Questions raised about APRA's handling of Trio and Astarra collapses

The Stronger Super legislation will endow the Australian Prudential Regulation Authority with greater powers, but ultimately, it will be a question of how those powers are used.

Australia’s financial services regulators have gained plenty of bouquets as having been pivotal to the manner in which the financial services industry navigated the global financial crisis, but a recent appearance by the Australian Prudential Regulation Authority (APRA) before a Parliamentary Joint Committee (PJC) suggests they are also owed a few brickbats.

APRA’s appearance before the PJC occurred in August when committee members — most of them sitting on the Government benches — asked a series of questions around the collapse of Trio and the Astarra-related superannuation funds.

Observed in the context of the Government’s Stronger Super legislation, the PJC transcript makes disturbing reading.

It paints a picture of a regulator who held concerns about the running of a superannuation fund and its trustee board back in 2005, but despite ongoing scrutiny which saw a change in the make-up of that board, did not act with finality until 2009.

What is more, while the Government’s Stronger Super changes will deliver APRA greater powers, there is absolutely no suggestion that its use of those powers would serve to prevent a repeat of the Trio/Astarra debacle.

APRA’s deputy chairman Ross Jones said in a preprepared address to the parliamentary committee: “Proposals within the Stronger Super reforms will in fact impose additional duties on the directors of a trustee to act honestly and in the best interests of beneficiaries.

The Government has announced APRA will be given a general prudential-standards-making power in relation to superannuation. It is a power that APRA has in the other industries it regulates, but we do not have this power at the present time in superannuation.

“While it is not possible to say that such powers would ensure these sorts of activities would never occur again, we do think that the standards- making powers with regard to investment governance and due diligence will greatly assist APRA’s supervisory processes and reduce the already small likelihood of fraud occurring in this process.”

The parliamentary committee transcript then went on to suggest APRA believed any fraud which had occurred with respect to Trio/Astarra had occurred in 2004, 2005 and 2006, and that the greatest likely sin committed by directors thereafter had been that of incompetence.

Whatever the case may have been, the manner in which APRA chooses to firstly interpret and implement its legislative powers was also laid bare in its evidence to the PJC.

Jones acknowledged that while the regulator held concerns about the fund’s assets, it was only after it appointed an external trustee — ACT Super — that it got to the nitty-gritty of what was really going on.

Jones told the PJC: “A lot of the cross-directorships and governance concerns were addressed very early on. In fact, it was not until late 2009 — when we were unable to get the valuations — that we had such concerns, that we issued a ‘show cause’ on the directors of Trio as to why they should not be suspended.

"We then dismissed the board and replaced them.

"Then ACT Super came in. ACT Super went through and said, ‘We believe that we have fraud of X dollars associated with the failure of the previous directors to have adequate processes around these investments’.”

Some would ask why it took ACT Super rather than APRA itself to identify the extent of the fraud and whether, on that basis, the Government’s Stronger Super changes should not go a good deal further.

Given all of the above, it is just as well that the Australian superannuation industry has, over the 20 years of the superannuation guarantee, proven to be exceptionally, prudentially sound, with only a handful of blow-ups of which Trio/Astarra has thus far proven to be the largest.

But when the regulatory time-scales involved in APRA detecting problems and finally acting on Trio/Astarra are put together with the global financial crisis and the manner in which it impacted superannuation fund liquidity, some serous questions must arise.

APRA has at various times acknowledged the manner in which it worked through liquidity issues with superannuation funds through the dark days of 2008/09, but it has steadfastly (and probably appropriately) refused to name those funds or indicate the level of assistance and monitoring that was ultimately provided.

The question, however, is that with markets having again hit a period of serious volatility, and with some signs that liquidity has again been tightened, will the regulator be speaking to the same funds again, and will it have to move beyond the sort of measures it applied two years ago?

One of the criticisms levelled at the Astarra/Trio directors was that they held multiple (and possibly conflicting) directorships.

The same sorts of criticisms (albeit, with no suggestion of criminality) have been made with respect to some of the trustee directors of industry superannuation funds, and we do not know whether any of those funds suffered liquidity issues through the height of the GFC.

It will be a very bad look for APRA if, some time in the next two or three years, it finds itself explaining to a parliamentary committee how it first held concerns about a fund in 2008, but did not act with finality until 2012—13.