Regulatory heat and emerging exposures: Why Australian super funds must strengthen their defences

The superannuation risk environment

In such a heavily regulated sector, compliance risks are naturally a major concern for superannuation funds and trustees.

Breaches of trustee duties are a key exposure, but funds are also exposed to investment and market risk, operational risks such as fraud and crime, and breach of fiduciary obligations.

However, two of the fastest-growing challenges for Australian funds and trustees are regulatory and litigation risks from cyber and ESG exposures.

In the United States, regulatory investigations and court proceedings for cyber-related exposures have highlighted the risk to funds’ directors and officers (D&Os) from data breaches.

Shareholder derivative actions and securities-related class actions have been brought against US companies for alleged failures to address cyber security risks and prevent data breaches. It's only a matter of time before similar cyber-related regulatory and litigation activities begin to impact the Australian market.

Meanwhile, allegations of ‘greenwashing’ – misleading claims about a company’s environmental and climate change policies – have become a significant exposure for D&Os in the superannuation space.

The Australian Securities and Investments Commission (ASIC) has made its enforcement priorities around sustainability claims abundantly clear. Some funds have received double-digit million-dollar fines for alleged misleading statements about the sustainable/ethical nature of some of their investment options.

Funds are also facing the emerging risk of allegations of 'bluewashing' – misleading claims about socially responsible and ethical investment policies.

With increased mandatory reporting requirements around issues such as modern slavery and greater scrutiny from stakeholders, several screening or ethical investment funds have faced claims about misalignment between their policies and their actions on social responsibility.

Risk mitigation for trustees and D&Os

Despite this heightened risk landscape, there are clear steps boards and trustees can take to mitigate regulatory and litigation risks.

Strong governance and board oversight is key. A clear understanding of the company’s legal and regulatory responsibilities should be matched with strong compliance and risk management frameworks.

Boards should strengthen investment governance by requiring management to provide supporting evidence for ethical or sustainable investment policies. Sustainability statements should also be scrutinised for potential greenwashing/bluewashing risks.

Where suitable, seeking an external, independent review of whether claims are reasonably supported by evidence will provide greater transparency.

Boards and trustees should also invest in enhanced cyber and data security, strengthen internal and operational controls, and promote and enhance a strong risk culture around the fund’s digital presence.

Finally, superannuation funds should ensure there’s adequate management liability and cyber liability insurance in place to cover trustees and D&Os against potential legal and regulatory action.

FI insurance market dynamics

In the current economic environment, companies are keen to cut costs wherever possible, and we’ve seen the impact on the financial institutions (FI) insurance market as clients seek to reduce coverage limits or narrow the scope of cover to achieve lower premiums.

The FI insurance market has also responded to the changing regulatory environment by refining wordings, tightening the scope of cover and, sometimes, changing claims conditions.

But in light of these significant emerging regulatory and litigation trends, it’s important for boards and trustees to consult with their risk advisors on reviewing the limits and scope of their liability coverage.

Insurance carriers play a key role in helping to educate brokers and insureds about the changing risk landscape and increased exposures for clients. The challenge for underwriters is to provide clarity around the risk and claims environment without oversimplifying these emerging exposures, especially where different jurisdictions introduce varying legislation to tackle greenwashing and blue washing claims.

Given the complexity of climate regulations across different jurisdictions, it’s essential insurers work closely with brokers and insureds, meeting in person wherever possible, to better understand the specific exposures of each business, and to tailor coverage to individual boards’ oversight of investment policies and statements.

As ASIC, the Australian Prudential Regulation Authority and other regulators continue to scrutinise the superannuation sector in Australia, insurers must remain agile, adapting underwriting approaches and refining policy language to match these evolving exposures, while working closely with intermediaries to deliver value and clarity to clients.

Through responding to recent changes in the regulatory risk environment, the FI insurance market has nonetheless developed products that are well-adapted to the emerging exposures for superannuation clients.