The governance risk of in-house management

It is important that in-house and external managers at superannuation funds are treated the same by the regulator, according to Financial Services Council chief executive, Blake Briggs.

Briggs, who took over as CEO in March after a period as acting CEO, admitted there was a tension between those which went in-house and those which relied on external mandate.

Funds such as Australian Super had committed to targeting around 75% in in-house while others like Australian Retirement Trust preferred to use external managers.

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Briggs said there would always be a combination of both in the sector.

“Significantly persistent growth means there has been a role for both and there will always be a combination of both. Both should be allowed to thrive and may the best model win.”

However, where he had questions was regarding how the two models were treated by the regulator when it came to underperformance.

“We want to avoid the situation where there’s regulatory arbitrage and either using an external manager or in-housing gets a lighter touch approach which makes it more attractive for super funds to use. Because then you would making decision which could have long-term investment return consequences for the wrong reason.

“Hypothetically, you could in-house and not have adequate controls about the performance of your in-house fund managers and not take corrective action when particular categories were underperforming. That could go on for a very long time.

“It would be immediately apparent if an external fund manager wasn’t delivering and the trustees would do something about it. Trustees may be disinclined to do something if it’s their own staff.

“There is a governance risk that needs to be properly scrutinised.”

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