Superannuation (prudential standard) determination No. 4 of 2013

EXPLANATORY STATEMENT

Prepared by the Australian Prudential Regulation Authority (APRA)

Superannuation Industry (Supervision) Act 1993, subsection 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 entity (RSEs).

On 28 June 2013, APRA made Superannuation (prudential standard) determination No. 4 of 2013 under subsection 34C(1) of the Act (the instrument).

The instrument commences on 1 July 2013.

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.[1]

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 the 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. 

On 15 November 2012, APRA determined eight new prudential standards for superannuation after a long consultation process. At the same time, three prudential standards – Prudential Standard SPS 160 Defined Benefit Matters (SPS 160), Prudential Standard SPS 310 Audit and Related Matters (SPS 310), and Prudential Standard SPS 520 Fit and Proper (SPS 520), – were released in proposed final version.

In the response to submissions that accompanied the final prudential standards, APRA indicated that these three standards could not be determined at the time because they each contained provisions that required the passage of the Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Bill 2012 (Tranche 4 Bill). The Tranche 4 Bill received royal assent on 26 June 2013 and the amendments to the SIS Regulations will commence on 1 July 2013.

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 SPS 520, which sets out prudential requirements for RSE licensees in determining the fitness and propriety of individuals to hold positions of responsibility. Its objective is to ensure that an RSE licensee prudently manages the risks posed to its business operations by having persons acting in responsible positions who are not fit and proper.

The key requirements of SPS 520 are that an RSE licensee must:

• have and implement a Fit and Proper Policy that meets the requirements of this Prudential Standard;
• assess the fitness and propriety of a responsible person prior to initial appointment and then re-assess annually;
• take all prudent steps to ensure that a person is not appointed to, or does not continue to hold, a responsible person position for which they are not fit and proper;
• ensure additional requirements are met for RSE auditors and RSE actuaries; and
• provide certain information to APRA regarding responsible persons and the RSE licensee’s assessment of their fitness and propriety.

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 fitness and propriety, 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.

No issues of substance were raised with respect to the provisions of draft SPS 520. SPS 520, therefore, contains only minor editing improvements as a result of the feedback received.

4.             Regulation Impact Statement

A Regulation Impact Statement has been prepared and has been lodged as supporting material.

5.             Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

A Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 is provided at Attachment A to this Explanatory Statement.

ATTACHMENT A

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Superannuation (prudential standard) determination No. 4 of 2013

This Legislative Instrument is compatible with the human rights and freedoms recognised or declared in the international instrument listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (HRPS Act)

Overview of the Legislative Instrument

The purpose of making this legislative instrument is to make SPS 520, which sets out prudential requirements for RSE licensees in determining the fitness and propriety of individuals to hold positions of responsibility. This is a new prudential standard which applies to RSE licensees in order to implement the Government’s Stronger Super reforms that come within APRA’s mandate.

Human rights implications

APRA has assessed the instrument against the international instruments listed in section 3 of the HRPS Act and determined that Article 17 of the International Covenant on Civil and Political Rights (ICCPR) is potentially of relevance to the instrument.

Article 17 of the ICCPR prohibits the arbitrary or unlawful interference with a person’s privacy, family, home and correspondence, and attacks on reputation. Article 17 is exclusively concerned with prohibiting interference with the privacy and/or reputation of individual persons. It does not extend to the privacy and/or reputation of corporate entities.

SPS 520 requires RSE licensees to determine the fitness and propriety of responsible persons as defined within SPS 520. Responsible persons can include directors, secretaries and senior managers of the RSE licensee as well as other individuals play a significant role in the management of the RSE licensee meaning that responsible persons aren’t limited to employees of the RSE licensee and could include employees of service providers. The requirements of SPS 520 necessitate RSE licensees obtaining personal information about any responsible persons in order to make an assessment about their fitness and propriety.

The personal information RSE licensees are required to obtain under SPS 520 is essential to the effective operation of SPS 520 including ensuring that only individuals with appropriate backgrounds, qualifications and experience hold key positions relating to the management of an RSE licensee. The RSE licensee understanding who the directors and the principal individuals are within an RSE licensee is central to the effective governance of superannuation entities.

This information ultimately supports APRA achieving its mission of ensuring that, under all reasonable circumstances, financial promises made by the institutions APRA supervises are met within a stable, efficient and competitive financial system.

APRA collects information on responsible persons, which includes personal information, under Reporting Standard SRS 520 Responsible Persons Information (SRS 520). SRS 520 has been determined in Financial Sector (Collection of Data) (reporting standard) determination No. 77 of 2013 for which a separate statement of compatibility with human rights was prepared.

APRA also considers that Article 6(1) of the International Covenant on Economic, Social and Cultural Rights (ICESCR) is arguably relevant.  The ICESR proclaims the right to work in a general sense. The United Nations Committee on Economic, Social and Cultural Rights (the UN Committee) has stated that ‘the right to work affirms the obligation of States parties to assure individuals their right to freely chosen or accepted work, including the right not to be deprived of work unfairly’. The right not to be deprived of work unfairly is relevant for the purposes of this Legislative Instrument.

This definition implies that depriving an individual of work may not be a violation of Article 6(1) where that deprivation is regarded as fair. In determining what is ‘fair’, regard may be had to Article 2 of the ICESCR. Article 2 prohibits discrimination in access to and maintenance of employment on the grounds of race, colour, sex, language, religion, political or other opinion, national or social origin, property, birth or other status, which has the intention or effect of impairing or nullifying exercise of the right to work. Where an individual is deprived of work on the basis of any of these grounds, it is reasonable to assume that that deprivation will be regarded as ‘unfair’ and, therefore, that the right to work has been engaged.     

Under SPS 520, an individual who fails to meet the prescribed criteria for determining if a person is fit and proper will be prohibited from being appointed to, or continuing to hold, a responsible person position. The criteria are whether the person:

a)             possesses the requisite competence, character, diligence, experience, honesty, integrity and judgement;

b)             possesses the requisite education or technical qualifications, knowledge and skills;

c)             is not disqualified under the Superannuation Industry (Supervision) Act 1993 from holding the position; and

d)             either:

i)              has no conflict in performing the duties of the position; or

ii)            if the person has a conflict, the conflict will not create a material risk that the person will fail to perform properly the duties of the position.

These fit and proper criteria are based on the competence and character of the individual having regard to the function and duties of the responsible person position. The criteria are not based on any of the grounds of discrimination stated in Article 2. Therefore, it is arguable that prohibiting an individual who does not satisfy the above criteria from holding a responsible person position is not unfair and, therefore, does not engage the right to work contained in Article 6(1). 

Article 7 of the ICESCR provides further support that depriving a person of work will not be regarded as unfair where it is based on a lack of competence and/or character. Article 7 ensures ‘equal opportunity for everyone to be promoted in his employment to an appropriate higher level, subject to no considerations other than those of seniority and competence’.

In addition, regard may be had to the Fair Work Act 1999, which provides that the dismissal of an employee will be ‘unfair’ where that dismissal was ‘harsh, unjust or unreasonable’ (section 385), taking into account whether there was a valid reason for the dismissal related to the person’s capacity or conduct (section 387). This also implies that depriving a person of work will not be regarded as unfair where it is based on a lack of competence and/or character. 

Accordingly, since the fit and proper criteria in SPS 520 are premised on the individual’s competence and character, it is arguable that the individual is not being unfairly deprived of work and, therefore, the right to work has not been engaged.

However, the proper interpretation of the right to work contained in Article 6(1) is ambiguous and, in particular, the right not to be deprived of work may not be qualified to the notion of unfairness. Therefore, the above analysis is not conclusive and the alternative might be argued: that is, this Legislative Instrument does engage the right to work.

Article 4 of the ICESCR provides that countries may subject economic, social and cultural rights only to such limitations ‘as are determined by law only in so far as this may be compatible with the nature of these rights and solely for the purpose of promoting the general welfare in a democratic society’.  The UN Committee has stated that such limitations must be proportional and should be of limited duration and subject to review.

The objective of SPS 520 is to ensure that an RSE licensee prudently manages the risks posed to its business operations by having persons acting in responsible positions who are fit and proper. Persons who are responsible for the management and oversight of an RSE licensee’s business operations need to have appropriate skills, experience and knowledge, and act with honesty and integrity. These skills and qualities strengthen the protection afforded to beneficiaries and other stakeholders. This contributes to APRA’s broader objective of ensuring that, under all reasonable circumstances, financial promises made by supervised institutions are met within a stable, efficient and competitive financial system.

Failure to limit access to reasonable person positions in the superannuation industry considerably increases the risk of significant loss to beneficiaries of superannuation funds. Consequently, the limitation of the right to work by this Legislative Instrument is reasonable, necessary and proportionate to its objective as described above.

Conclusion

Superannuation (prudential standard) determination No. 4 of 2013 is compatible with human rights because to the extent that this determination limits human rights, those limitations are reasonable, necessary and proportionate.

[1]  Stronger Super, Recommendation 10.2, p. 60.