There are plenty of big changes happening in the regulatory landscape in Australia, with updates issued by Australia’s prudential regulator, APRA, coming into effect from January next year. To help you understand the ins and outs, we’ve unpacked it in our latest AlphaChat.
If you liked this episode, there are plenty more Alpha Chats to watch on topics like Non-Fungible Tokens (NFT), Climate Change Financial Risk and The Russia-Ukraine Conflict Impact On Superannuation.
Helen Marks:
Hello everyone and welcome to this Alpha Chat. I’m Helen Marks, Chief Customer Officer of AlphaCert, and today I’m joined by Stephen Huppert, Independent Consultant and Advisor. Today we’re going to be talking about investment governance with a focus on the updated prudential standard issued by Australia’s Prudential Regulator, APRA, that takes effect on the 1st of January 2023. Stephen, what do we mean by investment governance and why is this important?
Stephen Huppert:
Thanks, Helen. Good to be with you. Investment governance refers to the effective use of resources by a fiduciary for the managing of the investments on behalf of the beneficiaries. And that covers the people, the policies, the processes and the systems, everything that the fiduciary needs to be able to make appropriate decisions about those investments. And the key here is for the benefit of the beneficiaries. So in the case of a superannuation fund, it governs the relationship between the trustee and the member, and making sure that the investments are done in the best interest of the members.
Helen Marks:
And so what are the regulatory obligations in Australia at the moment?
Stephen Huppert:
So all superannuation funds must comply with a whole range of prudential standards that are issued by APRA. And one of those, SPS 530, covers investment governance, and that has requirements around all the trustees having investment governance framework that looks at the selection, management and monitoring of investments. And really, that investment governance framework becomes the foundation for how superannuation funds structure and operate their investment activities. And again, coming back to everything must be done in terms of the member’s best interest.
Helen Marks:
Yeah. Not too dissimilar from what we have in New Zealand for the SIPO, which is the Statement of Investment Policy and Objectives under the FMC Act. So that really looks into making sure there are adequate controls in place for adequate stress testing and more specifically, ensuring that there is no exposure to unnecessary risks and that the strategy behind investments is really to the benefit of the investors.
Stephen Huppert:
Yeah. And some of those details, they are very similar to what we see in Australia. And it is about risk and how does the trustee manage those risks on behalf of their members? And that means having things like a specific and measurable investment objective, making sure that there’s appropriate due diligence done on all the investments, monitoring the performance and assessing the performance. And a couple of really important things that are being highlighted in the changes around stress testing, liquidity management and valuations.
Helen Marks:
So tell me about the changes that are happening in Australia.
Stephen Huppert:
Yeah. So the superannuation industry in Australia is growing dramatically, and we’ve now got a number of funds, 200, 250 billion plus. And the range of assets that are investing in is also growing. So offshore infrastructure, private equity. And so what APRA has done is reviewed the current processes and determined that it needs to tighten up on a few things. One of those is the valuation practices. And that’s something that’s been highlighted very recently, especially with the unlisted assets that many super funds are now holding. Stress testing is another important aspect. And that stress testing now has to be done at the member in the investment option level, not just at the fund as a whole. And liquidity management practices and the response to COVID, where members could access a certain amount of their funds as an emergency to support their financial requirements meant things like liquidity was highlighted. So funds need to have much tighter liquidity management practices.
Helen Marks:
Oh, that’s really interesting. And so then, in your view, what should superannuation funds be doing in preparation?
Stephen Huppert:
Yeah. So there’s not long to go. As we said at the start, 1st of January 2023, so less than three months away from the introduction of the new prudential standards. So trustees should have already been doing quite a lot of work, but some of the work still left to be done includes looking over their roles, the delegations of the board, because one of the things that the new standard does is tighten up the responsibilities of the board. And not just to have policies in place, but to be constantly reviewing and maintaining those policies. They should be looking at their existing stress testing processes and how do they match up against the new requirements? And I suspect most super funds will have to enhance their stress testing processes to make sure that it complies with the new standards.
And similarly, from evaluation perspective, what’s their evaluation policy? How do they go about updating their valuations of all their unlisted assets? And I think underlying all of that is having the right data, both from a level, granularity, and also from a quality to be able to meet the new requirements, especially from a stress testing perspective. And I think finally, if you read the letters and the output from APRA regarding the new standards, I think it’s really clear that there’s an expectation that investment governance is not just a compliance exercise, it needs to be baked into the day-to-day operations of the investment teams.