Governance & Leadership

Investment Manager Operational Due Diligence Guidance Note (February 2017)

In late 2014, APRA communicated its expectations of Registrable Superannuation Entities (RSEs) in relation to operational due diligence (ODD) on investment managers via its Insights publication. APRA has since reminded RSEs that, going forward it will assess their processes undertaken for managing both investment and operational risk when appointing investment managers/investing in external products.

The need for investment due diligence, including examining the investment philosophy and process, portfolio composition and performance of the investment manager and the relevant products is well recognised. Also of great importance, but frequently receiving less attention until now, is the need for operational due diligence on the investment manager/product. This is essential for the RSE licensee to understand the ability of the investment manager/product to adequately deliver on its representations, and hence be able to fulfil its intended role in meeting the RSE licensee’s investment strategy and achieving its investment objectives.

As well as the Insight article, this is reinforced by the requirements of Prudential Standard SPS 530 Investment Governance (SPS 530) and Prudential Standard SPS 231 Outsourcing (SPS 231). Furthermore, Prudential Standard SPS 220 Risk Management (SPS 220) emphasises the obligation to have an appropriate risk management framework addressing all material risks.

AIST, via a dedicated Working Group of RSE representatives, has developed this Guidance Note as a key way of facilitating the ODD review process. Investment managers supplying services to RSEs are encouraged to participate in this process to assist an existing or prospective client meet its regulatory requirements.

The ODD review process must be conducted by an appropriately qualified, reputable, competent firm that is independent of the investment manager/product. AIST is not in a position to recommend any such firms other than to note that APRA expects that any RSE relying on the ODD conducted will need to be satisfied of the skill and independence of the firm conducting the ODD.

AIST has developed this approach in order to streamline the ODD review process. However, any RSE reserves the right to undertake their own ODD of investment managers and the provision of a Summary Report to an existing or prospective client will not necessarily preclude this from happening. Ultimately RSEs wish to manage their investment risk prudently whilst doing so in the most economic and efficient manner.

The AIST Working Group/AIST will review this Guidance Note on an annual basis to ensure that it remains relevant and will update it for any changes to APRA requirements that may emerge.

View the AIST Investment Manager Operational Due Diligence Guidance Note (February 2017) and the Operational Due Diligence of Investments (March 2017).