Government Issues Financial Services Royal Commission Implementation Roadmap

On 19 August 2019, the Government released its plans on how it would respond to the recent Royal Commission into financial services.

The Treasurer, the Hon Josh Frydenberg MP, described how the comprehensive reform package would become the largest since the Corporate Law Economic Reform Program (CLERP) in the 1990’s, with 24 streams of work currently underway within Treasury to bring amendments to legislation before the Parliament. An additional $9.3 million has been allocated to Treasury to ensure the Government’s timetable can be met.

The Commission’s made 76 recommendations, in its final report released in February 2019, many of which (approx. 40) will require amendments to legislation. The Government in its response announced a further 18 commitments to address issues raised in the Final Report.


  • the Treasurer stated that by the end of the 2019, more than 20 commitments will either have been implemented or legislation will be before the Parliament;
  • By mid 2020, more than 50 commitments will have been implemented;
  • by the end of 2020 all commitments will have had legislation introduced into Parliament.

In three years’ time the Government has committed to a post implementation review to assess how well the reforms have been implemented and to help determine if further changes might be required.

APRA Chairman, Wayne Byres says Boards should not rely on financial targets to set executive remuneration

Boards have struggled to gain acceptance that new approaches are needed“.

27 March 2019, AFR Banking & Wealth Summit

Speaking at the AFR Banking & Wealth Summit in Sydney on Wednesday 27 March 2019, APRA Chair, Wayne Byres said APRA had concluded many of the institutions it regulates had failed to adequately address executive pay. He declared that regulatory intervention would now be inevitable.

Referring to the banking royal commission’s findings outlined in Commissioner Hayne’s final report, Byres agreed that APRA had to implement more intrusive supervision and robust regulatory frameworks.

Over reliance on executive bonuses tied to short term financial targets would need to adjust with non-financial considerations being used as a more prominent benchmark of performance in the future.

The Banking Executive Accountability Regime (BEAR), would be viewed as the minimum standard but Byres would expect most institutions to put in place a higher standard and aspire for better practice. This would likely include longer term deferrals on bonus payments and claw back provisions where emerging risks later resulted in breaches and restitution.

While Byres admitted APRA could not regulate good culture into existence, Boards would have to take responsibility for tidying things up.

How can boards and management give themselves a pass mark, when they have identified a wide range of weaknesses in a number of key areas? Do boards and management have a blind spot – that blind spot being themselves?”

Wayne Byres, APRA, Chairman, 27 March 2019

Speaking at the same Summit, David Murray, Chair of AMP, criticised the over-zealous crackdown on banking culture, describing it as ‘over the top’, stating there was a risk of returning to the Pre-Campbell 1980’s before deregulation which will erode competition. Mr Murray argued we won’t solve current problems by trying to regulate culture but by focusing more on systems.

Productivity Commission Inquiry Report

On 10 January 2019, the Productivity Commission Inquiry Report: ‘Superannuation; Assessing Efficiency & Competitiveness’ was publicly released after being handed to Government on 21 December 2018.

Key points from the Commission’s Report include:

  • Australia’s superannuation system needs to improve its adaptation to the modern workforce and the growing number of retirees. Structural flaws are resulting in: a) unintended multiple accounts; and b) entrenched under-performance
  • The above ‘harmful’ outcomes are the result of inadequate a) competition; b) governance; and c) regulation.
  • While Policy initiatives have made progress at ‘chipping’ away at some of the problems, ‘architectural change’ is now required
  • Implementation needs to commence now, to protect ‘member interests’ rather than the interests of superannuation funds.

The Inquiry found, that while under-performance spanned both default and choice funds, the majority of under-performance had been identified in the retail sector, as opposed to industry funds.

Concerns noted include:

  • excessive and unwarranted entrenched fees remaining despite trending down;
  • cost savings from realised scale have not been handed down to members as lower fees or higher returns;
  • very few mergers have been implemented following the introduction of the ‘Scale Test’;
  • 93 APRA Regulated funds (half the RSE Licensees) still have assets less than $1 billion;
  • a third of all accounts (approx 10 million) are unintended multiple accounts;
  • members still lack access to ‘simple and salient information, ‘ including impartial advice;
  • unhealthy competition in the choice sector, has led to the proliferation of products;
  • Regulators have focused too much on the interests of superannuation funds as opposed to the interests of their members.

Recommendations include:

  • members should be only defaulted once, and moved to a new fund only when they choose;
  • members should be allowed to choose their fund from a ‘best in show’ or ‘Top Ten’ shortlist set by an independent committee/panel;
  • all MySuper and Choice products must earn their right to remain in the superannuation system, under an elevated ‘Outcomes Test’ to improve safety for members;
  • all trustee boards must steadfastly appoint skilled board members, better manage conflicts of interests and promote member interests without fear or favour;
  • regulators require clearer: a) roles; b) accountability; and c) powers to confidently monitor trustee conduct and enforce the law.

Strengthening Outcomes for Superannuation Members

On 12 December 2018, APRA released a package of new and enhanced prudential requirements designed to ensure more robust measures are put in place by RSE Licensees for the oversight and delivery of quality outcomes for superannuation members.

The ‘Outcomes Assessment’ requires trustees to annually benchmark and evaluate their performance in delivering ‘sound, value for money outcomes to all members, including both MySuper and choice products‘.

In addition to the Outcomes Assessment, APRA will requires RSE Licensees to strengthen requirements for strategic and business planning including oversight of fund expenditure and reserves. These new requirements are set out in SPS515 Strategic Planning and Member Outcomes.

The commencement date for the new measures is set as 1 January 2020.

APRA seeks improvements from Superannuation Licensees on Conflicts of Interest

APRA has written to RSE Licensee’s seeking enhanced oversight of outsourcing arrangements with related parties to manage conflicts of interest.

APRA’s review of 14 licensees had been prompted by a concern that for some trustees commercial arrangements with related parties may be taking  precedence over outcomes delivered to members.   APRA concluded that:

  • ensuring related party contracts are for a set period with clear termination dates;
  • ensuring contracts have clear and measurable performance indicators which are monitored by the RSE licensee;
  • conducting rigorous market based benchmarking when engaging or renewing contracts to ensure terms and prices are competitive;
  • proactive documentation how decision to use related party service providers are in the best interests of members.

APRA Deputy Chairman Helen Rowell, said “RSE Licensees employing better practices rigorously tested the market before agreeing or renewing contracts with related parties.  They assessed the contracts’ materiality in line with APRA’s requirements and documented their decision making process that concluded the arrangement was in their members’ best interests.”

APRA Seeks Improvement in Executive Remuneration

On 4 April 2018, APRA released the results of a review of remuneration practices at large financial institutions which found considerable room for improvement in the design and implementation of executive remuneration structures.

APRA’s review comprised detailed analysis of executive remuneration practices and outcomes from a sample of 12 regulated institutions including ADI, insurance, and superannuation sectors.

The review found that remuneration frameworks and practices did not consistently and effectively promote sound risk management and long-term financial soundness, and fell short of the better practices set out in APRA’s existing guidance.

The report identified the need for improvement in:

  • ensuring practices were adopted that were appropriate to the institution’s size, complexity and risk profile;
  • the extent to which risk outcomes were assessed, and weighted, within performance scorecards;
  • enforcement of accountability mechanisms in response to poor risk outcomes; and
  • evidence of the rationale for remuneration decisions.

In response to the findings, APRA will consider ways to strengthen its prudential framework.

Chairman Wayne Byres of APRA  stated,  “Boards and senior executives should consider the findings of this review and take action to better align their remuneration arrangements with good risk management and the long-term soundness of their institutions.”

Any revisions to the prudential framework will be subject to APRA’s usual practices of stakeholder consultation and engagement.

A copy of the Information Paper may be found here:

Information Paper


APRA Measures to Strengthen Superannuation Member Outcomes

Superannuation Member Outcomes:

On 13 December 2017, APRA released a consultation package aimed at assisting RSE Licensees to better position themselves for delivering on sound member outcomes.   The package includes proposed changes to the prudential framework to enhance:

  • strategic and business planning;
  • oversight of fund expenditure; and
  • assessment of outcomes for members of RSE’s.

The proposed member-outcomes measures, first outlined in August in a letter to Trustees, includes:

  • changes to the existing prudential standard SPS 220 Risk Management relating to strategic and business planning and fund expenditure policies and processes;
  • a new prudential standard, SPS 225 Outcomes Assessment, requiring all RSE licensees to annually assess the outcomes provided to members using a broader range of measures;
  • new prudential practice guides to assist RSE licensees with their strategic and business planning and the outcomes assessment; and
  • amending SPS 250 to require RSE licensees to provide straight-forward processes for opting-out of all insurance products.

Deputy Chairman Helen Rowell stated APRA wanted to ensure all RSE licensees were prepared to manage emerging challenges, such as changing member demographics and a more competitive environment. APRA intends to engage more closely with RSE Licensees identified as not consistently delivering quality member outcomes.

They also reflect APRA’s ongoing efforts to encourage all RSE licensees to go beyond the minimum legislative requirements by conducting a broader outcomes assessment as part of their strategic and business planning processes,” Mrs Rowell said.

Submissions on APRA’s package are open until 29 March 2018. The new and revised prudential measures are expected to be released by mid-2018, with a proposed commencement date of 1 January 2019.



Assessing Quality Member Outcomes in Superannuation



On 31 August 2017, Helen Rowell, Deputy Chairman, APRA, issued a letter to all RSE licensees requesting additional focus by Trustees on delivering to members,  “quality outcomes on an ongoing basis“.

‘Quality outcomes for members’,  was described as:



  • high quality; and
  • value for money

superannuation products and services including;

  • optimal retirement benefits to fund members; and
  • other benefits and services such as insurance,

which should be consistent with a Trustee’s strategic objectives.

Ms Rowell stated that APRA’s supervision had revealed some RSE licensees were failing to provide consistent ‘quality member outcomes’, leading to APRA to question whether these licensees’ business operations were positioned appropriately for effectiveness and sustainability in an increasingly competitive industry environment.

APRA states that its view is that it is insufficient for an RSE licensee to simply comply with their legislative and prudential obligations without giving consideration to how their Funds will deliver quality outcomes for members. APRA requests that existing licensees review and consider whether there is a need to enhance their approach to delivering quality member outcomes and maintaining the future sustainability of their RSE’s.  This would include consideration of whether insurance offerings may be eroding member retirement benefits.

While each RSE licensee should develop its own framework for assessing member experiences, APRA will be using a wide range of metrics to assess member outcomes and future sustainability of RSE products in the future.  APRA will be expecting RSE licensees to establish targets (using relevant benchmarks) and objectives and then measure performance against them. This should include, where like-for-like comparisons are possible comparisons against peer offerings.

The following metrics to be used by APRA have been given as examples:

Methodology for assessing member outcomes and sustainability

APRA has recently conducted an assessment of all RSE licensees under its supervision  and will consider both an RSE’s historical member outcomes, as well as key indicators for future sustainability.  It also incorporates APRA’s supervisory knowledge of the unique characteristics of each RSE and RSE licensee, including APRA’s assessment of the adequacy of governance and risk management frameworks, strategic and business planning practices and business operations.

The metrics for APRA’s assessment of historical outcomes and future sustainability include:

  • net returns, on an absolute basis and relative to risk/return targets;
  • costs per member for MySuper products
  • cost of insurance cover;
  • administration and operating expenses as a percentage of average net assets (operating
    cost ratio);
  • net cash flows as a percent percentage of average net assets (net cash flow ratio);
  • net member benefit outflow ratio;
  • net rollovers as a percentage of average net assets (net rollover ratio)
  • trends in membership base; and
  • active member ratio.

These metrics and trend analysis are derived from data reported to APRA under the new reporting standards introduced in 2013/14.
APRA’s assessment therefore considers whether an RSE’s  measures are:

  • improving,
  • stable; or
  • deteriorating.

APRA’s quantitative assessment of an RSE’s performance considers each of the metrics on an absolute and relative basis as appropriate. Absolute performance is an indicator of both the delivery of member outcomes and future sustainability in the context of the RSE’s circumstances. The relative basis assists APRA to identify outliers, based on the RSE or product ranking for each metric, and in particular to identify RSEs that are in the bottom quartile on a specific measure.

In assessing historical member outcomes of RSEs, APRA has considered net returns relative to return targets of each fund’s MySuper products, operating cost ratios, and insurance costs, particularly the rate at which insurance premiums are likely to have eroded member balances. For funds without a MySuper product, assessing net returns requires consideration of product level information.

When assessing future sustainability of an RSE, APRA considers various measures linked to potential stability or growth in membership and assets as this is relevant to the likelihood that the RSE will be able to deliver quality member outcomes into the future. Key metrics for assessing potential future stability o growth will be:

  • net cash flow;
  • rollover ratios; and
  • membership trends.

reflecting an RSE’s ability to acquire new members and retain existing ones.

APRA’s approach to assessing fund performance and sustainability serves as a starting point only, in a more holistic assessment process that includes qualitative assessments by APRA supervisors.

The qualitative aspect of the assessment captures APRA supervisors’ judgment as to:

  • the robustness of an RSE licensee’s strategic and business planning practices; and

the quality of the RSE licensee’s:

  • governance; and
  • risk management frameworks.

APRA Response and Supervisory Focus

APRA will soon contact each of the RSE licensees of RSEs identified as a result of APRA’s assessment where concerns have been identified to request their respective Boards to meet with APRA to discuss their assessment.

These RSE licensees will be required to develop a robust and implementable strategy to address identified weaknesses within a reasonably short period and to engage more regularly with APRA to monitor the implementation of that strategy. Where it is clear that a particular product or RSE is unlikely to be able to continue to operate in the best interests of its members, APRA expects the relevant RSE licensee to act to ensure a timely and well-managed transfer of members to another suitable product or RSE, either within the RSE licensee’s own operations or those of another RSE licensee.

The full letter including charts based on various metrics used in APRA’s assessment of member outcomes and fund sustainability is available on the APRA website here



New APRA Consultation on Superannuation Governance Proposals

On 11 August 2017, the Australian Prudential Regulation Authority (APRA)  released a letter to superannuation trustees outlining proposed changes to the superannuation prudential framework to lift operational governance practices of APRA-regulated superannuation trustees (RSE licensees).

Helen Rowell, APRA Deputy Chairman, said APRA had identified areas for improvement in some RSE licensees, to better reflect evolving industry best practice and public expectations.

“The superannuation industry is going through a period of significant evolution and it is incumbent on RSE licensees to be focused on meeting the best interests of members through delivering high quality, value for money member outcomes. This extends to RSE licensees making decisions about the use of members’ money in a manner that provides appropriate transparency and accountability, and is demonstrably in the best interests of members,” Mrs Rowell said.

APRA will consult with the industry over coming months but has highlighted the following proposed changes:

  • requiring RSE licensees to have an operational governance framework, which covers the policies and processes that support strategic and business planning, and ensure rigour in operational decisions, particularly those related to expenditure and reserving;
  • expanding the existing business planning requirements to ensure RSE licensees appropriately implement, monitor and review their business plans in the context of clear strategic objectives;
  • requiring RSE licensees to meet minimum expectations when making decisions on fund expenditure, with a view to ensuring there is adequate rigour in decision-making, monitoring and transparency related to the use of members’ money; and
  • requiring RSE licensees to undertake an outcomes assessment for all members. APRA expects to provide guidance to support this assessment, including the proposed MySuper outcomes assessment.

The letter  to RSE licensees is available on APRA’s website at:

APRA Speech: Legacy, Operational Risk & The Changing Consumer

Geoff Summerhayes Australian Coat of Arms and APRA Logo

On 22 May 2017, Geoff Summerhayes, APRA Executive Board Member delivered a speech to the Actuaries Institute, in which he reflected on legacy, operational risk and the changing consumer describing the part the financial services industry, must play, particularly where they maintain what is termed a ‘social license’ to operate.   As well as stability in the broader financial system, positive consumer outcomes would be a critical element in the future.  He stressed the idea that companies must maintain the trust of the communities in which they operate and this will require innovation.

Mr Summerhayes observed that “we operate in a market steeped in tradition and burdened by a legacy of outdated products, systems and business practices.”   The legacy issues heightens operational risk eroding consumer trust and confidence.  “We have seen too often how quickly the reputation of a company can be threatened when it fails to meet consumer expectations. Ultimately, this can threaten prudential soundness.” Alongside regulation, the term social license is now considered by APRA an essential element of financial stability.  Corporate responsibility is not just appreciated, it is expected.

Calling for a new, sharper ‘consumer focused thinking’, with a particular emphasis on how examples of legacy issues in the insurance industry, hamper and impede innovation,  Summerhayes referred to some negative connotations in parts of the insurance sector;  “decades of neglected investment in systems, outdated products, poor business processes and ways of working that are not responsive to the challenges of our time.” Referring to a generation of new consumers, who, rather than fitting into moulds of prefabricated products, take pride in individuality with expectations of customised and unique products which reflect their lifestyle.

Greater importance will be placed on behaviour, accountability and transparency of financial institutions.  Summerhayes cited 2 consumer surveys which reveal how changing customer trends will need to be taken into account by financial service providers.  The first, conducted by Nielsen found that “nearly three-out-of-four consumers aged 34 and under were willing to pay more for brands that showed commitment to positive social and environmental impact’.   Quoting a further PWC survey, it was found that “while 78 percent of Australians view life insurance as important, only 42 percent believe their life insurer will be there for them in their time of need”. Summehayes, referred to this as a ‘trust gap‘ and it will need to be improved.

In a call to arms, and asking the industry to envision a new future, Summerhayes described how APRA would be reviewing its licensing framework to see how it can be improved for both new entrants, and existing companies, providing new and innovative products to customers. APRA will also be paying close attention to what other regulators are doing, such as a sandbox approach being tested overseas and by ASIC.  Additonally analytics in new risk data is enabling APRA to become more adept at understanding financial risks which includes an expansion of the amount of General Insurance data the regulator will publish in the future.

Summerhayes acknowledged that many insurers have work underway to reduce operational risk that comes with organisational legacy. Examples include “entity consolidation, core systems rationalisation and business model changes.”  He concluded, by suggesting the digital revolution and the changing consumer will define the financial services landscape in the years ahead. The industry will either change with the consumer or be forced to change by disruption.