Increased surveillance and potential for enforcement action 8 min read
APRA recently announced in a letter to all superannuation trustees that it will intensify scrutiny of 'fund-level expenditure to hold RSE Licensees accountable to improve practices' and 'reduce spending that is deemed to not be in members’ best financial interests'.
In this Insight, we highlight what APRA plans to do over the coming 12 months through surveillance and enforcement action and areas of its likely focus, and then set out practical steps trustees can take now to prepare for increased scrutiny and possible enforcement action from APRA.
What APRA plans to do about trustee expenditure
Over the next 12 months, APRA will prioritise its supervision of fund expenditure where member benefit is not immediately evident or may not be reasonably justified. It is this expenditure which we assume is at risk of being deemed not to be in members' best financial interests by APRA.
APRA Deputy Chair Margaret Cole also warned this week that APRA is prepared to 'test the limits of the law' in this area if needed, which we interpret to mean a willingness to commence proceedings even where there may be legal uncertainty about the application of the law to expenditure by trustees.
APRA will take a targeted approach, partly informed by expense data that RSE licensees were required to submit to APRA. It will initially focus on 'discretionary expenditure' such as travel, entertainment and conferences, outliers (which we take to mean RSE licensees with higher expenses than their peers), and particular types of payees and payments.
It says its focus will be informed by 'market intelligence and matters of public interest'. The reference to 'public interest' suggests APRA may be reacting to issues raised in the media or public criticism of individual funds and their expenses, and APRA may be more likely to target these trustees for scrutiny and enforcement action.
APRA's interest in trustee expenditure is not new, but its announcements are a warning to trustees that it is looking closely at this area and wants to be seen to be taking action against trustees who are not complying with their obligations.
APRA is already engaging with a number of trustees following its review of initial expense data. The review isn't finished and APRA has said trustees can expect it to issue notices requiring information that demonstrates how trustees determined that expenditure is in members’ best financial interests. In reviewing expenditure decisions, APRA will consider governance, conflicts of interest and attestations from management (as recommended under the updated SPG 515 from 1 July 2025) and the role of accountable persons under the Financial Accountability Regime (FAR). It has foreshadowed imposing rectification measures where warranted, and will make enforcement actions public where appropriate.
The focus on expenditure by trustees ties in with APRA's stated aim in the 2024-25 corporate plan of improving transparency around expenses and a focus on compliance by trustees with the updated SPS 515, which commences from 1 July 2025. APRA flagged in the plan that it will use the new, more detailed expense data it receives 'to identify trustees with outlying expenditure for certain discretionary expense categories and will intensify supervisory efforts accordingly'.
Steps trustees can take to anticipate APRA action
Given APRA's clear warning that it will focus on trustee compliance with expenditure obligations in the next 12 months, including increased surveillance and potential for enforcement action, trustees should take steps now to prepare and anticipate issues APRA may raise. Failure to do so may itself open trustees to criticism. This could include:
1. Reviewing compliance of existing expenditure management policies and processes
While APRA's level of scrutiny and apparent willingness to take enforcement action are new, the obligations are not.
Trustees have obligations under the SIS Act to perform their duties and exercise their powers in the best financial interests of beneficiaries, to give priority to beneficiaries' interests where there is a conflict, and to comply with the sole purpose test. They are also subject to existing requirements in SPS 515 to demonstrate that decisions about business operations that result in significant expenditure will contribute to meeting the trustee's strategic objectives.
All trustees should have governance policies and processes in place for complying with these requirements. This would include an expenditure management policy and procedures for reviewing and approving expenditure, including escalation of decisions to senior management or the board for significant decisions.
Trustees should check that their policies and procedures are up to date and that they are following their own policies and procedures when making decisions about budgets and expenses. Those people who will become their accountable persons should be taking reasonable steps now to make sure they are being applied.
It is these things that will enable trustees to demonstrate to APRA that they have complied with their duties in making expenditure decisions if required.
2. Reviewing high-risk expenses
APRA is likely to focus its scrutiny on certain types of expenses, including advertising, sponsorships, corporate entertainment, political donations and related-party transactions.
Trustees may want to review these categories of expenses—particularly where they are significant or where the link to financial interests of beneficiaries is not evident. A good starting point would be expense data that has been reported to APRA, as APRA will use the same data to identify areas for further scrutiny.
Trustees should test whether they can demonstrate that good governance processes were followed when approving expenses and that the decisions were consistent with the trustee's obligations. They should identify documents and information that could be produced to evidence the approval process if APRA raises concerns.
An internal review could bring to light expenditure decisions that potentially lack justification on the available information, in which case the trustee may need to reconsider the decisions or identify and document any additional information available to support the decisions. It is important to remember that some expenditure may have an indirect connection to members' best financial interests and can be justified on this basis—such as spending on employee benefits that assists in recruitment and retention of good employees that ultimately benefits members.
3. Checking on progress in implementing updated SPS 515 and SPG 515
The updated SPS 515 was finalised in July 2024 and takes effect from 1 July 2025. It includes additional requirements around expenditure management that apply to all expenditure decisions (not just to 'significant expenditure'), and the new SPG 515 includes revised guidance with a focus on trustees' duties to act in the best financial interests of beneficiaries, more scrutiny of expenditure that involves conflicts or provides incidental benefits to third parties, and greater focus on accountability around expenditure decisions.
Trustees will need to review and update their policies, procedures and governance arrangements to address the new requirements and APRA's expectations by 1 July 2025. Trustees should be in a position to provide APRA with an update on progress in this area, including timeframes and anticipated changes to their existing arrangements.
4. Testing whether some expenses may be outside the regulatory regime
The requirements in SPS 515 and the guidance in SPG 515 purport to apply broadly to 'expenditure decisions' by an RSE Licensee 'relating to its business operations'. There is an important unresolved issue around how far APRA's scrutiny will go, and whether it will extend beyond the use by trustees of fund assets for expenses.
There is an important distinction between trustee business models that is not acknowledged in SPS 515 or SPG 515. Some trustees pay expenses directly from fund assets relying on their right of indemnity or exoneration. Other trustees charge a fee for their services and then meet expenses out of their personal assets. Many trustees do both—with the proportion of expenses coming from fund assets or personal assets varying depending on the trustee's business model.
The source of funding for expenses has important implications for the trustee's obligations in relation to expenditure decisions. Trustees are required to comply with the SIS Act obligations to act in the best financial interests of beneficiaries, give priority to their interests and ensure consistency with the sole purpose test only where they are performing a trustee's duties or exercising a trustee's powers. In spending their own money, they are doing neither of these things (although some restrictions apply to the use of trustee capital which is maintained to meet operational risk loss events).
It is not at all clear whether SPS 515 and SPG 515 acknowledge this distinction. While the guidance refers to the requirement to 'have robust governance and oversight of fund expenditure', which suggests it is intended to apply only to expenses paid from fund assets, SPS 515 imposes requirements on a trustee when it makes 'an expenditure decision relating to its business operations'. On its face, this appears to apply equally to expenditure from fund assets or the trustee's personal assets.
In its letter to trustees, APRA says it will prioritise supervisory attention on 'fund expenditure'. Whether it gives this a narrower meaning confined to trustees spending fund money, or whether it includes a broader range of expenditure by trustees, is yet to be seen. This could be one area where it decides to 'test the limits of the law'. SPS 515 also includes new obligations in relation to the setting of fees—including to ensure the fee is 'appropriate and proportionate, having regard to factors such as the arm's-length value of the features and services that the fee relates to'. While this raises separate issues, it could provide another means for APRA to regulate the ability of trustees to pay for expenses out of their own funds.
5. Preparing a 'playbook' for responding to APRA notices or enforcement action
Given APRA has issued a letter to trustees saying it intends to increase scrutiny on expenditure and issue notices to trustees, trustees should prepare now to be able to respond to those notices in an efficient and cost-effective way.
We suggest trustees plan now:
- A process to ensure that, when a notice is received, it is quickly referred to those responsible for preparing a response, to avoid wasting time in the initial phase.
- The resources available and governance arrangements to be followed in responding to any notice, including identifying key accountable individuals and specifying roles and responsibilities, identifying advisers who will be briefed to assist in any response, setting out a process for obtaining input from a range of stakeholders, and setting out the approval and escalation process, including indicative timeframes required for review of draft responses.
- Collating relevant policy and procedures documents so they can be quickly produced and, to the extent possible, preparing draft responses in relation to governance arrangements and key areas of likely scrutiny.
- Preparing a public relations and press engagement strategy in the event issues are first raised in the media or come to light following an APRA notice (although given the nature of the investigations, having regard to the interests of members).
The plan should have input from key senior management and individuals who will be involved in any response.
What's next?
APRA's focus on fund expenditure over the coming 12 months will require trustees to consider their expenditure management arrangements again, and potentially to respond to scrutiny of their governance or individual expenditure decisions. APRA's warning gives trustees a rare opportunity to anticipate issues and prepare a response plan ahead of time. A failure to do so could itself be cause for criticism by APRA.