NEED TO KNOW
APRA has finalised eight prudential practice guides (PPGs) for APRA-regulated superannuation funds.
This update follows our Corrs In Brief dated 15 May 2013.
The PPGs were released on 8 July 2013 along with APRA's Response to Submissions on the guidance. These eight PPGs have immediate effect.
APRA first released the PPGs for consultation on 11 December 2012, as part of the first set of (ten) draft PPGs. A second set of draft PPGs were released for consultation on 9 May 2013.
Currently only eight PPGs from the first set have been finalised and updated to include issues raised in submissions to APRA. In its Response to Submissions paper, APRA states that the PPGs are designed to provide guidance only. Although the PPGs discuss legal requirements, they do not have the force of law.
We summarise the areas covered by the new PPGs below:
New superannuation PPGs
(without substantial changes)
|Prudential Practice Guide SPG 220 Risk Management|
|Risk Culture||APRA's views on a strong risk culture for an effective risk management framework.|
|Material risks||APRA's expectations that an RSE licensee demonstrate how it determines and communicates 'materiality' of risks and ensures that its approach is understood and applied consistently across its business operations.|
|Risk management framework||To implement a holistic and forward-looking approach to risk management throughout the entirety if its business operations to support sound risk-based decision-making.|
|Risk management strategy||RSE licensees to have systems for indentifying, assessing, managing, mitigating and monitoring material risks that may affect its ability to meet its obligations to beneficiaries.|
|Monitoring and reporting, and review of the risk management framework||
APRA's expectations in relation to reporting and information systems for reporting.
APRA's requirements for RSE licensees to consider what would be an appropriate degree of objectivity for the person(s) conducting the annual review and that the review does not need to be carried out by someone who is operationally independent.
|APRA notification requirements||When RSE licensees are required to notify APRA eg material changes to the RSE's business operations and certain other events.|
Business Continuity Management
|Prudential Practice Guide SPG 232
Business Continuity Management
|Board and senior management||RSE licensee's Board may delegate certain functions eg day-to-day operational responsibility to a responsible committee and/or senior management.|
|BCM Policy||To assist in ensuring that critical business activities can be maintained or restored if material disruptions occur. APRA expects a high-level strategic document outlining an RSE licensee's objectives and approach in relation to BCM.|
|Business impact analysis||To be conducted at least annually and to involve identifying all critical business activities and assessing the impact of disruption on these activities.|
|Business objectives and strategies||
Pre-defined goals for recovering specified critical business activities to a specified level within a defined period.
An RSE licensee may have a range of strategies to meet the recovery objectives.
|BCP responsibilities and authorities||
BCP to document specific responsibilities and authorities for:
BCP must be regularly tested and reviewed.
|Communication plan||To describe the information necessary for notifying key internal and external stakeholders if the BCP is invoked.|
|Outsourcing||As accountability for the BCP remains with the RSE licensee, APRAs expects that an RSE licensee will gain an understanding of the nature and scope of an outsourced service provider's BCP.|
Insurance in Superannuation
|Prudential Practice Guide SPG 250 Insurance in Superannuation|
|Insurance management framework||To support the identification and monitoring of risks relating to insured benefits and encompass all aspects relating to the management of those benefits.|
|Data management||RSE licensee to maintain records of at least fives years' durations about the claims experience for each RSE within its business operations.|
|Insurance strategy||Strategic decisions relating to making insured benefits available to beneficiaries to be made with reference to the collective best interest of beneficiaries of the RSE as a whole, as well as the financial interests of members with an interest in a MySuper product.|
|Insurer selection||Selection process to be conducted at arm's length and according to criteria in SPS 250, other important factors eg cost of insurance and the insurer's claims philosophy.|
Minimum requirements to be documented in the insurance arrangements to include the responsibilities of the RSE licensee, the insurer's service levels; and dispute resolution arrangements.
APRA's expectation that other matters be documented including:
|Monitoring the insurer relationship||APRA's requirement that there be detailed and frequent reporting between the insurer, the RSE licensee and other parties involved in the management of the insured benefits.|
|Prudential Practice Guide SPG 510 Governance|
|Principles||APRA's views on the principles that underpin a sound and effective governance framework for an RSE licensee.|
|Board and senior management||Guidance on the composition of the Board, establishment of Board committees including Board Audit Committee and Board Risk Committee.|
|Board performance assessment||
Objectives for the Board and individual directions to consider in assessing its performance and APRA's expectation that the Board have in place a documented policy on Board performance assessments including:
|Board renewal and equal representation requirements||APRA's expectation in relation to a having Board renewal policy and formal procedures in relation to the nomination and appointment of member and employer representatives in an equal representation environment.|
Fit and Proper
|Prudential Practice Guide SPG 520 Fit and Proper|
|Fit and Proper Policy||To assist in prudently managing the risk that responsible persons are not fit and proper. Members of the Board of an RSE licensee must collectively satisfy criteria of both fitness and propriety.|
|Responsible Persons||To consider that a responsible person takes into account the person's functions and duties, not simply their position and title.|
|Criteria to determine fit and proper||APRA's requirement that an RSE licensee consider the nature and extent of a number of matters in conducting fit and proper assessments. APRA sets additional criteria for RSE auditors and RSE actuaries that meet the definitions in the SIS Act.|
|APRA's powers||Guidance on APRA's powers under the SIS Act relevant to obligations in Prudential Standard SPS 520 eg to cancel an RSE licence, to suspend or remove an RSE licensee from being trustee of a super entity.|
|Informing APRA||APRA's expectation that RSE licensees provider certain information regarding responsible persons and ensure that information remains current.|
New superannuation PPGs
(with substantial changes)
Operational Risk Financial Requirement
|Prudential Practice Guide SPG 114 Operational Risk Financial Requirement|
|ORFR strategy||RSE licensees to facilitate consistent and effective maintenance of adequate financial resources to address operation risks.|
|ORFR target amount||An RSE licensee is to determine an ORFR target amount that is appropriate to the operational risks it is exposed to. ORFR target amount aims to cover the operational risks that may impact on business operations, and is based (at a minimum), on the predicted material impact of operational risk events.|
|Guideline ORFR target amount and tolerance limit||APRA's expectation that a soundly run RSE licensee have an ORFR target amount of at least 0.25 per cent of funds under management, and an ORFR tolerance limit to enable an RSE licensee to manage immaterial fluctuations below the ORFR target amount.|
|Financial resources to meet the ORFR target amount||ORFR target amount can be held as operational risk trustee capital and/ or an operational risk reserve within one or more RSEs within its business operations. ORFR strategy must include an investment strategy for maintaining any operational risk reserve.|
|Use of financial resources held to meet the ORFR||Financial resources can be called upon to meet the ORFR target amount to address an operational risk event. The ORFR strategy must describe the process for calling on the financial resources held to meet the ORFR target.|
|Prudential Practice Guide SPG 231 Outsourcing|
APRA suggests a sound outsourcing policy addresses:
APRA suggests factors to consider when entering into outsourcing arrangements include:
|Subcontracting||Specific rules on, or limitations to any subcontracting arrangements that should be addressed.|
|Custody arrangements||APRA's expectation that RSEs have full understanding of the assets covered by and the services provided under a custody agreement, and any assets held in a non-custodial arrangement. RSE licensees must consider whether a custodian's internal control framework ensures that an RSE's assets are safely and accurately maintained.|
|Offshoring||APRA's expectation that an RSE licensee consult with APRA prior to entering into offshoring arrangements.|
|Management and control of the outsourcing arrangement||Sufficient resources to be devoted to managing and monitoring an outsourcing relationship.|
|Prudential Practice Guide SPG 521 Conflicts of Interest|
|Conflict management framework||To implement in addition to a strong conflicts management culture, a holistic approach to the management of conflicts and ensure that all business units are aware of the potential impact of competing duties and interests on the RSE licensee's ability to comply with the conflicts of interests covenants.|
|Conflict management policy||
A primary means to clearly communicate an RSE licensee's approach to the management of conflicts across its business operations is the development of a conflict management policy. APRA expects that in addition to the minimum requirements in Prudential Standard SPS 521, RSE licensees consider whether the policy also documents:
APRA indicates that it will finalise the two remaining draft PPGs issued in December 2012 (draft Prudential Practice Guide SPG 530 Investment Strategy – Formulation and draft Prudential Practice Guide SPG 531 Investment Strategy – Implementation), once consultation on the second set of draft superannuation PPGs (which were released in May 2013) has been completed.
We are available to provide you with further information about any of the PPGs or APRA's prudential standards. Please contact any member of our team listed in this publication.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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