Industry funds challenge APRA on insourced investment management

Mike Taylor

Managing Editor/Publisher, Financial Newswire

3 April 2023

Industry funds have challenged what they see as an Australian Prudential Regulation Authority (APRA) perception that outsourced investment management is better for superannuation funds than insourced arrangements.

The Australian Institute of Superannuation Trustees (AIST) has raised issues with APRA Draft Prudential Practice Guide SPG 530 on Investment Governance and has declared that “the presumption that external management of investments is superior to internal management should be removed, in favour of an objective test”.

“There is an assumption in paragraph 12 [of the APRA draft] that the outsourcing of investment management functions provides the bar to which internal investment management should aspire, that is, that outsourced arrangements are better,” the AIST submission said.

“AIST challenges this assumption which sets an arbitrary and changeable comparator in any event and is flawed in a number of ways. For example, the quality and capabilities of external investment managers varies significantly; it would be nonsensical to suggest that a fund should compare itself to an underperforming manager or one with inadequate capabilities.”

“AIST submits that there should be an objective test provided in the practice guide for internal investment management,” it said.

“AIST recommends that the expressions used in section 912A of the Corporations Act for the general obligations of a financial services licensee be employed to amend paragraph 12, and that it read: ‘Where an RSE licensee operates or is considering operating some, or all, of its investment functions internally, it would be able to demonstrate that it has in place the organisational competence including systems, resources and processes to ensure that these functions are undertaken efficiently, honestly and fairly’.”

The submission said the APRA draft contained other incorrect assumptions “where internal management activities are asked to aspire to the presumably superior personnel, skills and experience of external managers”.

It suggested that APRA accept a rewriting of a particular paragraph to state: “An RSE licensee would have the appropriate skills and resources available to undertake the internal management of investment portfolios. The number of personnel, their skills and experience, and the RSE licensee’s systems, data, operations and policies supporting internal investment management would enable it to do all things necessary to ensure that the functions are undertaken efficiently, honestly and fairly”.