Managing conflicts of interest in superannuation
The recent letter issued by APRA to superannuation trustees concerning conflicts of interest, along with comments made in various public forums, suggest that superannuation fund trustees should closely examine and consider improving their practices for managing conflicts of interest and duty.
Review and findings
Prudential Standard SPS 521 Conflicts of Interest (SPS 521) came into effect on 1 July 2013 and prescribes how conflicts of interest and conflicts of duty are to be managed by trustees. In 2014, APRA reviewed a cross-section of 37 trustees in relation to compliance with SPS 521 and found that, while there are examples of good practice in the management of conflicts by trustees, further steps need to be taken by many to improve conflicts management practices to meet the SPS 521 requirements.
The key areas for development, identified by APRA, include:
- The identification of conflicts: APRA expects a broad approach to conflicts identification which captures possible conflicts as a trustee, as well as those of directors and other responsible persons.
- Sound governance structure: APRA suggests that sound governance practices might include having conflicts as a standing agenda item at board and committee meetings and the use of conflicts management committees for complex or particularly conflicted matters. APRA also suggests providing access to independent advice and training to ensure any responsible person in a position of actual or potential conflict is able to ensure all relevant actions and declarations in relation to such conflicts are made.
- Policies and procedures: The review revealed that trustees have reasonable conflicts management frameworks which set out how the duties of responsible persons should be disclosed, how registers should be maintained and how conflicts assessments and reviews should be undertaken. However, in a number of cases, procedures underpinning the framework lacked clarity, resulting in an inconsistent treatment of duties and interests, and some misreporting and poor management of conflicts. In APRA’s view, an effective conflicts management framework and policy should be supported with clear procedures for identifying, recording and managing conflicts.
- Related party dealings: APRA also identified a lack of consistency in how trustees identify and manage conflicts when dealing with intra-group service and product providers and related parties. Helen Powell of APRA stated in her address to the Conference of Major Superannuation Funds on 18 March 2015 that, where trustees have (or are considering) related party arrangements, APRA expects them to:
- be able to demonstrate a sound understanding of any such arrangements;
- have undertaken a rigorous process to assess the appropriateness of such arrangements in the context of their member best interests obligations; and
- review and monitor the arrangements on an ongoing basis to ensure that they remain appropriate and are meeting their objectives, and in particular, that they are providing the expected benefits for fund members.
What does this mean for trustees?
As well as this public guidance from APRA, many trustees will have recently been through their own reviews with APRA that focussed on the specific conflicts arrangements implemented by the trustee. Trustees should take the opportunity to step back and review the appropriateness of their current conflicts management framework, policies and governance practices. Steps which trustees might consider taking include:
- Assessing whether the governance arrangements covering conflicts of interest and duty are well embedded in the organisation. APRA identified that the trustees with a stronger risk culture tended to implement a more robust conflicts management framework. Trustees should view conflicts management as part of their overall risk management.
- Assessing the effectiveness of procedures to ensure the timely and accurate reporting of conflicts and appropriate management. Trustees will all have conflicts management policies, but they should take the opportunity to review whether their policies are actually effective;
- Reviewing the adequacy of their register of relevant duties and interests and conflicts management policy (which they are obliged to maintain under SPS521), and assessing whether the materiality thresholds need to be revised;
- Assessing whether training for directors and staff needs to be implemented or improved; and
- Assessing whether governance practices such as the establishment of a conflicts management committee, or other committees, would be appropriate to manage conflicts inherent in the business.
For example, where a number of directors sit on the board of both the trustee of a fund, and on the board of a related party service provider, the directors are likely to be placed in a difficult position if they obtain information in their capacity as directors of the service provider that would have a material impact on the benefits of members of the fund. They would need to consider whether they are required to divulge the information to the trustee board given that the managing conflicts covenant in the Superannuation Industry (Supervision) Act 1993 overrides any conflicting obligations which the director may have to the related entity under the Corporations Act 2001.
To manage this situation, the directors might consider delegating, at the related entity level, decision-making in relation to the service arrangements with the trustee to a committee in accordance with a delegation charter. This could help quarantine confidential or commercially sensitive information from the conflicted directors, and help prevent the directors from breaching an obligation to one entity by having to disclose information to another.
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