Investors are ramping up their Operational Due Diligence (ODD) capabilities with the philosophy that “you can outsource the task but not the responsibility”, responding to increased regulatory scrutiny of outsourcing relationships in the superannuation industry.
Funds traditionally focussed overwhelmingly on investment due diligence when appointing fund managers, looking at their ability to bring good returns to a set risk profile, says Seamus Collins, executive manager, portfolio implementation at Mine Super. But this is going through a fundamental change.
“ODD was an afterthought. Managers were appointed for ODD which was assumed would be satisfactory,” Collins says. “More recently, ODD in the larger funds started to emerge as a distinct separate discipline. There were specialised ODD teams and a lot more focus on ODD as a distinct discipline within an investment team.”
Collins will speak in a panel discussion with Joanna Chang, head of investment risk at the Australian Prudential Regulation Authority, and Jane Eccleston, senior executive leader of superannuation at the Australian Securities and Investments Commission, at the Investment Magazine Investment Operations Conference on at the Westin in Sydney on Tuesday, February 26.
While funds have previously formed their own views on how ODD should be done and to what standard, greater expectations of regulators – and guidance papers released by the Australian Institute of Superannuation Trustees and the Financial Services Council – have helped uplift and standardise ODD processes across the industry and increased the depth of information being sought from potential managers.
New disciplines have entered the process, with greater emphasis on cyber security, data protection and use of the cloud, Collins says. Funds typically lack this capability and are bringing in specialised functions to assist.
ESG considerations and legislation minimising the impact of ‘modern slavery’ have also played a part in increasing the rigour of ODD, he says.
Funds are also moving away from a ‘set and forget’ mentality once the initial due diligence has been completed, and enhancing processes to refresh and maintain the level of comfort they have around existing arrangements. They are assessing the benefits of re-certifying every three to five years, or even annually.
“We are looking at how we look at that more frequently, what level of onsite visits and discussions we have about ODD in the ongoing sense,” Collins says. “That’s also partly driven by operational due diligence becoming a specialised function in larger funds’ teams and viewed as part of the investment function that requires its own plan or implementation framework.”
There is broad agreement throughout the industry that ASIC’s goal of broad comparability of fees and costs through its RG97 fee disclosure regulations is “greatly to be desired”, he says, and ASIC is working hard to refine the reporting framework.
“My only note of concern is whether the focus purely on costs diverts from focussing on net returns,” he said.
“Overall I would suggest that RG97, while it has been onerous for industry, continues that theme that is coming out of ODD which is increased transparency and accountability in the industry. Most in the industry support that. While RG97 is far from perfect, it’s continuing to evolve in the right direction.”