Posted: 21 Sep. 2022 5 min. read

SPS 530 Investment Governance – What Was Missing

The consultations to the proposed SPS 530 amendments generated significant discussion around important developments which were not specifically addressed in the update. In this article and summarised below, we discuss three topical areas and how they interrelate to SPS 530 and the potential for future APRA guidance:

  • Delegations – With the increasing size, scope and sophistication of funds there is increasing need for boards to delegate investment functions and decisions. This is also consistent with what is considered global best practice.
  • Environmental, Social and Governance (ESG)– As members are placing more importance on ESG considerations, and the awareness of ESG related investment risks continues to increase.
  • Operational Due Diligence (ODD) – ODD reviews are imperative for the RSE licensee to understand the ability of their investment managers to help them meet their investment strategy and achieve their investment objectives.  



The Requirements of Boards and Appropriate Delegations

As outlined in SPS 530, boards approve the investment strategy, and they must also put in place robust structures and processes to support its effective oversight.  The amendments to SPS 530 require board approved policies to be established across stress testing, liquidity, and valuation and accordingly there is increased onus on boards to have the required investment skills and expertise to explain what is happening and why. These requirements, along with the increasing scale and complexity of investment portfolios, are requiring ongoing review of the suitability of board skillsets for the investment challenges ahead. APRA have also specifically referenced in their corporate plan that board renewal, skills, capability and the size and effectiveness of boards will be a key focus point of their supervisory work over the next five years.

 

SPS 530 outlines that each RSE licensee is responsible for determining its own governance processes for the selection, management and monitoring of investments. It does not however provide further detail on the extent of delegation or which activities should be retained by the Board. As RSEs continue to grow and become more complex, an effective delegation framework is critical. This includes delegating responsibilities that most effectively meet the need of the organisation, whilst acknowledging the Board’s ultimate responsibility for establishing adequate controls to ensure that activities remain within the board’s determined risk appetite.

 

When determining delegations, the Board must consider whether the delegation puts the Board in a better position to fulfil the particular responsibility that is being delegated. Common examples as referenced in SPS 530, include liquidity issues, stress testing programs and valuation processes, which can all be delegated to various specialist committees (Investment Committee, Risk and Compliance Committee, Valuation Committee, etc). It is imperative that these delegated authorities are clearly set out and documented within a Delegation Framework, which details the mechanisms which the Board must put in place for monitoring delegations. The emphasis on adequate Board oversight was notably prominent in APRA’s thematic review of valuation processes. APRA found that boards often did not challenge valuation decisions, and there were broad delegations to management on valuation matters, often without limits

 

Key issues for an RSE licensee to consider:

  • Does the board have the skills, experience and expertise to challenge information provided by independent experts?
  • Does the board undertake annual skill assessments to ensure that they have the required skills, experience, and expertise to carry out their duties? 
  • Are delegations of authority clearly documented and has appropriate oversight been established? 
  • Do delegates understand the capacity in which they are able to act?
  • Is the board supported by an appropriate number of committees with members who have the required skills, experience, and expertise?
  • Are the terms of reference for committees clearly documented, with clear delegations and established governance frameworks? 

 

Environmental, Social and Governance (ESG)

APRA’s response to consultation submissions noted that they intend to issue guidance on how a prudent RSE licensee can demonstrate it has a clear understanding of ESG risks and reflect ESG considerations in the investment strategy. APRA also intends to clarify the linkages between SPG 530 and CPG 229 Climate Change Financial Risks in the upcoming release of draft amendments to SPG 530, particularly with reference to stress-testing. ESG financial risk considerations are also expected to extend beyond climate change financial risk.

 

SPS 530 requires consideration of investment risks, and this includes ESG risks, and the investment risk appetite being pursued to achieve investment returns. The ESG risk spectrum is diverse (climate change, human rights, corruption, etc) and impacts financial performance in various ways (reputational damage, regulatory action, etc). As such, RSE licensees will need to review their existing investment governance frameworks to ensure they are compliant with APRA’s upcoming guidance.


As has always been the case, risks that are considered uncompensated should be minimised. As with other forms of risk, exposures need to be measured and monitored.

 

Key issues for an RSE licensee to consider:

  • Are roles and responsibilities for the identification and management of ESG related investment risks and opportunities clearly documented?
  • How ‘separate’ or ‘integrated’ are ESG related investment risks and how does this work within the overall framework of governance?
  • What are your ESG triggers that would demand a different approach?

 

Operational Due Diligence (ODD)

The amendments to SPS 530, do not specifically address updated guidance on operational due diligence (ODD). However, this has not diminished the importance of ODD in helping RSE licensees meet their investment strategy and objectives. It is imperative that RSE licensees ensure that prospective investment managers have the appropriate systems, policies, and processes in place to monitor and manage operational risk exposures, prior to their selection.

 

Industry practice and guidance continues to evolve. Most notably, AIST updated their Guidance Note on ODD including guidance around valuations. Good practice is for RSE licensees to have a process for managing the approval, rejection, and reassessment of valuations. This is interlinked to the proposed amendments to SPS 530, where there is a specific requirement for RSE licensees to develop, maintain and implement an effective valuation governance framework.

Key issues for an RSE licensee to consider:

  • Do you have the systems, policies, and processes in place to monitor and manage investment related operational risk exposures?
  • Do you have an appropriate policy governing the ODD program? 
  • Are individuals responsible for marking operational assessments sufficiently empowered?
  • Are operational conditions monitored on an ongoing basis?
  • Under what circumstances will you perform an ad-hoc ODD review? Who decides?


Conclusion

Whilst some developments have not been addressed by changes to SPS 530, there is a need to improve practices and these changes are a start. APRA has indicated that further guidance will be issued. There is also other relevant guidance material available, and RSE Licensees should always reference the latest market developments.


As a RSE licensee, it is important that you continue to consider how your investment activities need to evolve consistent with any changes to your size, scope, and business mix.


We would be pleased to assist you with responding to these developments.

 

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.