Four years after Graeme Samuel’s capability review into the performance of the Australian Prudential Regulation Authority, another independent review led by a former captain of industry has made for some uncomfortable reading for the watchdog and its officials.
The Financial Regulator Assessment Authority, established by former treasurer Josh Frydenberg in 2021 and chaired by former Macquarie CEO Nicholas Moore, has released its assessment of APRA’s performance, with a specific focus on its regulation of super trustees.
The review gave the regulator quite a few gold stars. “The FRAA notes APRA’s successful regulation of the banking, insurance, and superannuation industries through complex challenges and crises in recent years,” it concluded.
But on superannuation specifically, the results were more mixed. The review found that APRA’s “supervision” of super entities was “effective and capable”. In regulatory legalese, the term refers to identifying and responding to risks and misdeeds in the sectors it is tasked with overseeing. However, its “resolution” function – that is proactively planning for risks which may occur – was found to be “significantly less developed”.
APRA deserves some credit for engaging frankly with the review process. In its own self-assessment, the regulator admitted it was better at responding to, rather than planning for, systemic and specific problems. It should also be mentioned that the FRAA has its own critics. The Albanese government has effectively disbanded the authority, with its functions now to be performed by Treasury (and only every five years).
Nonetheless, at a time when there is a focus on the risks and complexities of increased allocations to offshore and unlisted assets, the resolution function takes on even more importance. And, even on the topic of supervision (which APRA rated itself more highly on), the review found room for improvement.
Illuminatingly, the review identified unlisted asset valuations and the conversion of illiquid assets to cash as key risks APRA needs to be more proactive on. Indeed, stakeholder submissions put to the review suggested the regulator’s recent focus on unlisted asset valuations – specifically singling out funds’ venture capital investments in tech darling Canva – were motivated by “ongoing media coverage of the issue” rather than their own proactive identification.
To be clear, the review did not necessarily agree with the accusation, but it did feel it worthy of inclusion in its final report. And CIOs and portfolio managers making critical decisions about allocating to unlisted assets would rightly be concerned to hear a front page newspaper splash may be motivating regulatory activity, rather than the regulator’s deeply held convictions.
The review’s findings dovetail with the most recent APRA stakeholder survey. Overall, the results for APRA were very good. Almost all respondents (98 per cent) agreed the regulator positively impacts their industry, and 90 per cent said APRA helped protect the financial wellbeing of the community.
But boiling down into the numbers, there was a telling disparity between the satisfaction levels of super trustees and their banking and insurance peers. Just 33 per cent of respondents from the super sector agreed that APRA’s super vision of their industry was “very or totally effective”, compared to 63 per cent pf general insurance respondents and almost three quarters (74 per cent) of bankers.
One anonymous survey participant was particularly blunt: “The primary systemic risks in the industry remain and appear of little import to APRA notwithstanding the threat to members financial interests and systemic stability including … major asset/liability mismatches in the system [and the] precarious state of the administration market.”
The review has recommended more regular communications and engagement from the regulator – something the sector, and this publication, would welcome.
APRA has said it will act on the findings and the review noted it had already made some progress on this front.
“APRA welcomes the FRAA’s review of APRA’s superannuation capabilities,” said chair John Lonsdale. “The recommendations provide helpful guidance and reinforcement for a more effective APRA into the future.”
It is natural for there to be some acrimony between the regulator and the regulated. But in this case, the sector is not pushing for deregulation, nor a light-touch regime. It is pleading for more guidance and engagement on the risks within the system and within funds.
That is a healthy basis upon which to build a better relationship – one that is critical to the competent management of the retirement savings of millions of people.