APRA has written to super funds about the way they manage conflicts of interest within related-party outsourcing arrangements.
In a letter to registrable superannuation entity (RSE) licensees, APRA deputy chair Helen Rowell released the thematic review findings and said that the way licensees managed contracts with third-party service providers was “critical” to member outcomes.
“APRA supports RSE licensees outsourcing services where they lack skills or expertise,” Ms Rowell said.
“But using related parties increases the risk of a conflict of interest. APRA’s thematic review noted wide variation in how licensees managed this challenge, including weaknesses in some licensees’ approach.”
These weaknesses could result in lowered quality of service provision, which would “ultimately affect outcomes for members”, Ms Rowell said in her letter.
According to the thematic review findings, the areas of “room for improvement” included ensuring contracts were for a defined period with outlined termination provisions as well as containing measurable performance indicators regularly monitored by RSE licensees.
The review also indicated RSE licensees could improve upon “conducting rigorous market-based benchmarking when engaging or renewing contracts” to ensure prices were commensurate with other options in the market, as well as more proactive consideration of how engaging third-party providers were in the “best interests of superannuation members”.
The thematic review found some contracts were open-ended and lacked “important provisions such as termination triggers and rights”; furthermore, it found “significant variance” in key performance indicators in areas such as criteria adequacy and performance reporting.
“Better practice would be to have clear performance-based triggers for considering termination,” the thematic review findings stated, recommending that RSE licensees ensure contracts were “formalised” and contained “clear and objective performance measurements” with a “fixed term for review”.
The APRA review also said that benchmarking and market testing was “essential” in demonstrating that engaging third-party providers were in members’ best interests.
“Among the RSE licensees reviewed, there was clear room for improvement in this area.
“While this need not involve formal tendering processes in all cases, RSE licensees should have a credible process for testing whether the pricing and terms from the related-party service provider are commensurate with others available in the market.”
RSE licensees were also found to have “inconsistent interpretation” of prudential requirements and “a wide variety of approaches” in assessing whether an arrangement was material.
APRA prudential requirements obligate RSE licensees to demonstrate that contract arrangements can be “conducted on an arm’s-length basis and in the best interest of members”, but the review found “mixed results” in how licensees documented meeting these requirements.
Furthermore, conflicts of interest existed where directors or officers of RSE licensees also had roles or relationships with service providers, the review pointed out.
“APRA found that while this potential conflict was reflected in a number of the sampled RSE licensees’ conflict management frameworks, there were examples where the potential conflict had not been comprehensively reflected in the framework.
“APRA noted better practice was for an RSE licensee to have policies in place to ensure that, where a director has a conflict, they are excluded from governance of related-party arrangements.”
In mid-December last year, Link Group chief information security and technology officer David Cowan said that super funds were not aware of risks involved in embracing big data.
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