Why are the prudential standards important?
Welcome back. If you missed the first edition of Financial and Prudential Regulatory Insights, you can read it here.
In this post, I will explain why financial and prudential standards are important. One way of approaching that question is to say they are important because the standards create obligations that must be complied with. Failing to conform with the standards can lead the Commission to find a provider to be non-compliant.
My preference is to lift things up a level. Experience has shown me that people are most likely to comply with a set of rules when they appreciate the principles that sit behind them. In fact, this not only leads to more willing compliance, it also reveals the opportunities inherent in a set of obligations that can shift them from being a set of chores to being seen as value added activities. That said, if you are looking for a good summary of the various rules you can find them here.
The prudential standards, which are set out in the Fees and Payment Principles are designed to ensure residential aged care providers protect the refundable accommodation deposits they receive. They do this by requiring them to:
- maintain adequate liquidity to repay refundable accommodation deposits when they are due
- keep proper records
- follow disclosure procedures, and
- have suitable governance in place to ensure compliance with the standards and refundable accommodation deposits are only used for permitted uses.
In short, they provide a template for providers to put in place basic controls to manage other people's money. In this case, money that is often a substantial part of older Australians' remaining wealth.
In addition to the prudential obligations, there is also a general financial obligation under Quality Standard 8 that focuses on aged care providers being able to demonstrate how planning and execution of financial decisions is aligned with the delivery of quality outcomes. The importance of this should go without saying, given the ultimate success of an aged care service, home care or residential, will be its ability to use its resources to deliver services that older Australians want, need and value.
My observation is that the expectations placed on aged care providers by the financial and prudential standards are very modest, with such controls in other contexts being considered good business practice. For that reason, I encourage providers to look beyond the specific obligations and view the standards as an opportunity to develop strategies to invest in things that improve care and manage operational risk, supported by robust financial governance controls and record keeping practices. Similarly, disclosure obligations should be viewed as just another way of empowering consumers and enabling them to be an equal partner in their own care.
In my next post I will spend a moment talking about the Commission’s expanding focus on financial viability issues. Until then I wish you and your families a peaceful and safe Christmas holiday period.
Executive Director, Financial and Prudential Regulation