Posted: 21 Sep. 2022 5 min. read

SPS 530 Investment Governance – Driving Resilience and Agility

One clear reminder from the last three years has been that things will often change in unexpected ways and often when we have the least flexibility to respond. In this article we discuss how the changes to the APRA Prudential Standard 530 Investment Governance (“SPS 530”), which take effect from 1 January 2023, seek to improve an organisation’s agility to respond to, and remain resilient through, change.


The Key Changes

The updates to SPS 530 are aimed at ensuring better member outcomes through updated requirements that enhance stress testing, valuation, and liquidity management practices. Specifically, the changes will necessitate an increase in the degree of formalisation of investment processes, assumptions, and responsibilities. There is also a particular and specific emphasis placed on the obligation of the Board (and relevant committees) to understand the strategy, the drivers of performance, and to have processes in place to identify the need for and to implement corrective action.

 

The performance of each investment option will need to be reported to the board and senior management, with appropriate performance benchmarks specified, and the sources of outperformance and underperformance identified and understood - critical to any effective management feedback loop. This will be crucial not only for explaining why the performance was what it was, but whether the performance was consistent with the approved investment strategy, and whether corrective action is or was warranted.

 

Several components of the APRA prudential practice guides relating to SPS 530 have been elevated into the Standard itself, and the amended SPS 530 now sets out specific requirements around:

  • Stress testing
  • Liquidity and cash flow management
  • Valuations.

This is unsurprising given that these were three areas that were considered by some to be “extensions” to the expectations of RSE licensees when SPS 530 was originally launched in 2013. These areas were also subject to significant media commentary in the wake of the initial COVID-19 induced market volatility in 2020 and liquidity concerns were prominent following the Early Release of Superannuation scheme.

Stress Testing

The extension of the stress testing requirements recognise that new investment risks can quickly arise and RSE licensees must be well equipped to withstand severe market and other dislocations, whilst still meeting obligations to their members. The amended requirements impose additional formality on the stress testing program, including the obligation that roles and responsibilities (both internal and external) be defined and that stress-testing programs are board approved. Importantly, there is a requirement that stress testing be applied across the option suite, and that it specifically considers adverse scenarios for options, and is performed annually. The documentation for the stress testing program should include:

  • Methodology, assumptions, and risk factors
  • Metrics and outputs for testing performance
  • Regular review of methodology and assumptions
  • Circumstances for triggering ad-hoc stress testing
  • Processes for ensuring the reliability of input data.

There also must be an explanation of how stress testing results are applied to investment decision making and results should regularly be reviewed by the board and relevant committees.

Key issues for RSE licensees to consider:

  • Does your stress testing framework cover the entire option suite?
  • Have appropriate adverse scenarios been identified for testing?  
  • Who has the responsibility for determining the scenarios?
  • Are the methodology, assumptions and risk factors clearly defined and explained? How frequently are these reviewed?
  • Under what circumstances will you perform ad-hoc stress testing?  Does the framework clearly outline who will make this decision and the process that needs to be followed?
  • What is done with stress testing results? Who receives the results and determines whether further action is required?
  • Have you tested the reliability of the input data?
  • If relying on stress testing provided by an external investment manager, is the board able to assess the appropriateness of methodologies and assumptions used in the stress testing process?


Liquidity and Cash Flow

The management of liquidity risk became an even bigger priority at the beginning of the pandemic, with potential liquidity concerns being exacerbated by the Early Release of Superannuation scheme. These concerns didn’t come to fruition across 2020, in part due to the existing liquidity and cash flow provisions contained within the existing SPS 530 standard.  Introduced in 2013, the original SPS 530 required RSE licensees to develop a better understanding of the drivers of liquidity risk and a methodological approach to managing liquidity in adverse circumstances. The recent updates to SPS 530 will require that RSE licensees identify personnel responsible for the management and oversight of liquidity risk and include liquidity stress testing as part of the comprehensive stress testing program. Lastly, it outlines key metrics to be reported on and periodically reviewed by the board, relevant board committees and senior management.

 

Key issues for RSE licensees to consider:

  • What actions will you take when a liquidity event occurs?
  • Who has responsibility for making key liquidity related decisions and implementing them?
  • Do you have a liquidity stress testing program and is it reviewed regularly?


Valuation

As highlighted in APRA’s thematic review of valuation processes, RSE licensees are required to implement greater rigour in valuation processes and identify areas of the valuation process that need immediate uplift. Consistent with broader changes to SPS 530 there must be a documented framework addressing valuation risk including the structures, processes, procedures, and controls. As with the other amendments, there is a new requirement to clarify roles and responsibilities in relation to valuation and key metrics for monitoring and reporting of valuations. The updated standard also calls for:

  • Valuation methodology for each asset class, including the source of valuation inputs
  • The framework around the use of external valuations
  • Circumstances in which external valuations will be required
  • Frequency
  • Triggers for interim revaluations
  • Validation of valuations and the circumstances which would lead to the rejection or reassessment of a valuation, and the process for obtaining an appropriate valuation in such a circumstance.

APRA intends to release a draft SPG 531 during Q4 2022, which will provide further guidance around valuation governance, methodology, frequency, monitoring, and the types of valuation risk.


Key issues for RSE licensees to consider:

  • Can the economic basis of valuations be explained, by asset class?
  • Under what circumstances will a valuation be rejected or updated? How will this be actioned?
  • What are the indicators? How are they measured?
  • What is the decision-making process? Who decides?
  • Is there a valuation committee? What is its charter and operation?


Comprehensive Reviews

The need for comprehensive reviews remains, and as comprehensive reviews are intended to be forward looking, they will need to consider the implementation of the new requirements.

Now is the Time to Act

As an RSE licensee, the time is now to act, to be compliant with the new requirements in time of commencement from the 1 January 2023. Please reach out if you would like to discuss how to respond to these changes.

More about the authors

James Oliver

James Oliver

Partner, Audit & Assurance

James is a partner with 20+ years of controls assurance, regulatory and risk management experience. He is focused on the financial services sector. He has worked across our London, Sydney and Melbourne offices. James’ sector focus includes superannuation (retail, corporate, industry and govt), custody, investment management (retail, wholesale, SWF’s) and the service providers to these sectors. Particular areas of focus and interest include investment governance, internal audit, unit pricing and regulatory assurance work. James assisted in the creation of the GS 007 assurance standard for wealth management controls in Australia. He is collaborative, client-centric, comfortable presenting to Boards and regulators, and will ensure you get access to the best expertise from across the Deloitte network.

Craig Roodt

Craig Roodt

Director, Investment and Wealth Advisory

Craig Roodt is a Director in Deloitte’s Investment & Wealth Advisory practice, with more than 20 years financial services experience across the investment value chain focusing on superannuation and investment governance. Immediately prior to joining Deloitte, Craig was the Head of Investment Risk at the Australian Prudential Regulation Authority. His experience includes: Developing key parts of the investment prudential framework in Australia, including SPS 530 Investment Governance and the Good Practice Guide to Unit Pricing Leading specialist investment risk teams, reviewing investment and governance frameworks, policies and processes and customer outcomes at numerous superannuation funds and asset managers and recommending improvements. Advising, developing and implementing liquidity management frameworks, processes, and stress testing programs, including investment strategy formulation.