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A tap on the shoulder: Prudential Standard CPS 900 – Resolution Planning

17 October 2023

#Superannuation, Funds Management & Financial Services

Published by:

Michael O'Connor, Matthew Darling

A tap on the shoulder: Prudential Standard CPS 900 – Resolution Planning

In May 2023, APRA finalised CPS 900 and released the Prudential Practice Guide CPG 900 – Resolution Planning (CPG 900). CPS 900 is yet to be registered as a determination. However, given that it takes effect from 1 January 2024, it is assumed that it will be.

CPS 900 empowers APRA to implement an action plan (Resolution Plan) to manage or respond to a superannuation fund trustee’s failure (or a failure that APRA considers likely to occur) (Resolution) to protect beneficiaries or maintain functions important to financial system stability or the availability of essential financial services (Critical Functions).

CPS 900 and CPG 900 were released a few months after the yet-to-be-registered Prudential Standard CPS 190 – Recovery and Exit Planning (CPS 190) was finalised around the same time as APRA released Prudential Practice Guide CPG 190 – Recovery and Exit Planning. Assuming both prudential standards are registered, CPS 900 commences before CPS 190 impacts trustees, and it is interesting to note that APRA acknowledges that a Resolution Plan complements a trustee’s exit and recovery planning obligations under CPS 190.

The tap

To be clear:

  • APRA determines and implements the Resolution Plan to maintain a fund’s critical functions;
  • in many cases, APRA’s Resolution Plan appears to be an “end-of-life plan” for any fund it determines as being non-viable via a wind-down and transfer strategy; and
  • the trustee assists APRA in giving effect to its Resolution Plan.

It is unclear whether APRA’s power crystallises prior to a failure or once it identifies a failure. This is because there is a requirement that trustees may need to undertake a critical functions analysis, and it is unclear if this only occurs once APRA makes a Resolution or if it can occur at any time APRA decides (including prior to a failure occurring). Irrespective, a trustee is not required to comply with CPS 900 until it is “tapped on the shoulder”.

It appears quite likely that APRA’s Resolution will lead to a Resolution Plan to wind-up a fund in many cases, noting that APRA states that a "strong recovery and exit plan [under CPS 190] would reduce the likelihood of resolution".

CPS 900 lacks detail on what failures may give rise to a Resolution Plan (aside from the inability of trustees to meet their obligations), but we assume that trustees would be attuned to the primary factors that APRA would consider, including failures under the performance test, continued non-compliance, and the inability to appropriately resource the trustee with appropriate personnel at all levels. However, CPS 900 not only captures Resolutions rising from actual failures, but also captures potential/likely failures. On that basis, could a fund that passes the (retrospective) performance test be considered potentially unviable on a prospective basis?

Trustees’ obligations

Critical functions analysis

In determining whether a Resolution applies, APRA may require trustees to undertake Critical Functions analysis, considering the systemic impact, customer impact and the substitutability by other providers if functions were to cease.

Resolvability assessment

Once the Critical Functions analysis has been completed, APRA may identify the strategy (Resolution Option) giving effect to its Resolution Plan and may require the trustee to conduct a resolvability assessment to determine the Resolution Option’s feasibility by assessing:

  • legal, structural, operational, or regulatory barriers to the Resolution Option’s implementation;
  • the Resolution Option’s implementation timeline;
  • execution risks; and
  • pre-positioning measures required to enable APRA to execute the Resolution Option (Pre-Positioning Plan).

Importantly, trustees may be required to seek an independent review of their resolvability assessment, most likely if APRA is dissatisfied with a trustee’s initial resolvability assessment.

Pre-Positioning Plan

APRA is likely to require the Trustee to implement a Pre-Positioning Plan so that barriers to its ability to execute the Resolution Plan are minimised. The Pre-Positioning Plan is broad in scope and requires trustees to plan:

  • changes to organisation or legal structure;
  • renegotiation of contracts;
  • development of wind-down or run-off plans for businesses or assets;
  • measures to ensure operational continuity of key functions and services during a Resolution;
  • capabilities to support APRA in effecting the Resolution Options; and
  • actions to remove barriers to the execution of Resolution Options or to mitigate execution risks.

If APRA is dissatisfied with the trustee’s Pre-Positioning Plan, it may impose additional pre-positioning actions on the trustee to support the Resolution Plan.

External advisors

APRA may require trustees to engage an APRA-approved service provider at the trustee’s expense and subject to consultation with APRA before finalising the terms of any agreement.

Maintaining capabilities for Resolution

Throughout the Resolution Plan’s lifecycle, trustees must maintain capabilities to support the Resolution Plan, otherwise APRA can:

  • impose additional capabilities on the trustee to support the Resolution Plan; and/or
  • adjust prudential requirements of the trustee.

Our thoughts

Which trustees/funds does CPS 190 apply to

CPS 900 makes it clear that trustees must support APRA through the Resolution Plan’s development and maintenance.

Interestingly, CPS 900 draws an initial distinction between funds:

  • valued above $30 billion (or subject to some degree of complexity) (SFIs);
  • valued below $30 billion (non-SFIs); and
  • non-SFI’s that APRA determines provide critical functions (Critical non-SFIs),

to determine whether CPS 900 applies or not.

However, we see a potential source of confusion in CPS 900 as, initially, the standard states that it only applies to SFIs or critical non-SFIs however, the it later states that a trustee ''must support APRA in the determination of whether it provides any critical functions, if required by APRA" and that APRA may require a trustee to undertake critical functions analysis.

In clarifying, CPG 900 states that APRA would need to determine whether a Trustee provides critical functions during the early Resolution Planning stage. This raises questions as to whether:

  • CPS 900, in its entirety, applies to all trustees (meaning that the distinction between SFIs, non-SFIs and Critical non-SFIs is irrelevant);
  • all trustees do provide critical functions (meaning that the distinction between SFIs, non-SFIs and Critical non-SFIs is irrelevant) and it should be seen as a foregone conclusion that CPS 900 applies to all trustees;
  • APRA will make the relevant determinations required under CPS 900 (potentially to avoid claims that it has acted outside of its powers) and when and how it will do so; and/or
  • APRA will undertake a cumbersome process of identifying a trustee’s failure, then have that trustee perform a critical functions analysis, and then incorporate the findings of that analysis into the Resolution Plan (subject to any review of a trustee’s critical functions analysis suggesting that no critical functions exist or are impacted), before determining whether the remainder of CPS 900 applies to a fund valued under $30 billion.

CPS 900 could be made clearer, in this respect.

We think that the intention is that CPS 900 applies to all trustees, partly because “Critical Functions” is defined as "any function provided by an APRA-regulated entity that is important to financial system stability or the availability of essential financial services to a particular industry or community".

This differs from how other APRA standards and prudential practice guides refer to “critical operations”, “critical business activities”, “critical business functions”, and “critical functions” (being functions such as fund administration, compliance, finance capabilities and claims and benefit processing and payments).

We assume that APRA would take the view that sub-$30 billion funds:

  • play an important role in financial services;
  • provide an essential financial service (because they manage compulsorily acquired contributions that are also subject to tax concessions); and
  • may have a relevancy/importance to certain communities (especially if they are marketed in that manner),

and, therefore, do provide Critical Functions.

Further, it would seem difficult for APRA to justify to a Senate Committee that a smaller fund was not subject to CPS 900 if flow-on effects from that fund’s failure impacted the financial services industry. We assume that APRA would require its power to cover all funds.

On that basis, all trustees should keep one eye on CPS 900, unless it is amended to provide specific rules (as CPS 190 does) to differentiate SFIs, non-SFIs and Critical non-SFIs.

Fail to prepare, prepare to fail

It is important to note that CPS 900 will not apply to a trustee unless and until it is “tapped on the shoulder” by APRA. Our view is that trustees (who wish to have any hope for survival) should prepare for that tap (similar to how they must prepare under CPS 190). Preparation may include a combination of measures, including:

  • considering a litigious avenue via (most likely) an administration law (judicial/merits) review process; and/or
  • a conciliatory approach, by determining its own “Resolution Plan” to proactively assist or consult with APRA in a manner that would seek to ensure viability.

Without these, APRA’s “tap” appears to be fatal.

APRA does not specify how CPS 900 and CPS 190 interrelate with each other. One possible scenario is that APRA may utilise CPS 900 to influence a trustee’s exit and recovery plan. Relevantly, CPS 190 allows APRA to impose on a trustee’s exit and recovery plan:

  • inclusions or exclusions of a particular recovery or exit actions;
  • inclusion of an APRA determined scenario; and
  • use of particular assumptions when assessing recovery capacity.

Further, APRA views a “strong recovery and exit plan” (under CPS 190) can reduce the likelihood of needing to execute a Resolution Plan. It is possible that APRA may utilise a trustee’s recovery and exit plan to evaluate the Resolution Options it proposes. A trustee with an insufficient recovery plan may see APRA take a strict approach when it develops its Resolution Plan for that trustee.

Consequences for failing to comply with CPS 900

Trustees who fail to comply with CPS 900 or APRA’s directions are subject to penalties (which will form a personal liability that the fund cannot indemnify). Putting that aside, a failure to comply with any APRA prudential standard entitles APRA to issue directions including:

  • the removal of the trustee’s responsible officer;
  • an audit or investigation of the trustee at the trustee’s expense;
  • the cessation of the acceptance of contributions to the fund; and
  • cancellation of the trustee’s RSE licence.

Failure to comply will likely be fatal, with any chance for a lifeline being remote. This may sound obvious, but we imagine that trustees who fail to support and work with APRA will have limited to no ability to determine the terms of a successor fund transfer (including but not limited to matters relating to the choice of transferee).

If you have any questions regarding this article, please get in touch with a member of our team below.

The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Michael O'Connor, Matthew Darling

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