MLC: impose capital requirements

Major financial services house and National Australia Bank subsidiary MLC has come out strongly against the ability of industry and not for profit funds to use custodial arrangements to overcome the capital requirements demanded of retail master trusts.

In a submission to the Parliamentary Inquiry into the structure and operation of the superannuation industry, MLC said the current regulatory regime distinguishes between publicly offered funds, which are subject to minimum capital requirements, and funds that are not publicly offered, which are not.

It said the current law requires trustees of all public offer funds to meet capital requirements in one of three ways — $5 million in net tangible assets held by the trustee, an approved guarantee of $5 million or the use of a custodian that has $5 million.

The submission said that, in theory, all fund members and investors are adequately protected under this regime because it gives the appearance of uniform capital requirements for all public offer funds.

However, it said an examination of current industry practices suggested that while imposing capital requirements on custodians could address the specific issue of securing fund assets, it clearly did not address the capacity of the fund trustee to compensate fund members for losses from fraud, maladministration (eg, unit pricing errors), technology failure and human error on the part of the trustee.

“In these circumstances, custodial arrangements — when compared to the other methods of meeting capital requirements — have the potential to compromise the ongoing viability of the fund and the investments of members,” the MLC submission said.

It said the capital requirement option of having all fund assets held by the custodian did not provide security or consumer protection for losses resulting from operational risk, trustee malfeasance or incompetence.

“MLC submits that while ever trustees are permitted to satisfy capital requirements through custodial arrangements, the prudential controls regulating Australia’s superannuation investments are potentially compromised and investors put at unnecessary and inappropriate risk,” the submission said. “MLC requests that the committee give consideration to removing the custodial option for trustees.”