3.6 Governance, regulation and supervision

As I have explained earlier in this chapter, I consider that there should be an adjustment of the roles APRA and ASIC have in relation to superannuation. And, as I have said, the role of each agency should accord with the general principle that APRA is to act as prudential regulator and ASIC as the conduct regulator.

Governance of superannuation funds inevitably raises both prudential and conduct issues. Proper governance of a fund is critical to the fund’s performance. That is, proper governance is necessary in order to fulfil the basic promise of a superannuation fund that the trustee will administer the fund in the best interests of members, and in particular, in the best financial interests of members.

Particular governance failures must be identified. More often than not, failures may be detected by the prudential regulator in the course of its prudential supervision. But however detected, particular failures of governance must be examined by the regulator and made the subject of the appropriate regulatory response. It is this last step that is necessary if trustees of RSEs are to be held properly accountable for their failures of governance.

Failures of governance are reflected in particular decisions that are made with respect to the administration and investment of the fund. The larger superannuation funds are now large enterprises dealing with very large sums of money.

There is no reason in principle why the directors and the senior executives of at least the large superannuation funds should not be subject to statutory obligations of a kind generally similar to those imposed on members of the board and banking executives by the BEAR – to conduct the responsibilities of their positions:

  • by acting with honesty and integrity, and with due skill, care and diligence;
  • by dealing with APRA and ASIC in an open, constructive and cooperative way; and
  • by taking reasonable steps in conducting those responsibilities to prevent matters from arising that would adversely affect the prudential standing or prudential reputation of the fund.[1]

I say that there is ‘no reason in principle’ not to impose obligations of this kind on the board and the senior executives of a superannuation fund on the simple basis that if the BEAR is seen as a necessary step in the proper supervision and regulation of (at least some of the) banks, proper supervision and regulation of superannuation funds needs no less. And imposing these obligations should not increase the regulatory burden to any significant extent.

This last point should be explained.

A necessary step in implementing provisions of the kind under consideration is to identify who in the regulated entity has senior executive responsibility for certain functions. Those responsibilities should either already be identified or, at least be readily identifiable. If that is correct, and it should be, preparation of accountability statements and accountability maps, though a burden, should not be a large burden. Performance of the obligations would then entail no reporting or recording beyond what prudent administration would require anyway.

The advantage of this course of action is that the imposition of the obligations clarifies what is expected of the relevant senior executives. And it would provide additional and important standards against which the prudential regulator and the conduct regulator may examine the conduct of the affairs of the fund by both its board and by its senior management. (I say ‘additional’ standards because, of course, the trustees’ and directors’ covenants and obligations set standards against which the conduct of the trustee and its directors are to be judged.)

Recommendation 3.9 – Accountability regime

Over time, provisions modelled on the BEAR should be extended to all RSE licensees, as referred to in Recommendation 6.8.

[1]Cf Banking Act s 37CA(1).