The Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) today jointly published Unit Pricing – Guide to good practice for the life insurance, superannuation and funds management industries.

The guide outlines a range of good practices and has been developed following a joint review by APRA and ASIC of unit pricing practice, aided by extensive industry consultation.

Both regulators have noted that serious problems can arise for investors where errors in the calculation of unit prices occur.

Professor Berna Collier, ASIC Commissioner, said unit pricing issues can be complex, and there have been cases where compensation has been or is being paid to affected unit holders.

‘We acknowledge that there are many thousands of unit prices calculated by industry each day and the vast majority will be correct. Consumers can be confident that they will be treated fairly’, Professor Collier said.

‘ASIC and APRA are committed to working with the industry to resolve these errors in the best interests of unit holders’, she added.

APRA Member, Mr Steve Somogyi said that APRA and ASIC were encouraged by companies pro-actively identifying and reporting unit pricing problems to the regulators.

‘APRA and ASIC are concerned to ensure that boards and senior management take seriously their responsibilities to unit holders by developing and maintaining a culture that embeds risk management within operations’, Mr Somogyi said.

Mr Somogyi added, ‘If providers are taking their responsibilities seriously, we expect to find sound understanding of good practice in unit pricing demonstrated at all levels of the organisation and a strong commitment to the implementation of effective and equitable unit pricing’.

APRA and ASIC will continue to review aspects of unit pricing practice as a part of ongoing regulatory monitoring and expect that product providers will follow the good practices described in the guide. The regulators acknowledge that there may be circumstances in which alternative practices are appropriate. In such cases, product providers are expected to have a reasonable and well-documented justification for adopting alternative practices.

Background

Further detail is provided in the attachment and in the guide.

Between them APRA and ASIC have regulatory responsibilities for aspects of life insurance, superannuation and managed funds.

The finalised guide follows receipt of industry submissions on a draft consultation paper issued by APRA and ASIC in December 2004.

End of release

Go to our consumer website, FIDO, to read our information sheet Unit prices - what they are and your rights if they're miscalculated.

Attachment to ASIC/APRA media release 05/344: Strategic unit pricing issues for the board and senior management

Focus on unit pricing issues

Unit prices are often calculated in a high-speed, high-pressure environment. Your organisation may calculate and publish many hundreds of unit prices every day. Even if you only calculate a smaller number of unit prices weekly or monthly, you still face considerable pressure to obtain timely, if less frequent, information and to ensure consistency and accuracy in your operations.

You need to consider the following strategic unit pricing issues to ensure that your organisation measures up to industry good practice.

We discuss these issues in more detail in the remainder of this guide and outline good practice in relation to them.

Errors in unit pricing can be costly

When large errors arise they tend to be very large indeed.

There have been instances of errors costing more than $10 million in compensation. The associated costs of rectification can also be substantial, as can the consequences of reputational damage or publicity. As a senior manager or member of the board, it is therefore important to get unit pricing right.

Give unit pricing a high profile and resources

To avoid costly errors ensure that unit pricing in your organisation has a high profile and adequate resources.

In each budget cycle you need to consider the resources required for unit pricing and ensure they are at the appropriate level.

You also need to determine the appropriate level of board and senior management involvement in unit pricing issues, including endorsement of policies and the implementation of a unit pricing policy framework.

Comply with your legal obligations

At all times you are subject to a wide range of duties.

In particular, in all cases you need to act honestly, diligently and impartially and in the best interests of all unit holders.

Build an effective risk management culture

You need to build an effective risk management culture in your organisation from the top down.

Theboard and senior management set the tone and approach. Your attitude to risk management is the major determinant of the likelihood and impact of unit pricing errors. Significant errors have arisen, and have continued undetected, where the approach to risk management has been inadequate.

You also need to demonstrate your commitment to risk management.

This may be done by setting policy, monitoring performance and leading risk management committees. In such ways your staff and professional advisers are more likely to see risk management as a high priority for your organisation.

Your risk management systems should include controls, monitoring and reporting, so that unit pricing errors are avoided or quickly identified.

The more effective your risk management systems, the more likely it is that errors will be avoided or quickly identified. The sooner an error is detected and resolved, the lower the potential cost and reputational damage to your organisation.

You need to support and encourage staff and professional advisers to report issues, incidents and exceptions.

Establish a policy framework

You need to take responsibility for developing and implementing a unit pricing policy framework for your organisation

Your policy framework needs to cover all of the management, technical and consumer issues identified in this guide. It should also include policy and procedures for managing any unit pricing errors that arise and for addressing rectification and compensation issues.

Implement the policy framework in such a way that your unit pricing policies are discussed, understood and applied consistently throughout your organisation.

Implementation should include regular monitoring to ensure that your policies are updated as required.

Maintain robust systems and processes

You need to have reliable unit pricing systems, procedures and controls in place, as well as business continuity and disaster recovery plans.

Where possible, avoid manual systems and upgrade your old information technology systems. Old systems require significantly greater controls and maintenance, as well as viable interfaces with up-to-date systems. You also risk loss of critical knowledge and skills as old systems become obsolete.

Your unit pricing systems and procedures need to be well designed and well understood, and should be reviewed periodically.

End-to-end process maps and end-to-end maps of unit pricing controls may be useful, particularly when developed by the people involved in unit pricing functions.

Your systems and procedures should include measures to minimise the likelihood of unit pricing errors.

This includes applying reliable cross-checks to data before it is used in calculations and reviewing valuation methodologies.

Design effective reports for monitoring

You need to ensure you receive appropriate and timely information on unit pricing issues.

The reports you receive should focus on key unit pricing measures and show the cumulative impact of unit pricing issues arising in different parts of your organisation.

If you are not kept adequately informed then you cannot manage the risks.

Establish clear delegations and accountabilities

You need to ensure responsibility for each function in your organisation is allocated to a designated person.

Depending on the nature and scale of your operations, the range of functions impacting on unit pricing will probably include:

• Product development
• Marketing
• Unit pricing operations
• Information technology
• Tax
• Accounting
• Legal
• Compliance
• Risk management
• Outsourcing management
• Internal audit.

Your end-to-end process map should completely describe all business activities that can impact on unit pricing.

Manage complexity and diversity

If you choose to offer complex products or a diverse range of products, or if you operate with diverse systems, then you must ensure that you appropriately manage all aspects of your operations.

Some unit pricing issues are common to most products. However, unitised products are numerous and diverse. A single provider may administer many different unitised products offering a variety of investment choices. Many products and investment choices may no longer be actively marketed to new investors, yet they still need to be administered. Some unitised products invest in other unitised products.

Multilayered products and the use of performance fees add complexity to unit pricing decisions and management.

Diversity in information technology systems and in product range constrains simplification and standardisation.

Extra layers of complexity require greater commitment to implementing effective systems and procedures and greater attention to risk management.

Manage change effectively

Many unit pricing errors arise as a consequence of change.

Some change occurs in the external environment, while other change is driven by the board and senior management implementing strategic direction, such as takeovers, downsizing or relocation. Other change, such as changes in policy, investment strategy, fees or product documentation, comes about during normal business operations.

Change that might appear initially to be unrelated to unit pricing may significantly affect the unit pricing function.

You need to attend to risk management during periods of change, particularly where there is more than one change or where change arises frequently.

Where possible, schedule the implementation of change to avoid reporting and other peak periods, when business workloads may affect the success of the change program.

You should also implement project management policies, planning and reporting systems to approve, monitor and control change.

You need to assess the effect of proposed change on unit pricing and need to involve unit pricing staff as early as possible.

You are responsible for outsourced functions

While you can outsource some of your functions, remember that you cannot outsource your responsibility for those functions.

You need to decide which functions will be outsourced and be satisfied that all aspects of the end-to-end unit pricing process are addressed in outsourcing arrangements.

The outsourcing agreement must include arrangements for service levels, reporting, determining the extent of liability, dispute resolution, error and complaint management, business continuity and disaster recovery and termination of the agreement.

You need to build and maintain effective working relationships with service providers, maintain appropriate knowledge and build and maintain appropriate monitoring systems.

Meet periodically with service providers to understand the effect any proposed strategic change will have on unit pricing functions.

Be prepared to manage errors and compensation

Regardless of the quality of your systems and controls, unit pricing errors may occur – you need to be ready to deal with them.

When an error has been identified, all your attention needs to be directed to limiting damage and addressing the loss to investors. At that stage it is too late to be establishing general processes to deal with errors.

You need rectification and compensation procedures in place so that they can be applied promptly.

These should be applied consistently and in good faith so that current or former unit holders are not disadvantaged. You should also give priority to preventing recurrence of the error.

Communicate with the regulators as soon as possible after you detect a unit pricing error.

Independent review by external experts is likely to be important in helping you quantify errors and rectify your systems and may help you to avoid errors in the future.

For more detail, download a copy of 'Unit Pricing – Guide to good practice'