Universal licensing regime
The SWG recommends that trustees of superannuation entities (other than SMSFs or EPSSSs) be licensed by APRA. To obtain such a licence, a trustee should be required to:
- comply with conditions on a licence, with other legislative requirements and with the covenants in the trust deed;
- have adequate resources in place (financial resources (see discussion on capital under 6.1), technological and human resources);
- meet minimum standards of competency;
- have adequate risk management systems in place, including a risk management plan and adequate arrangements for ensuring compliance with the plan;
- have adequate levels of professional indemnity insurance and material damage/consequential loss insurance in place;
- have adequate outsourcing arrangements in place; and
- meet any other conditions as prescribed in regulations or as required by APRA.
Licensees would also need to meet these licence criteria on an on-going basis.
The SWG recommends that the Government consider enforcement powers to enable APRA to suspend or remove a trustee or to revoke its licence where the trustee breaches the conditions of its licence or where an existing trustee fails to obtain a licence from APRA.
The SWG recommends that the licence apply to either the trustee corporation as a whole, or where the trustee is comprised of individuals and no corporate trustee structure exists, to a 'notional entity' comprising those individuals. The SWG further recommends that the Government consider mechanisms to ensure that trustees as a whole are able to show the capacity to meet the licence criteria. This would include enabling the trustees to 'buy in' the expertise to demonstrate the competence to operate the fund, or through the application of 'key person' licensing conditions.
The SWG recommends that licensed trustees be required to register with APRA an intention to establish all funds they propose to operate prior to commencement. As a component of this registration process, trustees should be required to lodge the trust deed and a risk management plan, and certification that the trust deed and risk management plan comply with relevant requirements.
The SWG recommends that existing trustees be given up to two years from the date of commencement of legislative amendments to apply for a licence and to register existing funds. New trustees would be required to be licensed from the date of commencement of the licensing regime. Consideration will need to be given to how the licensing process can be smoothed administratively during the transitional period to ensure that a significant number of applications are not received at the end of the two year period.
The SWG recommends that the requirement for an APRA licence be in addition to the FSRA requirements to have an AFSL to advise or to deal in interests of the fund. However, a trustee should not be required to have an ASIC licence to operate the fund.
The SWG recommends that the Government review the exemption from the AFSL requirements for dealing by trustees of non-public offer superannuation funds.
Single entry point
The SWG recommends that the Government consider streamlining arrangements for trustees required to hold both an APRA licence and an AFSL, through the development of a single entry point enabling trustees to lodge only one application to cover both licences. The single entry point would only apply to applications for an APRA licence and AFSL submitted after commencement of the APRA licensing requirements. The application would need to contain sufficient information to meet the requirements for both licences. In considering this recommendation, the SWG suggests that the Government examine:
- the matters that ASIC should consider when licensing an entity that has been or is to be licensed by APRA;
- the extent to which the regulators should be required to consult with each other in taking licensing action; and
- the memorandum of understanding that establishes information-sharing arrangements between APRA and ASIC.
The SWG recommends that the Government consider:
- the current threshold for SMSFs to determine whether it is an appropriate test for determining which funds require prudential regulation; and
- whether the existing successor fund provisions contained in the SIS Act are appropriate to deal with any restructuring that may occur as a result of the new licensing requirements.
Risk management plans
The SWG recommends that superannuation trustees, as a condition of their APRA licence, be required to prepare and maintain a risk management plan in respect of each fund that they operate. The plan would need to be submitted as a part of the fund registration process. Trustees would be required to demonstrate in the plan how they intend to deal with specific risk areas relevant to superannuation funds, including compliance with particular provisions in the SIS Act. The Government should consult with relevant stakeholders on the risk areas that would need to be addressed in the risk management plan.
The SWG recommends that compliance with the risk management plan be audited each financial year, as a component of the fund's existing audit procedures.
The SWG recognises the diversity of trustee structures that exists in the superannuation industry, and recommends that the Government consider, in consultation with relevant stakeholders, mechanisms for independent oversight of the trustee's compliance with the risk management plan, and for reporting breaches to the regulator.
The SWG recommends that appropriate enforcement measures be put in place to address non-compliance with the risk management plan. For example, a significant breach could be required to be reported both to APRA and to members, regardless of whether steps had been taken to remedy the breach. In addition, the SWG recommends trustees be required to notify members that they may seek a copy of their fund's risk management plan from the trustee.
Prudential standards-making power
The SWG recommends that APRA be empowered to make prudential standards similar to the power it has in relation to general insurance. The SWG acknowledges that there are a number of practical implementation issues that will need to be addressed progressively in relation to such a power, in consultation with relevant stakeholders.
Longer term options - separation of prudential and retirement income provisions
The SWG acknowledges that the SIS legislation is complex, and recommends separation of the prudential and retirement income provisions of the legislation to assist in simplifying the legislation. However, the SWG notes that there are a number of practical implementation issues that will need to be addressed and consulted on in relation to such a proposal.
The SWG recommends that APRA consider developing prudential standards that cover capital, investment rules, outsourcing, governance and operational risk, in consultation with relevant stakeholders.
The SWG recommends that, as a part of the licensing process, APRA should determine the amount of resources, including capital, required to be held by each trustee to address the operational risks relevant to that trustee. The legislation should list the factors
APRA is required to take into account in determining an appropriate amount of capital, but should not specify a minimum or maximum amount of capital required for each trustee nor how it should be held. APRA should also provide guidance to industry on the weightings it intends to apply to those factors. The SWG recommends that the revised capital requirements be developed in consultation with relevant stakeholders, and be phased in at the same time as the licensing requirements.
The SWG recommends that APRA update Superannuation Circular No. II. D.1 - Managing Investments and Investment Choice (April 1999).
The SWG recommends that trustees be required to:
- ensure that the fund's objectives are clearly articulated; and
- identify in their risk management plan the measures that the trustee is adopting to ensure that the fund's investment strategies match the fund's objectives, and are in compliance with the sole purpose test contained in section 62 of the SIS Act.
The SWG also recommends that trustees be required to certify whether a fund's investment strategy is in compliance with the fund's objectives. This would be subject to the fund's annual compliance audit.
The SWG recommends that, as a condition of the APRA licence, trustees be required to include a term in any contracts with third party service providers that provides APRA with a right of access to the service provider in the event that APRA has concerns about the impact of the activities of the service provider on the APRA-regulated entity. The SWG also considers that APRA should be required to notify other trustees using the same service provider of any concerns APRA may have in relation to the service provider.
Governance and operational risks
The SWG recommends that, as a component of the licensing framework, trustees be required to demonstrate in their risk management plan how they propose to deal with governance and risk management requirements.
The SWG recommends that the proposals contained in the Issues Paper, to require superannuation funds to hold AGMs or that members be given the right to request a meeting at any time, not be proceeded with.
Public disclosure of annual returns
The SWG recommends that for funds other than those with fewer than five members and EPSSSs, ASIC use its existing electronic facilities to make the audited accounts of funds and the fund information required to be given to members publicly available, provided the costs are reasonable.
The SWG recommends that trustees be required to notify superannuation fund members of the presence, and nature, of any qualification of the fund's auditor's report.
Member approval for giving benefits to related parties
The SWG recommends that the Government consider reducing the length of time that grandfathering arrangements contained in Part 8 of the SIS Act apply for all funds other than SMSFs.
The SWG recommends that trustees be required to disclose in their PDS any in-house assets held by the fund.
The SWG recommends that trustees be required to disclose non-investment transactions entered into with related parties.
Financial assistance to failed superannuation funds
Given that the current provisions contained in Part 23 of the SIS Act have not yet been fully tested, the SWG recommends that the provisions not be changed at this time. However, the SWG recommends that the Government review the operation of Part 23 and consider possible amendments to it, in consultation with relevant stakeholders, once the first decision under Part 23 has been made.
The SWG recommends that the Government consider examining the need to specify a timeframe within which salary sacrifice superannuation contributions should be paid to a superannuation fund on behalf of an employee.