With trustees at industry funds facing greater accountability and liability for regulatory breaches, the need for additional structure will lead to some convergence between industry and retail business models, experts say.
Damian Murphy, a risk, legal and governance consultant who was consultant to trustees at Credas Solutions and formerly chief risk officer at NAB Wealth, said industry funds “will require additional capital, they will require additional insurance, and they will require additional processes,” and this “additional structure” is “where the point of similarity will emerge.”
Murphy was speaking with Scott Donald (pictured), director of the Centre for Law, Markets and Regulation, UNSW Law, at the University of New South Wales, on a podcast conversation about regulatory changes to the accountability of individuals responsible for the custodianship of Australians’ retirement savings, hosted by Investment Magazine in partnership with AIA Australia.
Donald said there has been a longer-term trend, sped up by the Hayne Royal Commission, to ensure people making key decisions in superannuation funds are held accountable for the decisions they make. This is driving increased professionalisation across the sector, and this trend is likely to continue.
Regulations that make it clear trustees subject to penalties or sanctions would not be able to use fund assets have led to a widespread tightening up of the processes around how funds allocate to–and use–their reserves.
But despite a drive towards greater transparency across the sector, movements in fund reserves are one matter that is rarely, if ever, reported to the public. While net reserve movements are reported, this hides details about payouts due to regulatory sanctions and subsequent top-ups, and reporting on these details is likely to deepen in the future, Donald said.
“That, I think, is one of the things I would want to know as a member,” Donald said. “I would want to know if my Trustee was regularly incurring a lot of regulatory sanctions or other sorts of things.”
Donald said regulators had previously been keen to maintain confidence in the system, preferring to resolve problems behind closed doors. But the Hayne royal commission brought a realisation from regulators that if they never push for harsh sanctions and public dressing-downs, the industry can become complacent.
“And so we have seen over the last few years an increased determination from [The Australian Securities and Investments Commission] and from [The Australian Prudential Regulation Authority] to be a little bit more visible in what they’re doing and to take more transparent types of action, like court cases,” Donald said.
While retail funds operated by a bank or other financial institution can turn to shareholders and ask for assistance to pay that, profit-for-member industry funds running more of a mutual model face real questions about where they would draw that money from.
This has led to a push for mutuals and profit-for-members to create structures – such as holding capital or taking out insurance – that would enable them to meet claims “just as they would if they were in a for-profit organisation on the retail side.”
Donald said the term profit-for-member could start to look more like a “communications exercise” as funds evolve their internal structures to meet this heightened need for accountability and change the way they are organised.
Murphy said he is seeing a greater focus on systems and skills involved in monitoring investments, reporting and oversight, as funds increasingly internalise asset management. And with heightened regulatory enforcement, a greater number of risk professionals are moving from the broader financial sector into industry funds.
“I think this has been a great focus for APRA,” Murphy said.
“I think APRA is right over these funds, [saying]: ‘Show me your risk frameworks, show me your risk professionals that are on the ground doing the job and delivering into our expectations.”