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Australian Prudential Regulation Authority

CHAIR —We welcome the Australian Prudential Regulation Authority. Dr Laker, welcome back and I believe that you have a short opening statement.

Dr Laker —Yes, thank you, Chair. My opening statement to the committee today need not take long. This is not because the end of the global financial crisis is in sight; few are willing to make that call. APRA-regulated financial institutions continue to face a testing environment, but since we last met that environment has been less susceptible to the bouts of severe global financial turbulence that we witnessed in the second half of 2008. As a consequence, APRA’s supervisory priorities and its prudential policy agenda remain much the same as outlined to the committee in February. Since that meeting, conditions in global credit markets have improved further, as the range of financial policy actions taken by governments, including the Australian government, have gained traction. Spreads have reduced considerably, funding markets are reopening to higher rated borrowers and investor confidence in banking institutions has begun to revive; nonetheless, sentiment remains fragile. Australian banks have raised over $80 billion of longer term wholesale funding under the Australian government’s guarantee arrangements. Encouragingly, some of our major banks recently have raised term wholesale funds, domestically and offshore, without recourse to the guarantee. Global equity markets, which had plumbed new depths earlier this year, also have enjoyed an improving tone over recent months.

The Australian economy has felt the chill winds from abroad. In contrast to global outcomes, however, the most recent data show that domestic economic activity expanded over the March quarter and Australia is expected to fare better than most other advanced countries. Nonetheless, with all the uncertainties around and a global deleveraging process still running its course, the environment for APRA-regulated financial institutions will continue to require very close and careful management on their part and intense supervisory oversight on ours.

Let me emphasise that nothing in recent global and domestic developments has diminished APRA’s confidence in the fundamental strength of the Australian financial system. In brief, our main priorities for our authorised deposit-taking institutions—banks, building societies and credit unions—remain credit quality and capital strength. Since last September, our larger banks have raised over $20 billion in equity—a strong vote of investor support. With the life insurance industry, we are continuing our focus on capital adequacy and its sensitivity to market volatility. The succession of adverse weather events is an important topic in our dealings with the general insurance industry. With the superannuation industry, we have recently updated our prudential guidance on conflicts of interest, the use of reserves and the valuation of unlisted assets. We are continuing to review the financial position of defined benefit superannuation funds.

APRA’s prudential policy agenda continues to be shaped by the initiatives of the Financial Stability Forum, now the Financial Stability Board, and the G20 action plan. At the April meeting of the G20, these initiatives received strong endorsement by the leaders of the G20 in their declaration Strengthening the financial system. This declaration confirmed the principles of strengthening transparency and accountability, enhancing sound regulation, promoting integrity in financial markets and reinforcing international cooperation.

Our involvement in global reform will intensify as a result of our recent invitation to join the Basel Committee on Banking Supervision, the global standard-setting body for banking regulation. This is a welcome development, ensuring that APRA now has a seat at each of the major international forums for prudential regulation. The Basel committee is developing enhancements to the Basel II framework that would improve its coverage of risks, strengthen the quality and consistency of capital in banking systems and address the complex issue of procyclicality.

Last week APRA delivered on a major reform initiative when it released a consultation package on remuneration for APRA-regulated institutions. These proposals give effect to the Financial Stability Forum’s tough new principles on pay and compensation and they respond to the Prime Minister’s request that APRA consider the linkages between remuneration practices and the capital adequacy requirements of regulated institutions. As I foreshadowed to this committee, APRA’s proposals do not address the absolute level of remuneration; that was never our intention. They address the need to realign remuneration incentives with good stewardship of institutions.

APRA is taking a principles based approach in this area. It is requiring boards of regulated institutions to align their remuneration arrangements with the long-term financial soundness of the institution and its risk management framework. In addition, it is proposing that regulated institutions have a board remuneration committee, comprising only independent directors with the appropriate experience and expertise, to minimise any potential for conflicts of interest.

Subject to the consultation process, APRA intends to implement its proposals on remuneration through extensions to its existing governance standards and through a prudential practice guide. Within this framework, boards will be able to design remuneration arrangements that suit the structure of their own institution. That is what ‘principles based’ means. However, where these arrangements are likely to encourage excessive risk-taking, we in APRA will respond—and that response can include the imposition of higher capital requirements as a buffer against risks.

My fellow executive member Mr Trowbridge, on my left, has had carriage of the remuneration issue in APRA and will be happy to take the committee’s questions on this issue. My colleagues and I are also ready to take any other questions that the committee may have. Thank you.

CHAIR —Thank you.

Senator BUSHBY —Thank you for your report, Dr Laker. There is a lot of good news in there. I am particularly pleased to hear that you got a seat on that international board, which is a good thing. I think it puts Australia in a good position to ensure that we are well protected into the future in terms of these prudential issues. I asked a question of Treasury earlier regarding the cost of borrowing for banks. Looking through the Economist a week or two ago, I noted an article saying that the TED spread, which shows the difference between what banks and the US Treasury pay to borrow money, for three months, has continued its steadily narrowing path, standing at less than 0.6 of a percentage point on Monday, 18 May. It noted that was the lowest level since August 2007, which predated the collapse of Lehman Brothers but obviously was still well into the period of credit issues. Is that an indication of how things are panning out in Australia?

Dr Laker —You would find comparable evidence in the spread between the issue of bank bonds of longer term maturities and Commonwealth government securities. If I remember the figures, that spread increased to around 210 basis points. At the moment it is down to 170 basis points or thereabouts. However, that compares with the spread of about 50 basis points before this crisis started.

The developments in global credit markets over the last few months have been encouraging, but that is a reminder that we have a long way to go to get back to the spreads that applied before the crisis. Perhaps we will not see spreads that low again, because during that period risk was not being properly priced into markets. There is still a substantial degree of risk aversion or fear of risk in the marketplace, although I think that is being whittled away slowly by signs of improvement in global economies and by the actions that governments have taken to support banking systems.

Senator BUSHBY —So the 170 basis points still has a way to go to get back to where it probably should be with a proper assessment of risk.

Dr Laker —It is not for us in APRA to judge where that might be.

Senator BUSHBY —That is right.

Dr Laker —But it is an indication that a considerable retreat from risk started in August 2007.

Senator BUSHBY —That answer is entirely consistent with the one provided by Treasury earlier. They also mentioned that competition can have an impact on that spread and positive competitive forces can lead to banks perhaps taking a smaller margin and choosing to do so to gain business. Do you think anything regulatory can be done to assist and promote competition? I know that is a big question.

Dr Laker —That is a long and large question. At the moment I would say that, in the short term, what will be most conducive to competition over time in the Australian banking system is that we have robust financial institutions that, if they need to grow their balance sheets over time, are capable of competing and of accessing capital markets. That has been our preoccupation really since the beginning of the global financial crisis. So our preoccupation at the moment is and has been stability, which provides a foundation over time for competition.

Senator BUSHBY —Yes. In your assessment, is there still stability in the regulated banks in Australia at the moment? I think we had a discussion at a past estimates hearing about international rankings of Australian banks. How are we currently standing with our major banks?

Dr Laker —According to any international criteria, our banks stand very strongly. If we take the rating agencies themselves, I think at last count ours were four of only 11 remaining institutions that were AA rated or above. The indications from the rating agencies are that we would maintain AA ratings, barring extreme circumstances; that is what the rating agencies have voted for strongly. Our banks continue to generate good, solid profitability. In many cases it is not the level of profitability that they enjoyed before their impaired assets started to build up but, in the current environment, the returns on equity for those institutions are the envy of most banks internationally and their access to capital has been, I think, well received. They have been able to raise funds, which often are at modest discounts and oversubscribed, which is a good vote of investor support. The general phrase I have used about our banking system—I talk more broadly than just banks here—is that it has been and is, generally speaking, ‘well managed, well capitalised and profitable’. From our point of view, as a prudential regulator, we would much rather be in that position than in the position of many of our peers.

Senator BUSHBY —Absolutely. I am not discounting the job that you do, but I imagine that makes your job far easier than its equivalent in some comparable nations around the world.

Dr Laker —I am sure it does.

Senator BUSHBY —You have mentioned the impaired assets of our banks—and there are some as is inherent in your statement. How is that situation tracking? I think we also discussed this in past estimates, but it probably would be useful to see how that is playing through in terms of percentages. How is that looking?

Dr Laker —I think I could give you the details. Our non-performing asset ratio might have risen to about one per cent of total assets. At the peak in 1991-92, it was about six per cent, so it is well under. Within that, I suppose the major component to have seen impaired assets rise has been business lending. In the early stages of the crisis, that was attributable to some high-profile corporates, whose business models were exposed by the crisis. We would acknowledge that the impaired asset movements now are more reflective of a broader based decline in credit quality in some areas. But these figures are coming off a low base and, as I say, they still remain low compared with previously.

Senator BUSHBY —You have mentioned that it peaked at one per cent. Has it peaked?

Dr Laker —I am not in the forecasting business and I would not want to make a forecast.

Senator BUSHBY —What is the most recent trend?

Dr Laker —The trend is upwards and we are monitoring it closely. Looking ahead, the major influence on the trend will be the change in the level of unemployment in the community.

Senator BUSHBY —And its impact on people’s ability to repay—

Dr Laker —That will have an impact on residential housing exposures. Looking ahead, it will also be determined by the strength of the economy, which will have an impact on business lending and commercial property lending. So, looking ahead, the extent to which it changes will depend really on what happens to the economy as it evolves. However, there is an expectation that these numbers will continue to drift up and, as I say, that will depend particularly on unemployment.

Senator BUSHBY —You mentioned in your responses how we are faring better than comparable nations in terms of our banking system and also with the level of impaired assets compared with what they were in, I think, 1991. At the risk of asking you to blow your own trumpet, what reason do you suggest is different now, firstly, as to overseas and, secondly, as to the situation in the early nineties? What has led to our being able to withstand this, given that the shock in a lot of ways is probably much worse now than it was in the early nineties? Given that we are all experiencing the same influence of what happened internationally, why are we faring better now than we did then and than other overseas nations?

Dr Laker —Much of the shock in the early nineties was associated with commercial property exposures and our banks have retreated from that area, although not completely. If I were to give you a quick answer about what is different over time and from other countries, I think what has distinguished Australia and its banking system is that we have had a virtually uninterrupted period of strong economic growth—16 to 17 years—which apparently started to tail off only late last year. That really has provided substantial business opportunities in Australia to grow balance sheets. Our banks have not been tempted to join the complex credit derivatives and other markets to pursue income, because they had opportunities for sound income in Australia. I think the experiences of the early nineties were fairly scarifying for some institutions and we saw, over time, a much greater commitment to and investment in risk management systems. The regulatory framework has improved considerably in that time. We introduced the Basel II framework at the beginning of 2008. Before that, APRA had tightened up some of its prudential requirements, particularly in the area of housing lending. A number of factors, I think, coalesced to give you that outcome. Also, irrespective of the regulatory arrangements, we have been very active as a frontline supervisor in the trenches with our institutions.

Senator BUSHBY —Forgive me, but I cannot recall the name of the global banking regulation body.

Dr Laker —The Basel Committee on Banking Supervision.

Senator BUSHBY —Do you think with our membership of the Basel committee, rather than getting a lot back, we might be giving a lot to the others in terms of how we have approached things?

Dr Laker —Modesty limits my answer, but—

Senator BUSHBY —As I said, I am asking you to blow your own trumpet.

Senator Sherry —Do not let modesty prevent you.

Dr Laker —It might come to haunt me when I go to my first meeting of the Basel committee. I think it is fair to say that, even though we have not been a member of the Basel committee, we have been active in the work that the committee has done through various outreach and liaison programs. To the credit of APRA—and, before that, the Reserve Bank—I think we have been able to influence important elements of debate, such as exposures to housing and how you should take them into account in your capital requirements, without being at the table; so we are respected for what we have done. We have provided and are currently providing staff to the Basel committee and some of its working groups. As I say, we have provided considerable intellectual input into a lot of the debate that has been going on.

Senator BUSHBY —Is that just since the financial crisis, or have you been doing that for a longer period?

Dr Laker —No, before that.

Senator BUSHBY —From how far back has that been occurring?

Dr Laker —I think it really has been from the time that bank supervision became a specialist function within the Reserve Bank.

Senator BUSHBY —When would that have been?

Dr Laker —In the mid-1980s. It is a large global effort that everybody feels they have influenced. But I think it is a fair to say that some very smart and committed people of ours have worked on that task for a long period of time and the work has been and is taken notice of.

Senator BUSHBY —For how long has APRA been in existence in its present form?

Dr Laker —Almost 11 years.

Senator BUSHBY —Effectively, you have been involved in that from day one then.

Dr Laker —When APRA was established, one of its important priorities was to develop the potential of the integrated regulator, so a lot of work was done to harmonise requirements across industries. Through most of APRA’s early history, the Basel II framework was being developed globally and we were certainly taking part in that development but, as I say, not sitting at that table. So we need to wait and see. It is a much-enlarged body now and we are not the only ones who have been invited, so it is not a reward for hard work. It is a G20 body now and it is a larger gathering. They have a tremendous agenda with quite a lot of work to get through, and we are going to put our shoulder to that wheel.

Senator BUSHBY —How often are they likely to meet?

Dr Laker —I think that body meets on a quarterly schedule, but it may meet more frequently, depending on the reform agenda.

Senator BUSHBY —Does it impose additional resource requirements on APRA?

Dr Laker —We take part in a number of the subcommittees and in a particular liaison group that is designed to try to bring the work of the Basel committee to a wider audience. There is some substitution and we will not need to be on that anymore, but it will be an additional demand on our resources, yes.

Senator BUSHBY —Will you be able to meet that from the resources that you have?

Dr Laker —Yes, but we will need to manage them carefully.

Senator BUSHBY —I will touch quickly on executive remuneration. Just before we start, I must admit and put on the table that I have not read your consultation paper in detail. As a result, could you explain to me the fundamentals of the recommendations that the consultation paper contains?

Dr Laker —If you do not mind, I will defer to the two experts with me, both of whom were closely involved in the development of that paper. Just before John starts, I would say that this is one area of work where we were only one of three countries that were contributing—at least initially with the pen—to the drafting of the Financial Stability Forum’s principles, which were published in April. That was a tremendous acknowledgement that we had something to say in this area, and we said it; so we were able to help shape the development of those principles.

Mr Trowbridge —I think the most important framework to describe is that, because we are a prudential regulator and we supervise institutions, we can set up a situation where they are required to tell us what they are doing and we reserve the right to persuade them or, otherwise, to impose sanctions on them if they do not do things in a sound way. That is very different from all the other remuneration arrangements that have been used around the world to try to control, limit or otherwise manage executive remuneration. They have relied on disclosure; the ASX already does that. The Corporations Law requires that companies disclose what they do. The act of disclosure is designed to create a form of accountability, and we have non-binding shareholder votes for listed companies too. Generally that does not work very well. Today many of the disclosures, with the way they are done, are very legalistic, so it is quite hard to make a lot of sense of them.

Of course, we are restricted to APRA-regulated institutions, but APRA can look deeply, if you like, at the remuneration structures. We have said that there needs to be a remuneration committee with a properly prepared remuneration policy. Many companies do that already, but they will be required to make those available to us, if we want to see them. We will be able to examine them to see whether we think that the incentives built into the remuneration system are encouraging excessive risk-taking or otherwise prejudicing the soundness of the institution. That is the direction in which we are heading.

Senator BUSHBY —Is that the fundamental deciding factor: whether, in terms of its viability, it is in the interests of the institution?

Mr Trowbridge —Yes, that is right. We are a risk-oriented institution. We want to see a supervisor and we want to see institutions minimise their risk. We already do that: they have to have proper governance arrangements, certain capital, risk management and so forth. If you like, this is another governance and risk management tool that we will use.

Senator BUSHBY —I guess the key to that is that your consultation paper, if adopted, will only apply, as you have said, to companies that fall within your prudential regulation area.

Mr Trowbridge —That is correct.

Senator BUSHBY —On the whole, they are ones where risk is a big issue. If you are a company out there making widgets, risky behaviour may deliver big returns for shareholders; however, that is not something that with new regulation you want to build into the companies.

Mr Trowbridge —We cannot do anything outside of that. But one of the things we are trying to encourage companies to do is to avoid the ‘big-risk and big pay-off’ outcome; we do not want to see that. We want to see institutions that are stable over time. In a non-financial institution where the public do not have a great interest in the outcome, if people want to take high risks and have either high rewards or go broke, they can do so; however, in the financial sector, we do not want that.

Senator BUSHBY —I understand what you are saying. Obviously, in terms of risk-taking and its potential consequences, for Australians in the institutions that you regulate there are consequences that do not exist for a lot of other companies. But the concern about executive remuneration is not just about the potential consequences of risk being taken in those companies; it is about the size of executive pay packets. This is probably a question more for the minister than for APRA. Will this just be a suite of measures to—

Senator Sherry —APRA have their set of responsibilities, as they have outlined. But, firstly, there have been some announcements, which I think we did discuss at previous estimates; I would have to double-check that. The government has announced policy and has released a draft bill on termination payments—so-called ‘golden parachutes’. That is one side of the equation. The other side of the equation, which is other issues relating to start-up and ongoing pay et cetera, is currently before the Productivity Commission and Professor Fels.

Senator BUSHBY —I am sure that we will ask him about that at a later stage.

Senator Sherry —They are the processes.

Senator CAMERON —We have golden parachutes but, about 12 months ago, I noticed the start of the ‘golden hello’. Is that side of the equation being addressed as well?

Mr Trowbridge —It is covered in our prudential practice guide, because we do not want to see large incentive payments linked to the risks taken by the institution. We do not want to see someone given a big payment up-front and then given carte blanche to do what they want, including perhaps even engineering their own retirement or taking big risks. We want to see those sorts of payments structured in such a way that, if the outcomes for the institution are good, the employee or the executive can get good remuneration; but, if not, they would have a lower incentive payment.

Senator CAMERON —But the areas of your responsibility are the areas that were setting the culture throughout the whole economy. Isn’t that true?

Mr Trowbridge —I think so. The nature of our work will probably change the nature of disclosures. Even though the law on disclosures will not change, it is quite likely that there will be an influence through what the financial sector companies now need to do to manage their remuneration. If I could encapsulate it in one phrase, it would be that we will be concentrating on ‘substance over form’ all the time whereas, at the moment, it is possible to concentrate on form because it is simply disclosures under a legal regime. So we will be looking at the substance.

The question you have asked is an interesting one: will the concentration that APRA introduces change the culture of boards and companies around remuneration; and, if it does that in the financial sector, will it spill over into other parts of the community? Obviously, we do not know yet. What we require is entirely consistent, for example, with what the AICD, the Australian Institute of Company Directors, has been advocating as guidelines anyway; but they have no jurisdiction in the way that we do.

It is also clear that many boards welcome this. We usually find that institutions do not want to embrace our new standards; they regard them as a burden. But this is an exception and it does look like many companies are very interested in conforming. The boards are very interested in working with the sorts of things that we have put forward, and we do expect some change in remuneration culture around this. But, having said that, we must recognise that at the moment we are in poor economic times and pressure for high remuneration is not on. So we have it in our minds that we need to be ready for the next boom. It is not so much what is going to happen this year and next year but what will happen the next time things boom. We want to be kerbing excessive risk-taking, once there is high confidence.

Senator CAMERON —You may not want to go where I want to take you here, but you did comment that, if companies outside of your jurisdiction want to take high risks and provide high remuneration, basically that is okay. It is not really okay for workers who end up being the victims of this high-risk taking. That is not what you meant, is it?

Mr Trowbridge —I did not mean that; I meant that some others may choose to do that. But boards, at large, are under pressure already to revise their remuneration arrangements or, if they seem unreasonable, to make them more reasonable. I think we are adding a serious voice to that, which will certainly have an effect in the financial sector; but what kind of effect it will have across the rest of the community remains to be seen.

Senator Sherry —APRA has significant authority, if you like, directly through another mechanism. In terms of non-financial institutions, when the PC—including Professor Fels—finishes its conclusion, there may or may not be amendments to the Corporations Act. It would have to be a direct change through the Corporations Act.

Senator BUSHBY —Moving on to superannuation issues, I understand that in the US rule 22c-1 of the Investment Company Act 1940 requires all mutual funds to unit price on a daily basis. Are you aware that, in other jurisdictions, there is a requirement for all super funds to unit price on a daily basis?

Mr Venkatramani —In Australia, in respect of unit pricing and the associated issue of crediting rates, trustees, as part of the risk management processes, are required to consider the pace with which members get in, get out and switch. In other words, we have said that you need to have an alignment between the way you distribute your earnings, which is what unit pricing and crediting rates do, and the frequency with which you do it. Therefore, APRA has been agnostic about whether unit pricing or crediting rates should be used, other than saying, ‘Please align your processes with the on-and-off movements that take place.’ So we have not been prescriptive about what people should do, other than to have risk management processes whereby trustees must recognise what is happening within the fund in terms of member characteristics: age, state, demography, on-and-off movements and other things.

Senator BUSHBY —I understand that, Mr Venkatramani. I have written here that in February you made a statement similar to the one that you have just made—and I will get onto that in a moment. However, there are other nations around the world in which there is a mandatory requirement to unit price on a daily basis. Even though we in Australia do not—

Mr Littrell —Perhaps I could respond. The Investment Company Act 1940 in the US refers to public mutual funds, which are like unit trusts in Australia; so it does not necessarily bind on private investment vehicles or pension funds.

Senator BUSHBY —Are there other nations in the world where there is a requirement for them to do that?

Mr Littrell —I have not conducted a comprehensive survey.

Senator BUSHBY —Could you take it on notice to see whether you can find out, within reason, without having to travel the world to do so?

Mr Littrell —Yes.

Senator BUSHBY —I will come back to Mr Venkatramani’s comments about making trustees aware of the matters that you have just mentioned. What does APRA do to ensure that funds that do not regularly unit price are aware of that higher duty in respect of disclosure and valuations, which you have just mentioned?

Mr Venkatramani —During our prudential reviews and other specialist reviews, including market risk reviews, we look at member movements and associated processes to ensure that there is what you would broadly would call ‘equitable treatment’ between people who come into the fund, people who stay in it and people who leave it. At the last ASFA conference, our deputy chair, Ross Jones, presented on enhancing member equity and one of the issues specifically covered was this. So we have provided guidance in general; we look at it when we review individual funds, and the fund’s practices, where they require improvement, are picked up as part of review findings, which we follow up on.

Senator BUSHBY —As part of that review, what sorts of things do you look for to ensure that they are acting upon that higher duty?

Mr Venkatramani —Essentially, they would be dependent on the benefit payments made during the year, the number of requests for internal switching, the number of requests for rollovers to other funds and, in that process, how members’ entitlements are determined, including the associated issue of valuation of assets.

Senator BUSHBY —I would like an update on this: what is the total loss or gain attributable to Australia’s superannuation funds to date for the last four quarters and for the most recent financial year? I am happy for you to take that on notice.

Senator Sherry —Do you want that in monetary or percentage terms, or both?

Senator BUSHBY —Both, if you can. Where is APRA currently at in terms of the reporting of performance of particular funds? I understand that some work is being done on that at the moment.

Mr Littrell —Yes. We put out a discussion paper on this issue late in 2008, subsequent to a ministerial request in July 2008. The consultation on that closed in February. We received 11 submissions from various parties. As a consequence, we have done some internal work and also have spoken to some external parties on where we are going. It is likely that we will release the next round of that material very shortly. That remains subject to internal approval, but my expectation is that release will be within the next month.

Senator BUSHBY —You have referred to the ‘next round of material’. I am not asking necessarily about the content, but what do you mean by that? Is it further consultation or a draft?

Mr Littrell —At this point we have probably achieved what we can from consultation, so I expect we will be coming out with the final version.

Senator BUSHBY —So it will be a final version.

Mr Littrell —Yes.

Senator BUSHBY —It will not be a draft exposure for final comment or anything like that?

Mr Littrell —No. We had quite extensive comments in the initial round.

Senator BUSHBY —As part of that, will you look into the performance of particular investment options or products within funds or just an aggregate of the performance of each fund?

Mr Littrell —This publication will focus on fund-level performance.

Senator BUSHBY —Does APRA consider that reporting an aggregate or fund-level performance provides a sufficiently sophisticated tool for consumers to fully understand the potential suitability to themselves of particular options within a fund?

Mr Littrell —I suppose that one always would rather have more data than less and we are separately, at this point in time, consulting on an expansion of our superannuation statistics, which will include more investment option material. Having said that, the core issue in the Superannuation Industry (Supervision) Act is trustee behaviour and, in this case particularly, the requirement for trustees to form an investment strategy for the fund and to maximise or look after the interests of members. So the whole-of-fund performance does not suggest which investment option a member should take; however, if it is run over a sufficient period, it does allow members and other observers to identify trustee ability to maximise member interest.

Senator BUSHBY —I will move on to statistics in a minute. In answer to one of my questions on notice, APRA stated that it did not collect data on fees charged to members, and that superannuation funds report to APRA at the whole-of-fund level. Do you not think it would be better to equip consumers with meaningful information so that they could compare the actual fees and administration costs as well as the performance of different products within a fund?

Mr Littrell —This has been an area of considerable focus by and of some frustration for APRA over many years. In our view, the important number for a super fund, or for any investment option within the fund, is the net return—that is, the actual money that ends up in the account. It would be useful, for many reasons, to disaggregate that into the gross return and then subtract the various expenses and taxes associated with that fund. Our experience over many years of deepening our collections has been that a truly comparable fee and tax collection—remembering that taxes also are quite substantial—is probably beyond us at this point. With the expense of ensuring that detail of collection is true and comparable versus the relatively straightforward collection of net returns, that has not really struck us as prudentially necessary.

Senator BUSHBY —Is that the expense for APRA or the expense that you would impose—

Mr Littrell —There would be much more expense on the industry, which flows through to members, than for APRA. You have to say, ‘Okay, what expenses are the trustee charging, what expenses are the platform charging, what expenses are the financial planners charging and what expenses are the several levels of investment manager charging?’ It is possible to do all that, but it is costly. From APRA’s point of view, our main focus is on ensuring that the trustee is doing their job properly; it is not necessary to know that detail.

Senator BUSHBY —But, as soon as you start gathering any comparison information across different funds and publishing that information, you are putting people in competitive positions where, if you do not give them all the information, they cannot make proper, fully informed decisions. I know that you have to strike a balance between cost and what is reasonable. But, if you make a decision to put something out there, you need to make sure that, when you do so, it has sufficient information for people to make a properly informed decision; otherwise, it can be misleading.

Mr Littrell —I am sorry; I have to dispute that. It is not misleading; it is incomplete. The number that is produced is correct.

Senator BUSHBY —Technically it is incomplete but, for the layman looking at it and trying to work out where they should go, it can be misleading. Of course, it is incomplete.

Mr Littrell —Okay. Not only for members but also, more importantly, for other trustees and the broader professional industry, the publication that we are putting out—again, it is not meant to be financial advice; it is not saying, ‘Go and talk to this firm about this investment option’—will give a strong sense of which sorts of trustees are successful in generating good net returns.

Senator BUSHBY —However, despite the best intentions and reasons that APRA has for putting it together, it will be used by individual funds that appear to have performed well to try to sell at a deeper level. I understand your point and we will move on. In relation to default funds specified in modern awards, is APRA aware of whether any of these funds in the last six months has increased the administration fees it charges to its members; and, if so, to what extent?

Mr Littrell —We will have to take that on notice.

Senator BUSHBY —You have mentioned a statistics review and that you have released a discussion paper on your plans to upgrade the existing database on which APRA bases its quarterly statistics. To what extent has APRA decided to probe in terms of the information on net returns that it will collect from funds? Where do you look to obtain sufficient information to enable APRA to report on the performance of actual products within a fund?

Mr Littrell —That is subject to consultation. But one of the aspirations of the expanded collection is that at least we will be able to detail the default option returns as well as the whole-of-fund return.

Senator BUSHBY —I think that is important.

Mr Littrell —Yes. There is a very high correlation between the default return and the general fund performance. To some extent, we are inviting industry to make a case: is it worth the cost for all concerned to do more fund options than just the default option? In the past, industry has suggested that we should collect a lot of fund option material and publish it. We say, ‘Okay, we can do that, but it’s costly; you tell us whether it is worthwhile.’

Senator Sherry —That is a really important point. A fund may have 10 or 100 options and some of them have 200 or 300. There is a useful debate around whether having those options with their long-term performance is superior—for a whole range of reasons that people could debate and analyse—to a default option; therefore, why are those options there, if they are not in the best interests of the member? That is a really interesting debate to be had.

Senator BUSHBY —If they went down to the level where you could compare, I think everybody would agree that that would be useful.

CHAIR —Senator Bushby—

Senator BUSHBY —Okay. We will not have that debate. In terms of the consultation paper, what other information would you like to get out of it; what are you looking to achieve?

Mr Littrell —This is the first renovation of this collection since 2003, and the industry has moved a long way since then. For example, we are looking at collecting material on subfunds; currently we do not hold that. Essentially, that is a hole on our prudential radar whereby we do not know which subfunds might be underfunded. In our current collection there is some fuzziness in hybrid funds—the split between defined benefit and defined contribution—which we would really like to sharpen up. The largest other issue is that we are proposing to switch the balance sheet collection from something that, frankly, is obsolete to something that is more modern in terms of asset class breakdown. There are many other issues.

Senator BUSHBY —In answers to questions on notice, you noted that funds currently do not report separately the super guarantee proportion of employment contributions. Is that something that you will be looking to get?

Mr Littrell —I will have to take that on notice.

Senator BUSHBY —It would be useful in comparing specifically the performance of that part of super contributions made by law. Given that people making voluntary contributions are far more likely to be informed, it is quite important to be able to examine how that default option is performing.

Mr Littrell —Was that a question or a statement?

Senator BUSHBY —It was only a statement.

Senator JOYCE —I imagine that Senator Macdonald will be touching on Storm, so I will truncate and leave those questions out.

Senator Sherry —Storm is actually for ASIC. I do not know whether there would be any direct issues for APRA.

Senator JOYCE —I believe that BankWest has something to do with APRA. Is the current movement of deposit funds from BankWest, after its association with the CBA, of any concern to APRA?

Dr Laker —I would preface anything I say by saying that, unless we have this discussion in camera, I cannot talk about our dealings with individual institutions—

Senator JOYCE —We will go to something more macro then. Where is bad debt globally at the moment and what is the associated cost? You have said that we do not have an extensive association with derivative products at the moment but, quite obviously, especially in eastern European countries and in England, there is still a collapse of access to liquidity. What mechanisms do we have in Australia to shield us from that?

Dr Laker —Perhaps I could clarify. First of all, our banks have exposures to derivatives, which is part and parcel of their banking operation, but they had only limited exposure to the complex financial instruments associated with subprimes. That is the point I made. Our banking institutions have three main sources of funds. One is retail deposits. They have grown very strongly, particularly since the introduction of the deposit guarantee.

Senator JOYCE —Can I interrupt quickly, not to interfere but to elucidate? What proportion of the bank deposit funding is retail deposits?

Dr Laker —I will take that on notice to give you the exact numbers. Retail deposits were in the order of 30 per cent and the rest were wholesale, which were split roughly between offshore and domestic. Retail deposits have become an increasingly important share since the government guarantee arrangements were put in place and, more generally, were a flight into safety in the banking system. But, as I said earlier, our banks have been able to access, on better terms now than before, the short and longer term funding that is available in global credit markets. That is not just Australia; that is a general statement about the improvement that is taking place globally in those sorts of funding markets.

Senator JOYCE —So 35 per cent is wholesale offshore.

Dr Laker —I would not want to lock myself into exact figures.

Senator JOYCE —I will not hold you to it. Is that market tightening, or do you say it is starting to get further liquidity?

Dr Laker —It has been improving steadily for some time but, as I said, the pricing of that longer term funding is still well above where it was two years ago. Some markets, such as the securitisation market, which is an important market to some of our institutions, remain dislocated. So it is not a completely even picture.

Senator JOYCE —The pricing is increasing?

Dr Laker —Improving. The spreads that they pay for risk are coming down bit by bit.

Senator JOYCE —As a rate, is the general pressure on that offshore funding rising? The spreads might be decreasing, but is the overall rate going up?

Dr Laker —I would have to look at the most recent series. The rates have been coming down and the spreads have been coming down as well. More recently, we are seeing competition for funding between governments and banks. I will have to look at a series and get back to you on that.

Senator JOYCE —I am particularly interested in competition between banks and governments. Does this have the capacity to push rates up, or is there evidence of it pushing rates up currently?

Dr Laker —General pricing is not an issue that APRA focuses on. Our banks have been able to access capital markets and to get their funding plans for this year largely finished and make a start on next year. That is the sort of focus we have had. We know that it will become a more competitive market for them, but we do not forecast where markets might go.

Senator JOYCE —You say that, in 1992, non-performing loans were around six per cent.

Dr Laker —Of total assets, yes.

Senator JOYCE —To your knowledge, what proportion of them was in the residential market?

Dr Laker —In the early nineties?

Senator JOYCE —Yes.

Dr Laker —Very little.

Senator JOYCE —So the question now is: what proportion of the banks’ books is secured by residential housing blocks?

Dr Laker —Broadly speaking, about half of their balance sheet is exposures to residential property.

Senator JOYCE —Obviously, the residential property market would be affected by employment, wouldn’t it?

Dr Laker —Yes.

Senator JOYCE —It would be perceived that, if there were a fallout in employment and a realisation on certain residential property markets, you would have to reassess the whole book. If you have a 50 per cent exposure to residential property markets and the realisation on forced sales starts bringing about a reassessment of security held by the bank, you would have to go through the whole book, wouldn’t you?

Dr Laker —We have been subjecting our banking system to that kind of stress test for some years: ‘If certain things happen, what happens to your book?’ As I say, we have been doing and continue to do that work with the banks. Banks themselves look at what impact, say, a substantial increase in unemployment or a significant reduction in house prices would have on their profitability and capital. That is the sort of work that they do.

Senator JOYCE —I will try to cut through the gobbledegook for the minister at the table. Quite obviously, we had an extensive outpouring of funds, with the prospect of people buying ‘McMansions’—that is the derogatory term; I do not know what the proper term is—based on two-income households and a prospect of capital growth. With a possible correction in or pressures coming on to the labour market, which is becoming more evident—we have seen this all the way through our discussions with Treasury—1½ people will not be able to pay for a place in the same way that two people could, and one person certainly will not be able to pay for a place in the way that two people could. If a bank has provided finance on the basis of two people servicing a debt and then only one of them has a job, is there a tipping point in unemployment where a bell starts to ring for you and you say, ‘Well, we’re going to have to go back and reassess that book’?

Dr Laker —It is an issue that has been on our mind for some time, well before the global financial crisis struck. In 2005-06 we looked at all of our major institutions and how they assessed the ability of borrowers to pay debt under different circumstances. We looked at what allowances they made for dual incomes and for increases in interest rates. We have been through that process thoroughly. We learned a lot and went back to some institutions, requiring them to stiffen up that process. But it is not a one-imensional issue. The other important element that needs to be taken into account is that the debt servicing burden on households at the moment is much lower than it was three or four years ago because interest rates have come down; so, as a result of monetary policy actions, the monthly payments are much lower now than they were. That is an offset to what might be happening on the unemployment front.

Senator JOYCE —So the countervailing pressures are employment and interest rates. But interest rates going up, in itself, can get you to a form of stagflation, which can exacerbate unemployment. You can end up with a double whammy, can’t you?

Dr Laker —I do not know whether we have the time to debate economics, but I would say that clearly we are monitoring the evolution of unemployment and debt burden, as are the institutions themselves. We continually get them to stress those books to see what would happen if things got worse.

Senator JOYCE —Do you have tipping-point figures? You do not have to nominate them; otherwise they will be reported all through the paper. Do you have tipping-point figures in your own mind for where unemployment gets to before it becomes a concern for the valuation of the residential book?

Mr Littrell —The phrase ‘tipping point’ assumes that there is some point at which there is a sharp break. There is not a tipping point associated with unemployment; it just does not work that way for unemployment. If you have double the unemployment, you will have double the default. There are other risks that you run into—in particular, falls in house prices will create tipping points—but unemployment per se is not one of them.

Senator JOYCE —Shouldn’t there be a point where the residential stock that is coming on to the market has to bring about a revaluation of the book? Obviously, with the security requirements of the bank, a revaluation of the book down by a certain degree will require a whole new restructure for what they are doing and it will mean that they have to access capital or deleverage.

Mr Littrell —Yes. Essentially, the balance of new stock, new household formation and forced sales versus non-forced buyers determines the direction of house prices.

Senator JOYCE —From what you perceive at the moment, is real estate stock clearing?

Mr Littrell —As a general observation, yes.

Senator JOYCE —Relating back to where the United States was, obviously they could not clear their real estate stock; therefore, we had an issue.

Dr Laker —We have not had the excess supply of housing that characterises the US market, particularly the US subprime market.

Senator JOYCE —But the price for our residential real estate is very high compared to around the globe, isn’t it?

Mr Littrell —Yes.

Senator JOYCE —Are we about fourth?

Mr Littrell —If you measure prices as the ratio of prices to average income, Australian urban prices are quite high.

Senator JOYCE —Are they amongst the highest in the world?

Mr Littrell —Yes, we would probably be in the top half-a-dozen countries.

Senator JOYCE —Is that a risk? Anything that is high has the capacity to come down. Your countervailing force would be that there is no new product coming onto the market?

Senator CAMERON —Is that part of your scare campaign?

CHAIR —Please ignore the interjection.

Mr Littrell —Could you repeat that question?

Senator JOYCE —With the countervailing force, are you saying that if there is not much real estate stock coming onto the market that keeps the price high?

Mr Littrell —Yes. Also, we still have net household formation, people looking for houses. The geography of most Australian cities is more limited than in many US cities, where there is land as far as you can see. The marginal value of land in most Australian cities is likely to remain reasonably high. In the worst affected US cities the issue is not that the price has fallen; the issue is that the price is zero.

Senator JOYCE —Yes, it is $1.

Mr Littrell —It is very hard to find an Australian suburb where people will give you a house.

Senator JOYCE —I have seen on the internet that you can buy them for $1, but they do not look like much. Australia currently has a program of trying to stimulate people’s entry into the marketplace. The first home owners grant is part of its stimulus package. Is this package working? Are people taking it up, buying houses and building houses?

Senator Sherry —As we discussed earlier, you are getting into the realms of macroeconomic policy, not APRA.

Senator JOYCE —Are you aware of a government package that encourages people to buy houses or build houses?

Dr Laker —Of course.

Senator JOYCE —Is this bringing new, younger entrants into the market?

Dr Laker —Yes, as intended.

Senator JOYCE —Are they the most likely to default in the time of crisis?

Dr Laker —I would not like to venture an opinion on that. I do know that many first homeowners have been an important source of growth in housing lending in the last period of time. As part of our normal credit risk assessment, we work with the institutions to make sure that there is sound lending in what might be more extreme times. That is part of their credit assessment process and that is part of our oversight.

Senator JOYCE —Are we looking at about 20 per cent? Do they have to produce 20 per cent inclusive of what the government provides them, or 20 per cent on top? What do you see as reasonable?

Dr Laker —The policies that banks and other lenders have on loan-to-valuation ratios vary from one institution to the other. They all have some cap beyond which they are not prepared to provide more lending and want more equity. We have always seen that LVR as an important indication of how much buffer there is and how much skin in the game the borrower has. There is nothing particularly new from a prudential angle in anything that is happening in these markets. That has been our focus from time immemorial.

Senator JOYCE —Is it consistent from prior to the first home owners grants to where it is now?

Dr Laker —There have been first home owners grants in previous episodes. It has been part and parcel of support for the housing industry by governments of all persuasions. It is very hard to generalise where we sit with the demographics, the social backgrounds, professional backgrounds and incomes of the borrowers. As a prudential regulator, we do not drill down to that kind of detail. We look at how banks address those questions in their portfolios.

Senator JOYCE —If the individual is saying, ‘This is my money’, but it is not actually their money, it is the government’s money, and then they are using that as a factoring-up mechanism where they say, ‘Now I can borrow another 80 per cent on top of what the government has given me’, then they are overleveraging themselves and creating an artificial height in the market. Once that scheme is taken away—and we do envisage that scheme, in the future, being taken away—it basically pulls the plug out and creates what could be the instigation of a bubble that will pop.

Dr Laker —Our understanding is that our regulated lenders look for genuine contributions from the borrower in addition to what is provided by government.

Senator JOYCE —Do you know to what extent? Is there any sort of belief in your discussions as to what extent?

Mr Littrell —At this point there is not a uniform industry approach on this. Some lenders require a pattern of savings by the prospective borrower, independent of any parental support or a first home owners grant, because they want to ensure that person knows how to save as well as spend. Others will take the first home owners grant in lieu of personal savings. The trend in the industry has been towards requiring more personal savings history, but there are still lenders who will give credit for the government grant.

Senator JOYCE —Compounding on that from the other side, it would see an immense draw on desired funds internationally. There is about $4 trillion out there which will be required to be raised in bonds and notes internationally. Am I in the ballpark there?

Dr Laker —I could not give you an answer to that. That is a macro question. It is not one that I am looking at.

Senator JOYCE —Is there a capacity for a crowding out on an international basis to affect the domestic supply of money where people have to find 80 per cent of the money to buy a house? Very rarely do people buy a house with 100 per cent of the funds. There does seem to be a crowding out of access to capital to some extent, through companies such as Suncorp moving towards a deleveraging position. There obviously are stressors in the marketplace. Does this international factor exacerbate what could happen to the domestic residential book that is held by Australian banks?

Dr Laker —That is a very complex macroeconomic question: what are the determinants of interest rates in global markets? Clearly, the broad macroeconomic setting is: the demand by borrowers, whether they be banks or governments; the supply, whether it come from sovereign wealth funds or investors; and what level of risk investors perceive and what premium they want to pay. Within that there is a range of possible outcomes. It would be very hard for me to forecast. That is not our role.

Senator JOYCE —I will move on. What potential oversight do you have on the operation of sovereign wealth funds in Australia?

Dr Laker —None.

Senator JOYCE —Does that give sovereign wealth funds any form of capacity to operate in a more extensive form than organisations that you do have prudential oversight over?

Dr Laker —We know very little about sovereign wealth funds. We do not meet them and we do not talk with them. I will leave it for others to judge what freedoms they perceive they have. We have a particular focus to look after the beneficiaries of our financial institutions—that is, depositors, policyholders and superannuation fund members. That is our focus.

Senator JOYCE —Thank you.

Senator IAN MACDONALD —I have a question in view of your comments and the minister’s comments about Storm, which is why I am here to talk to ASIC tonight. Dr Laker, has the name Storm ever come up in any of your official discussions?

Dr Laker —I would have to go back to the answer I gave earlier. We are not in a position to discuss our dealings with individual institutions. That is the act that I operate under. I could say, in general, that, where there are issues that pertain to any of our regulated institutions and there are question marks about those institutions, in the first instance we would look to the institution to explain, investigate and respond to us if there were issues of a prudential nature. That is the general response we take. I am not in a position to comment on the Storm matter. It has been a matter for ASIC.

Senator IAN MACDONALD —I appreciate it is a matter for ASIC, and that is where most of the questioning goes. Perhaps you have confirmed the issue surrounding Storm—their relationship with banks and various financial institutions which were involved in the Storm issue. I hear what you are saying. I am trying not to directly ask about anything you discussed. Has your board considered reassessing, or relooking at, the way you might do things as a result of anything you might have gleaned from the Storm issue?

Dr Laker —You are talking to two members of the board, and the third one is, unfortunately, absent. We do not have a board as such but we have an executive group. The answer to your question is no. We have a clear demarcation between our responsibilities and ASIC’s responsibilities. That particular matter falls squarely into their area of responsibility. As a matter of general principle, if there are issues that ASIC believes need to come to our attention because there are prudential matters, they will do so. Likewise, in our prudential oversight, if we came across matters we thought were germane to what ASIC is charged with doing then we would refer that matter to ASIC. There is no need for us to consider a change in those arrangements. In our view they have worked well and productively.

Senator IAN MACDONALD —I guess that was the question. I think you have answered it. There is nothing that you have learned that would, in any way, let you consider a change in the way you perform your duties or in the rules under which you operate because of anything you have learned from the way some of the institutions which you do oversee were involved in the matter surrounding the Storm collapse.

Dr Laker —My understanding is that matters are still under investigation with ASIC. That is a question you could put to ASIC. As I say, at this point we have had no direct involvement in those matters.

Senator IAN MACDONALD —If there were, as a result of ASIC’s inquiry, suggestions that prudential arrangements should change in relation to some of the banks or lending institutions, ASIC would make that recommendation to you. Is that what you are saying?

Dr Laker —As I say, as a matter of general principle we have a memorandum of understanding with ASIC which encourages us, very strongly, to share information that may be of interest to the mandate of the other side. All I can say is that we would expect to operate within that framework. If there were matters that either side wanted to draw to the other’s attention coming out of the global financial crisis, because there is a range of issues that have come up, then we would expect that information to be shared. It is shared and the arrangements work very well.

Senator IAN MACDONALD —If an institution over which you have jurisdiction were to lose a very large sum of money as a result of a transaction or an incident, would that trigger your authority’s involvement and interest?

Dr Laker —Yes. That has happened in the past and it certainly triggers our interest, but our focus there is not necessarily just the transaction—I am talking hypothetically here. It is more than that; it is what risk control mechanisms were meant to be in place and how they worked or did not work in a particular case. I would not want to give the impression that we spend a lot of our time chasing particular loss-making transactions down burrows. We would need an army of people to do that, and that is not our role. Materiality is very important. If there were material breaches of risk management systems, yes, we would certainly be active in understanding and investigating to see what the response was.

Senator IAN MACDONALD —If there were losses of a magnitude which could bring into question the whole banking system, that would be something that you would be involved in?

Dr Laker —I would have to give you an extremely loud yes to that one. That is the core of our business. I am charged with informing the minister as well. The act makes it very clear. If there were threats to the solvency of any regulated institution, the minister would hear APRA very loudly and so would the institution.

Senator IAN MACDONALD —When would the public become aware? At what stage do your investigations become available to parliament and the people?

Dr Laker —I cannot give you a black and white answer to that. I can tell you what the elements of our approach are. We are charged under the APRA Act with maintaining the confidentiality of our dealings with regulated institutions. There is a quite severe penalty on me or anybody else who breaches that, and I rather like my freedom. Our dealings are confidential. We are also aware that listed companies are subject to a continuous disclosure regime. In many countries around the globe, the dealings with a prudential regulator are protected by law, in any event, so we are not the only one that has that framework.

There is a question of how you balance the ‘working behind the scenes’ approach we have always taken as a prudential regulator with the market conduct and disclosure requirements for listed companies. I might say that not many of our companies are listed companies. We would work that situation through, depending on the circumstances. As I said, it is very hard to be black and white about that. We would account to the minister, as I am charged with doing under the act, and we would judge each set of circumstances as they arise. There is no simple recipe book.

Clearly, if there were concerns in the public about the solvency of an institution, in the past APRA, and before that the Reserve Bank, has issued press releases and given indications of the strength of institutions. We are very mindful in trying to resolve a problem behind the scenes that the depositors, the policyholders or the members whose interests we are acting on behalf of are not left unduly alarmed. We have got to get all of that balance right.

Senator IAN MACDONALD —Thank you for that. Thank you, Chair and Senator Eggleston, for allowing me to push in.

Senator EGGLESTON —I noticed that APRA publishes performance or league tables. Where else in the world does the prudential regulator publish investment performance statistics for the individual firms that it regulates?

Dr Laker —Are you referring to the superannuation industry?

Senator EGGLESTON —We are talking about superannuation, yes.

Mr Littrell —We have not done a comprehensive survey. The FSA puts out some of our material on an online website in the UK. The format that they use in their web is slightly different, but that is accessible information. Other than that, we would have to have a look around. It varies a bit by industry. Globally, there tends to be more information disclosed on banking than on super.

Mr Venkatramani —This industry has, with some assistance from APRA and other entities, become increasingly sophisticated and refined. There has been consolidation and there has been a huge amount of competition. The industry itself, from time to time, publishes its data—sometimes selectively when they do well. Given all of that and the increasing stake that the Australian public has in super, it is entirely appropriate that the available information is shared. As noted earlier, if the available information can be improved then it should be improved. I think that point has to be understood and made.

Senator EGGLESTON —Thank you. Is there any additional funding provided to APRA to facilitate the publication of superannuation fund trustee level data?

Mr Littrell —What has been published has already been collected. We had funding from previous years to collect the data. This is essentially electronic reordering of the data and, as things go, it is not very expensive.

Senator EGGLESTON —It is not very expensive, so it is not very difficult to publish that sort of superannuation fund trustee level data.

Mr Littrell —Yes. In fact, we have published it internally for years.

Senator EGGLESTON —You have published it internally?

Mr Littrell —Yes.

Senator Sherry —Not even I can get my hands on it. I would dearly love to see it, as I am sure the public would as well.

Senator EGGLESTON —Is that going to be made public completely? Is that what we are working towards? Would the minister like to see all this data made public?

Mr Littrell —We are currently responding to the minister’s request, as we noted earlier with Senator Bushby. At this point the final version of what becomes available online has yet to be approved by the executive group of APRA, so I am a bit constrained in saying what would be in it. But there is an intention to make a lot more material available publicly online than currently exists.

Senator EGGLESTON —Would it be terribly costly to introduce a fast-tracking system and perhaps make the superannuation fund performance statistics available at an investment option level so that people could pick and choose a bit?

Mr Littrell —That is more expensive because we do not currently collect that data. The expense in a statistical collection is essentially the work that people providing the data have to incur to provide it to APRA. APRA does have some expenses but they are minor in the scheme of things. But, given that we do not collect the investment option level data now, we would have to levy that requirement on industry and they would have to organise their reporting systems in a way to deliver it. We are in fact currently consulting as a separate matter on an expansion of the superannuation collection which would address, among several other issues, that question.

Senator EGGLESTON —Would you think that was a good option to go down that pathway?

Senator Sherry —I certainly do. We just had a discussion earlier. I think publication of what is currently available is important. I think there are 13,000 to 14,000 investment options. I think the long-term results would be quite interesting if only because of the earlier issue I mentioned. Some funds have five, 10, 100, 200 investment options. Whether in fact some of these more exotic investment options—if I can use that phrase—in the long-term actually are performing in a superior way to, say, a default investment option would be an interesting debate in itself. I just take a general view that the more information that is out there on our superannuation system, the better. It is not in the APRA area particularly, but, for example, we cannot get disaggregated data on contributions over and above the compulsory superannuation in any great detail. There are some private sector surveys that are done but we cannot get accurate data on that. That is not a criticism of APRA. But the more information there is out there to have an informed debate, the better our system will be.

Senator EGGLESTON —I think Senator Bushby asked you about unit pricing. I understand most retail funds revalue their units every day. Some industry funds will do this only over a three-year cycle. Is this a matter of prudential concern?

Senator Sherry —I am not being critical, but you may have had a bit of a double-up here with Senator Bushby. Whoever has assisted you, the questions are remarkably similar. They follow a similar track. We are happy to answer again but—

Senator BUSHBY —I am—

Senator Sherry —Yes. But it just strikes me that they are remarkably similar and parallel. That is not a criticism. If you want to take the time—we have dealt with these issues.

Senator EGGLESTON —It must be a remarkable coincidence.

Senator Sherry —I am sure. Do not worry, when I sat where you did, we did have some remarkable coincidences with questions, too.

Senator EGGLESTON —What about default funds?

Senator BUSHBY —I touched on default funds, but not thoroughly.

Senator EGGLESTON —Can APRA advise if any of the default funds have higher administrative costs?

Senator Sherry —Again, that is almost exactly, word for word, the question we had earlier.

Senator EGGLESTON —Amazing.

Senator BUSHBY —I asked whether they had gone up.

Senator Sherry —I said ‘almost exactly, word for word’.

Senator EGGLESTON —What meetings or discussions has APRA had with industry participants in relation to the selection of default funds? Is that a question we might consider?

Mr Venkatramani —That goes to the issue of trustee responsibility and in particular risk management not only in respect of industry funds but in respect of all the trustees which we have licensed and which we regulate. One of the key issues would be the setting of investment strategy, the setting of various menu options and investment choices offered and, within that, what happens if somebody does not choose, which is where the default comes into play. We do try to understand the trustee processes and to the extent those processes require improvement we make suggestions in our reports and findings and follow them up. From time to time we also issue best practice guidelines, which are not enforceable at law but which certainly determine our risk assessment. The higher risk means you will probably be spending more time with the trustee. That is the way we approach it, but it is not confined only to industry funds.

Senator Sherry —As to the issue of the determination of a default fund—and it is not just an industry fund; there are corporate and public sector funds that are default funds, and some retail funds in some instances, particularly through a subcontract arrangement with a corporate master trust—there are no criteria for selection of those in this country. The selection is made by the independent Industrial Relations Commission. We have not discussed my actions in respect to that as to the request I made to the industrial commission, but APRA obviously, as has been outlined, has the prudential oversight of the funds and the way they operate.

Senator EGGLESTON —Is APRA satisfied with the role of the Australian Industrial Relations Commission, that they have used due process and due consideration in selecting their truncated list of default funds? Are you happy with the list that is available? Is that a question that is difficult to answer?

Senator Sherry —It is really a policy issue.

Mr Littrell —It is not a question for APRA, really.

Senator Sherry —APRA does not have involvement in it. As I have indicated before, am I happy with the approach? No, I am not. I have said it on a number of occasions. I wrote to the industrial commission and suggested it was an appropriate time to evaluate the long-term performance of default funds, based on long-term performance. That has not occurred. The commission is an independent court; I cannot instruct or influence them other than to make a submission and suggest. They gave some reasons and it is an issue that will be considered in the context of the panel to be led by Jeremy Cooper that I announced on Friday of last week.

Senator EGGLESTON —APRA will have an ongoing role, will they, in this matter of default funds?

Senator Sherry —I have not got one at the moment.

Senator EGGLESTON —Will they have an ongoing role—

Mr Littrell —In terms of the Industrial Relations Commission choice of default funds for industrial awards, it has really got very little, if anything, to do with APRA.

Senator EGGLESTON —But should APRA have a role?

Senator Sherry —That is a policy matter and that issue has been referred to the panel. I gave a commitment to the Senate, particularly to Senator Fielding, that this matter of criteria for the selection of default funds would be considered, and the panel I announced last week will be considering it.

CHAIR —Thank you very much to APRA for coming in this afternoon.

Proceedings suspended from 4.46 pm to 4.56 pm