Are the superannuation regulators taking sides?

The superannuation regulators are playing a dangerous game when they appear to be dabbling in debates rather than serving the interests of Government and policing the industry.

Due to the time frames dictated by Federal Government’s Stronger Super agenda, the public servants working within the Australian Prudential Regulation Authority (APRA) ought to be very busy over the next 18 months.

Indeed, the deputy chairman of APRA, Ross Jones, went to some trouble to outline to the recent Conference of Major Superannuation Funds (CMSF) just how busy his organisation would be, saying he believed that the deadlines, while tight, were achievable both for APRA and the superannuation industry at large.

As busy as APRA must be, Jones and his boss, APRA chairman John Laker must have been very disturbed to read a letter published in the Australian Financial Review from Tasmanian Liberal Senator David Bushby lamenting that the regulator had not delivered on range of questions and requests he had made during Senate committee proceedings.

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Bushby, who has not been the least bit shy about directing criticism at APRA, suggested that the organisation should be more focused on directing time and resources towards addressing its core tasks.

In doing so, Bushby was referring to the time and effort APRA had clearly been directing towards research, and in particular, a research paper developed by Dr James Richard Cummings on the “Effect of Fund Size on Superannuation Funds”.

The essential bottom line of Dr Cummings’ research was that size matters, and that superannuation funds with scale do better than those without scale.

The abstract said: “Larger not-for-profit funds have higher allocations to investments, such as private equity and real estate, where they are likely to have a size-related advantage.

"Lower investment expense ratios of larger not-for-profit funds suggest that they negotiate more favourable fee schedules with external managers. Larger funds (whether retail or not-for-profit) realise substantial operational cost savings.

"However, fund size does not have an overall positive impact on the performance of retail superannuation funds.”

Followers of Cummings’ research might have recalled his contribution to an APRA Working Paper published in 2011 that found not-for-profit superannuation funds earn higher risk-adjusted returns than retail superannuation funds as a result of their higher allocations to illiquid investments – for example, private equity and real estate.

Now there is absolutely nothing wrong with a chap like Dr Cummings undertaking such research, but a large question mark ought to hang over the appropriateness of his undertaking such work as an employee, and therefore representative of a financial services regulator which ought to be beyond reproach in terms of being both independent and apolitical.

A number of questions have been raised about the role APRA plays in collecting data and statistics across the financial services industry and whether this ought not be a task more properly undertaken by the Australian Bureau of Statistics.

Given the nature of financial services and the value which can be gleaned from particular data sets, it is possibly arguable that APRA should retain its role in financial services statistical collections, but there seems little to no justification for conducting the type of work undertaken by Dr Cummings.

Given his background in academe, someone such as APRA deputy chair Jones might argue that contributions such as that made by Cummings hold value in terms of stimulating discussion and debate, but again, that is not the role of a regulator and certainly not one to which extensive funds should be directed.

If APRA had wanted to stimulate debate, it could have protected its independence by simply commissioning research from someone within an academic institution.

Over the past decade and a half, there has been a disturbing blurring of the lines with respect to the appropriate role of the financial services regulators – such that all too often they have sought to be players in the policy game rather than servants of a government charged with policing the regulations.

This blurring of the lines is as much a product of bad government practice as it is of empire building and ego within the regulators themselves.

Over time, the notion of the regulators being the servants of government policy has given way to the practice of treating them as stakeholders capable of being trusted not only to interpret the law into regulation but to police it.

To date, nothing untoward has occurred as a result of the blurring which has occurred around the role of the financial services regulators, but the Gillard Government and its successors need to be conscious that while there has been intense scrutiny of the financial services industry and a significant rewriting of the ground rules, no similar scrutiny has been applied to the regulators.

In any review of the APRA and the Australian Securities and Investments Commission (ASIC), a good starting point would be determining whether the two bodies sufficiently comply with the underlying tenets which guide the Australian Public Service. Key elements of such compliance are remaining independent and apolitical.

In these circumstances, the regulators would be best advised sticking to their knitting.