The peak industry body, the Association of Superannuation Funds of Australia (ASFA), is concerned about a proposed reform to strengthen supervision of superannuation funds during crises.
Although ASFA broadly supports proposals in the Treasury consultation paper, Strengthening APRA's Crisis Management Powers, it has reservations about a potential trigger that would allow the Australian Prudential Regulatory Authority to exercise its direction powers for superannuation.
As part of its Stronger Superannuation announcement in December 2010, the federal government committed to giving APRA power to issue prudential standards for superannuation, and introduced legislation to that effect in parliament in February 2012.
APRA has comprehensive direction powers in relation to authorised deposit-taking institutions (ADIs) and general and life insurers, but not in relation to registrable superannuation entity (RSE) licensees.
Enhancing ARPA's powers in superannuation would allow it to direct how a superannuation fund should remedy a problem, and it could use its direction powers as a deterrent before a fine is issued.
Simply put, the direction powers would provide APRA with a powerful early-intervention tool in crises involving superannuation funds.
Under proposed reforms, the Superannuation Industry Supervision (SIS) Act will be amended to allow APRA to issue a direction to super funds, based on five triggers: a current or anticipated breach of the RSE licensee law or licence condition; promoting instability in the Australian financial system; conducting affairs in an improper or financially unsound way; and where the failure to issue a direction would materially prejudice the beneficiaries of a superannuation entity.
In its submission this week, ASFA said it broadly supported the proposed new direction triggers, with the exception of "promoting instability in the Australian financial system". "In our view, this proposed power is already sufficiently covered by the new prudential standards for superannuation," it said.
ASFA added, "Our concern with this is that history has shown we only know which instruments cause financial instability in hindsight. For instance, in the aftermath of the global financial crisis it would be obvious to say structured products, such as mortgage-backed securities, led to financial instability. If a regulator had the power proposed in the consultation paper, it could have used it to prevent trustees of superannuation funds from investing in such products. . The drying up of the mortgage-backed securities market in Australia almost led to a freezing of Australia's banking system."
ASFA said a range of investments made by superannuation trustees could be seen by APRA as promoting financial instability, for example, engaging in high-frequency trading (HFT) investment strategies. Also, the lending of stock by superannuation funds to hedge funds that short the market, and even engage in dark pools (outside the lit market), can, at a system level, have implications for financial stability.
". Our concern stems around giving the regulator such broad sweeping powers to ban certain investments, without having sufficient confidence that ARPA would fully understand the implications of any actions they might take in this regard," ASFA said.
ASFA sensibly suggested the best place to regulate potential financial instability was where it occurred, rather than issuing directions to those who engaged in it. "As an example, the best place to regulate instability that could be caused by high-frequency trading is not to restrict the ability of superannuation funds to engage in HFT strategies, but to regulate the conduct of ASX and provide ASIC with powers to manage behaviours in the market."
ASFA says there is a danger in putting a "financial stability" covenant around the behaviour of super funds that other investors do not have. It says a better alternative is providing broader power for APRA to direct that an activity causing financial instability be banned by all market players, rather than the proposed situation where less-regulated investors could have an advantage over super funds.
