Issue 702, 28 March 2019
In this issue:
- Default MySuper group life cover: consultation on Royal Commission recommendation
- Managing information security risks: APRA consultation
- Ending grandfathered conflicted remuneration: consultation
- APRA’s expectations on trustees and 2019 focus areas
- Climate change risks: APRA scrutiny
- Increased funding for APRA and ASIC
- Federal Court’s jurisdiction to include financial sector criminal misconduct
- SMSF borrowing arrangements
- Strengthening corporate and financial sector penalties: regulations
- Superannuation contributions (surcharge) regulations remade
Default MySuper group life cover: consultation on Royal Commission recommendation
Treasury has released an issues paper addressing a number of matters in relation to insurance in superannuation raised in the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
The Royal Commission recommended that Treasury determine, in consultation with industry, the practicability and likely pricing effects of legislating key definitions, terms and exclusions for default MySuper group life policies (recommendation 4.13). Commissioner Hayne also recommended that this review should consider the merits of prescribing:
- higher minimum coverage for life insurance than is currently provided for by the Superannuation Guarantee (Administration) Regulations 2018
- minimum coverage for permanent incapacity insurance
- maximum coverage for life and/or permanent incapacity insurance
- a fixed level of coverage for life and/or permanent incapacity insurance so as to set a standard amount of default insurance across all MySuper products.
The Government agreed to this recommendation in its initial response to the Commission’s report (see ASFA Action issue 697). The issues paper Universal terms for insurance within MySuper seeks stakeholder views on the matters raised by Commissioner Hayne in relation to recommendation 4.13.
If you have any feedback on the issues paper you would like ASFA to consider, please forward it to Byron Addison by close of business Wednesday, 17 April.
Managing information security risks: APRA consultation
APRA has released for consultation updated guidance on protecting against the rise in information security risks, including cyber-crime, following the recent finalisation of its cross-industry prudential standard on information security.
The updated cross-industry Prudential Practice Guide 234 Information Security (CPG 234) will replace the existing CPG 234 Management of Security Risk in Information and Information Technology. The updated CPG 234 has been developed to help industry embed the new cross-industry prudential standard CPS 234 Information Security, which comes into effect from 1 July this year (see ASFA Action issue 691). It also provides guidance on addressing several common information security weaknesses that APRA has observed through its regular supervisory activities.
The guide is aimed at boards and senior management, as well as risk and information technology experts within regulated entities. It outlines how entities can maintain information security capabilities commensurate with the size and complexity of their business and the sensitivity of the data they possess. It also explains how entities can optimise their resilience when aspects of their information security are managed by third parties.
APRA is aiming to finalise CPG 234 before CPS 234 comes into force on 1 July.
If you have any feedback on CPG 234 that you would like ASFA to consider, please forward it to Byron Addison by close of business Friday, 10 May.
Ending grandfathered conflicted remuneration: consultation
Treasury has released for consultation draft regulations to support the proposed removal of grandfathering arrangements for conflicted remuneration from 1 January 2021.
In its final report, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry recommended that the grandfathering arrangements for conflicted remuneration in relation to financial advice provided to retail clients should be removed as soon as reasonably practicable (see recommendation 2.4).
In its response to the Royal Commission, the Government announced that it would end grandfathering of conflicted remuneration to financial advisers effective from 1 January 2021. In late February, the Government released exposure draft legislation to implement this recommendation (see ASFA Action issue 700).
Treasury has now released draft regulations providing details on how benefits must be passed through to the customer and imposing record keeping obligations on persons required to pass through benefits.
Submissions are due to Treasury by 25 April.
APRA’s expectations on trustees and 2019 focus areas
APRA has written to registrable superannuation entity licensees to outline its expectations on superannuation trustees and its areas of focus for the year ahead.
The letter notes that APRA’s focus will continue to be on ensuring that all trustees are putting their members first and meeting their responsibilities under the Superannuation Industry (Supervision) Act 1993. In particular, APRA will be intensifying its focus on identifying underperforming funds to ensure timely and adequate action is taken to address areas of underperformance. APRA will also take steps to enhance transparency through improved data and disclosure on the industry’s performance and operations, and increased visibility of APRA’s actions to address underperformance.
APRA’s letter details a number of specific focus areas and expectations of trustees in more detail, including areas where APRA expects them to review and, where needed, improve their performance and operations. These relate to:
- assessing and improving member outcomes
- trustee board capabilities and culture
- risk governance
- conflicts of interest
- data and reporting
- accountability and remuneration
- sole purpose test
- insurance and inactive accounts
APRA has noted that:
All of these areas should be explicitly considered by trustees in the coming months, and appropriate action plans developed. Plans to address relevant recommendations of the Royal Commission directed at the superannuation industry should also be developed, in anticipation of necessary regulatory or prudential requirements being implemented.
Climate change risks: APRA scrutiny
APRA has indicated it will increase its scrutiny of how regulated entities—including superannuation trustees—are managing the financial risks of climate change to their businesses.
APRA has released the results of its first climate risk survey of regulated entities, calling on entities to move from gaining awareness of the financial risks to taking action to mitigate against them.
The survey last year of 38 regulated entities sought to assess entities’ views and practices related to climate-related financial risks. In particular, one third of survey respondents indicated that they believed climate change was a material financial risk to their businesses now, while a further half thought it would be in future
APRA Executive Board Member Geoff Summerhayes said APRA had a responsibility to ensure financial institutions were alert to issues that could impact their ability to fulfil promises to customers. He said APRA wants to see continuous improvement in how organisations disclose and manage climate change risks over coming years. “APRA expects that climate risks be assessed within existing prudential risk management standards CPS 220 and SPS 220, and supervisors will be factoring this into their ongoing supervisory activities”.
Increased funding for APRA and ASIC
The Government has indicated that next week’s Federal Budget will include significant funding increases for APRA and ASIC. The funding boost is intended to allow the regulators to strengthen and intensify their approach to enforcement and take on expanded responsibilities to address misconduct in the financial sector, following on from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
According to the Treasurer, the Hon Josh Frydenberg MP, the additional funding for APRA is intended to allow APRA to strengthen and improve its capabilities so it can perform its critical role in restoring trust in Australia’s financial sector. It will facilitate activities including:
- extending the Banking Executive Accountability Regime (BEAR) to all APRA-regulated entities including insurers and superannuation funds
- boosting supervision intensity across APRA-regulated entities, including a strong focus on underperforming superannuation funds and members outcomes
- enhancing the supervisory framework for governance, culture and remuneration applying to all APRA-regulated entities, including through building internal technical expertise and accessing technical specialists outside of APRA, supporting APRA’s response to key areas of concern raised by Commissioner Hayne.
The Treasurer has indicated that the additional funding for ASIC will support:
- an accelerated enforcement strategy
- expanded regulation of financial services in accordance with the Royal Commission recommendations – specifically, in relation to credit, financial advice and insurance
- enhanced on-site supervision of larger institutions
- ASIC’s expanded role as the primary conduct regulator for superannuation
- ASIC’s new role in administering a conduct-focused accountability regime.
Federal Court’s jurisdiction to include financial sector criminal misconduct
The Government has announced that next week’s Budget will include funding of more than $35 million to expand the jurisdiction of the Federal Court of Australia to include corporate crime, to ensure those who engage in financial sector criminal misconduct are prosecuted and face the appropriate punishment for their actions in a timely manner.
The Attorney-General, Christian Porter MP, indicated that the funding will support the appointment of two judges, 11 registry and support staff and the construction of new court facilities for the hearing of criminal proceedings.
The action is being taken as part of the Government’s response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Referrals arising out of the Royal Commission and increased enforcement activity as a result of ASIC’s shift to a ‘why not litigate’ approach are expected to give rise to more criminal prosecutions.
Criminal prosecutions for misconduct by banks and other financial institutions are currently heard in state courts and hence have to compete with state cases for resources and scheduling. The expansion of the Federal Court’s jurisdiction will provide additional capacity within the Australian court system to allow matters to be heard faster.
The announcement follows on from a review to determine the appropriateness of expanding the Federal Court’s jurisdiction, conducted in late 2018 (see ASFA Action issue 691).
SMSF borrowing arrangements
The Government has announced that it does not intend to make any changes to the ability of self-managed superannuation funds (SMSFs) to utilise limited recourse borrowing arrangements (LRBAs).
A LRBA involves a SMSF taking out a loan from a third-party lender and using that loan to purchase an asset(s) to be held in a separate trust. Any investment returns earned from the asset go to the SMSF. If the loan defaults, the lender’s rights are limited to the asset(s) held in the separate trust.
The Treasurer, the Hon Josh Frydenberg MP and the Assistant Treasurer, the Hon Stuart Robert MP, have addressed the findings of a report by the Council of Financial Regulators (CFR) and the Australian Taxation Office (ATO) in relation to LRBAs. The report, commissioned as part of the Government’s response to the Financial System Inquiry, found that assets held by SMSFs under LRBAs are unlikely to pose systemic risk to the financial system at this time.
The report also found that LRBAs form a relatively low proportion of SMSF assets overall. Only around 8.9 per cent of SMSFs now have a LRBA, holding 5.2 per cent of total SMSF assets or 1.4 per cent of total superannuation assets.
In light of this, the Government has announced it will not be making any changes to LRBAs and will instead request that the CFR and the ATO continue to monitor LRBAs in the superannuation system and report back again in three years. The Treasurer and Assistant Treasurer noted that this is consistent with the Productivity Commission’s recent report on superannuation which also found that LRBAs do not “currently pose a material systemic risk”, but that “active monitoring is warranted to ensure that SMSF borrowing does not have the potential to generate systemic risks in the future”.
Strengthening corporate and financial sector penalties: regulations
The Government has made regulations to support recently passed legislation expanding and increasing penalties for a range of corporate and financial sector offences.
The Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2018 makes a number of reforms to the penalties for certain criminal offences in ASIC-administered legislation, introduces new offences, and significantly increases the penalties for others (see ASFA Action issues 699, 698 and 689 for background).
The Government has now made the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Regulations 2019 to support these reforms. The regulations amend multiple instruments to prescribe the list of offence, civil penalty and key requirement provisions that are subject to an infringement notice regime, ensure penalties and some offences in regulations are consistent with the strengthened penalty framework inserted by the Act, update a number of cross-references and provide for contingent amendments.
Superannuation contributions (surcharge) regulations remade
The Government has remade a set of regulations dealing with the superannuation contributions tax (also known as the superannuation contributions surcharge) to replace the existing 1997 regulations, which were due to sunset (expire) on 1 April 2019.
The surcharge is an additional tax on certain superannuation contributions for superannuation benefits accrued by high income earners that applied to contributions accrued between 1 July 1996 and 30 June 2005. While the tax is no longer imposed, payment of accrued surcharge liabilities relating to some members for superannuation contributions accrued on or before 30 June 2005 are deferred until, generally, the relevant members receive a superannuation benefit. As a result, there is a need to maintain regulations supporting the legislation that imposes the surcharge and deals with its assessment and collection.
The Government has now made the Superannuation Contributions Tax (Assessment and Collection) Regulations 2019 and the Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Regulations 2019 to repeal and replace the 1997 regulations with effect from 1 April.
ASFA REGULATORY WATCHLIST
ASFA’s Regulatory Watchlist (ARW) tracks developments in Legislation, inquiries, consultations
and other regulatory announcements relevant to superannuation.
