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.

RELATED ARTICLES

The death of the single-industry superannuation fund

SMSF returns competitive with big funds at $200,000

Consumers need an effective super performance test

banner

Most viewed in recent weeks

How to enjoy your retirement

Amid thousands of comments, tips include developing interests to keep occupied, planning in advance to have enough money, staying connected with friends and communities ... should you defer retirement or just do it?

Results from our retirement experiences survey

Retirement is a good experience if you plan for it and manage your time, but freedom from money worries is key. Many retirees enjoy managing their money but SMSFs are not for everyone. Each retirement is different.

A tonic for turbulent times: my nine tips for investing

Investing is often portrayed as unapproachably complex. Can it be distilled into nine tips? An economist with 35 years of experience through numerous market cycles and events has given it a shot.

Rival standard for savings and incomes in retirement

A new standard argues the majority of Australians will never achieve the ASFA 'comfortable' level of retirement savings and it amounts to 'fearmongering' by vested interests. If comfortable is aspirational, so be it.

Dalio v Marks is common sense v uncommon sense

Billionaire fund manager standoff: Ray Dalio thinks investing is common sense and markets are simple, while Howard Marks says complex and convoluted 'second-level' thinking is needed for superior returns.

Fear is good if you are not part of the herd

If you feel fear when the market loses its head, you become part of the herd. Develop habits to embrace the fear. Identify the cause, decide if you need to take action and own the result without looking back. 

Latest Updates

Economy

The paradox of investment cycles

Now we're captivated by inflation and higher rates but only a year ago, investors were certain of the supremacy of US companies, the benign nature of inflation and the remoteness of tighter monetary policy.

Shares

Reporting Season will show cost control and pricing power

Companies have been slow to update guidance and we have yet to see the impact of inflation expectations in earnings and outlooks. Companies need to insulate costs from inflation while enjoying an uptick in revenue.

Shares

The early signals for August company earnings

Weaker share prices may have already discounted some bad news, but cost inflation is creating wide divergences inside and across sectors. Early results show some companies are strong enough to resist sector falls.

Property

The compelling 20-year flight of SYD into private hands

In 2002, the share price of the company that became Sydney Airport (SYD) hit 80 cents from the $2 IPO price. After 20 years of astute investment driving revenue increases, it sold to private hands for $8.75 in 2022.

Investment strategies

Ethical investing responding to some short-term challenges

There are significant differences in the sector weightings of an ethical fund versus an index, and while this has caused some short-term headwinds recently, the tailwinds are expected to blow over the long term.

Investment strategies

If you are new to investing, avoid these 10 common mistakes

Many new investors make common mistakes while learning about markets. Losses are inevitable. Newbies should read more and develop a long-term focus while avoiding big mistakes and not aiming to be brilliant.

Investment strategies

RMBS today: rising rate-linked income with capital preservation

Lenders use Residential Mortgage-Backed Securities to finance mortgages and RMBS are available to retail investors through fund structures. They come with many layers of protection beyond movements in house prices. 

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
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.