5.1 Conduct regulation and superannuation

5.1.1The current division

Responsibility for administration of the SIS Act is divided between APRA, ASIC and the Commissioner of Taxation. In general terms, ASIC’s role under the SIS Act is limited to matters of disclosure. For example, ASIC has general administration of the covenants imposed on Registrable Superannuation Entity (RSE) licensees under section 52 of the SIS Act, but only to the extent that it relates to, in general terms, any disclosures made by the RSE licensee to members.[1] The Commissioner of Taxation is responsible for those parts of the SIS Act that concern self-managed superannuation funds and revenue matters more generally. It falls to APRA to administer the balance of the Act.

The trustee’s covenants set out in the SIS Act have been generally described in the chapter dealing with superannuation. I will not repeat that summary here. For present purposes, it is important to note that many of the Act’s covenants both protect the interests of individual members and serve a prudential purpose.

In a document published in 2018, APRA and ASIC set out their respective responsibilities in superannuation. They said that:[2]

Five years after the introduction of the Superannuation Guarantee in 1992, the Wallis Inquiry (1997) made some fundamental recommendations which influenced the way superannuation was regulated. Key recommendations included the establishment of APRA as the prudential regulator and ASIC as the regulator for market conduct and disclosure. The regulation of the superannuation system involves an adjustment to the twin peaks model whereby APRA has general oversight of best interest obligations derived from trust law. The model reflects risks arising from the compulsory and market-linked nature of superannuation.

The last two sentences of this paragraph reflect the different nature of the financial promise an RSE licensee makes to members of the fund and the risks inherent in that promise. As I noted above, and in the chapter on superannuation, the promise of the superannuation trustee is to manage the member’s account in a particular way, in accordance with the covenants provided under the SIS Act. That differs markedly from the promises made to consumers by ADIs and insurers. Unlike ADIs and insurers, an RSE licensee promises no particular outcome.[3] Instead, the trustee promises (it covenants) to exercise powers and perform its duties in the best interests of beneficiaries. The SIS Act therefore requires the regulator with administration of the Act (in this case, APRA) to have regard not only to the viability of each fund but also to the conduct of trustees.

5.1.2Enlarging ASIC’s role

Allocating responsibilities between prudential and conduct regulation is not always assisted by using the word ‘conduct’ to describe the type of activity requiring a regulator’s attention. Conduct often has both prudential and non-prudential connotations. In its prudential sense, conduct is most directly concerned with the institution in question being administered with appropriate integrity, prudence and professional skill and with action by the institution that, alone or in aggregate, could present a threat to the survival of the institution or the stability of the market. In each case, the focus is on the health of the institution and its ability to meet the promises it has made, and the health of the broader market. In its more common, non-prudential sense, ‘conduct’ is concerned with consumer protection and market conduct rules. Its essential focus is on the rights and interests of consumers in the context of their participation in the financial services industry.

APRA and ASIC have acknowledged that each has a responsibility for conduct issues concerning RSE licensees. ASIC has a responsibility because RSE licensees are also Australian financial services licence (AFSL) holders. However, the current arrangements for the administration of the SIS Act mean that where an RSE licensee’s conduct gives rise to harm to a member (other than in respect of disclosure) and is a breach of one or more of the covenants under section 52(2), the prospect of regulatory action is slight. APRA, as the prudential regulator, does not naturally administer those covenants with consumer protection in mind. ASIC, the conduct regulator, has a role limited to disclosure.

The Productivity Commission said, in its report on superannuation, that APRA and ASIC’s respective roles need to be more clearly delineated and better aligned with their distinct “regulatory DNA”.’ [4]

It might be thought, therefore, that there is a need for a separate regulator for the superannuation sector altogether. For reasons I explain in the chapter on superannuation, I do not consider that is necessary.

The Productivity Commission proposed that ‘APRA should be distinctly focused on prudential health – ensuring high standards of system and fund performance. And ASIC should focus on the behaviour of the system – the conduct of trustees, advisers and the appropriateness of products (including for particular target markets)’.[5]

I agree. In my opinion, the twin peaks should be preserved and reinforced in superannuation. For this reason, I recommend that APRA’s remit in respect of the SIS Act be shared with ASIC in a way that aligns with their traditional roles and strengths. As APRA submitted, an appropriate allocation of responsibility would be as follows:

APRA, as the prudential regulator for superannuation, is responsible for establishing and enforcing Prudential Standards and practices designed to ensure that, under all reasonable circumstances, financial promises made by superannuation entities APRA supervises are met within a stable, efficient and competitive financial system

As the conduct and disclosure regulator, ASIC’s role in superannuation primarily concerns the relationship between RSE licensees and individual consumers.[6]

I have reached this conclusion for three broad reasons.

First, providing ASIC with the power to protect the interests of members would provide some consistency across the two legislative regimes that apply to RSE licensees. An RSE licensee holds an AFSL and in holding that licence is subject to the obligations under section 912A of the Corporations Act. Those obligations have some general similarity with obligations imposed under section 52 (and section 52A) of the SIS Act. They are also similar to the obligations imposed on RSE licensees who are authorised to offer a MySuper product under section 29VN(a) (and section 29VO) of the SIS Act. It is evident that the same conduct may give rise to breaches of all of these provisions.

The second reason relates to practical matters. APRA’s skills are geared to prudential regulation. Its capabilities in respect of enforcement are less developed, and are currently the subject of an internal review.[7] Its enforcement culture is similarly underdeveloped. Seldom, if ever, has it brought proceedings of the kind it instituted in December 2018 against persons and entities associated with IOOF.

Conversely, enforcement is a fundamental aspect of ASIC’s work. In enforcing the SIS Act, ASIC would face issues not dissimilar to those it currently faces in enforcing other legislation. For example, the covenants of RSE licensees and their directors under the SIS Act are akin to the duties that ASIC already enforces in respect of responsible entities of managed investment schemes and their officers under the Corporations Act.[8]

The third reason for wanting to embed the twin peaks model into superannuation is informed by APRA’s approach to its core tasks. APRA is predisposed to methods of regulation that rely on ‘supervisory suasion’[9] conducted ‘behind closed doors’, rather than to public deterrence.[10] The prudential regulator may wonder whether public denunciation of an entity might disturb the stability of an entity or the system. But, as I have said, deterrence of misconduct depends upon visible public denunciation and punishment. ASIC’s core work is consistent with that objective. APRA’s is not.

Because of the nature of its core tasks, APRA is more alive and attentive to threats to the stability and safety of an entity or the financial system as a whole than it is to consumer outcomes. As the Wallis Inquiry noted, where an agency is charged with both consumer protection and prudential regulation, consumer protection tends to become subservient to the prudential objectives.[11] When asked if the ability to commence proceedings for breaches of the SIS Act was in tension with APRA’s regulatory approach, Mr Byres answered:

To some extent, yes. There are obvious tensions there. And if we were – if we were taking lots and lots of enforcement action, I would probably have to conclude we were a poor prudential supervisor because ideally we should be trying to head these things off.[12]

Recommendation 6.3 – General principles for co-regulation

The roles of APRA and ASIC in relation to superannuation should be adjusted to accord with the general principles that:

  • APRA, as the prudential regulator for superannuation, is responsible for establishing and enforcing Prudential Standards and practices designed to ensure that, under all reasonable circumstances, financial promises made by superannuation entities APRA supervises are met within a stable, efficient and competitive financial system; and
  • as the conduct and disclosure regulator, ASIC’s role in superannuation primarily concerns the relationship between RSE licensees and individual consumers.

Effect should be given to these principles by taking the steps described in Recommendations 6.4 and 6.5.

5.1.3Giving effect to co-regulation

It is necessary then to say something about which provisions ASIC should have the ability to enforce, and how this should be achieved.

ASIC should be given the power to enforce all provisions in the SIS Act that are, or will become, civil penalty provisions or otherwise give rise to a cause of action against an RSE licensee or director for conduct that may harm a consumer. They are provisions that have members’ interests and outcomes as their touchstone. At a minimum, this will include sections 52, 52A, 29VN and 29VO, but I do not intend that to be an exhaustive list. That expansion of ASIC’s functions and powers will also increase the range of circumstances in which it can cause proceedings to be commenced in the name of beneficiaries to recover loss or damage resulting from a breach of the Act.[13] ASIC is the more appropriate litigant for those proceedings for the reasons I have given.

To be clear, the provisions should not exclude APRA from exercising the same powers. Any decision by APRA to litigate in respect of a provision that is also actionable at the suit of ASIC will be motivated by different concerns. But APRA should retain the ability to have recourse to the provisions in order to achieve the prudential objectives they can serve.

It is also necessary to say something about some responsibilities and powers that APRA should retain, particularly under the SIS Act. Section 6 of the SIS Act sets out the divisions of administrative responsibilities under the Act. In large part these should not change. APRA should retain its current functions, including responsibility for the licensing and supervision of RSE licensees and the powers and functions that come with it. This includes any powers to apply to the court to disqualify a person (section 126H of the SIS Act) and remove that person from being a director of a trustee (section 133); the power to accept an EU (section 262A) and to conduct an investigation under section 263(1), where it appears to APRA that there has been a contravention of the Act. It also includes any power to issue directions that APRA presently has or is to be given.[14] I consider the directions power to be a useful complement to APRA’s supervisory toolkit because it can be used to bring pressure to bear on an uncooperative trustee. APRA has itself expressed support for having a broader directions power, which will reflect the scope of directions powers it has for other industries it regulates.[15]

Recommendation 6.4 – ASIC as conduct regulator

Without limiting any powers APRA currently has under the SIS Act, ASIC should be given the power to enforce all provisions in the SIS Act that are, or will become, civil penalty provisions or otherwise give rise to a cause of action against an RSE licensee or director for conduct that may harm a consumer. There should be coregulation by APRA and ASIC of these provisions.

Recommendation 6.5 – APRA to retain functions

APRA should retain its current functions, including responsibility for the licensing and supervision of RSE licensees and the powers and functions that come with it, including any power to issue directions that APRA presently has or is to be given.


[1]See SIS Act ss 6(1)(d) and (2).

[2]Exhibit 7.145, Witness statement of Wayne Byres, 27 November 2018, Exhibit WB-1-45 [APRA.0075.0001.0306 at .0306] (emphasis added; footnotes omitted).

[3]Save for, as noted above, defined benefit superannuation funds.

[4]Productivity Commission, Report 91, Superannuation: Assessing Efficiency and Competitiveness, 21 December 2018, 459

[5]Productivity Commission, Report 91, Superannuation: Assessing Efficiency and Competitiveness, 21 December 2018, 459.

[6]APRA, Module 5 Policy Submission, 8 [15]–[16].

[7] Exhibit 7.145, Witness statement of Wayne Byres, 27 November 2018, 813 [325]–[334].

[8] Corporations Act ss 601FC, 601FD; SIS Act ss 52, 52A.

[9] Exhibit 7.145, Witness statement of Wayne Byres, 27 November 2018, 86 [341].

[10] Transcript, Wayne Byres, 30 November 2018, 7451–2.

[11] Wallis Inquiry, Final Report, 18 March 1997, 244.

[12] Transcript, Wayne Byres, 30 November 2018, 7478.

[13] SIS Act s 298.

[14] The amendments proposed by the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 1) Bill 2017 would give APRA the power to give directions where it has prudential concerns in certain circumstances: see Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 1) Bill 2017, 56 [6.12]. Under the proposed provisions, APRA would be able to issue a direction if it has reason to believe that the direction is necessary in the interests of beneficiaries or where the failure to issue a direction would materially prejudice the interests or reasonable expectations of those beneficiaries’: see Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 1) Bill 2017, 59 [6.29].

[15] Helen Rowell, ‘Opening Statement’ (Speech delivered at the House of Representatives Standing Committee on Economics, Canberra, 10 October 2017) <www.apra.gov.au/ media-centre/speeches/opening-statement-house-economics-committee-october-2017>.