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Economics Legislation Committee
17/10/2012
Estimates
TREASURY PORTFOLIO
Australian Prudential Regulation Authority

Australian Prudential Regulation Authority

[21:09]

CHAIR: I welcome Dr Laker and officers from the Australian Prudential Regulation Authority. Do you have an opening statement, Dr Laker?

Dr Laker : Just a brief one. At the time of our last appearance in May, global financial markets were experiencing yet another bout of severe turbulence in response mostly to concerns about the public finances and banking systems of some peripheral euro countries. The roller-coaster ride was continuing. In more recent months, however, sentiment in global financial markets improved significantly. Strong rhetoric from the President of the European Central Bank—ECB—backed up by the ECB's plans to intervene in European sovereign debt markets to help protect the euro gave markets some comfort, as did the September announcement by the European Commission of its plans to establish a banking union in the euro area under a single supervisory mechanism involving the ECB. Additional monetary policy measures in major advanced economies have also boosted confidence.

Despite these positive developments, market sentiment remains fragile. A pattern has emerged where markets rally on announcements by European authorities but then lose confidence as the scale of the task facing Europe reasserts itself and tangible progress is slow to materialise. Beyond Europe, concerns about the looming US fiscal cliff and about the trajectory of the US and Chinese economies continue to weigh on global economic prospects. In its just-released World economic outlook, the IMF has concluded that downside risks to global economic forecasts have increased and are considerable. In its view, a key reason for recent setbacks to global recovery is that: 'Policies in the major advanced economies have not rebuilt confidence in medium term prospects.'

Notwithstanding this difficult global environment, the industries regulated by APRA remain in sound financial condition. You will be able to read this judgement and the reasons supporting it when APRA's annual report is tabled in parliament over the coming period. It is the judgement, as well, of the IMF after two recent reviews of Australia, the regular Article IV Consultation and the five-yearly Financial Sector Assessment Program review, which evaluates the strength and potential vulnerabilities of a country's financial system and regulatory architecture. The two IMF reviews are still being finalised but the preliminary finding is that the Australian financial system is, 'sound, resilient and well managed'. Of particular relevance to APRA, the IMF recommends that the authorities continue to emphasise intensive bank supervision. That has been the hallmark of our supervisory approach to date and we intend to maintain it.

Since we last appeared before the committee we have made good progress on the prudential policy front. Firstly, APRA has released final prudential and reporting standards that give effect to major elements of the Basel III capital reforms. The remaining elements will be in place by 1 January 2013 when the flag drops on the global implementation timetable. Australia is one of seven Basel committee members to have published its final Basel III capital requirements by the end of September. Secondly, APRA has finalised its reforms to capital standards for the general life insurance industries, intended to make the standards more risk sensitive and improve their relying on across-regulated industries. Prudential standards have been released and new reporting standards will follow shortly. Thirdly, APRA has released its proposed final MySuper package that gives effect to this element of the government's Stronger Super reforms. Although the legislation is yet to be finalised, release of the package is intended to give industry as much certainty as possible about the process for authorisation of MySuper products. APRA has also been consulting on its draft prudential standards for the superannuation industry and will be releasing final standards within the next few weeks. In addition, we are currently consulting on the new reporting framework for superannuation, which is also an element of the government's Stronger Super reforms.

We are now happy to take the committee's questions.

Senator CORMANN: I will start off with some questions about the transition arrangements to MySuper. Legislation that is currently before the parliament provides for a transition timetable in relation to the movement of accrued default amounts to 1 July 2017, yet in a draft prudential standard—SPS410: MySuper Transition—circulated by APRA in a subsequent discussion paper, you assert that APRA expects the movement of accrued default amounts to occur at the earliest opportunity. That seems, on the face of it, to be inconsistent with the legislation. Why would APRA go beyond the legislation in its expectations?

Mr Jones : It is not so much going beyond in terms of expectations. As you mentioned, there is a period through to 2017 whereby the accrued balances can be moved over, but if the accrued balances can be moved over earlier and it is in the members' best interests then we would expect that those balances would be moved over earlier.

Senator CORMANN: But either the transition timetable is to 1 July 2017 or it is not. On what authority does APRA take it upon itself to impose requirements that go beyond what is provided for in the legislation?

Mr Jones : It is not a case of APRA imposing standards that go beyond the legislation. The legislation, in fact, says that they have up until 2017, and APRA has suggested, through guidance, that if the trustees of the fund are of the view that it is in the members' interests to move those balances over then that is what we would expect them to do.

Senator CORMANN: You have not suggested; you have said that that is your expectation.

Mr Jones : It is our expectation.

Senator CORMANN: When the regulator puts an expectation like that into the marketplace it obviously has some weight with it. You would be conscious of the fact that this is a pretty significant exercise, which is why the government has provided for the transition timetable it has. I am just intrigued that APRA seems to be sending pretty strong messages into the marketplace that it will not be recognising that sort of timetable to 1 July 2017.

Mr Jones : I do not think so. It is more the case that if the trustees take the view that it is in members' best interests to move those balances earlier, and the trustees are confident that they have a MySuper product that is appropriate, then we would certainly expect that the trustees would move the balances prior to 2017.

Senator CORMANN: You might just want to reflect on that now that it has been raised.

Mr Jones : Sure.

Senator CORMANN: In relation to this whole MySuper issue, did the Cooper review canvass how MySuper would be licensed?

Mr Jones : I am not quite certain whether it came out of the Cooper review or not. The legislation requires an authorisation, that is correct, but I do not remember now whether the process for the MySuper—

Senator CORMANN: Maybe go and have a look back, and take it on notice.

Mr Jones : I do not think it did come out of Cooper, actually.

Senator CORMANN: As I understand it, Cooper recommended a separate licence, but I would be interested in APRA's read on it. Did APRA have a view on how MySuper products would be taken to market through the regulator once the government announced that it would support the MySuper recommendations out of the Cooper review?

Mr Jones : We had to establish a process once it was decided that the products would be authorised. This was a little bit unusual for APRA because this is a situation where we are authorising products, given that MySuper is, notionally, a product. We will go through an authorisation process, that is correct.

Senator CORMANN: What options were considered in permitting MySuper products?

Mr Jones : It came via the legislation in the first instance. The legislation developed a process of authorisation, and so we—

Senator CORMANN: Did APRA play a role in putting together the options in the legislation?

Mr Jones : Not in any direct sense. There had to be a recognition that APRA was comfortable with what is a MySuper product, and so it was determined that there would be an authorisation process.

Senator CORMANN: The consultation led by Paul Costello in 2011 recommended that MySuper should not have a separate licence but that it should be a variation of the RSE licence. What did APRA think about that?

Mr Jones : I am trying to remember.

Senator CORMANN: You do not have a top-of-mind view on it?

Mr Jones : The crucial thing was that once it was determined that there was going to be a MySuper product the question for APRA was ensuring that whatever was offered met the MySuper requirements. I can go back and check, but the actual process—

Senator CORMANN: Let me rephrase the question. APRA as an organisation is a prudential regulator which is focused on the prudential management of entities.

Mr Jones : Correct.

Senator CORMANN: And here you are now in a position where you have to authorise financial products.

Mr Jones : That is correct.

Senator CORMANN: Is that a position that you are spontaneously comfortable with or, all other things being equal, would you have preferred a different approach?

Mr Jones : It was more the case of implementing what the legislation said. The legislation suggested a process and the main point for APRA, as the regulator, was to determine the most effective way to authorise the products.

Senator CORMANN: Let me ask the question again. Have you got a view on whether APRA really is the most appropriate organisation if it is about approving products rather than providing prudential supervision of entities? Has an organisation like ASIC been considered if it is a matter of approving products rather than providing prudential supervision of entities?

Mr Jones : I do not know whether the government considered whether ASIC would be appropriate or not.

Senator CORMANN: You have not been part of discussions that explored that question?

Mr Jones : No.

Senator CORMANN: Essentially, the government came to you and said we want you, APRA, to do it. And they have not provided any explanations.

Mr Jones : I think it probably made sense in that it is a product issued by an RSE licensee and so we are going to be the people who actually do the supervision of it. So it probably makes sense that, once the legislative boundaries are in place, we probably determine whether or not it meets the criteria.

Senator CORMANN: Once tailored MySuper products were permitted did APRA have a view on whether it wanted to authorise each MySuper product or whether it would be preferable to do it in a more generic process?

Mr Jones : APRA definitely had a view on that.

Senator CORMANN: What was your view?

Mr Jones : Our view was that if there was going to be an authorisation process we wanted to authorise every product.

Senator CORMANN: Why is that?

Mr Jones : That is because there was a proposal at various times for a so-called generic product and then a tailored product. At one stage, through various discussions, I understand that there was a proposal from part of the industry that the generic product be authorised but that the tailored product not be authorised. The consequence of that is that you would have different types of product in the market at the same time. Some of them would be authorised; some of them would not be authorised. I think there would be a lot of confusion. Our view was that if you were going to offer a MySuper product then that product needed to be authorised. The mechanism—

Senator CORMANN: The question is to what extent you have to become party, essentially, to product design. There is an arguable view that as long as you comply with certain features as prescribed in the legislation and it is ticked off by APRA if you provide some specifically tailored features that go beyond that, then that would be all part of competitive tensions in the system.

Mr Jones : That is fine. That is not a problem. All the usual—

Senator CORMANN: Except that you have to tick off every single product.

Mr Jones : No you do not. All you have to do is look at the variations. Generally speaking, once you have a generic product—we put this out in the MySuper authorisation process—you would come into APRA and show APRA where the variations were. If those variations were very minor my guess is that it would be fairly simple to get the authorisation.

Senator CORMANN: Your 'guess is'. When the parliament was—

Mr Jones : Well, given that there have not been any yet—

Senator Wong: Senator—

Senator CORMANN: You are the minister for deregulation. You should be on my side, Minister.

Senator Wong: Senator, you have a very particular position, which is about expressing the views of a particular set of interests. The government has looked at a broader public policy—

Senator CORMANN: That is very funny coming from this government! That is very, very funny.

CHAIR: The minister was speaking.

Senator Wong: Do you want him to rephrase 'guess', because if you are going to make a political point of it the officer should be allowed to restate.

Senator CORMANN: I am not making a political point, believe me.

Senator Wong: I think you were.

Senator CORMANN: No, it is actually a policy discussion.

Senator Bushby interjecting

Senator Wong: Do you want to have an argument?

Senator CORMANN: Mr Jones, were you aware of the amendments that the coalition moved to the Superannuation Legislation Amendment (MySuper Core Provisions) Bill when the legislation was before the parliament? That is a fair question.

Senator Wong: What do you want me to do?

Senator CORMANN: It could well be that, given APRA's integral role in this, believe it or not, Minister—

Senator Wong: The world does not revolve around you, Senator Cormann. I know you would like to believe it does but not everybody hangs off your every amendment.

Senator CORMANN: Minister Shorten did seek advice from ASIC in relation to some amendments that we circulated on FOFA, believe it or not.

Senator Wong: That is great; congratulations!

Senator CORMANN: So it is not entirely unprecedented, Minister.

Senator Wong: I am sure Mr Jones has lots of things to do.

Senator CORMANN: I just asked a question; there is nothing unreasonable about it.

Senator Wong: He can answer it. I was just amused at the question.

Mr Jones : The answer is, no.

Senator CORMANN: You were not asked for advice.

Senator Wong: Senator, we heard your question as, 'Were you aware of …'

Senator CORMANN: That was the start of it. The next part of it was—

Senator Wong: We did not hear the 'advice' bit.

Senator CORMANN: That is because you interrupted me.

Senator Wong: Of course!

Senator CORMANN: If I were to interrupt you the way you interrupt me I would probably be called all sorts of names by this government so I am being very cautious.

Senator Wong: Senator, I would not start this if I were you, particularly in this committee, given the history. I suggest that if we look at the Hansard we would be pretty much even on the interrupting. Neither Mr Jones nor I heard the advice question. Would you like the advice question answered?

Senator CORMANN: If he is not aware of the amendments then I assume he was not asked for advice.

Mr Jones : What happens in some of these circumstances is that we become aware after the fact. And sometimes we become aware by reading in a newspaper or reading in Hansard some days later—

Senator CORMANN: You have already said that you were not aware, so presumably you have not been asked for advice.

Mr Jones : That is correct.

Senator CORMANN: I think the issue is resolved.

CHAIR: Senator Cormann, I think your time is about to expire.

Senator CORMANN: Is APRA of the view that by authorising every MySuper product the government is, in fact, giving each product a stamp of approval?

Mr Jones : I do not think it is a stamp of approval. It is really the case that there needs to be a recognition of what the trustee duties are with respect to each product. And APRA needs to have the confidence that if the product is being sold into the market as a MySuper product that it complies with the regulations.

Senator CORMANN: Does that mean that APRA stands behind the MySuper product not failing?

Mr Jones : No, it does not.

Senator CORMANN: It does not?

Mr Jones : No, it does not.

Senator CAMERON: Mr Laker, you probably have not seen this article. It is an article by Marcus Padley, who says he is a stockbroker with Patersons Securities and author of stock market newsletter Marcus Today. He says his views do not necessarily reflect the views of Patersons. This is an article that was in the Sydney Morning Herald on 13 October 2012. To me it is a blatant promotion of self-managed super funds. I am just wondering if someone who is promoting themselves as an expert on some financial advice in the press as to what people should do in terms of their super choices, would fall under your purview.

Dr Laker : No.

Mr Jones : It would be ASIC's responsibility.

Dr Laker : It is ASIC's.

Senator CAMERON: Sometimes it is very difficult to get the mix. The reason I am thinking it would be you guys is that it is actually about risk profile. His article is about the risk profile of self-managed funds against, basically, industry funds.

Dr Laker : Yes.

Senator CAMERON: It is about the performance, both relative and actual. So these are issues that go to the organisations that you have responsibility for. He basically promotes self-managed funds in this article. The question I am asking is, if someone is doing this—and it really seems to me to be just a blatant push for the Association of Superannuation Funds of Australia—shouldn't there be some warning to potential investors or people who are looking to pick a superannuation fund, that this is fundamentally an ad for ASFA?

Mr Jones : With regard to warnings, there are now warnings on the ATO website, as I understand it, that self-managed superannuation funds are not covered by the same protections that APRA regulated funds are, but I think your question probably goes a bit beyond that. I am not aware of the article but from the sound of things it is probably linked to the advice. I will check out the article, as well.

Senator CAMERON: Yes, it was in the Sydney Morning Herald on 13 October 2012. Could you take it on notice and maybe come back. My concern is that self-managed funds do not provide the same protections.

Mr Jones : Correct.

Senator CAMERON: I am just wondering how we can deal with this as a government to try and protect people who may look at an article like this from a prominent media personality and stockbroker. They may say, 'This is great,' but none of the problems are explained there. If it is just advertising that is fine.

Mr Jones : It would probably be a useful question also for ASIC, in the sense that ASIC has also been doing some work recently on the nature of advice given to individuals who are contemplating setting up self-managed superannuation funds. I think, for instance, they had some information about minimum balances and being aware of the costs that may be appropriate. A lot of ASIC work has been done on that.

Senator CAMERON: I will take this up with ASIC when they appear. I have raised on a number of occasions the issue of hedge funds. I would have thought that hedge funds after the global financial crisis would have diminished, but they are coming back pretty strong which I am surprised about. Again it is the capacity of trustees on the boards of super funds to understand what type of risk is associated with a hedge funds, how you get to the bottom of what the hedge funds is all about and how you get some transparency into this. I have asked these questions before. Has there been any further consideration of these enormous issues for trustees and members of superannuation funds?

Mr Jones : Effectively, under Australian legislation there are no restrictions upon what trustees can invest in with the exception of a so-called in-house asset rule. Trustees can invest and APRA's role in this is to make sure that the trustees are aware of their obligations and, as you say, that the trustees understand the risk associated with these various types of investments. We hope that the trustees have a very good understanding of the nature of the investment.

Senator CAMERON: Surely it is not good enough to hope? The reason I raise this and I will continue to raise this is that you say it is up to the trustees, but the trustees have an information asymmetry when they are dealing with this. I am not sure how you get more transparency about hedge funds. I would have thought that you guys would be extremely concerned if decisions are being made to invest in a fund where there is a massive information asymmetry, so that is not a proper approach. I do not think it is good enough to say the individual trustees have to make that call.

Mr Jones : Speaking as a regulator, regulators always think it would be great to have more powers and so the regulators' response immediately would be we should look at banning certain types of investments.

Senator CAMERON: Can you draft me some legislation?

Senator Wong: A private senator's bill.

Mr Jones : It comes with some risk, of course, in the sense that you can over regulate and the consequence of over regulation is that you limit the investment opportunities to such an extreme that members are probably worse off.

Senator CAMERON: I would like you to keep thinking about the balance because I will keep asking and I will have a look at this again.

Senator BUSHBY: First, I have a process question. In questions on notice from the last estimates, I asked you about unanswered questions on notice from previous estimates. In your answer you said that APRA has provided Treasury with all responses to questions on notice in the past 12 months. As of a couple of hours ago, there are still three APRA answers to questions on notice that have not been received by the secretariat. One is from October last year and two are from May this year. I want to confirm that you have sent the answers to all of those questions to Treasury and if there is a hold-up in the answers getting to the secretariat it is somewhere between you and the secretariat.

Dr Laker : As I have said in a previous answer, we are very diligent in trying to meet those timetables. We have indicated to you that we have cleared our in-tray of those questions, but we cannot control the process once they are in the outbox.

Senator BUSHBY: Is it concerning for you that you have answered these and it looks as if you have not answered them if people look on the website and see that questions remain unanswered?

Dr Laker : Thank you for giving me the opportunity to say it is not APRA.

Senator BUSHBY: I understand that.

Dr Laker : If we had not been able to respond in the time we would let the Treasury know. There has been quite a wave of those questions on notice which I see going through and my understanding is we meet the timetables.

Senator BUSHBY: I do not expect you to have the answers, so please take on notice the dates that questions on notice 519 from last October and 209-214 and 77 from May this year were forwarded to Treasury.

Senator Wong: I will ask where those are at. I did ask for some statistics on this. We took 1,334 questions on notice at the last budget estimates in this portfolio in the last hearings. I am advised that a total of 83 have yet to be provided to the committee. That is obviously from the budget estimates round.

Senator BUSHBY: One of those is from October last year.

Senator Wong: Okay. I would reflect to the committee that is an extraordinary number of questions for a portfolio. It is well ahead of what we took on notice in Finance. It is no criticism, but that takes significant resources.

Senator BUSHBY: Here the agency has done the work and has forwarded the answers. I was curious to work through why we have not received them.

Senator Wong: I have not taken issue with your question, I just want to give that context.

Senator BUSHBY: What is APRA's policy and practice in respect of unit pricing errors in superannuation?

Mr Jones : I think you should have asked this question a few points before.

Senator BUSHBY: I asked lots of questions about unit pricing before, but this one is slightly different.

Mr Jones : Do you mean what do we do about errors?

Senator BUSHBY: Yes, if unit pricing errors become apparent as part of your work.

Mr Jones : We have the unit pricing guide which we put out jointly with ASIC. Unit pricing errors are generally identified by the institutions themselves and quite often the unit pricing errors come from the complexities of the tax legislation surrounding it. Generally speaking the institutions concerned will get in touch with APRA and explain to APRA that they have a unit pricing error. We talk to them about the process by which they will undertake restitution.

Senator BUSHBY: You indicated there are a number of reasons this may happen and some of those are above board. What percentage of funds regulated by APRA experience errors? Do you have those sorts of figures?

Mr Jones : It is not a statistic we collect in terms of percentage of funds that have unit pricing errors. They tend to be random. The institutions notify us and then we talk about restitution. It is not a large number. I could go back and work out the number and give you a percentage, but I do not think it would have much relevance in the sense of a percentage of the number of funds. It is far more important in terms of the size of the unit pricing errors rather than number.

Senator BUSHBY: I suspect that would direct APRA in terms of the response that you would take. If it is a small error it is probably easily fixed, but if it is substantial it may have an impact on some of the owners of the accounts and it may be more important to make sure you get restitution.

Mr Jones : You tend to find that the large errors in terms of dollars do not necessarily turn out to be large dollar amounts for individuals, because quite often they are small errors for a very large number of individuals.

Senator BUSHBY: Do you conduct any investigations into those that you think are more serious?

Mr Jones : Yes, because we have in certain circumstances established complete restitution plans whereby there are very specific deadlines to be met. Also, it is not just a case of getting restitution for members; it is also a case of looking at the processes that led to the errors in the first place and making sure that they have a mechanism to make sure it does not happen again.

Senator BUSHBY: Obviously without naming any, are you investigating any funds at the moment for unit pricing errors?

Mr Jones : Not that I am aware of.

Senator BUSHBY: Are you aware of any cause for legislative reform to redress unit pricing deficiencies?

Mr Jones : No.

Senator BUSHBY: Have you received any recommendations on making any legislative changes or that you have looked at providing advice on?

Mr Jones : No, not that I am aware of.

Senator BUSHBY: Have you issued any enforceable undertakings in respect to retail and employer sponsored funds during the past six years in respect of unit pricing?

Mr Jones : I think the answer would be yes.

Senator BUSHBY: Please take that on notice.

Mr Jones : I will take that on notice and check. Given that most of the unit pricing errors that have been identified over the past number of years have come from retail funds, they may or may not have involved enforceable undertakings depending upon the way in which you had the restitution program.

Senator BUSHBY: My final question is: in rectifying unit pricing errors so as to ensure no detriment to the super fund members, what sources of funding are available? Do they access shareholder funds, use fund reserves, retrieve moneys from members who have been beneficiaries of these errors. How do they approach that?

Mr Jones : In almost every circumstance I am aware of it has come from shareholder funds. In most of the circumstances it has been through retail funds and the parent companies of these retail funds have done it out of shareholder capital. I am not aware of circumstances whereby the members who were overpaid have been asked to repay.

Senator BUSHBY: This is one of the consequences of the unit pricing errors.

Mr Jones : Exactly. I do not think those people have ever been asked to pay back.

CHAIR: Thank you, Dr Laker and your officers for your assistance.

Proceedin gs suspended from 21:40 to 21 : 49