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.

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2 Responses to APRA still resisting ‘retail’ deposits in public super funds

  1. Chris February 14, 2014 at 3:29 PM #

    Great article Graham. The hoop for Superfunds to offer deposits has been made more difficult, but not insurmountable.

    We can be certain that this is not the end of it, as this will undoubtedly be addressed by the Murray Inquiry. The following comment was made by Ian Narev in recent intereviews:

    “The inquiry should also look at the funding model for Australia including bank funding and superannuation, and with the rapid change in technology, the issue of security.”

  2. Greg Einfeld February 14, 2014 at 2:48 PM #

    Graham – I’m one of the thousands of geeks you refer to. Or perhaps I am the only geek and I viewed your previous article thousands of times:)

    Either way – financial advisers should be across this issue. As it stands this represents a big advantage of SMSFs over public offer funds. It is impossible to compare SMSFs and retails funds without understanding this issue. Thanks for bringing it to our attention.

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