APRA's new powers in superannuation - A worthy idea, but checks and balances required

By Geoff Sanders
Banking Financial Services Funds Risk & Compliance Superannuation

Written by Partner Geoff Sanders and Lawyer Lisette Stevens

As highlighted in our article from July (available here), APRA is in line to get significantly increased powers of direction in respect of RSE licensees and their 'controlled entities' as part of the package of superannuation reforms announced in the Treasury Legislation Amendment (Improving Accountability and Member Outcomes in Superannuation) Bill 2017. While APRA's new powers have been billed as merely an extension of its existing powers in order to align them with the equivalent powers APRA has for the banking and insurance industries, if used, the potential application of the new powers could be game-changing for the superannuation industry.

APRA's expanded powers

The proposed new directions powers to be handed to APRA under Part 16A of the Superannuation Industry (Supervision) Act 1993 (Cth) are striking both in the breadth of the directions able to be given as well as the circumstances in which APRA can use them.

Relevantly, APRA will have the power, both in relation to RSE licensees themselves and in relation to any 'controlled entity' (ie, a corporate subsidiary) of a licensee, to direct the licensee or subsidiary to do an incredibly broad range of things, including:

  • to comply with SIS and associated regulation (although this power, along with some of the others, is not altogether new);
  • not to accept contributions from any member (new or existing – now much broader than the current power to prevent a licensee operating an employer-sponsored fund from accepting contributions where the equal representation rules are not met);
  • not to borrow (given the borrowing restriction already contained in SIS, we query whether this is perhaps an attempt to give APRA power to deal with the possibility of investment holding vehicles of super funds borrowing for investment purposes if they think that practice poses a prudential risk at any stage);
  • not to accept any new liability or discharge any existing liability to any person;
  • to remove a responsible officer, auditor or actuary from their role;
  • to make changes to the licensee's 'systems, business practices or operations'; and
  • perhaps most starkly, 'to do, or refrain from doing, anything else in relation to the affairs' of the licensee, the fund(s) for which that licensee is the trustee or any subsidiary.

Thankfully, given the impact that the use of the new power may have on members and counterparties of super funds, the exposure draft of the Bill does usefully contain some 'safe-haven' provisions for trustees and subsidiaries which (perhaps with some minor tweaking through the consultation process) should provide trustees and subsidiaries with protection from third party claims arising from the implementation of an APRA direction (so long as the trustee acts in good faith and without negligence). Trustees will also be given an express power to take steps to implement a direction even in the face of inconsistent constitutional or contractual obligations that would otherwise have prevented them from doing so.

When can the expanded powers be used?

It doesn't take a particularly active imagination to see just how far reaching and potentially game-changing use of the new powers could be – they could very easily be used by APRA to do anything from dictating a fund's investment activities (eg, to refrain from investing in particular asset classes or particular investments or to divest a particular asset); to requiring trustees to amend disclosure documentation (although we would query if that is really the intention given disclosure is within ASIC's, not APRA's, purview); to moving on staff and directors who are 'out of favour' with the regulator; to effectively shutting down a fund's entire operations (no fund could possibly last long in the marketplace without an ability to accept even SG contributions or to satisfy liabilities that are owed to third parties).

Indeed, given the scope of the catch-all 'to do, or refrain from doing, anything else' limb, perhaps the only real limit on the power is APRA's imagination.

Accordingly, if we accept that the scope of the powers is unlikely to be reduced following public consultation on the exposure draft of the Bill (and, indeed, we can see the benefit in APRA having exceptionally broad powers of direction in cases of emergency or where members' retirement savings are in real danger), the real focus for funds should be on the circumstances in which APRA can (or, more accurately, will likely) use the powers in practice.

Unfortunately, the Bill itself won't impose any sensible legal limitation on APRA's use of its new powers – there are hurdles for it to jump over before using the powers, but they are not very high to say the least. All that is required (among other possible justifications) is that APRA 'has reason to believe' that the direction is 'necessary in the best interests' of members or, perhaps with even less difficulty, that the fund is conducting its affairs in an 'improper or financially unsound way'. Indeed, APRA's concerns needn't necessarily rest with just the relevant licensee – a further trigger applies where APRA considers that the licensee is conducting its affairs in a way that may 'cause or promote instability in the Australian financial system'.

Can lessons be learned from the checks and balances imposed on the use of similar powers in other industries?

In our view, given the potentially damaging implications (both to reputation and practically) for trustees of the use of the powers available to it, APRA would ideally have a higher bar to jump over before being able to exercise its powers.

For example, the Law Council of Australia in their submission in response to the draft Bill have sensibly argued for the introduction of at least some form of a procedural fairness requirement – for example, giving a trustee potentially affected by a direction an opportunity to be heard prior to the direction taking effect and/or for APRA to be satisfied that the trustee would not act on its own volition without the direction being issued.

Alternatively (or ideally in addition), lessons might also be learned from other similar powers granted to Australian regulators in other contexts.

For example, the Explanatory Memorandum to the draft Bill notes that the power merely 'harmonises the directions powers across the banking, insurance and superannuation industries, by enabling APRA to intervene at an early stage to address prudential concerns in a manner that ensures the required actions are in the best interests of members.' And, indeed, the language of the draft Bill does align almost word for word with section 11CA of the Banking Act 1959 (Cth) and section 104 of the Insurance Act 1973 (Cth).

In the context of those powers, APRA has published its own guidance on its approach to exercising its powers, stating that '…it is not our intention to become involved in the detailed day-to-day management of ADIs' and that the power is to be used 'rarely' and as a 'last resort' – that is, the power is reserved for solving 'significant problems' where an institution is 'unresponsive to a request'. With or without further legislative hurdles being introduced through the consultation process, we would hope to see similarly reassuring guidance from APRA in the superannuation space.

It is also worth contrasting the proposed APRA powers with the (arguably) parallel product intervention powers being proposed for ASIC (see our article on those reforms here). The Treasury Consultation Paper on those powers, released in December 2016, proposed that ASIC be given powers to intervene in relation to all financial products available to retail clients and consumer credit products, permitting it to intervene in either a market wide manner or by targeting an individual product or issuer.

However, in contrast to the new superannuation powers, the Treasury proposal was that ASIC would have the power to intervene only where it identified 'a risk of significant consumer detriment' and, further, prior to invoking the power, ASIC would be required to consult with affected parties and consider the use of alternative powers. Interestingly, the ASIC intervention power is proposed to apply for up to a maximum of 18 months, with the idea being that any permanent regulatory change should instead come from Parliament – no such limit applies to the proposed APRA powers.

Ultimately, while it must be acknowledged that the checks and balances cannot be so overwhelming that they end up being counterproductive (and, let's face it, regulators in general already show a reluctance to use these sorts of powers except in exceptional cases), in our view, we see no reason why some sensible further checks and balances of a similar nature should not be applied here.