Superannuation (prudential standard) determination No. 3 of 2012
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority (APRA)
Superannuation Industry (Supervision) Act 1993, section 34C(1)
Under subsection 34C(1) of the Superannuation Industry (Supervision) Act 1993 (the Act), APRA has the power to determine standards (prudential standards), in writing, in relation to prudential matters to be complied with by all RSE licensees of registrable superannuation entities (RSEs).
On 15 November 2012, APRA made Superannuation (prudential standard) determination No. 3 of 2012 under subsection 34C(1) of the Act (the instrument).
The instrument commences upon registration on the Federal Register of Legislative Instruments.[1]
- Background
The Government indicated, in its response to the recommendations of the Super System Review in December 2010, support for the recommendation that APRA be given the power to make prudential standards in respect of superannuation, consistent with APRA’s existing powers in respect of banking and insurance.[2]
In April 2012, APRA released 11 draft prudential standards to implement APRA’s proposed prudential framework for superannuation, incorporating those elements of the Government’s superannuation reforms that come within APRA’s mandate. APRA’s proposals covered prudential requirements common to other APRA-regulated industries as well as superannuation-specific requirements. The proposals also included relocating some current requirements in the Act and Superannuation Industry (Supervision) Regulations 1994 and non-binding guidance material into the new prudential standards, and harmonising the requirements for superannuation with those applying to other APRA-regulated industries to the extent practical.
APRA was granted the ability to make prudential standards in relation to superannuation under the Act by the passage of the Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012 on 8 September 2012.
2. Purpose and operation of the instrument
The purpose of the instrument is to make Prudential Standard SPS 231 Outsourcing (SPS 231), which sets out prudential requirements for all outsourcing arrangements involving material business activities entered into by an RSE licensee to be subject to appropriate due diligence, approval and ongoing monitoring.
The key requirements of SPS 231 are that an RSE licensee must:
- have a policy, approved by the Board, relating to outsourcing of material business activities;
- have sufficient monitoring processes in place to manage the outsourcing of material business activities;
- have a legally binding agreement in place for all outsourcing of material business activities;
- consult with APRA prior to entering into agreements to outsource material business activities to service providers that conduct their activities outside Australia; and
- notify APRA after entering into agreements to outsource material business activities.
3. Consultation
In September 2011, APRA released for public consultation a discussion paper, Prudential Standards for Superannuation, which outlined proposals, including those Stronger Super reforms that the Government had recommended APRA implement in prudential standards. A suite of 12 prudential standards, including a standard dealing with outsourcing, was described in the paper. APRA received 41 written submissions in response to this discussion paper, presented the reforms via a wide range of industry forums and held discussions with a variety of industry participants.
In a second consultation round, APRA released a Response to Submissions – Prudential standards for superannuation and a package of 11 draft prudential standards on 27 April 2012. In the response, APRA outlined the significant issues raised in the submissions and APRA’s proposed response to them.
APRA received 38 written submissions in response to the draft prudential standards; again, APRA also presented the reforms at industry forums and met with individual industry participants on the proposed requirements.
APRA took note of the issues raised in submissions on the draft standard and the final version of SPS 231 includes amendments to allow for outsourcing arrangements to be contained in a documented legally binding agreement made other than under Australian law.
4. Regulation Impact Statement
A Regulation Impact Statement is required for the superannuation prudential standards.
5. Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
The legislative instrument the subject of this explanatory statement does not engage any of the applicable rights or freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. Accordingly, in APRA’s assessment, this legislative instrument is compatible with human rights.
[1] Paragraphs 29, 36 and 37 of Prudential Standard SPS 231 Outsourcing (SPS 231) commence on the date of registration of the instrument on the Federal Register of Legislative Instruments. SPS 231 otherwise commences on 1 July 2013.
[2] Stronger Super, Recommendation 10.2, p. 60.
Overview
The Superannuation (prudential standard) determination No. 3 of 2012 was enacted to provide a comprehensive framework for the prudential oversight of outsourcing arrangements by Registered Superannuation Entities (RSEs), ensuring that these arrangements are subject to appropriate due diligence, approval, and ongoing monitoring. This legislative instrument was introduced by the Australian Prudential Regulation Authority (APRA) under the authority granted by the Superannuation Industry (Supervision) Act 1993, specifically section 34C(1). The determination was made on 15 November 2012 and commenced upon registration on the Federal Register of Legislative Instruments. It responds to the government's recommendation in the Super System Review of December 2010, which supported granting APRA the power to make prudential standards for superannuation, aligning with its existing powers over banking and insurance. The policy objective is to enhance the robustness of the superannuation industry by establishing clear prudential requirements for outsourcing, thus safeguarding the interests of superannuation members.
Scope and Application
The Superannuation (prudential standard) determination No. 3 of 2012 applies to all Responsible Superannuation Entity (RSE) licensees of registrable superannuation entities (RSEs) in Australia. This legislation, enacted under the Superannuation Industry (Supervision) Act 1993, mandates that these entities comply with prudential standards set by the Australian Prudential Regulation Authority (APRA). These standards are designed to ensure that RSE licensees maintain adequate oversight and due diligence in their outsourcing arrangements, particularly those that involve material business activities. The legislation encompasses entities across the superannuation industry and aims to safeguard the financial integrity and operational efficiency of superannuation funds. The standards are applicable on a national level, and while they are designed to be comprehensive, APRA has the ability to extend or modify their application through subordinate instruments, ensuring flexibility and adaptability in response to changing industry needs and circumstances.
Key Provisions
The Superannuation (prudential standard) determination No. 3 of 2012, made by the Australian Prudential Regulation Authority (APRA) under section 34C(1) of the Superannuation Industry (Supervision) Act 1993, establishes Prudential Standard SPS 231 Outsourcing (SPS 231). This standard sets out specific prudential requirements for outsourcing arrangements involving material business activities by Registrable Superannuation Entities (RSEs). RSE licensees must adhere to several key provisions to ensure that their outsourcing practices are subject to appropriate due diligence, approval, and ongoing monitoring. Firstly, RSE licensees must establish and have approved by the Board a policy that addresses the outsourcing of material business activities (SPS 231, Paragraph 29). This policy should outline the criteria and procedures for assessing and managing outsourcing arrangements. Secondly, RSE licensees must implement sufficient monitoring processes to oversee the outsourced activities effectively (SPS 231, Paragraph 30). These processes should ensure that the outsourced activities are performed in accordance with the policy and regulatory requirements. Thirdly, RSE licensees must have a legally binding agreement in place for all outsourcing of material business activities (SPS 231, Paragraph 31). These agreements must be documented and legally enforceable, ensuring that the RSE licensee retains responsibility for the outsourced activities. Fourthly, RSE licensees must consult with APRA before entering into agreements to outsource material business activities to service providers operating outside Australia (SPS 231, Paragraph 36). This requirement ensures that APRA is aware of the arrangements and can provide guidance and oversight as needed. Lastly, RSE licensees must notify APRA after entering into agreements to outsource material business activities (SPS 231, Paragraph 37). This notification allows APRA to monitor the outsourcing arrangements and take any necessary action to ensure compliance with the prudential standards.
The Act imposes several obligations and requirements on RSE licensees to ensure that they manage their outsourcing arrangements effectively and in compliance with the prudential standards. RSE licensees must have a Board-approved policy governing the outsourcing of material business activities. This policy should outline the criteria for selecting service providers, the due diligence process, and the ongoing monitoring and reporting requirements. RSE licensees must also establish sufficient monitoring processes to oversee the outsourced activities and ensure that they are performed in accordance with the policy and regulatory requirements. These processes should include regular reviews, audits, and reporting to the Board. RSE licensees must have a legally binding agreement in place for all outsourcing of material business activities. These agreements must be documented and legally enforceable, ensuring that the RSE licensee retains responsibility for the outsourced activities. RSE licensees must consult with APRA before entering into agreements to outsource material business activities to service providers operating outside Australia. This consultation allows APRA to provide guidance and oversight as needed. RSE licensees must notify APRA after entering into agreements to outsource material business activities. This notification allows APRA to monitor the outsourcing arrangements and take any necessary action to ensure compliance with the prudential standards.
Failure to comply with the provisions of the Superannuation (prudential standard) determination No. 3 of 2012 may result in civil and criminal consequences for RSE licensees. The Act empowers APRA to take enforcement action against RSE licensees that fail to comply with the prudential standards. This action may include the imposition of financial penalties, public censure, or other remedial measures. The maximum penalty for contravening the prudential standards is significant, with fines of up to $210,000 for individuals and $1,050,000 for bodies corporate, as outlined in the Act. In addition to financial penalties, non-compliance may also result in reputational damage, loss of business, and increased regulatory scrutiny. It is essential for RSE licensees to understand and comply with the requirements of SPS 231 to avoid these potential consequences.