The Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) play distinctly different roles in the regulation of the Australian financial market, with ASIC acting as conduct regulator and APRA as prudential regulator. Events unfolding as a result of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, highlighted a need for increased engagement and cooperation between the two agencies. In November 2019 ASIC and APRA entered into a memorandum of understanding setting out the parameters of cooperation between the two agencies in order to meet key objectives focussed on improving the effectiveness and efficiency of regulatory activities undertaken by each agency.
In the midst of COVID-19, ASIC and APRA postponed a number of their planned regulatory activities to allow RSE Licensees (Trustees) to focus on managing the fallout of the impact of COVID-19 on super funds. On the 1st of April ASIC and APRA issued a joint letter to all Trustees setting out their expectations on how the impacts of COVID-19 are managed by Trustees, noting that unusual circumstances required new business arrangements, amended priorities and adjusting short term investment strategies. However, this was highlighted on the backdrop of Trustee’s obligations to comply with the law and to continue to act in the best interests of members remaining constant.
ASIC and APRA set their views that in order for Trustees to protect the interests of members in a period where there is a great deal of uncertainty, there must be a focus on managing risks associated with liquidity, communications with members, insurance, scams and fraud.
Focussing on the issue of liquidity, in order to meet payment obligations to members such as those arising from the Government’s early access to superannuation scheme to improve the financial position of individuals who have suffered financially as a result of COVID-19, Trustees are expected to:
- Undertake regular and robust stress testing taking into account future cash flow changes, member behaviour and market conditions;
- Monitor areas that may give rise to liquidity concerns, such as member switching, or deterioration in the liquidity of member portfolios; and
- Assess the impact on liquidity of liabilities and contractual commitments.
Resulting from this scheme, Trustees are bracing themselves in anticipation of significant withdrawal requests and are seeking to address tensions between short term policy measures and continuing to meet the complex raft of legal obligations. This includes those obligations found under the Superannuation Industry Supervision Act (SiS Act), prudential standards (SPS210) and general trust law principles.
A primary challenge will inherently sit within how Trustees will balance and continue to maintain funds for the sole purpose of providing benefits upon a members retirement (amongst other core purposes set out in s.62 of the SiS Act). Whilst also allowing withdrawal requests that are likely to be contrary to a core purpose of the fund, and may potentially not be in the best interests of all members of the fund.
Continuing to meet liquidity obligations is likely to be a more challenging issue amplified in super funds with a younger membership that are concentrated in industries that have been hit harder by the COVID-19 pandemic, such as hospitality and retail. These funds are also more likely to have lower levels of liquid assets as a reflection of the member base being in early accumulation phase, which may cause a need to crystallise losses sustained in more volatile assets to bolster Trustees ability to meet liquidity obligations.
As proposed by ASIC and APRA, the practical actions for Trustees may be a requirement to amend short term investment strategies, together with more robust ongoing monitoring of asset bases to ensure sufficient liquid assets are held to service withdrawal requests, whilst also meeting prudential standards and legal obligations.
The letter issued by ASIC and APRA can be found here: https://www.apra.gov.au/a-joint-letter-from-apra-and-asic-on-impact-of-covid-19
For more information on this topic, please contact us and a member of our Financial Services team will be able to assist.
This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.