SYDNEY: 14 October 2014 – The Australian superannuation sector manages more than $A1.2 trillion and relies on external providers to provide systemically critical services. Member benefit administration is a critical part of the activity of a superannuation fund, which is frequently outsourced. However, the number of service providers in the superannuation sector is declining. The five shareholders of Superpartners  (AustralianSuper, Cbus, HESTA, HOSTPLUS and MTAA Super) are in the process of a trade sale to Link Group, the owner of Australian Administration Services (AAS). This move merges the firms with the largest and second largest market share (measured by assets under management) to create a single administration outsource provider with greater than 22% market share by assets under management. With the fourth largest administration outsource provider, NAB looking at strategic reviews and the sixth, Russell, having been bought by the London Stock Exchange for its index business, it seems likely that there will be consolidation in the sector. As well as potentially exiting the member benefit administration, NAB is also proposing to cease being a custodian to the superannuation sector and exiting the life insurance business.

Part of the reason for the consolidation is the challenge faced by member benefit administrators in scaling their technology platforms for increased member interaction and complexity of engagement. This was identified in the Cooper Review (at page 21) with the lament that “administration is a low margin business”.

The effects of the technological complexity include exit. In late June the Australian Financial Review reported “Superpartners pulls the plug on botched IT project”. The investment was reported at being close to quarter of a billion dollars and with little likelihood that the system would be deployed. In 2012, the investment was $130 million with the system due to be “live” by the end of 2013. The business uncertainty exists with other providers. The NSW state owned business Pillar Administration is either “on the block” or expanding its IT staff numbers.

Despite the flux in which the superannuation administration sector finds itself, there are calls for regulatory change. As the Financial System Inquiry (FSI) noted in its interim report at page 3-106 “The provision of fund administration is not currently subject to direct regulatory oversight, although such providers often provide services to regulated entities”. It also notes that “A similar concern relates to vendors of IT systems”. It is in this context that the FSI sought views on whether to impose Australian Financial Service Licence (AFSL) requirements for providers of fund administration and technology service of sufficient scale. This echoes the previous call from the Cooper Review, which In Recommendation 6.2, called for member benefit administrators to be licensed by APRA.

There is a high degree of support for licensing major service providers. ASIC supports “imposing Australian financial services licensing requirements on the providers of investment administration and fund administration services” and “regulatory oversight of technology service providers of sufficient scale”. ASIC goes further and describes the form of licensing that it recommends should be imposed. ANZ “supports an approach which regulates similar types of economic activity in an equivalent way for all providers”. Westpac “supports the need for fund administrators to be appropriately licensed”. The Association of Superannuation Funds of Australia (ASFA) conceded that “the application of AFSL requirements may need review” and “that administrators do not currently have AFSLs to cover their customer contact business. This should be addressed. However, ASFA believes “that these policy considerations should be considered holistically”.

The law firm, Minter Ellison was mildly opposed to licensing. It noted that many fund administrators already have an Australian financial services licence but acknowledged that there is no specific regulatory regime or licensing criteria. Minters is “not convinced that a case has been made out for requiring specific licensing requirements to apply to these service providers”.

There was concerted opposition of administrator licensing with respect to self managed superannuation funds (SMSF). Chartered Accountants Australia and New Zealand is opposed to increasing the regulatory burden on administrators and Dixon Advisory argued “As there has been no evidence of systemic risks or failure in the fund administration sector there is no rationale for fund administrators to obtain an AFSL, particularly before existing reforms have finalized”. The SMSF Professionals Association of Australia (SPAA) “does not support having fund administrators and technology service providers subject to AFSL requirements”.

If both fund administrators and technology providers of scale are to be the subject of an AFSL, what would the provisions of such a licence encompass? Perhaps the most informative answer comes from the ASIC submission. ASIC argues that there are four benefits to licensing fund administrators and technology providers:

1. Licensees would be required to lodge a breach report for any significant breaches by the licensee. Problems with member data on insurance or unit pricing—would be able to be handled centrally and efficiently with the regulator, rather than through the registrable superannuation entity licensee. The ability for the regulator to directly require information and assistance from the licensee, rather than seeking it from another person, would allow more direct oversight of changes to systems and compliance frameworks. If the administration system is defective, for example, the licensee is directly responsible to the regulators to fix it.
2. There would be more visibility and transparency associated with potential systemic issues that may emerge from outdated administration systems or technology.
3. Administrators and technology providers would be required to have appropriate risk management systems under their AFS licence.
4. (There would be a regulatory level playing field between entities with an in-house administrator and entities with an outsourced administrator.

If ASIC believes that superannuation funds outsource member benefit administration in order to “tip” the regulatory playing field, this would be a concern. That member benefit administration relies so heavily on technology, and that technology providers of scale are likely to be required to hold AFSL in the future means that external member benefit administrators will likely have to follow suit. There is a business risk that licensing will discourage new entry into this low margin sector and may even encourage exit. The regulatory risk that licensing creates is the exacerbation of the effects of the overlaps and gaps caused by the dual regulation of superannuation between ASIC and APRA.