Lifebroker: APRA Helps RSE Licensees Understand New Reforms

The Australian Prudential Regulation Authority, commonly abbreviated as APRA, has released a comprehensive report detailing the implications of the reforms of the Federal Government on the superannuation industry. There are 12 total proposed reforms, which have been broken down into four different areas. There are three major areas, including governance-related prudential standards, risk management-related prudential standards, and the investment governance prudential standard. The area of "other prudential standards" covers the area of denied benefit funds. Each area is affected differently by the new reforms.

The superannuation industry, for example, will likely experience heightened regulations for registrable superannuation entity licensees that rely upon outsourced service providers. These reforms will focus on increased monitoring of service providers along with an emphasis on due diligence from the RSE licensees.

In the category of governance-related prudential standards, RSE licensees will be required to have a more extensive process of evaluation including a "fit and proper" policy as well as an internal audit function. They will need to construct some kind of board performance assessment process in addition to a board renewal policy.

In the category of investment, RSE licensees will be required to provide more thorough documentation of their investment objectives. These objectives include the selection of investment managers, the process by which the licensee monitors investments, and the criteria used when formulating an investment strategy. The other prudential standards section covers the potential effects of a minimum requirement for an insurance strategy.

APRA's intention is to help RSE licensees navigate their way through an increasingly regulated and defined operating environment. The specific effects of these proposed regulations differ depending on the specific circumstances of the licensee, but in general APRA is concerned that certain sectors of the industry may be growing faster than they should in relation to their profit generation ratio. Group life insurance in particular poses a potential problem for the industry. Group life insurance makes up a third of the industry although overall profits are lower.

Another major concern is how prepared insurers are to handle sudden shifts in the market. Many of the new reforms have been suggested as a way to help companies set up internal review boards and evaluation panels so that in the event of an external or internal crisis each licensee will be prepared to handle the situation. The idea behind these reforms is to allow the industry to survive in case of a major pandemic or sudden uptick in the number of disability claims.

The regulations also have been designed to help companies more effectively govern the products that they offer through third-party call centres or through an online portal. In many cases, the third-party providers require slightly tighter regulation from the RSE licensee in order to make sure they are adhering to company policy. The review consistently highlights the importance of "enhanced data collection" in both internal and external processes.

The review seems to support the notion that creating a more transparent record of strategy formulation will help mitigate potentially difficult or challenging situations.

The APRA report states that "the review was conducted with a focus on the concepts of the best interests of beneficiaries and maximising retirement income for Australians." The report goes on to say that the draft PPGs or Prudential Practice Guides will likely be released for consultation in 2012.