If Australia’s $3 trillion superannuation industry is to flourish and maintain its world-beating standard, the development of technology solutions may need an extra lift from the prudential regulator in the form of a regulatory ‘sandbox’, similar to the one successfully employed by the corporate regulator.
ASIC’s sandbox allows those without an AFS license to test financial or credit activities in a safe environment; the program has been so successful an ‘enhanced’ regulatory sandbox was opened this very week, allowing a broader range of activities to be tested for a longer amount of time.
APRA and ASIC have vastly different purviews – AFSL holders take part in vastly different activities than Authorised Deposit-taking Institutions.
Yet while the technological progress of AFSL holders is being nurtured, that of ADIs – in particular superannuation funds – lags.
According to research from IQ Group, which has published an annual study on digital engagement in Super since 2014, the use of technology – particularly on the consumer side – is patchy. Only 48 per cent of the top 50 funds in 2019 have a member app, for example, and only 6 per cent of used a Single Sign On process.
The superannuation value chain is especially ripe for advancement, according to a recent report from Bravura Solutions, most notably the areas of asset management, custody, administration, product and platform, distribution, advice and the end user.
The Bravura report says there have been “lower levels” of fintech activity in Super than in other industries, and adds that one of those reasons for this has been “a constantly evolving and complex regulatory environment”.
It stands to reason then that APRA may consider encouraging and facilitating more innovation from the funds directly and from service providers in the ecosystem.
It’s not that APRA isn’t on board with innovation. The regulators has restricted licensing pathway for banking, for example, lets aspiring ADIs start operating on a limited basis without having to meet the requirements of a full ADI licence. Since 2018 APRA has granted Restricted ADI licences to three entities and two of have since gone on to be granted full ADI licences.
Yet a similar scheme isn’t available in Super. APRA board member Geoff Summerhayes did intimate that it was on the radar, however, in a 2017 presentation: “We are also paying close attention to what other regulators are doing, such as, for example, a sandbox approach being tested overseas and by ASIC,” he noted.
These days, however, the corporate regulator is less keen on the idea. A spokesperson told Investment Magazine that APRA examined a range of options, “including a sandbox”, at the time of establishing its restricted licensing framework for banks.
“However, a sandbox typically allows institutions to test new products or services without a licence,” the APRA rep stated. “This form of experimentation does not work well with prudentially regulated businesses, which requires longer term commitment and a focus on building and maintaining financial safety and stability.”
Instead, they continued, APRA “made it easier for applicants to navigate the licensing process”.
This is a reasonable response, and it stands to reason that APRA’s foremost responsibility is to protect consumer interests. But it also has a vested interest in fostering a healthy, innovative market environment. To this, the representative noted that if regulated entities “wish to try to innovate new products” their APRA supervisory team will work with them on it.
The efficacy of this ‘supervisory team’ approach can only be judged by APRA-regulated entities, but there does seem to be appetite for further solutions.
According to Jessica Ellerm, co-founder and former CEO of startup Super fund Zuper, innovation could “definitely” be approached differently. Ellerm makes the point that it’s not just startups funds that are keen to work with the regulator; external service providers and large, incumbent funds are just as ready.
“Lots of fintechs would like to have a different relationship with the regulator,” she says, adding that while she had got to experience ASIC’s sandbox when they were getting Zuper off the ground, APRA didn’t have the same facility.
“I do remember early on having some engagement with ASICs sandbox but it wasn’t set up to cater to Super and Super wasn’t set up to cater to the fintech world,” she recalls.
Christina Hobbs, CEO and co-founder of Verve Super, stresses that while stringent regulation of Super is a “good thing”, a sandbox for funds and service providers might be a welcome addition to APRA’s suite of tools.
“For fintechs it could be useful,” Hobbs says. “For us the regulation was clear in our sector, but potentially for other areas it could be pretty useful.”
According to the Bravura report on technology in Super, change is coming whether it’s embraced and facilitated or not.
“While the Australian superannuation industry has been relatively sheltered from disruption to date, it cannot escape the next wave of change,” the report states.