Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 49

APRA still resisting ‘retail’ deposits in public super funds

In the last month, the Australian Prudential Regulation Authority (APRA) has issued two papers on Basel III bank liquidity which continue to take a hard line on deposits offered by public super funds qualifying as ‘retail’. APRA views the super fund trustee responsibility as a crucial ‘non retail’ characteristic. It makes it more difficult for public super funds to compete with retail deposits offered directly by banks themselves, and gives another advantage to SMSFs.

However, while there’s certainly no welcome mat, the door is not slammed firmly shut. There are a few snippets in the announcements which give hope to trustees of public super funds. The special exemption which categorised SMSFs as retail has been confirmed.

Previous debate in Cuffelinks

This discussion can become rather technical, but there was a lively debate when the subject was posted in Cuffelinks on 17 April 2013. Here’s the previous article. Although we at Cuffelinks thought this was a seriously geeky subject (we even issued a health warning), it received thousands of pageviews. Lots of geeks out there!

We will not repeat the entire argument here. The conclusion was:

“Both the Basel rules and APRA’s interpretations judge money from financial institutions to be ‘hot’ and an unstable source of funding, and the regulations will discourage banks from raising this type of money … It’s not a good prospect for publicly-offered super funds as investors seek the security of bank deposits, and it will do nothing to reduce the reliance of our banks on wholesale and offshore funding. We should be designing the system to put super money and bank deposits together, not force them apart.”

What are the new announcements, and why is there still any doubt?

There have been two important APRA updates:

1. Implementing Basel III liquidity reforms in Australia – December 2013

APRA released its final position on the implementation of the Basel III liquidity reforms for authorised deposit-taking institutions (ADIs) in Australia in December 2013, linked here.

The liquidity reforms involve a 30-day Liquidity Coverage Ratio (LCR) to address an acute stress scenario and a Net Stable Funding Ratio (NSFR) to encourage longer-term funding resilience. The LCR will become effective from 1 January 2015 and the NSFR from 1 January 2018.

In its response to previous drafts, APRA clarifies the position for deposits sourced through public super funds (underlinings are mine):

Intermediated deposits

In draft APS 210, APRA provided for a treatment for deposits sourced via an intermediary that was different to that for retail deposits. In its May 2013 discussion paper, APRA clarified the reasons for that different treatment, noting that where the intermediary retains investment responsibility or has a fiduciary duty to the underlying customer, APRA considers it appropriate to assume the intermediary will observe that responsibility and duty in a time of liquidity stress.

APRA considers that, in cases where a fiduciary duty exists, the intermediary will consider the complete withdrawal of intermediated deposits at a time of ADI liquidity stress. APRA does not believe it appropriate to consider alternative and weaker interpretations of fiduciary duty.”

That appears firm and clear. A super fund trustee has a strong fiduciary obligation to consider a complete withdrawal of funds, and so retail treatment is not appropriate.

But then it becomes slightly equivocal:

“Where an intermediary enters into an arrangement with the receiving ADI to restrict its own ability to withdraw intermediated funds at a time of liquidity stress, while the intermediary can choose to do this with its own funds, such a contract would not limit its fiduciary duty toward its client. APRA also observes that such an arrangement appears dubious on its face for intermediaries with a fiduciary duty to others.”

The words “… such an arrangement appears dubious on its face” is hardly a definitive, blanket ruling.

Some in the industry believe APRA will not allow retail treatment of any managed investment scheme due to the trustee responsibility, and APRA does not accept that the trustee can put a notice period on its obligations. APRA is also not impressed by ‘devices’ which try to circumvent the intent of the regulations. Others argue this advice could be interpreted as only warning trustees that they must genuinely have the best interests of their members in mind.

What else supports the claim that the door to ‘retail’ is slightly ajar?

APRA has reworded the actual Prudential Standard APS210 on Liquidity, Appendix A, paragraph 34, linked here since the last draft by adding this:

“An ADI is required to notify APRA prior to applying a retail deposit treatment to a category of intermediated deposits in the LCR and must be able to demonstrate how this treatment satisfies the conditions outlined in this paragraph.”

APRA is inviting trustees to make the case. No doubt it will be a high bar to jump, but publicly-offered super funds will start carefully crafting their responses.

2. Implementation of the Committed Liquidity Facility – January 2014

On 30 January 2014, APRA issued a letter on the operation of the Basel III Committed Liquidity Facility (CLF), linked here, on related-party transactions. This is especially important as banks want their own wealth management businesses (including public super funds) to direct deposits back to the bank.

In the letter, APRA says that some local banks seem to believe that funding from related-party entities has a potential to reduce cash outflows, highlighting two categories that raise prudential concern:

  • firstly, where an ADI assumes the related-party entity would choose not to withdraw funds in a stress situation even though it had the right to do so; and
  • secondly, where the related-party entity entered into a contractual arrangement that significantly impeded its ability to withdraw funds without any obvious compensating benefit to that entity.

Sounds clear. But here again, the door is left open. It says: “without any obvious compensating benefit to that entity.” But there may be a compensating benefit for retail treatment. It assists the banks to meet their liquidity requirements, and therefore they will be willing to pay a higher rate. The trustee can pass this on to the investor (depositor) and show they have assessed the risk/return trade off and decided the compensating benefit is worth it.

But it’s certainly not a welcome mat, and APRA also says:

 “APRA cannot accept assumptions relating to the potential behaviour of directors and trustees of related-party entities that are not consistent with their duties and fiduciary obligations, in particular where they are imposed through legislation such as the Corporations Act 2001 or the Superannuation Industry (Supervision) Act 1993. Nor can APRA accept directors or trustees of related-party entities signing legal agreements that are not in the best interests of their own entity, its customers or members. APRA expects that ADIs will give careful and detailed consideration to such matters as they assign related-party deposits to particular outflow categories.”

Again, “careful and detailed consideration to such matters” does not sound like a deal breaker. That’s what investment committees and compliance committees are for. Some public super fund trustees will be comfortable that their fiduciary obligation is met in return for a higher rate.

Where to from here?

Qualification as a retail deposit is the Holy Grail for deposit margins, and APRA has been discussing the Liquidity Prudential Standard for years. There remains a divide between those who believe there is little or no room for super funds to claim ‘retail’, versus others who are convinced that trustees will be able to designate the deposits as outside the LCR (due to a notice period beyond 30 days, for example) and be satisfied they are fulfilling their fiduciary obligations.

The Prudential Standard came into effect on 1 January 2014, although the LCR compliance is not until 1 January 2015. You can guarantee that a few more thousand hours of meeting time will be consumed this year by trustees (and their grateful lawyers) debating whether APRA has left an opening. Ultimately, APRA has the supervisory authority to impose its will, so it’s a brave trustee who designs a deposit product that relies on retail pricing before justifying its position with APRA. With the confirmation of genuine retail treatment for SMSFs, it will make it difficult for public funds to offer competitive rates on their deposits.


Consumers need an effective super performance test

Three reasons why super performance test fails

Industry funds capitalise on Commission wins


Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Three all-time best tables for every adviser and investor

It's a remarkable statistic. In any year since 1875, if you had invested in the Australian stock index, turned away and come back eight years later, your average return would be 120% with no negative periods.

The looming excess of housing and why prices will fall

Never stand between Australian households and an uncapped government programme with $3 billion in ‘free money’ to build or renovate their homes. But excess supply is coming with an absence of net migration.

Five stocks that have worked well in our portfolios

Picking macro trends is difficult. What may seem logical and compelling one minute may completely change a few months later. There are better rewards from focussing on identifying the best companies at good prices.

Let's make this clear again ... franking credits are fair

Critics of franking credits are missing the main point. The taxable income of shareholders/taxpayers must also include the company tax previously paid to the ATO before the dividend was distributed. It is fair.

Welcome to Firstlinks Edition 424 with weekend update

Wet streets cause rain. The Gell-Mann Amnesia Effect is a name created by writer Michael Crichton after he realised that everything he read or heard in the media was wrong when he had direct personal knowledge or expertise on the subject. He surmised that everything else is probably wrong as well, and financial markets are no exception.

  • 9 September 2021

Latest Updates

Investment strategies

Joe Hockey on the big investment influences on Australia

Former Treasurer Joe Hockey became Australia's Ambassador to the US and he now runs an office in Washington, giving him a unique perspective on geopolitical issues. They have never been so important for investors.

Investment strategies

The tipping point for investing in decarbonisation

Throughout time, transformative technology has changed the course of human history, but it is easy to be lulled into believing new technology will also transform investment returns. Where's the tipping point?

Exchange traded products

The options to gain equity exposure with less risk

Equity investing pays off over long terms but comes with risks in the short term that many people cannot tolerate, especially retirees preserving capital. There are ways to invest in stocks with little downside.

Exchange traded products

8 ways LIC bonus options can benefit investors

Bonus options issued by Listed Investment Companies (LICs) deliver many advantages but there is a potential dilutionary impact if options are exercised well below the share price. This must be factored in.


Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Investment strategies

Three demographic themes shaping investments for the future

Focussing on companies that will benefit from slow moving, long duration and highly predictable demographic trends can help investors predict future opportunities. Three main themes stand out.

Fixed interest

It's not high return/risk equities versus low return/risk bonds

High-yield bonds carry more risk than investment grade but they offer higher income returns. An allocation to high-yield bonds in a portfolio - alongside equities and other bonds – is worth considering.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.