on an ongoing basis, so that benetscan be paid when they come due.

Other prudential standards

Although the majority o superannuation unds oeraccumulation benets, some RSE licensees operate

dened benet unds. Certain obligations are uniqueto dened benet unds and Chapter 10 o thisdiscussion paper provides the details or the proposedprudential standard on dened benet unding andsolvency. The proposals include requirements to raisethe required unding level to the vested benets level,in accordance with the announced Government policy,as well as introduce requirements or sel-insurers anddened benet unds in technical insolvency.

Stronger Super requires that lie insurance and totaland permanent disability insurance be oered to all

members on an opt-out basis.3 Chapter 13 o thisdiscussion paper provides details o the proposedprudential standard on insurance in superannuation,in particular, minimum requirements or an insurancestrategy.

Next steps

APRA is seeking comments on the proposals or thesuite o superannuation prudential standards outlinedin this discussion paper. Subject to the passage o thelegislative amendments proposed by the Governmentand eedback received in response to this discussionpaper, APRA intends to release drat prudentialstandards or consultation in early 2012, with a viewto nalising the prudential standards later that year.APRA will also consult on drat PPGs to support theproposed prudential standards in due course.

3 Reer to Stronger Super Inormation Pack, 21 September 2011,

pp6-7; http://strongersuper.treasury.gov.au/content/Content.aspx?doc=publications/inormation_pack/deault.htm

APRA will also consult on other elements o theimplementation o Stronger Super in 2012, includingthe authorisation process or RSE licensees to oerMySuper products and enhancements to the statisticalcollections and publications or superannuation.
http://strongersuper.treasury.gov.au/content/Content.aspx?doc=publications/information_pack/default.htmhttp://strongersuper.treasury.gov.au/content/Content.aspx?doc=publications/information_pack/default.htmhttp://strongersuper.treasury.gov.au/content/Content.aspx?doc=publications/information_pack/default.htmhttp://strongersuper.treasury.gov.au/content/Content.aspx?doc=publications/information_pack/default.htm


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Glossary

APRA Australian Prudential Regulation Authority

ASIC Australian Securities and Investments Commission

ATO Australian Taxation Oce

BCM Business continuity management

BCP Business continuity policy

CEO Chie Executive Ocer

Corporations Act Corporations Act 2001

DB und Dened benet und

FSCODA Financial Sector (Collection o Data) Act 2001

MySuper RSE licensee An RSE licensee that has an authorisation to oer MySuper products

PPG Prudential practice guide

The Review Review into the Governance, Structure and Operation o Australias SuperannuationSystem also known as The Super System Review

RMP Risk management plan

RMS Risk management strategy

RSE Registrable superannuation entity as dened in s. 10 o the SIS Act

RSE licensee A constitutional corporation, body corporate, or group o individual trustees,that holds an RSE licence granted under s. 29D o the SIS Act

SG Act Superannuation Guarantee (Administration) Act 1992

SIS Act Superannuation Industry (Supervision) Act 1993

SIS Regulations Superannuation Industry (Supervision) Regulations 1994

SMSF Sel-managed superannuation und

Stronger Super Governments response to the Review (December 2010) and additionalInormation pack (September 2011)

TPD insurance Total and permanent disablement insurance


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Proposed prudential standards

SPS 114 Prudential Standard SPS 114 Operational Risk Financial Requirement

SPS 160 Prudential Standard SPS 160 Defned Beneft Funding and Solvency

SPS 220 Prudential Standard SPS 220 Risk Management

SPS 231 Prudential Standard SPS 231 Outsourcing

SPS 232 Prudential Standard SPS 232 Business Continuity Management

SPS 250 Prudential Standard SPS 250 Insurance in Superannuation

SPS 310 Prudential Standard SPS 310 Audit and Related Matters

SPS 410 Prudential Standard SPS 410 Transition to MySuper

SPS 510 Prudential Standard SPS 510 Governance

SPS 520 Prudential Standard SPS 520 Fit and Proper

SPS 521 Prudential Standard SPS 521 Conicts o Interest

SPS 530 Prudential Standard SPS 530 Investment Governance


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On 29 May 2009, the Government commissioned theSuper System Review (the Review) to comprehensivelyexamine and analyse the governance, eciency,structure and operation o Australias superannuationsystem. The Review was conducted with a ocus onthe concepts o the best interests o beneciaries andmaximising retirement incomes or Australians. TheReviews objectives were also to improve regulationo the superannuation system, whilst also reducingbusiness costs within the system.4 The Reviews nalreport was provided to the Government on 30 June2010.

The Governments response to the recommendationso the Review (Stronger Super) aimed at deliveringbetter outcomes or members and their employersthrough a range o measures. These include enhancingrequirements and responsibilities or superannuationtrustees and providing APRA and other regulators withimproved tools and powers.5

1.1 Prudential standards andassociated guidance material or

superannuationStronger Super supports the Reviewsrecommendation that the Government giveAPRA the power to issue prudential standards inrelation to superannuation. The Government hasannounced that it will release drat legislation toestablish APRAs ability to make prudential standardsin relation to superannuation in theSuperannuationIndustry (Supervision) Act 1993 (SIS Act).6 The Reviewrecommended that APRA be provided this power asit recognised the need or a more nely calibrated

capacity or APRA to supervise and regulate thesuperannuation industry.

This paper introduces APRAs proposed approachto implementation o prudential standards orsuperannuation. It sets out, in particular, the range o

4 www.supersystemreview.gov.au/content/terms_o_reerence.aspx5 http://strongersuper.treasury.gov.au/content/Content.

aspx?doc=publications.htm6 http://ministers.treasury.gov.au/DisplayDocs.

aspx?doc=pressreleases/2011/131.htm&pageID=003&min=brs&Year=&DocType

topics to be covered in prudential standards and the keyrequirements APRA expects to include in each standard.

APRA expects that drat prudential standards will bereleased or consultation in early 2012. Final prudentialstandards are expected to be released later in 2012,subject to the passage o legislative amendmentsproposed by the Government.

APRAs practice is to provide guidance material toaccompany prudential standards. In superannuationthere is a range o existing guidance material, includingprudential practice guides (PPGs), circulars, letters

and requently asked questions. APRA no longerissues guidance notes or circulars. Instead, all guidancematerial is issued as PPGs. PPGs assist APRA-regulatedentities in complying with requirements outlined inthe prudential standards and, more generally, outlineprudent practices. PPGs do not contain enorceablerequirements.

APRA proposes that some elements o existingguidance will be included as mandatory obligationsin prudential standards. Remaining guidance materialwill, where appropriate, be revised and consolidated

into a set o PPGs.

Details o some key areas o proposed guidancematerial are outlined throughout this discussion paper.APRA expects that drat PPGs will be released orconsultation in 2012 and will be nalised once theprudential standards have been nalised.

1.2 Other reorms

1.2.1 MySuper

A new superannuation product called MySuper is oneo the major reorms to be introduced under StrongerSuper. MySuper products will be able to be oered tomembers rom 1 July 2013 and will replace the currentdeault investment options rom 1 October 2013.

Chapter 1 Introduction
http://www.supersystemreview.gov.au/content/terms_of_reference.aspxhttp://strongersuper.treasury.gov.au/content/Content.aspx?doc=publications.htmhttp://strongersuper.treasury.gov.au/content/Content.aspx?doc=publications.htmhttp://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/131.htm&pageID=003&min=brs&Year=&DocTypehttp://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/131.htm&pageID=003&min=brs&Year=&DocTypehttp://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/131.htm&pageID=003&min=brs&Year=&DocTypehttp://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/131.htm&pageID=003&min=brs&Year=&DocTypehttp://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/131.htm&pageID=003&min=brs&Year=&DocTypehttp://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/131.htm&pageID=003&min=brs&Year=&DocTypehttp://strongersuper.treasury.gov.au/content/Content.aspx?doc=publications.htmhttp://strongersuper.treasury.gov.au/content/Content.aspx?doc=publications.htmhttp://www.supersystemreview.gov.au/content/terms_of_reference.aspx


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The majority o the proposed content o theprudential standards applies to RSE licenseesregardless o whether they oer MySuper products,choice products7 or both. MySuper requirementsrelating to investment governance and insurancemanagement are addressed in Chapters 8 and 13 othis discussion paper, respectively.

APRA proposes to introduce a transitional PrudentialStandard SPS 410 Transition to MySuper to outlinerequirements or all RSE licensees during thetransition period rom 1 July 2013 to 1 July 2017,

by which date all existing balances o their deaultmembers must be in a MySuper product except inlimited circumstances. This standard is expected toinclude, at a minimum, requirements:

to identiy deault members and their existingdeault balances;

or those registrable superannuation entities(RSEs) with deault members and their existingdeault balances, to develop and executea transition plan that, among other things,determines when existing deault balances will be

transerred to a specied MySuper product;

to explain how the transer will be in the bestinterests o beneciaries; and

to develop and execute a communication planto members and employers about the MySupertransition plan.

APRA also expects to introduce reportingrequirements to assist the transition to MySuper.These requirements are likely to cover dataitems related to the transer o deault member

contributions and existing deault balances, and willbe consulted on as part o the consultation on dratreporting standards and orms.

7 A choice product is any superannuation product oering that is not aMySuper product.

1.2.2 MySuper authorisation

Existing licensing ramework

The SIS Act and SIS Regulations empower APRA toissue RSE licences that entitle an RSE licensee to actas the trustee o various classes o RSEs or o namedentities. These licences permit the holder to be theRSE licensee o one or more RSEs o the type, or types,specied in the licence. The current licence classes arepublic oer, non-public oer, extended public oerand acting trustee. This ramework ensures that RSE

licensees need only hold one licence, regardless o howmany RSEs might be under their trusteeship.

Authorisation or MySuper

APRA will authorise, under new legislative provisions inthe SIS Act, RSE licensees to oer MySuper products.RSE licensees will be able to apply or authorisationto oer MySuper products in an RSE where that RSEis not a pooled superannuation trust, eligible rolloverund or an approved deposit und or a und withewer than ve members. RSE licensees that meetspecic legislative criteria may apply to oer morethan one MySuper product per RSE. The RSE licenseesauthorisation would speciy the MySuper product thatthe RSE licensee is permitted to oer. RSE licenseesthat are granted the necessary authorisation to oerMySuper products are reerred to throughout thispaper as MySuper RSE licensees.

APRA expects that the applicants seeking to oerMySuper products will largely comprise existing RSElicensees. RSE licensees that receive authorisationto oer a MySuper product will not be preventedrom also oering choice products. Further, MySuperproducts will be able to be provided in both non-public oer RSEs and public oer RSEs.

APRA will consult on proposed MySuper authorisationrequirements in mid 2012.


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1.2.3 Scale and eciencyOne element o Stronger Super is that MySuper RSElicensees will be required to actively examine andattest on an annual basis whether their MySuperproduct(s) and RSE(s) have sucient scale.

APRA proposes that scale and eciency would bereviewed as part o its prudential supervision, withthe RSE licensee to consider whether both theMySuper product and RSE continue to ull theRSE licensees obligation to act in the best nancialinterests o beneciaries. Supervisory oversight o

trustee governance, investment governance, riskmanagement, operational risk nancial requirements,business continuity management (BCM) and tnessand propriety will also take into account the size andnature o the MySuper product. APRAs supervisionwill provide the RSE licensee with the opportunityto demonstrate how they have concluded that theMySuper product continues to meet the obligations inthe legislation.

1.2.4 Enhanced data collection

In May 2009, APRA consulted on proposedamendments to the reporting obligations orsuperannuation. These proposals were put onhold pending completion o the Review. APRA willrecommence its work on enhanced data collection inlight o the data requirements supporting StrongerSuper. The revised data collection proposals will besubject to separate consultation in mid 2012.

1.3 Structure o this paperThis discussion paper provides:

an overview o the proposed prudential ramework,including an introduction to the role and structureo prudential standards (Chapter 2); and

a more detailed discussion o key issues in eacho the topic areas or the proposed prudentialstandards and PPGs (Chapters 3 13). Thesechapters do not cover all o the proposed contento the prudential standards and related PPGs.

Consultation on the drat prudential standardsand PPGs will be undertaken in 2012.

Chapter 14 contains a request or inormation on thecost-benet impacts o APRAs proposals.


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2.1 Objectives o prudential standardsThe Government has announced that APRA is to begiven a general prudential standards-making power inrelation to superannuation in the SIS Act.

APRA thereore proposes to determine new prudentialstandards or superannuation that will apply to RSElicensees. Prudential standards will not apply to thetrustees o sel-managed superannuation unds(SMSFs) or exempt public sector superannuationschemes, which are not regulated by APRA.

A number o actors have infuenced the proposalscontained in this paper:

Stronger Super has reerred to APRA a number ospecic reorms to be implemented in prudentialstandards. Further, there are a number oproposed amendments to the SIS Act that will besupported by the principles-based requirementsthat APRA determines in prudential standards;

APRA seeks to harmonise requirementsapplying across APRA-regulated industries,where appropriate;

the absence o a prudential standards-makingpower in superannuation has meant that a numbero prudential requirements are currently locatedin legislation and operating standards. Subject tothe necessary amendments to the SIS Act andSIS Regulations being made, APRA proposes tobring those obligations into prudential standardsto the extent easible. In a number o areas, thesubstance o the prudential requirements will notchange even though the location and presentationo the requirements will be amended; and

APRAs previous guidance to industry has takenmany orms, such as PPGs, circulars, letters andrequently asked questions. APRA intends toreview the entire suite o guidance material.Some matters will become requirements inthe prudential standards. The remainder o theguidance material that continues to be relevantwill be incorporated into PPGs.

In determining prudential requirements, APRArecognises that the nature, size and complexity oentities vary across any industry. Prudential standardsallow or appropriate fexibility, avoiding a one-size-ts all approach to regulation. APRAs emphasis ison sound prudential outcomes, without speciying orprescribing the exact manner in which those outcomesare to be achieved.

APRA will consult extensively on the drat prudentialstandards, as well as any necessary transitionalarrangements, in 2012.

2.2 Stronger Super: Prudentialstandards-making power

The Governments announcement o a newprudential standards-making power in the SIS Act willprovide APRA with similar powers in superannuationto those it has been granted under the Banking Act1959, the Insurance Act 1973 and the Lie Insurance Act1995 (the industry specic Acts).

APRAs power to issue prudential standards is based

on the concept o prudential matters; standards canbe determined where they cover topics that all withinthe denition o prudential matters. It is expected thatthe denition o prudential matters in the SIS Act willbe broadly consistent with the industry-specic Acts.

2.3 Current ramework

Stronger Super conrms the approach o managingthe superannuation benets o Australians withina trust structure, where additional legislativerequirements reinorce the trust law duty o trustees

to act in the best interests o their beneciaries.The current superannuation ramework includesprimary legislation in the orm o the SIS Act,subordinate legislation in the orm o the SISRegulations and modication declarations, and acollection o non-enorceable supporting guidancematerial issued by APRA.

Chapter 2 Prudential standards


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Section 6 o the SIS Act sets out which provisions areadministered by APRA, the Australian Securities andInvestments Commission (ASIC) and the AustralianTaxation Oce (ATO). Requirements in the SIS Actadministered by APRA can be loosely grouped intoour categories: high-level obligations or trustees;prudential matters; high-level denitions; andenorcement powers.

Some o the operating standards contained in the SISRegulations administered by APRA can be describedas primarily relating to prudential matters. Some o

the modication declarations issued to date also coverprudential matters.

Existing material issued by APRA ocuses on providingguidance on a wide range o prudential matters. IAPRA previously had prudential standards-makingpower or superannuation, a number o thesematters would have been determined as enorceablerequirements in prudential standards rather than beingissued as guidance.

2.4 Proposed ramework

The proposed ramework or the prudential regulationo superannuation refects the three-tiered approachthat applies in other APRA-regulated industries, namely:

primary legislation, being the SIS Act, whichoutlines high-level obligations, high-leveldenitions and enorcement powers;

subordinate legislation, in the orm o relevantSIS Regulations and prudential standards, whichcontain more detailed requirements on prudentialmatters; and

guidance material, in the orm o PPGs, whichsupports the obligations and requirementscontained in the primary and subordinatelegislation, in particular, APRAs prudentialstandards.

Under the proposed ramework, existing high-levelobligations in the SIS Act administered by APRAin relation to the activities o RSE licensees (e.g. s.52 and s. 56), high-level denitions (e.g. s. 10) andenorcement powers (e.g. Part 17) would remain in theSIS Act.8

The Government has announced that it will releasedrat legislation to make necessary consequentialamendments to legislation and regulations to supportAPRAs prudential standards. This will enable APRAto rerame legislative provisions as requirements

in the prudential standards. Provisions in the SISAct administered by ASIC and the ATO would notbe directly aected by the introduction o APRAsprudential standards.

It is expected that the consequential amendments tothe SIS Regulations will allow APRA to determine inprudential standards provisions that can be classedas prudential matters. SIS Regulations administeredby ASIC and the ATO would not be aected. Wherea regulation is expressed to apply to both APRA-regulated unds and SMSFs, it is expected that the

regulation would be restated to apply only to SMSFs.The content o some modication declarations,certain licence conditions and matters currentlycontained in APRAs guidance material that APRAbelieves should be mandatory, are proposed to beincluded within prudential standards. Material thatAPRA considers should remain as guidance will bemoved into new or revised PPGs.

2.5 Suite o prudential standards

APRAs prudential standards applying to other APRA-regulated industries can be broadly classied asbehavioural standards and technical standards.

8 The provisions that apply to trustees o SMSFs will be amended only

to the extent necessary to implement other relevant Stronger Superreorms applying to SMSFs.


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The behavioural standards cover risks that relateto the behaviour o the board and management oAPRA-regulated entities. These risks are essentiallyidentical across the APRA-regulated industries and, tothe extent appropriate and achievable, APRA seeksto apply a consistent approach to their prudentialregulation and supervision. This ensures that likerisks are treated in a like manner and no signicantdierences arise in the regulatory treatment o entitieswith similar risks operating in dierent industries.

APRA recently released cross-industry prudential

standards or the authorised deposit-taking institution(ADI) and insurance industries relating to outsourcing,BCM, governance and tness and propriety.9 Theseconsolidated prudential standards will apply toADIs, general insurers, lie companies (includingriendly societies) and authorised and registerednon-operating holding companies. APRA does notpropose to apply these consolidated standards to thesuperannuation industry at this stage. However, asdiscussed in the ollowing chapters o this discussionpaper, APRA proposes to harmonise the requirementsor superannuation with these consolidated standardswhere appropriate.

Technical standards cover risks that are specic to eachindustry and hence are most appropriately addressed inprudential standards that are specic to each industry.

Attachment A o this discussion paper comparesthe proposed suite o prudential standards orsuperannuation with the behavioural prudentialstandards applying to the other APRA-regulatedindustries.

9 Prudential Standard CPS 510 Governance (CPS 510), Prudential StandardCPS 520 Fit and Proper (CPS 520), Prudential Standard CPS 231

Outsourcing (CPS 231) and Prudential Standard CPS 232 Business ContinuityManagement (CPS 232).


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3.1 Objectives o governanceprudential requirements

Governance has been described as the rameworko rules, relationships, systems and processes withinand by which authority is exercised and controlledwithin an entity.10 This encompasses the mechanismsby which a board11and individuals who control theentity are held accountable, set and achieve objectives,monitor and assess risks and optimise perormance.

In the context o RSE licensees, eective governance

arrangements promote the interests o beneciarieso RSEs. They ensure that RSE licensees and theirindividual directors meet their legal obligations in amanner that meets the reasonable expectations obeneciaries.

Stronger Super conrms that RSE licensees, as trustees,should be required to meet heightened obligationsrelative to current requirements. This refects boththe duciary obligation owed to beneciaries and themandatory character o superannuation.

RSE licensees must maintain governance arrangements

that are appropriate to the nature, scale andcomplexity o their operations.

The proposals outlined in this chapter incorporaterequirements arising out o Stronger Super. Theyalso harmonise where appropriate the governanceobligations applying to superannuation with thoseapplying to other APRA-regulated industries.

10 Reer to Corporate Governance Principles and Recommendations with 2010Amendments, (2nd edition, ASX Corporate Governance Council) page 3and the Review, page 49.

11 Throughout this paper, reerences to the board should be read toinclude both boards o trustee corporations as well as groups oindividual trustees. In addition, reerences to a director should be read

to include directors o trustee corporations as well as individuals in agroup o individual trustees.

3.2 Existing requirementsThere is a range o existing requirements thatinfuence the governance o RSE licensees and theRSEs under their trusteeship. These encompassgeneral law duties, the covenants contained in s. 52o the SIS Act, general director duties as articulatedin the Corporations Act 2001 (Corporations Act) andthe trustee composition obligations or standardemployer-sponsored unds contained in Part 9 o theSIS Act. Also relevant to an RSE licensees governanceare obligations to manage conficts o duty and

interests and tness and propriety considerations.

Section 29H(2)(a)(i) o the SIS Act urther requiresthat the risk management strategy o an RSE licenseemust set out reasonable measures and proceduressuch that the board is able to identiy, monitor andmanage the risks associated with governance anddecision-making processes. APRA imposes urtherobligations in standard licence conditions relating toboard size and composition. These obligations aresupported by APRA-issued guidance.12

3.3 Stronger SuperStronger Super has announced a number o reormsthat will aect the governance arrangements o RSElicensees. These include greater clarity about the dutieso both RSE licensees and their individual directors, aswell as the management o conficts o interest andtness and propriety o key persons. In addition to theproposals in this Chapter, these recommendations arediscussed in Chapters 4 and 5 o this discussion paper,respectively.

12 Reer toSuperannuation Circular III.A.2 Trustee Arrangements or

Superannuation Funds other than Public Oer Funds andSuperannuationCircular III.A.3 Trustee Arrangements Publi c Oer Superannuation Funds.

Chapter 3 Governance


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Stronger Super also armed the role o equalrepresentation requirements or RSE licensees ostandard employer-sponsored unds. The rules orequal representation, as contained in Part 9 o theSIS Act, vary depending on the type and size o theund, including whether or not the und is a publicoer und. RSE licensees o RSEs that are not standardemployer-sponsored unds do not have to complywith the equal representation requirements.

The Government has also expressed support or avoluntary code o governance developed by industry.

3.4 Proposed Prudential Standard SPS510 Governance

An RSE licensee is ultimately responsible or the soundmanagement o each RSE under its trusteeship in theinterests o beneciaries. Accordingly, the RSE licenseemust manage the RSE to meet the requirementsimposed by the general law, legislation, prudentialstandards and the governing rules o the RSE.

The ocus o APRAs proposed governance prudential

standard is on establishing minimum requirementsor how RSE licensees govern themselves to ensurethat they conduct their aairs with a high degreeo integrity. A ramework that promotes goodgovernance benets beneciaries o an RSE and helpsto maintain public condence in the RSE licenseesoperations. The proposed minimum requirementsrefect good practice and, where appropriate, theobligations that apply to other APRA-regulatedindustries.13

Key matters that APRA proposes to include in drat

Prudential Standard SPS 510 Governance (SPS 510) andrelated guidance are outlined below.

13 Reer to CPS 510.

3.4.1 Independence o directorsStronger Super conrms that, beyond the existingregulatory ramework, board composition is a matterthat should be let to the discretion o the RSE licensee.Accordingly, APRA does not propose to include arequirement in SPS 510 that RSE licensees have aminimum number o independent directors on itsboard. However, APRA does consider it appropriate toencourage a higher standard o governance throughguidance. This guidance would apply equally to all RSElicensees to the extent that it is consistent with the

equal representation requirements in the SIS Act.

Proposed PPG guidance

APRA proposes to issue guidance to support anRSE licensees considerations when determining thecomposition o its board.

At present s. 10 o the SIS Act contains a denitiono independent director that applies specically inthe context o equal representation requirements.This denition considers a director will only beeligible to act as an independent director on an equal

representation board where they are not associatedwith either the employer-sponsor or the memberrepresentatives. It also precludes members o the undrom serving as an independent director.

APRA proposes to introduce (in a new PPG) anobjective, principles-based concept o independencewith broader application than the existing denition oindependent director in s. 10 o the SIS Act.

Specically, in the context o the PPG, an independentdirector would be one who is not, and in recent yearshas not been:

in an executive role with an employer-sponsor;

an ocial or representative o a body that hasthe right under the governing rules to nominateor appoint directors (or individual trustees) torepresent either member or employer interests;

a director, employee or shareholder o a companyrelated to either a standard employer-sponsor orto the RSE licensee (other than in the case o awholly owned subsidiary o the RSE licensee); or


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a director, employee or shareholder o a materialservice provider, whether related or not.

APRAs proposed guidance on independence diersrom the denition in the SIS Act. Under APRAsproposed guidance, a director may be consideredindependent even when they are or were a membero the RSE, as long as they meet the other criteriaor independence. Directors that are also memberso the RSE can be well-suited to act in the bestinterests o beneciaries because there is a naturalalignment o interests.

3.4.2 Independence o the Chair

Noting the Governments position on boardcomposition, APRA does not propose to includea requirement in SPS 510 that the Chair o an RSElicensees board be independent.


APRAs guidance will encourage a higher standardo governance by suggesting RSE licensees consideran independent Chair. In particular, APRA does not

consider that the Chie Executive Ocer (CEO)or a ormer CEO (within three years o ceasingemployment) would be suciently independent to actas Chair.

3.4.3 Tenure and renewal policies

The ongoing renewal o boards is central to ensuringthat they continue to operate eectively.

Proposed SPS 510 prudential requirement

APRA recognises that benets arise rom having

experienced directors on a board. However, therealso needs to be appropriate recognition o thebenets that can fow rom having new thinking andperspectives on a board.

APRA does not propose to speciy in SPS 510 amaximum tenure or directors. This is consistent withthe approach taken in other APRA-regulated industries.

APRA proposes to require in SPS 510 that an RSElicensee must put in place a Board renewal policy.Under this requirement, an RSE licensee would berequired to dene an appropriate maximum termor its directors. Where an RSE licensee considers itappropriate or an individual director to serve a termlonger than the maximum stated in its policy, theboard needs to be able to demonstrate to APRA whythis longer term is appropriate.

The RSE licensees board renewal policy wouldbe reviewed as part o APRAs normal supervisory

processes. In addition to the requirement to speciy amaximum tenure, APRA proposes that the minimumeatures o such a policy include:

a clear statement o how the RSE licensee intendsto ensure that the board remains open to newideas and independent thinking while retainingadequate expertise;

consideration o whether the period o serviceo a director could reasonably be perceived tomaterially interere with their ability to act in thebest interests o beneciaries; and

the process or appointing and removing directors(or individual trustees), including member oremployer representatives.

3.4.4 Board assessment processes

Ongoing assessments o perormance andeectiveness, both o the board as a whole and oindividual directors, are critical to ensure that dutiesare discharged eectively in particular, the dutiesthat both RSE licensees and their individual directors

owe to beneciaries.Proposed SPS 510 prudential requirement

APRA proposes to include a requirement in SPS 510that an RSE licensee maintain ormal proceduresor completing a regular independent and objectiveassessment o perormance. This would coverperormance o the board (including any committeeso the board) and individual directors. Thisrequirement is consistent with the requirements thatapply to other APRA-regulated entities.


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This assessment would take place at least annually. Thedetail o the assessment procedures would be let tothe discretion o RSE licensees, with the adequacy othese arrangements to be reviewed as part o APRAssupervision.


In APRAs view, external assessments can providemore robust assessments o perormance because othe greater independence o the assessor. However,APRA does not propose to mandate that RSE licensees

engage external assessors.Internal assessments would be undertaken ollowinga suitably independent process, where possible.APRA intends to provide guidance on better practiceprocesses that improve the eectiveness andobjectivity o such assessments.

3.4.5 Use o Board Committees

Entities in other APRA-regulated industries arerequired to have in place a Board Audit Committee.This committee is responsible or monitoring

compliance with a boards policies, prudential andstatutory requirements, as well as or oversight onancial reporting, internal and external audits andthe appointment o the external auditor. APRA placesrequirements on the composition o this committeeto assist the board by providing an objective, non-executive review o the eectiveness o the entitysrisk management and control processes. Theserequirements are consistent with the approachcontained in the ASX Governance principles.14

14 Corporate Governance Principles and Recommendations with 2010Amendments, (2nd edition, ASX Corporate Governance Council).

Proposed SPS 510 prudential requirementAPRA proposes to include a requirement in SPS 510that RSE licensees have a Board Audit Committee,comprising only non-executive directors o the RSElicensee. This refects the requirement in CPS 510and supports suitable independence o this oversightunction rom the management o the RSE licensee.The Board Audit Committee would be requiredto have a charter that clearly sets out its roles andresponsibilities, including responsibility or:

monitoring compliance with the boards policies

and prudential and statutory requirements;

ensuring appropriate systems and controls are inplace to identiy and address the risks arising romthe RSE licensees activities;

instilling a strong risk management culturethroughout the RSE licensee; and

overseeing nancial reporting, internal andexternal audits and recommending externalauditor appointments.

Consistent with the requirements applying toother industries, it would be open to the RSElicensee to nominate the entire board to act as theBoard Audit Committee, subject to discussion withAPRA. Further, to acilitate the objective oversightrole o the committee, APRA proposes to require thatthe Chair o this committee be a person other thanthe Chair o the board, unless the Chair was the soleindependent director.


Refecting the act that not all boards haveindependent directors, APRA does not proposeto require independent directors on the BoardAudit Committee. Where a board has one or moreindependent directors, APRAs expectation is that theBoard Audit Committee would include at least one othese independent directors, and that the Chair o theBoard Audit Committee be an independent director.


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APRA recognises that a range o board committeestructures is employed across the superannuationindustry. Accordingly, the RSE licensee would beree to determine whether the minimum unctionso the Board Audit Committee might be perormedin part by a Board Risk Committee, subject to therequirements o the prudential standard being met.APRA intends to provide guidance on actors RSElicensees may consider in determining whethermultiple committees are appropriate.

Further, APRA expects that RSE licensees would

ensure that the Board Audit Committee has at leastone member with nancial, auditing or accountingqualications, skills and relevant experience.

3.4.6 Remuneration

Remuneration practices should not encourageunsound risk-seeking behaviour. APRA has includedprinciples and guidance or the eective managemento remuneration arrangements in the governanceprudential rameworks or its other regulatedindustries.

CPS 510, which sets out APRAs governance standardsapplicable to the other APRA-regulated industries,requires each regulated entity to establish a BoardRemuneration Committee comprised o a majorityo independent directors with the requisite skills andknowledge to perorm its unctions. This Committeemust review the regulated institutions remunerationpolicy periodically and make recommendations tothe board on the policy and the remuneration o allresponsible ocers.

Consistent with this approach, APRA proposes a

principles-based approach or superannuation aimedat encouraging compliance with the intent andsubstance o APRAs remuneration requirements. Therequirements will not be completely harmonised withthose or other APRA-regulated industries due to thedierent composition o boards as well as the truststructure o superannuation. APRAs view, however,is that having a Board Remuneration Committee,ideally with separate leadership, is important toenable ocussed attention on, and separate review o,remuneration matters.

For other APRA-regulated industries, a regulatedinstitutions remuneration policy must ensure thatthe perormance-based components o remunerationencourage behaviour that supports both theentitys long-term nancial soundness and its riskmanagement ramework. Where there is a contractualarrangement between a regulated entity and itscustomers, the nancial well-being o the customer isdependent on the nancial well-being o the entity.Remuneration practices are thereore directed atmaintaining the health o the entity directly in theinterests o the depositor or policyholder.

The trust structure in superannuation creates adierent relationship between the regulated entityand beneciary. The nancial interests o beneciariesdepend upon the nancial returns o RSEs rather thanbeing directly tied to the health o the RSE licensee.Also, as an RSE licensee has a right o indemnityrom the assets o the RSE in certain circumstances,there is not necessarily congruence between theinterests o the RSE licensee shareholders and those obeneciaries. Including non-executive directors withinthe scope o the entitys remuneration policy wouldbetter align these interests.


APRA proposes to require all RSE licensees to establishand maintain a Board Remuneration Committee withthe same responsibilities as in CPS 510. Recognisingthat many RSE licensees lack independent directors,the structure o the Board Remuneration Committeeor RSE licensees would not require a majority oindependent directors in all circumstances. However,the members o the Board Remuneration Committee

must be non-executive directors o the RSE licensee.Further, the Chair o the Board RemunerationCommittee would be required to be a person otherthan the Chair o the Board unless the Chair wasthe sole independent director. In that case, thequestion o whether the Board Chair could also chairthe Remuneration Committee would be a matteror determination by the board. Boards would bepermitted, as discussed in the context o the BoardAudit Committee, to nominate the entire board to actas the Board Remuneration Committee.


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APRA also proposes that each board would needto have in place a remuneration policy that coversthe requirements in CPS 510. This would includealignment o remuneration arrangements with theongoing capacity o each RSE under the RSE licenseestrusteeship to meet the reasonable expectationso its beneciaries as well as the RSE licensees riskmanagement ramework. The remuneration policywould cover the same parties as stated in CPS 510, butwould also cover non-executive directors.

Consistent with Stronger Supers endorsement o

enhanced systemic transparency in superannuation,APRA also proposes that SPS 510 require the RSElicensees remuneration policy to be published in thepublic section o each unds web site.

To ensure that beneciaries, as key stakeholdersin superannuation, have access to the same typeo remuneration inormation as is available toshareholders o listed companies, APRA proposesthat SPS 510 require publication o the remunerationo responsible ocers. Further consideration will begiven to the nature o the disclosure to take account

o the variety o ways that directors are remuneratedin the superannuation industry.


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4.1 Objectives o prudentialrequirements on conficts o interest

Appropriately managing conficts o duty and interestis essential to ensure that RSE licensees comply withtheir overarching obligation to act in the best interestso beneciaries. A robust conficts managementramework should be appropriate to the nature, scaleand complexity o an RSE licensees operations.

APRAs proposals or the management o confictsincorporate requirements arising out o Stronger

Super and consolidate existing guidance relating toconficts management or RSE licensees.

4.2 Existing requirements

At present, RSE licensees and their individual directorsare subject to a number o legal requirements or themanagement o conficts o duty and interest thatmight otherwise impede the sound management oRSEs. These requirements include obligations arisingrom the statutory covenants in Part 6 o the SIS Act,in particular, the covenants to act in the best interests

o beneciaries and to exercise care, skill and diligence.The activities o RSE licensees are also subject to thegeneral law duciary obligations o trustees.

Further, under s. 52(9) o the SIS Act, individualdirectors o an RSE licensee must exercise areasonable degree o care and diligence or thepurpose o ensuring that the RSE licensee complieswith its statutory covenants. Directors must alsocomply with duties imposed under the CorporationsAct and the general law duties o company directors.

APRAs current guidance about the management o

conficts is set out in FAQ 13.1 Conicts o interest. In2009, APRA released a drat PPG, Prudential PracticeGuide SPG 521 Conicts o Interest (SPG 521) or publicconsultation but deerred nalising this PPG pendingthe outcomes o the Review. In developing therequirements or the drat Prudential Standard SPS 521Conicts o Interest (SPS 521), APRA intends to take intoaccount the material contained in that drat SPG 521and the eedback received rom the 2009 consultation.

4.3 Stronger SuperStronger Super implements a number o reormsthat aect how RSE licensees manage conficts oduty and interest.

The key reorm is the introduction o requirementsapplying to directors o RSE licensees and individualtrustees to give priority to the interests o beneciarieswhere a duty to those beneciaries conficts with aninterest or other duty o the director or trustee. Thisobligation to prioritise beneciaries interests wouldapply equally to all RSE licensees.

The Stronger Super reorms will also amend the SISAct to include a new provision that overrides anyprovision in the governing rules o an RSE that requiresthe RSE licensee to use a specied service provider inrelation to any services in respect o the RSE. The maineect o this reorm is that RSE licensees will no longerbe constrained in their duty to act in the beneciariesinterest because o trust deed provisions that mandateuse o a related-party service provider.

The Government has asked APRA to consider whether

a prudential standard that covers conficts o interestand conficts o duties would assist RSE licensees andtheir directors to observe their duties to beneciaries.This chapter outlines the key requirements proposedto be included in APRAs prudential standard.

4.4 Proposed Prudential StandardSPS 521 Conicts o Interest

An RSE licensee must ull its duciary and relatedstatutory duties in managing RSEs under theirtrusteeship. A confict o duty or interest can arise

when an RSE licensee is required to take a decisionwhere a separate personal interest or a duty owed toanother party may interere with the RSE licenseesobligation to act in the best interests o beneciaries. Aconfict may be actual, perceived or potential in nature.

Chapter 4 Conficts o interest


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APRA recognises that some conficts are inherentin the superannuation model and does not seek toeliminate all conficts. The purpose o the proposedprudential standard is to require RSE licenseesto develop appropriate processes to managethese conficts. RSE licensees must be alert to thecircumstances that may give rise to a confict andhence have the potential to adversely aect theirability to carry out their duties.

APRA proposes to support the prudential standardwith guidance material in the orm o a revised

version o SPG 521, which would include examples oarrangements that may give rise to conficts.

Key matters that APRA proposes to include in dratSPS 521 and SPG 521 are outlined below.

4.4.1 Conficts management ramework

An RSE licensee must adopt a holistic approach tomanaging potential and actual conficts.


Similar to the requirement or a risk managementramework, APRA proposes that an RSE licenseedevelop and maintain a conficts managementramework, which comprises a comprehensive systemo internal controls and reporting.

This ramework would require the RSE licensee to:

ensure that all directors or individual trusteeso the RSE licensee clearly understand thecircumstances that might give rise to a confict, thecontent and purpose o the confict managementpolicy (as discussed urther below) as well as their

obligations as a director o the RSE licensee; undertake regular and thorough enquiry to

identiy any conficts arising rom existing orprospective service providers to the RSE (reer alsoto the proposals on outsourcing in Chapter 7);

undertake regular and thorough enquiry to identiyany conficts o duty or interest or existing orprospective service providers where these havethe potential to aect the service providersperormance in respect o the RSE (reer also tothe proposals on outsourcing in Chapter 7);

adopt procedures to require the disclosure ointerests both at the time o appointment oresponsible persons and on an ongoing basis;

maintain up-to-date registers o relevant gits,interests and benets, and other duciary andnon-duciary roles o the RSE licensee and eachdirector (as discussed urther below); and

maintain a record o how actual conficts aremanaged at a minimum, in the minutes o Boardmeetings.

4.4.2 Minimum requirements or a confictmanagement policy

The Government has indicated that RSE licenseesshould be required to have a conficts policy thatcovers all relevant issues. The purpose o this policywould be to provide a denitive statement aboutidentiying and managing actual, potential andperceived conficts.


APRA proposes that an RSE licensee must have acomprehensive confict policy containing appropriatemeasures to satisy the core obligation to identiy andmanage conficts.

APRA proposes that the confict management policywould cover, at a minimum:

eective processes to ensure that the RSElicensee monitors and assesses on an ongoingbasis all material conficts, both potential andactual, and takes action as necessary;

how the RSE licensee identies and responds toconficts, e.g. by requiring individual directorsto absent themselves rom certain aecteddecisions; and

adequate disclosure o actual conficts tomembers o the RSE, with active considerationo the need or alternative measures wheredisclosure does not adequately address the risk oa conficted decision being made.


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Proposed PPG guidanceTo support the obligation on RSE licensees to identiyand respond to conficts, APRA proposes to includein SPG 521 examples o situations that may giverise to conficts. These include, or example, wherean individual director holds multiple RSE licenseedirectorships, a single corporate entity is both anRSE licensee and a responsible entity o a managedinvestment scheme, or where a director who sits onthe board o a service provider also sits on the Board.

4.4.3 Registers o duties and interestsStronger Super supports in principle therecommendation that RSE licensees should berequired to develop and maintain a register o allgits, emoluments and benets. This includes thatthe register be subject to a materiality threshold,cover RSE licensees, individual directors and seniormanagement, and be disclosed to APRA annually. Thisregister, and the additional register o duties discussedbelow, are considered a logical extension o the dutyon RSE licensees and individual directors or trustees to

avoid conficts o interest.The Government has also announced that confictsregisters will be required to be made available tobeneciaries, preerably on the und website. APRAintends to work with ASIC to develop the mosteective means o implementing this requirement.


APRA proposes that RSE licensees should be requiredto maintain two registers: one that outlines all dutieso the RSE licensee and duties o each individual

director, and the other that lists all material interestso individual directors and senior management (whereinterests include matters such as gits, emolumentsand benets).

These conficts registers are designed to provide anadditional layer o rigour in an RSE licensees confictmanagement policy. A register o duties creates acentralised list that denes the duties owed to relatedparties o the RSE licensee that give rise to, or havethe potential to give rise to, conficts o duty. Itwould also act as a living record o other duties owedby individual directors (including all directorships,executive positions and material shareholdings ocompanies). The register o interests, on the otherhand, would identiy all material gits and benetsprovided to directors and senior management.Together these conficts registers would provide theRSE licensee, as well as APRA, detailed inormationabout where potential conficts might arise.

These registers would not be required to be submittedto APRA on an annual basis. Instead, APRA proposesthat RSE licensees be required to make these registersavailable to APRA on request.

APRA does not intend to require in SPS 521 thatall interests and gits be disclosed on the register ointerests. Only those that are determined by the RSE

licensee to be material should be included on theregister. The RSE licensee would be required to have adeensible process in place or determining materiality.


APRA expects to issue guidance on the types oconficts o interest and duty that may appear onconficts registers.

4.4.4 Tied service provider arrangements

As outlined above, Stronger Super amends the SIS

Act to override provisions in trust deeds that requirethe RSE licensee to outsource particular unctions tospecied service providers.


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This proposed legislative amendment would notprevent RSE licensees rom retaining the services oa related service provider. It will become necessary,however, or RSE licensees to ensure that thearrangement is in the best interests o beneciariesand consistent with the RSE licensees other duties,as is the case or non-tied arrangements. The RSElicensee would have to comply with the requirementsin SPS 521 and the proposed Prudential Standard SPS

231 Outsourcing (SPS 231) (as discussed in Chapter7) regardless o whether the decision is infuencedby a tied arrangement. The combination o theserequirements will mean that RSE licensees may onlyuse a related service provider when a wide rangeo potential providers has been considered and it isdetermined that the related service provider oers aservice that best refects the interests o beneciaries.

4.5 Interaction with ASIC obligations

For those RSE licensees that are also responsibleentities licensed by ASIC, Regulatory Guide 181 Licensing:

Managing conicts o interest (RG 181) is designed

to assist understanding and compliance with theirobligations under s. 912A(1)(aa) o the CorporationsAct. Under this requirement, a nancial serviceslicensee must have in place adequate arrangements orthe management o conficts o interest. WhileRG 181 is not specically concerned with conficts ointerest in the context o the SIS Act, and does notcover all relevant issues in a SIS Act context, some othe elements that a typical confict o interest policywould contain are already expressed in RG 181. It is notintended that dual licensees duplicate these in separatedocuments where they achieve similar outcomes.

APRA will have regard to the content o RG 181 whendeveloping both the drat SPS 521 and SPG 521.


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5.1 Objectives o prudentialrequirements on tness and propriety

There are numerous examples o nancial institutionsthat have suered material losses or have ailed dueto the incompetence or dishonesty o management,board members, auditors and actuaries. Compliancewith tness and propriety obligations can reduce(though not eliminate) the risk o ailure arising romincompetent or dishonest responsible persons.

The tness and propriety o any RSE licensee depends

on the tness and propriety o each individual whoacts as a director, responsible person or as one o agroup o individual trustees. This is refected in theact that an essential condition or the granting o anRSE licence at present is that APRA must be satisedthat the applicant meets the tness and proprietystandard in r. 4.14 o the SIS Regulations.

The aim o the existing tness and proprietyrequirements is to ensure that responsible personso RSE licensees have the technical competence andintegrity necessary to perorm these roles. The ocus

o APRAs proposed t and proper prudential standardis similar. The prudential standard would set out theminimum requirements or RSE licensees determiningthe tness and propriety o individuals to holdpositions o responsibility within the RSE licensee.

A secondary purpose o the standard is to supportAPRAs ability to seek the disqualication o untpersons. The tness and propriety criteria are alsothe criteria that APRA would apply when consideringexercising its powers to direct the removal o aresponsible person, or when seeking a Federal Court

disqualication order under s. 126H o the SIS Act. AnRSE licensee is responsible or taking appropriate stepswhen a person is not t and proper or a responsibleperson position. However, this legislative provisionallows APRA to seek the removal o a responsibleperson who is not t and proper where an RSElicensee is unable or unwilling to remove this person.

5.2 Existing requirementsCurrent requirements relating to the tness andpropriety o RSE licensees and individual directorso such entities are contained in r. 4.14 o the SISRegulations, and are supported by Prudential PracticeGuide SPG 520 Fitness and Propriety (SPG 520).

Regulation 4.14 o the SIS Regulations requires an RSElicensee to possess relevant attributes that enable itto properly discharge its duties and responsibilitiesin a prudent manner. These include character,competence, experience, integrity, honesty, judgementand relevant technical qualications, knowledgeand skills. An RSE licensee is not t and proper i itis a disqualied person or is aware that a director orindividual trustee is disqualied and ails to inormAPRA or remove the person.

5.3 Stronger Super

Stronger Super has announced the replacement othe existing prudent person covenant in s. 52(2)(b) o the SIS Act (the care and diligence covenant)

with a more demanding prudent person o businesstest. Under this amendment, RSE licensees and theirdirectors would be required to exercise the care, skilland diligence that an ordinary prudent person obusiness would exercise in dealing with the propertyo another or whom the person elt morally bound toprovide. A similar amendment is expected to be madeto s. 52(9), which relates to the duty o the directorso RSE licensees to take steps to ensure that the RSElicensee meets its s. 52 covenants.

Stronger Super envisages a strengthening o APRAs

administration o the tness test. This would requireRSE licensees to ensure that individual directorsare ully inormed about their obligations andresponsibilities prior to accepting appointment andthat the Board can demonstrate on an annual basisthat it has the collective skill set to govern the RSE(s)or which it is responsible.

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5.4 Proposed Prudential Standard SPS520 Fit and Proper

APRA proposes to determine a new prudentialstandard, Prudential Standard SPS 520 Fit and Proper(SPS 520). It is expected that these requirements willbe largely consistent with the tness and proprietystandard currently contained in r. 4.14 o the SISRegulations, as well as APRAs existing guidance inSPG 520.

The proposed t and proper requirements outlined

in this chapter refect APRAs view that primaryresponsibility or sound and prudent managementresides with the board and senior management o anRSE licensee. RSE licensees are required to ensure thatpersons who are responsible or the managementand oversight o their RSEs have the appropriateskills, experience and knowledge to do so and thatthey can reasonably be expected to act with honestyand integrity. A minimum mandatory standard oracceptable behaviour and practice in the appointmento responsible persons is expected to reduce thepossibility that the interests o beneciaries are

put at risk.

APRA intends to align the requirements in theproposed SPS 520 with those in CPS 520, whereappropriate. Extending this harmonised ramework tothe superannuation industry would promote equity orresponsible persons in all APRA-regulated industries andassist APRA in its supervision o both individual entitiesand those that operate within a group structure.

There are a number o important dierences betweenkey provisions in the SIS Act and their equivalents

in other APRA-administered industry Acts. Theseprovisions mean that complete harmonisationwith the provisions in CPS 520 is not possible. Theproposals contained in this chapter refect the law as itcurrently stands in the SIS Act.

Key matters that APRA proposes to include in dratSPS 520 and related guidance are outlined below.

5.4.1 Responsible personAt present under s.10 o the SIS Act, responsibleocer is dened as a director, a secretary or anexecutive ocer o the body corporate. Executiveocer is urther dened as a person, by whatevername called and whether or not a director o thebody corporate, who is concerned, or takes part in themanagement o the body corporate.


CPS 520 includes a concept o responsible

person that has a broader application than the SISAct denition. This standard outlines the seniormanagement responsibilities that make an individual aresponsible person.

An RSE licensees t and proper policy is expected tocover all responsible persons. In order to harmonisethe requirements that apply to all APRA-regulatedentities, APRA thereore proposes to include in SPS520 a concept o responsible person that refects thedenition contained in CPS 520.

Responsible person would be dened to includea director, individual trustee or senior manager oan RSE licensee (a person who exercises the seniormanagement responsibilities set out in the prudentialstandard), auditor or, or dened benet unds (DBunds), an actuary appointed by the RSE licensee. Aperson need not be an employee o the RSE licenseeto be a responsible person. This means that in somecircumstances a consultant, contractor or employeeo a subsidiary or otherwise related company may be aresponsible person.

APRA would also have the right to determine that aperson is a responsible person where APRA is satisedthat the person plays a signicant role in relation tothe RSE licensee or one or more RSEs.


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Proposed PPG guidanceAt present there is guidance or APRA-regulatedentities as to how the concept o responsible personmight apply in dierent scenarios in the industry-specic PPGs on t and proper. APRA will consider theextent to which this guidance might be refected inan updated SPG 520 to assist RSE licensees to complywith the new requirements in SPS 520.

5.4.2 Fit and proper policy

APRAs view is that RSE licensees should be required

to maintain a t and proper policy that sets outrequirements about the tness and propriety oits responsible persons. This would enhance theBoards oversight o the entitys compliance with theobligations contained in SPS 520 and would reducethe risk that people who are not t and proper causeloss to beneciaries.


APRA proposes that, at a minimum, the new SPS 520would include a requirement or an RSE licensee to

document a t and proper policy and processes orassessing and taking action on tness and propriety.

Proposed minimum requirements or this t andproper policy, which refect the requirements GPS 520currently applying to other APRA-regulated industries,include:

coverage o all persons acting in responsibleperson positions;

processes to be undertaken in assessing whethera person is t and proper or a responsible person

position; specication o the actions to be taken where a

person is assessed as not t and proper ater theirinitial appointment; and

adequate provisions relating to whistleblowing.

An RSE licensee would be required not only toundertake an annual assessment o the tnessand propriety o all responsible persons, but alsoundertake a separate assessment as to whether theBoard has the collective skill set required to eectivelygovern RSEs under new trusteeship. The standardwould also include a requirement to report to APRAabout both t and proper and board skill assessments.

5.4.3 Criteria to determine whether a person ist and proper

At present, r. 4.14 o the SIS Regulations lists theattributes that, i possessed by an RSE licensee, allowthem to meet the t and proper standard. Theseattributes go to both the character o the RSE licensee(including individual directors) and their technicalqualications.

CPS 520 also includes a list o criteria that apply orthe purposes o determining whether a person is tand proper to hold a responsible person position.While these largely refect the attributes listed in r. 4.14o the SIS Regulations, there are additional criteria in

CPS 520 that relate to conficts o interest.


To ensure appropriate harmonisation o requirementsacross all APRA-regulated industries, APRA proposesto include in SPS 520 a list o criteria consistent withthose in CPS 520. This list would include eligibilitycriteria or auditors and actuaries.

These provisions would have the eect o placing anappropriate emphasis on considering these criteriawhen the RSE licensee is assessing whether a person

is t and proper. This should serve to reinorce theRSE licensees duty to act in the best interests obeneciaries.


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6.1 Objectives o risk managementprudential requirements

A risk management ramework comprises policiesand procedures, risk management methodologyand processes, the system o internal controls andreporting, and independent review processes. It alsoincludes appropriate mechanisms or governance andoversight. Robust risk management is a cornerstone oAPRAs prudential requirements in superannuation.

An RSE licensees risk management ramework should

be appropriate to the nature, scale and complexity oits operations, and address the material risks, nancialand non-nancial, identied by the RSE licensee.

6.2 Existing requirements

The existing ramework or prudentially sound riskmanagement in superannuation is articulated asboth mandatory obligations within legislation and asguidance in PPGs.

The SIS Act and SIS Regulations currently containprudential requirements or all RSE licensees to have

a risk management strategy (RMS) and or all RSEs tohave a risk management plan (RMP). Part 2A, Division8 and Part 2B, Division 5 o the SIS Act set out thebroad requirements or the content, maintenance andreview o the RMS and RMPs. Division 4.1A o the SISRegulations expands on the required content o theRMS and RMP, including the requirement to considermaterial risks and to develop processes to address allidentied risks.

Guidance on APRAs expectations o RSE licenseesor risk management in superannuation is provided

in Prudential Practice Guide SPG 200 Risk Management(SPG 200), Prudential Practice Guide SPG 233 PandemicPlanning and Risk Management (SPG 233), PrudentialPractice Guide SPG 234 Management o Security Risk inInormation and Inormation Technology (SPG 234) andthe jointAPRA-ASIC Unit Pricing: Guide to Good Practice.

6.3 Stronger SuperStronger Super includes a number o reorms to riskmanagement by RSE licensees. It will no longer bemandatory or RSE licensees to maintain a separateRMP or each RSE where the RMS is considered toadequately cover all risks applicable to the particularRSE. It is proposed this requirement will be replacedby a requirement in the prudential standard or RSElicensees to determine whether their RMS adequatelyaddresses all risks attributable to their und or undsor, alternatively, that a separate RMP is required.

RSE licensees will no longer automatically be requiredto make a copy o the RMP available to all undmembers or to employer-sponsors in the case o a DBund. Finally, RSE licensees will be required to explicitlyinclude a liquidity management component in theirRMS. This includes giving consideration to the liquiditycharacteristics o investment options oered orproposed to be oered to members, including in theretirement phase.

To enable the transition o existing prudentialrequirements into prudential standards, theGovernment has announced that it will releasedrat legislation to make necessary consequentialamendments. This will allow the redetermination ocertain requirements in a number o relevant SIS Actprovisions in a prudential standard.15 SIS Regulationsmade under these provisions will also be reviewed toassess the need or any amendment.

6.4 Proposed Prudential Standard SPS220 Risk Management

An RSE licensee is responsible or the eectivemanagement o all risks o the RSE licensee and RSEsunder its trusteeship, especially those that can aectthe interests o beneciaries. The proposed Prudential

Standard SPS 220 Risk Management (SPS 220) ocuseson the minimum requirements or the managemento risks, drawn rom a range o sources and refectingindustry good practice.

15 APRA expects these provisions to include ss. 29E(1)(c) and (e); Part 2A,Division 8; and Part 2B, Division 5.

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APRAs approach continues to be principles-basedand harmonised with the requirements in otherAPRA-regulated industries, where appropriate. Thisincludes requiring RSE licensees to develop a riskmanagement ramework appropriate to their entitiesand operations.

Key matters that APRA proposes to include in dratSPS 220 and related guidance are outlined below.

6.4.1 Risk management ramework

The current SIS Act obligations ocus RSE licensees

attention on the documents required (namely, theRMS and the RMP), rather than on developing anadequate and appropriate ramework or RSE licenseesto eectively manage all material risks to which theyare exposed.

Developing and maintaining a holistic rameworkor risk management is expected to result in RSElicensees having better oversight o their RSEs, thusenabling them to better make decisions in the bestinterests o beneciaries. Consistent with other APRA-regulated industries, this ramework would compr

Documents

APRA DiscPaper SuperPrudStds 2011-09-29