15.2 APRA

APRA is Australia’s prudential regulator, with responsibility for banking, insurance and superannuation.[1] Among other things, it regulates RSE licensees and has the general administration of important parts of the SIS Act.[2] Helen Rowell, Deputy Chairman of APRA, told that Commission that APRA is concerned with making sure that RSE licensees can meet their financial promises to their members ‘within a stable, efficient and competitive financial system’.[3] ASIC also regulates RSE licensees, but is mainly concerned with their relationship with consumers.[4]

15.2.1 Approach to regulation

Mrs Rowell said that APRA’s approach to regulation is ‘principles based’ and ‘risk based’.[5] This approach is consistent with the Federal Government’s Statement of Expectations, which sets out the Federal Government’s view on APRA’s roles and responsibilities.[6] Mrs Rowell said that ‘principles based’ regulation means that it focuses on outcomes. It allows regulated entities to choose how to comply with high level principles, rather than controlling them with detailed prescription.[7] ‘Risk based’ regulation means that APRA focuses on areas of high risk or impact. That means smaller or lower risk entities get less attention than larger or higher risk entities.[8] Mrs Rowell said that APRA’s focus is on making sure superannuation entities can meet their promises and obligations to members.[9]

As part of its ‘principlesbased’ regulation, APRA issues Prudential Standards. The Prudential Standards set principles-based objectives to support compliance with the law.[10] As Mrs Rowell put it, the Prudential Standards ‘elaborate on the high level requirements’ in the legislation.[11] RSE licensees must comply with these standards. There are five prudential standards specific to superannuation, and six prudential standards that cover superannuation and other APRA-regulated industries.[12] APRA also publishes non-binding guidance to help entities understand its requirements.[13]

APRA considers that the assessment of prudent conduct and risk management is ‘nuanced and intentionally directed to processes and outcomes’ rather than questions of compliance or breach.[14] As a prudential regulator, APRA tries to improve outcomes for members and standards of practice. It considers this approach to be quite different ‘from other regulators with the mandate to enforce compliance with legislation after a violation has occurred’.[15]

15.2.2 Supervision and enforcement

As part of its regulatory role, APRA supervises RSE licensees. Each RSE licensee has a nominated supervisor within APRA, who is expected to have in-depth knowledge of the entity.[16] Large entities may have a team of supervisors.[17] The supervisors do various kinds of supervision activities. These can include ‘prudential reviews’, which are detailed assessments of selected practices or procedures, as well as regular meetings with senior executives and other staff.[18]

APRA aims to be ‘forward looking and consultative’ in its supervision.[19] If it detects problems, it prefers to work with the entity to resolve those problems.[20] It is focused on pre-emptive steps, rather than reacting to problems and taking formal enforcement action.[21] Mrs Rowell’s evidence was that in APRA’s experience it has ‘generally not had to pursue or resort to litigation’, given other options such as increased supervision and enforcement action, and the availability of voluntary undertakings.[22]

However, APRA does have a range of enforcement options. From 2003 to 2008, APRA could disqualify a person from acting as a trustee or responsible officer of a superannuation fund. It disqualified 133 people during that that time.[23] In 2008 the law changed, and APRA now has to apply to the Federal Court for a disqualification order. When Mrs Rowell gave evidence, APRA had applied to disqualify one person, a director of Trio Capital.[24] That proceeding resolved with an EU. APRA has accepted 13 EUs from individuals instead of commencing proceedings to disqualify. Each of these individuals was associated with Trio.[25]

No corporate trustee has given APRA an EU regarding a superannuation matter in the last 10 years.[26] APRA has never commenced a civil proceeding for breach of the ‘sole purpose test’ in section 62 of the SIS Act. When Mrs Rowell gave evidence, APRA had never formed the view that an RSE licensee was not acting in the best interests of members. Other than those mentioned above, it had not started any other court proceeding about superannuation in the past 10 years.[27]

It is important to note, therefore, an event that happened after the Commission received Mrs Rowell’s evidence. As I have recorded in the section dealing with the IOOF Holdings Ltd group of companies, and as discussed further below, on 6 December 2018 APRA commenced proceedings in the Federal Court against five individuals, IOOF Investment Management Ltd (IIML) and Questor Financial Services Pty Ltd (Questor).[28] By those proceedings, APRA seeks seeks disqualification orders under section 126H of the SIS Act. It also seeks declarations that IIML, Questor and certain individuals had breached their duties as trustees and contravened various provisions of the Act.

APRA does not publicly identify entities who have engaged in particular conduct, except through EUs.[29] However, it does not think that public disclosure is needed to achieve general deterrence.[30] APRA believes it is more important to make sure RSE licensees are aware of issues and practices of concern to it.[31] Therefore it communicates with the industry generally, including through reports, letters and speeches, and with entities individually, through its regular supervision activities.[32] APRA considers that its approach to general deterrence is effective, and ‘regulated entities know that APRA will take action to enforce its standards if it must’.[33]

In dealing with individual cases, Mrs Rowell said that APRA prefers to take a ‘behind the scenes’ approach.[34] This is because APRA is concerned that negative publicity about a fund can harm members.[35] Where public concerns are raised, members or employers might seek to withdraw their funds, which in turn could create liquidity and asset valuation issues that could reduce the value members get from their superannuation investments. APRA considers this issue when deciding whether or not to take enforcement action.[36]

15.2.3 Fees for no service

Mrs Rowell said that APRA was aware of ASIC’s investigation into the fees for no service issue. [37] APRA had not decided whether to take any action against trustees for breach of the sole purpose test. It did not want to ‘intervene in ASIC’s process’, even though APRA, not ASIC, is responsible for addressing contraventions of the sole purpose test under the SIS Act.[38] Mrs Rowell said that APRA would consider ‘at an appropriate point’ whether to take further action.[39] APRA had not decided when that point would be. Mrs Rowell was not sure whether there was a limitation period for prosecuting a breach of the sole purpose test.[40]

Mrs Rowell did say that, as a general proposition, APRA would be concerned if an RSE licensee did not have appropriate monitoring systems in place, including monitoring whether advice had been provided in exchange for fees paid out of superannuation.[41] She said that APRA supervisors had been engaging with individual entities to understand those issues.[42]

Something more should be said about two particular cases: Colonial First State (CFS) and the transfer of members to MySuper, and IOOF.

15.2.4 CFS and the transition of members to MySuper products by retail fund trustees

From 1 January 2014, superannuation trustees had to pay new default contributions into a MySuper account. Before the change came into effect, APRA reminded RSE licensees of their obligations, and that failing to comply was an offence under section 29WA(3) of the SIS Act.[43] APRA’s expectation was that RSE licensees would have systems in place to comply with the provision from 1 January 2014.[44]

As I have explained earlier, in February 2014, CBA’s subsidiary Colonial First State Investments Limited (CFSIL) told APRA that it may have breached section 29WA. This was because some members of its FirstChoice Personal Super product had received contributions into a non-MySuper product. APRA told CFS that it needed to fix the problem ‘in the short term’, or else APRA might take enforcement action.[45] CFS’s breach notification to APRA said approximately 13,000 members were affected.[46]

As part of engaging with APRA, CFSIL provided its proposal to address the breaches. It told APRA that it had started calling affected members to get an investment direction. One call script it used said that CFS was ‘required to confirm the investment options into which you would like your superannuation contributions paid’.[47] That statement was not accurate. CFS was not ‘required’ to make any such confirmation. Rather, if CFS did not receive an investment direction it had to pay contributions into a MySuper account. In evidence, Ms Elkins of CBA said that the script was misleading,[48] although in submissions CFS did not agree.[49] Ms Elkins also said that the script was not balanced, because it was focused on keeping members in their investment option.[50] When asked about the script, Mrs Rowell said that it ‘did not provide complete information to the member’. When asked if that was acceptable, Mrs Rowell said that it was ‘not desirable’. She said it would be ‘preferable if there was complete disclosure to members’.[51]

After receiving the proposal, APRA asked for some further information but otherwise told CFS that it was acceptable.[52] CFSIL continued to receive contributions in breach of section 29WA for more than two years. Every few months, CFS would provide an update to APRA. In its update number 24, on 13 September 2017, CFSIL told APRA that it had resolved the final tranche of contributions it had received in breach of section 29WA.[53] APRA subsequently considered the matter closed.[54]

APRA did not take any formal enforcement action. This was because CFS had agreed to a process in consultation with APRA to address the issues, and APRA was satisfied that the process had been followed.[55]

More generally, Mrs Rowell agreed that it was typically in the interests of retail trustees to keep members in choice products rather than moving them into MySuper, due to the higher fees and commissions attached to choice products.[56] However, she said that did not necessarily mean that it was not in members’ best interests. Her evidence was that the payment of commission, for example, could not be ‘looked at in isolation’. More analysis was required to assess whether there was a member interest issue.[57] APRA had not done a general project to evaluate whether retail trustees had acted in their own financial interests at the expense of members’ interests when transferring ADAs to MySuper.[58] She was not aware of APRA giving that issue any internal consideration.

15.2.5 IOOF

Throughout 2015, APRA was communicating with IOOF about various issues. In September 2015, it told IOOF that ‘[g]iven the size and complexity of IOOF, the number and range of prudential matters raises concerns for APRA’.[59] In late 2015 and early 2016, it made a number of recommendations to IOOF including that IOOF restructure its APRAregulated entities to reduce the number of common directors,[60] and consider establishing an ‘Office of the Trustee’ to improve oversight.[61] IOOF told APRA it would review its governance frameworks ‘as a priority’.[62]

Stephen Glenfield, General Manager, Specialised Institutions Division of APRA, told that Commission that despite this, APRA’s supervision team continued to have concerns. In March, after a meeting with the board, an internal file note again commented that IOOF appeared to favour its shareholders above its members. The note also said that IOOF often took a legalistic approach to ‘shield IOOF from obligations which may be in members’ best interests’.[63] In July, IOOF told APRA it would appoint two new independent directors to the boards of its APRA regulated entities. APRA’s supervision team told Mr Glenfield this had been done to ‘appease’ APRA, and that IOOF ‘did not intend to engage in genuine and critical consideration’ about its governance.[64]

In December 2016, APRA wrote to Questor about the CMT over-distribution discussed above. It said that Questor’s use of the general reserve to compensate members was inappropriate, and that Questor had not effectively identified and managed conflicts of interest and duty.[65] APRA said that Questor should immediately replenish the general reserve, and that a failure to do so would ‘escalate APRA’s concerns’.[66] IOOF replied in April 2017. It said that Questor’s behaviour had been appropriate, and that the ‘so-called pub test, which in these circumstances is a proxy for members’ best interests’ had been passed.[67] In evidence, Mr Glenfield agreed that the ‘pub test’ was not a way of explaining the best interests duty.[68]

Despite this, APRA decided not to take any further action. This was partly because APRA’s internal legal advice said the likelihood of success in a proceeding was ‘less than clear cut’. It was also partly because APRA could not direct IOOF to replenish the reserve.[69] Mr Glenfield thought Questor’s behaviour was a symptom of IOOF’s structural issues, and the most important thing was to get the structure right.[70] When deciding whether or not to start a court proceeding, Mr Glenfield thought about the effect of any action on IOOF. He did not think about issues of general deterrence across the industry.[71]

In June 2017, the supervision team gave Mr Glenfield another memorandum. It said that the IOOF Board ‘fundamentally misunderstood’ the duty to prioritise the interests of superannuation members.[72] It also said that IOOF directors had difficulty identifying conflicts with related parties and were ‘resistant to detailed documentation’ about conflict management.[73] The supervision team was concerned that the IOOF Board might not be fit and proper to be superannuation trustees. They recommended that APRA consider this issue further.[74]

After meeting with the board, APRA sent IOOF another letter. That letter said that IOOF’s understanding of its obligations under the SIS Act was wrong. It said APRA ‘required’ IOOF to comply with those obligations.[75] It took no other formal action.

In October 2017, IOOF announced that it was buying some of ANZ’s business, including its superannuation funds.[76] In March 2018, APRA wrote to IOOF. It had ‘continued concerns’ about conflicts.[77] It thought IOOF’s management of conflicts was ‘inadequate’. It also thought the boards were inherently conflicted because of IOOF’s structure.[78] On 19 June 2018, APRA told IOOF that four ‘minimum changes’ were necessary. Those were to:

  • split the RSE licensee and responsible entity (RE) functions;
  • appoint an independent chair to lead a majority independent board;
  • establish a dedicated support function; and
  • consolidate the RSE licensees and REs after the ANZ acquisition.[79]

On 1 August 2018, the IOOF Holdings Board decided to accept three of the four changes. It would appoint an independent chair to the IIML Board and replace Mr Kelaher with an independent director.[80] It would also investigate separating the RSE licensee and the RE, potentially as a result of the acquisition of the ANZ wealth entities by IOOF.[81] However, at that time, IOOF did not agree to establish a dedicated support function. IOOF formally told APRA of its decision on 14 August 2018.[82]

In evidence, Mr Glenfield agreed that Mr Kelaher, the Managing Director of IOOF, did not think there were legitimate concerns about IOOF’s governance. Mr Glenfield said APRA’s intervention with IOOF was an ‘ongoing matter’. He said that a successful intervention from his perspective would involve splitting the RSE licensee and RE functions, with a fully independent board of the RSE licensee acting in the best interests of the members.[83]

On 4 September 2018, after the Commission’s hearings into superannuation had concluded, APRA wrote to IOOF. Among other things, it asked the IIML Board to reconsider the decision not to replenish the CMT general reserve. On 27 September 2018, the IIML Board resolved to replenish the IPS Fund’s general reserve by the same amount that was used to compensate members of the CMT.[84]

On 20 September 2018, IOOF agreed to implement a ‘managed action plan’ set out by APRA, ‘subject to some comments on timing and approach’.[85] Among other things, that plan included a number of further governance changes and the establishment of a dedicated support function.[86]

As I have recorded in the section dealing with IOOF, on 6 December 2018 APRA commenced proceedings in the Federal Court against IIML, Questor, Mr Kelaher, and four other individuals holding senior positions at IOOF.[87] It also sent IOOF a ‘show cause’ letter setting out its intention to direct IIML to comply with its RSE licence, and to impose additional conditions on the licences of IIML and two other IOOF subsidiaries.[88]

As I have also explained in the section dealing with IOOF, I make no comment or findings about the matters referred to in the documents filed by APRA. For that same reason, I make no comment on APRA’s response to those matters over a period of more than three years.

In general, I would observe that the conduct that a regulator tolerates crystallises the meaning and effect of the standards it sets.


[1]Transcript, Helen Rowell, 17 August 2018, 5163.

[2]SIS Act s 6.

[3]Exhibit 5.298, Witness statement of Helen Rowell, 14 August 2018, 5 [46].

[4]Exhibit 5.318, Witness statement of Peter Kell, 13 August 2018, 2 [4].

[5]Exhibit 5.298, Witness statement of Helen Rowell, 14 August 2018, 2 [23].

[6]Exhibit 5.443, Undated, Statement of Expectations – Australian Prudential Regulation Authority.

[7]Exhibit 5.298, Witness statement of Helen Rowell, 14 August 2018, 2–3 [24].

[8]Exhibit 5.298, Witness statement of Helen Rowell, 14 August 2018, 3 [25].

[9]Transcript, Helen Rowell, 17 August 2018, 5174.

[10]Transcript, Helen Rowell, 17 August 2018, 5163.

[11]Transcript, Helen Rowell, 17 August 2018, 5163.

[12]Exhibit 5.298, Witness statement of Helen Rowell, 14 August 2018, 7–8 [61][62].

[13]Exhibit 5.298, Witness statement of Helen Rowell, 14 August 2018, 7 [59].

[14]Exhibit 5.298, Witness statement of Helen Rowell, 14 August 2018, 3 [32].

[15]Exhibit 5.298, Witness statement of Helen Rowell, 14 August 2018, 3 [27].

[16]Exhibit 5.298, Witness statement of Helen Rowell, 14 August 2018, 10 [78].

[17]Exhibit 5.298, Witness statement of Helen Rowell, 14 August 2018, 10 [78].

[18]Exhibit 5.298, Witness statement of Helen Rowell, 14 August 2018, 14 [101].

[19]Exhibit 5.298, Witness statement of Helen Rowell, 14 August 2018, 6 [53].

[20]Exhibit 5.298, Witness statement of Helen Rowell, 14 August 2018, 378 [249]–[250].

[21]Exhibit 5.298, Witness statement of Helen Rowell, 14 August 2018, 35 [230].

[22]Exhibit 5.298, Witness statement of Helen Rowell, 14 August 2018, 4 [39].

[23]Exhibit 5.298, Witness statement of Helen Rowell, 14 August 2018, 44 [288].

[24]Transcript, Helen Rowell, 17 August 2018, 5167.

[25]Exhibit 5.298, Witness statement of Helen Rowell, 14 August 2018, 45 [297].

[26]Transcript, Helen Rowell, 17 August 2018, 5178.

[27]Transcript, Helen Rowell, 17 August 2018, 5169.

[28]APRA v Christopher Francis Kelaher & Ors, NSD 2274/2018.

[29]Transcript, Helen Rowell, 17 August 2018, 5178.

[30]Transcript, Helen Rowell, 17 August 2018, 5178.

[31]Transcript, Helen Rowell, 17 August 2018, 5178.

[32]Exhibit 5.298, Witness statement of Helen Rowell, 14 August 2018, 33–4 [220]; Transcript, Helen Rowell, 17 August 2018, 5178.

[33]Exhibit 5.298, Witness statement of Helen Rowell, 14 August 2018, 34 [221].

[34]Transcript, Helen Rowell, 17 August 2018, 5179.

[35]Transcript, Helen Rowell, 17 August 2018, 5179.

[36]Transcript, Helen Rowell, 17 August 2018, 5179.

[37]Transcript, Helen Rowell, 17 August 2018, 5180.

[38]Transcript, Helen Rowell, 17 August 2018, 5181.

[39]Transcript, Helen Rowell, 17 August 2018, 51812.

[40]Transcript, Helen Rowell, 17 August 2018, 5181.

[41]Transcript, Helen Rowell, 17 August 2018, 5182.

[42]Transcript, Helen Rowell, 17 August 2018, 5183.

[43]Transcript, Helen Rowell, 17 August 2018, 5186.

[44]Transcript, Helen Rowell, 17 August 2018, 5186.

[45]Exhibit 5.299, 14 March 2014, Letter APRA to CFSIL.

[46]Exhibit 5.184, 19 March 2014, Breach Notice Colonial First State Investment to APRA.

[47]Exhibit 5.187, 26 March 2014, Email CBA to APRA and Attached Call Script.

[48]Transcript, Linda Elkins, 14 August 2018, 4888.

[49]CBA, Module 5 Case Study Submission, 22 [58].

[50]Transcript, Helen Rowell, 17 August 2018, 4888.

[51]Transcript, Helen Rowell, 17 August 2018, 5196.

[52]Exhibit 5.190, 29 April 2014, Letter, APRA to Elkins.

[53]Exhibit 5.195, 21 September 2017, Email, APRA to Colonial First State Concerning Section 29WA Update Number 24.

[54]Exhibit 5.195, 21 September 2017, Email, APRA to Colonial First State Concerning Section 29WA Update Number 24.

[55]Transcript, Helen Rowell, 17 August 2018, 5188–90; APRA, Module 5 Case Study Submission,14 [62].

[56]Transcript, Helen Rowell, 17 August 2018, 5193–4.

[57]Transcript, Helen Rowell, 17 August 2018, 5194–5.

[58]Transcript, Helen Rowell, 17 August 2018, 5195.

[59]Exhibit 5.104, 15 September 2015, Letter APRA to IOOF Holdings, 4.

[60]Exhibit 5.106, 21 December 2015, Letter APRA to IOOF Holdings, 5.

[61]Exhibit 5.302, Witness statement of Stephen Glenfield, 14 August 2018, Exhibit SG-1-26 [APRA.0002.0004.1315].

[62]Exhibit 5.367, 21 July 2016, Memorandum, IOOF Group Status of Governance Review.

[63]Transcript, Stephen Glenfield, 17 August 2018, 5206; Exhibit 5.303, 24 March 2016, File Note of Meeting between APRA and IOOF.

[64]Exhibit 5.376, 21 July 2016, APRA Memorandum Regarding IOOF Group, 2.

[65]Exhibit 5.116, Witness statement of Christopher Kelaher, 26 July 2018, Exhibit CK-2 (Tab 18) [IFL.0006.0003.4087].

[66]Exhibit 5.116, Witness statement of Christopher Kelaher, 26 July 2018, Exhibit CK-2 (Tab 19) [IFL.0006.0003.4093].

[67]Exhibit 5.116, Witness statement of Christopher Kelaher, 26 July 2018, Exhibit CK-2 (Tab 19) [IFL.0006.0003.4093].

[68]Transcript, Stephen Glenfield, 17 August 2018, 5210.

[69]Exhibit 5.302, Witness statement of Stephen Glenfield, 14 August 2018, 24–5 [109].

[70]Transcript, Stephen Glenfield, 17 August 2018, 5220.

[71]Transcript, Stephen Glenfield, 17 August 2018, 5220.

[72]Exhibit 5.307, 13 August 2018, Memorandum to Mr Glenfield of 14 June 2017 Concerning IOOF Prudential Review.

[73]Exhibit 5.307, 13 August 2018, Memorandum to Mr Glenfield of 14 June 2017 Concerning IOOF Prudential Review.

[74]Exhibit 5.307, 13 August 2018, Memorandum to Mr Glenfield of 14 June 2017 Concerning IOOF Prudential Review.

[75]Exhibit 5.124, 15 August 2017, Letter APRA to IOOF.

[76]Transcript, Stephen Glenfield, 17 August 2018, 5218.

[77]Exhibit 5.302, Witness statement of Stephen Glenfield, 14 August 2018, Exhibit SG-1-23 [APRA.0002.0007.2874].

[78]Exhibit 5.302, Witness statement of Stephen Glenfield, 14 August 2018, Exhibit SG-1-23 [APRA.0002.0007.2874].

[79]Transcript, Christopher Kelaher, 10 August 2018, 4604; Exhibit 5.302, Witness statement of Stephen Glenfield, 14 August 2018, Exhibit SG-1-16 [APRA.0002.0007.3219].

[80]Transcript, Christopher Kelaher, 10 August 2018, 4606.

[81]Transcript, Christopher Kelaher, 10 August 2018, 4606.

[82]Exhibit 5.308, 14 August 2018, Letter IOOF to APRA.

[83]Transcript, Stephen Glenfield, 17 August 2018, 5220.

[84]Exhibit 5.440, 30 October 2018, EF 27.9.18 signed.

[85] Letter APRA to King & Wood Mallesons, 6 December 2018, 7 <www.apra.gov.au/sites/default/files/show_cause_notice.pdf>.

[86] Letter APRA to King & Wood Mallesons, 6 December 2018, 67 <www.apra.gov.au/sites/default/files/show_cause_notice.pdf>.

[87]APRA v Christopher Francis Kelaher & Ors, NSD 2274/2018.

[88] Letter APRA to King & Wood Mallesons, 6 December 2018, 1 <www.apra.gov.au/sites/default/files/show_cause_notice.pdf>.

71 thoughts on “15.2 APRA”

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