PROPOSED APRA PRUDENTIAL STANDARDS:
HOW WILL THEY AFFECT INVESTMENT
MANAGERS?
What you need to know
• The Australian Prudential Regulation Authority (APRA), the prudential regulator of
superannuation funds, insurance bodies and banks, is proposing to release new
prudential standards for trustees of superannuation funds.
• The new prudential standards will have an impact on investment managers that provide
investment management services to superannuation trustees, as existing investment
management agreements relating to management of superannuation fund assets are
likely to need to be amended to take into account the standards.
What are the APRA prudential standards?
The Australian Prudential Regulation Authority, the prudential regulator of superannuation
funds, insurance bodies and banks, has proposed mandatory prudential standards for
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Registrable Superannuation Entities (RSEs) to be effective from 1 July 2013 (Prudential
Standards).
The Prudential Standards that are the most relevant for investment managers that provide
services to RSEs are:
• SPS 231: Outsourcing; and
• SPS 530: Investment Governance.
Other Prudential Standards that may affect the services provided by investment managers
to RSE’s are SPS 232 Business Continuity Management, SPS 510 Governance and SPS
520 Fit and Proper.
Although the onus is on the RSE licensee (not the investment manager) to ensure
compliance with the Prudential Standards, investment managers should be mindful of them
when entering into contracts with RSE licensees. Investment managers should also
anticipate that any current clients that are RSE licensees will be asking for amendments to
their existing contractual relationship.
How will the prudential standards affect investment managers?
The prudential standards are likely to affect existing and new Investment Management
Agreements (IMAs) since IMAs will be required to include some matters not previously
required by the existing operating standards under the Superannuation Industry
(Supervision) Regulations (SIS Regulations). RSE licensees may also be subject to more
onerous requirements, such as the obligation to monitor outsourced service providers, and
these requirements will most likely have an impact on investment managers. Non-Australian
investment managers will also be affected by an RSE licensee’s obligation to consult with
APRA before appointing a foreign manager.
The Prudential Standards discussed in this note will generally take effect from 1 July 2013,
except certain of the new outsourcing (SPS 231) and business continuity management
(SPS 232) requirements. In relation to outsourcing, the effect of this is that most of the key
provisions of SPS 231 that affect the form and content requirements for IMAs are expected
to become effective in late 2012 or early 2013 (see paragraph C below), although the
precise date for this is still unknown.
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The RSE is the superannuation entity, i.e. the trust. An RSE licensee is the trustee.
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Proposed APRA Prudential Standards: how
will they affect investment managers?
Authors: Austin Bell and Andrew Moore, October 2012
The key potential effects of the proposed Prudential Standards that are likely to be relevant
to an investment manager are summarised below:
Outsourcing - SPS 231
SPS 231 relates to the process for entering into outsourcing agreements (including IMAs),
and the form and content of those agreements.
Among other things, from 1 July 2013 an RSE licensee must (SPS 231, para 18) be able to
demonstrate to APRA that, in assessing the options for outsourcing a material business
activity (which includes investment management), the RSE licensee has:
“(b) undertaken a tender or other selection process for the service provider;
(c) undertaken a due diligence review of the chosen service provider,
including the ability of the service provider to conduct the business activity
on an ongoing basis; …
(g) considered all the matters outlined in paragraph 20 [see below], that
must, at a minimum, be included in the outsourcing agreement itself;
(h) established procedures for monitoring
outsourcing agreement on a continuing basis;
performance
under
the
(i) addressed the renewal process for outsourcing agreements and how the
renewal will be conducted;
(j) developed contingency plans that would enable the outsourced business
activity to be provided by an alternative service provider or brought in-house
if required; and
(k) determined that the outsourcing agreement is in the best interests of
beneficiaries.”
SPS 231 also introduces prescriptive requirements in relation to the form and content of
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outsourcing agreements, such as IMAs, entered into by RSE licensees. These are set out
at paragraphs 19 to 24 of SPS 231. While there is some overlap with the existing SIS
Regulation 4.16, the requirements of SPS 231 extend beyond this regulation in the following
areas:
“19. All outsourcing arrangements must be contained in a documented
legally binding agreement that is enforceable in Australia and is subject to
Australian law. The agreement must be signed by all parties to it before the
outsourcing arrangement commences.
20. At a minimum, the agreement must address the following matters:
(a) the scope of the arrangement and services to be supplied;…
(c) review provisions;…
(e) service levels and performance requirements;
(f) the form in which the data is to be kept and clear provisions identifying
ownership and control of the data;
(g) reporting requirements, including content and frequency of reporting;…
(o) insurance; and
(p) to the extent applicable, offshoring arrangements (including through
subcontracting).
2
There are some exceptions to the requirements to comply with the form and content requirements that apply
where an outsourcing agreement is entered into as a result of “unexpected extreme events”: in para 22 of SPS 231.
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Proposed APRA Prudential Standards: how
will they affect investment managers?
Authors: Austin Bell and Andrew Moore, October 2012
21. An RSE licensee that outsources a material business activity must
ensure that its outsourcing agreement includes an indemnity to the effect
that any subcontracting by a service provider of the outsourced function will
be the responsibility of the service provider, including liability for any failure
on the part of the sub-contractor…
24. An RSE licensee must take all reasonable steps to ensure that a service
provider will not disclose or advertise that APRA has conducted an on-site
visit, except as necessary to coordinate with other entities regulated by
APRA that are existing clients of the service provider.”
In addition, under SPS 231, from 1 July 2013:
• RSE licensees will need to consult with APRA before they appoint an offshore
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investment manager. For such managers, the potential delay will need to be factored in
to the timing for finalisation of IMAs (SPS 231 para 27).
• The RSE licensee has obligations in relation to monitoring outsourced provision of
services, including ensuring regular contact and monitoring, that may have an impact on
investment managers (SPS 231 para 29).
• RSE licensees have certain obligations in relation to review of outsourcing arrangements
by an RSE licensee’s internal and (at APRA’s request) external auditor. Although these
are obligations of the RSE licensee itself, it is possible that they may affect an investment
manager to the extent that the investment manager is required to co-operate with the
auditor (SPS 231 para 32).
SPS 530 – investment governance
RSE licensees will be required to implement investment governance arrangements as set
out in SPS 530. Given that these requirements relate specifically to investment
management, it seems likely that RSE licensees may want to include them in IMAs as
obligations binding on the investment manager; this would be a significant means of
ensuring that RSE investments are managed in accordance with SPS 530. As with SPS
231, this may, in some cases, require renegotiation of existing IMAs and review of draft new
IMAs to ensure that the relevant requirements are included.
The SPS 530 requirements that may be addressed in an IMA include:
• investment objectives for a given investment option, including return and risk objectives
(SPS 530 paragraph 14);
• the investment strategy for an investment option (SPS 530 paragraph 15), including for
example (when there are multiple assets or asset classes) asset allocation targets and
ranges, and a rebalancing policy to monitor and correct deviations outside the asset
allocation ranges;
• processes and criteria for selecting each investment to give effect to the investment
strategy to ensure that effective due diligence that is commensurate with the nature and
characteristics of the investment is undertaken prior to the selection of an investment for
an investment option (SPS 530 paragraph 20);
• appropriate risk and return measures, approved by the Board, to monitor the
performance of investments on an ongoing basis and regularly report the performance of
investments to the Board and senior management (SPS 530 paragraph 22);
• a policy for review of the investment strategy (SPS 530 paragraph 27); and
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For the purposes of SPS 231, ‘offshoring’ means the outsourcing by an RSE licensee of a material business
activity to a service provider where the outsourced activity is to be conducted outside Australia. Offshoring includes
arrangements where the service provider is incorporated in Australia, but the physical location of the outsourced
activity is outside Australia. Offshoring does not include arrangements where the physical location of an outsourced
activity is within Australia but the service provider is not incorporated in Australia.
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Proposed APRA Prudential Standards: how
will they affect investment managers?
Authors: Austin Bell and Andrew Moore, October 2012
• a liquidity management plan (SPS 530 paragraph 29).
SPS 232 - business continuity management
Under SPS 232, RSE licensees must ensure, among other things, that outsourced service
providers (which includes investment managers) have in place certain business continuity
management procedures. Although under SIS Regulation 4.16 outsourcing arrangements
were required to provide for business continuity planning, the SPS 232 requirements appear
more extensive, and RSE licensees will most likely be reviewing their existing IMAs to
ensure that they include warranties from investment managers regarding compliance with
these requirements.
SPS 510 – governance
Under SPS 510 RSE licensees are not permitted (from 1 July 2013) to impose constraints
on outsourced service providers’ communications with APRA or with others who have
statutory responsibilities in relation to the RSE licensee. RSE licensees will most likely be
reviewing their IMAs to ensure that the IMA confidentiality and other provisions conform to
these requirements.
Also in relation to governance, it should be noted that the Financial Services Council (FSC)
has published a proposed superannuation corporate governance policy. This goes beyond
the requirements of SPS 510; among other things it requires an RSE licensee to maintain
an environmental, social and governance policy in relation to investee companies, and to
disclose a proxy voting policy and publish its Australian proxy voting record. Some RSE
licensees may seek to include in their IMA’s material relating to the licensee’s obligations
under this policy.
The final version of the policy is to be released in about December 2012, and will become
effective from 1 July 2013. Compliance will be mandatory for RSE licensees that are full
FSC members.
SPS 520 – fit and proper
It is still unclear whether investment managers or their employees or officers are intended to
fall within the ambit of SPS 520, which requires RSE licensees to have a Fit and Proper
policy in respect of certain responsible persons. If SPS 520 does extend to all or some of
an investment manager, its employees or its officers, from 1 July 2013 the RSE licensee
would need to satisfy themselves that these persons are fit and proper for the purposes of
the RSE licensee’s Fit and Proper Policy. RSE licensees may seek to satisfy this obligation
by having their IMAs refer specifically to these SPS 520 requirements.
When will the prudential standards start to apply?
Outsourcing – SPS 231
The key date in relation to the provisions dealing with the form and content of IMAs4 is the
date of registration of the Prudential Standards on the Federal Register of Legislative
Instruments. Based on the information released by APRA, this date (the Registration Date)
seems likely to be in late 2012 or early 2013.
An RSE licensee must ensure that, on and from the Registration Date, the form and content
requirements are met in relation to all outsourcing arrangements that it enters into (which
includes IMAs).
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Set out in paragraphs 19 to 24 of SPS 231.
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Proposed APRA Prudential Standards: how
will they affect investment managers?
Authors: Austin Bell and Andrew Moore, October 2012
The RSE licensee must also assess existing outsourcing arrangements (those entered into
before the Registration Date) and identify whether or not they comply with the SPS 231
requirements. To the extent that existing IMAs do not currently comply with SPS 231, these
IMAs will need to be conformed to SPS 231; an RSE licensee will need to make reasonable
efforts to renegotiate existing arrangements where these do not currently comply with SPS
231.
Where, as a result of the reasonable efforts made by the RSE licensee, the RSE licensee
determines that renegotiating the terms of the arrangement would be contrary to the best
interests of beneficiaries, the RSE licensee must demonstrate to APRA why it considers the
existing arrangement should continue.
The RSE licensee must also report to APRA the anticipated end date for all existing
outsourcing arrangements. Given that most IMAs will be open-ended and not for a specific
term, each of them will most likely need to be amended to specify a particular end date.
The requirements of SPS 231 dealing with matters other than the form and content of
outsourcing arrangements, including consultation with APRA on the appointment of foreign
managers, monitoring, and audit, commence on 1 July 2013.
Business Continuity Management – SPS 232
New business continuity arrangements must comply with SPS 232 from the Registration
Date. The RSE licensee must also assess existing business continuity arrangements as at
the Effective Date; in respect of these existing arrangements, similar provisions regarding
reasonable efforts to renegotiate the arrangements apply as for SPS 231.
In other respects, the effective date of SPS 232 is 1 July 2013.
Other Prudential Standards
The other Prudential Standards discussed above commence on 1 July 2013.
Note that APRA also proposes to release prudential practice guides to support the
Prudential Standards, towards the end of 2012 or in early 2013, and these are likely to
provide further detail on APRA’s expectations in relation to the Prudential Standards.
For further information please contact:
Austin Bell
Partner
Andrew Moore
Senior Associate
T +61 2 8247 9620
T +61 8274 9525
austin.bell@jws.com.au
andrew.moore@jws.com.au
Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor
is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any
professional advice depends upon the particular circumstances of each case, neither the firm nor any individual
author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of
any articles. Before acting on the basis of any material contained in this publication, we recommend that you
consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation
(Australia-wide except in Tasmania).
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