Operational Risk Financial Requirements – SPS114 update

APRA has released for consultation proposed amendments to Prudential Standard SPS 114 operational risk financial requirement (ORFR) and its associated guidance.

The proposed changes listed in the table below are expected to better position RSE licensees to use the ORFR for its intended purpose: to manage the impact of disruption and smooth operational risk related losses fairly across different cohorts of beneficiaries.

 

Change

Description

Guideline of 25 bps to remain

APRA views that it is prudent to maintain the existing guideline target amount for the ORFR of 25 basis points of FUM.

The proposed changes to SPG 114 recognise that, in exceptional cases, an RSE licensee may seek to adopt a lower target amount.

APRA’s expectation is that, in such exceptional cases, the entity would typically be a significant financial institution and would provide a clear, compelling and evidence-based rationale for a different amount

No two-component approach model

 

In the previous discussion paper APRA proposed using a two-tiered model to determine the ORFR, consisting of:

1.   a baseline component, to ensure ready access to financial resources to fund recovery or exit activity; and

2.   an operational risk component, that largely reflects the approach of the current ORFR with the use expanded to include investigations, remediations and mitigation-related activities — both to address operational risk within the fund as well as encourage operational risk prevention activities.

APRA no longer intends to proceed with this approach. 

More allowable uses for ORFR

 

The proposed amendments to SPS 114 introduce a direct relationship with CPS 230. It is also proposed that the supporting guidance explains how the ORFR may be used for an extended range of cases, which include both making good losses that have arisen and addressing matters that could cause members to sustain a loss.

The expanded uses seek to better enable RSE licensees to effectively utilise the ORFR to smooth losses from operational risk incidents. The changes aim to strengthen confidence in the superannuation system by allowing funds to be available when needed to better protect members from both the disruption and cost of an operational risk event.

Less notification requirements

 

APRA proposes to remove the broad notification requirements in SPS 114, with only the specific requirement to notify APRA where an RSE licensee seeks materially to amend its ORFR target amount to be retained.

APRA will retain oversight of operational risk incidents through notification requirements within CPS 230 and also Prudential Standard CPS 234 Information Security. APRA will also gain insights on ORFR amounts and usage across the industry through data collections.

Neekhil

 

About the Author:

With 20 years global experience in actuarial, superannuation and investment consulting, Neekhil Shah is the Partner and conduit to clients and the McGing team of analysts.

Neekhil and the team at McGing Advisory & Actuarial provide a wide range of superannuation support services including regulatory guidance and actuarial advice