Insurance & Reinsurance
In the next part of Clyde & Co's multi-part Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) series, we consider the key recommendations and findings in the Final Report as they relate to Superannuation providers.
Funds should expect to see a renewed interest by the regulators as to whether trustees, in practice, are prioritising the interests of their members and managing conflicts. Trustees also need to immediately review fees being deducted from members' accounts and ensure that any ongoing fees are limited to advice about particular superannuation investments.
The Trustee of a Registrable Superannuation Entity (RSE) should have no other role or office other than those arising from or in the course of its performance of the duties of a trustee of a superannuation fund
Deduction of any advice fee (other than for intra-fund advice) from a MySuper account should be prohibited
Deduction of any advice fee (other than for intra-fund advice) from superannuation accounts other than MySuper accounts should be limited and prohibited unless certain preconditions are met
No hawking of superannuation products
A person should have only one default superannuation account. Machinery should be developed for 'stapling' a person to a single default account
No 'treating' of employers with the purpose to have the employer nominate the fund as a default fund or become a member of the fund. This provision should be a civil penalty provision enforceable by ASIC
Civil penalties for breach of trustee covenants and like obligations
Adjustment of APRA and ASIC’s roles
Over time, provisions modelled on the Banking Executive Accountability Regime (BEAR) should be developed for RSE licensees
The Royal Commission's flagship concern with the superannuation sector was the potential for conflicts of interest and the management of those conflicts of interest. The Royal Commission explored several examples of potential areas of conflict. Of particular concern was the potential conflict of trustees of for-profit funds which are part of a corporate group and have a related corporate entity which can perform the administration services or investment management services of the fund, for a fee.
The Royal Commission noted the positive covenants imposed by section 52 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), which include an obligation to perform the trustee's duties and exercise the trustee's powers in the best interests of beneficiaries and an obligation to prioritise the beneficiaries' interests where a conflict arises.
The Royal Commission found that trustees can fulfil their duties to members only if they recognise that the interests of the fund's parent company and the interests of members are not only different but are often opposed. The Report observed that:
(a) Disclosure of conflicts of interest is not enough. The statutory duty to comply with the RSE licensee law and to perform properly the duties of the trustee demands action, not just disclosure;
(b) Outsourcing to a related entity requires ongoing care and diligence on the part of the trustee. The best interests covenant means that the trustee's obligation is to perform its duties and exercise its powers in the best interests of the beneficiaries. Hence, both the instigation and maintenance of every arrangement must be judged against the best interests of members. The trustee should test the information received and query it where necessary;
(c) APRA needs to "get deeper" and identify where frameworks and polices are not effective. The regulators must be astute to observe whether trustees are giving priority to the best interests of members. Commissioner Hayne noted that checking whether regulated entities have robust frameworks and policies in place is not enough.
The Royal Commission noted that strategic enforcement action to both address the immediate member harm and to deter future conduct, appears to have been 'missing in action' in the superannuation industry.
Despite its misgivings around the potential for conflict in the sector, the Royal Commission ruled out the more drastic reforms to the industry which had been raised in submissions:
The Royal Commission recommended that the trustee of a RSE should be prohibited from assuming any obligation other than those arising from or in the course of performing the duties of a trustee of a superannuation fund. This would not prevent an RSE licensee from being a trustee of more than one superannuation fund but would prevent it from taking on obligations of any other kind.
The Royal Commission also recommended that breach of the SIS Act covenants be a civil penalty provision.
The Royal Commission was very critical of the deduction of financial advice fees and ongoing advice service fees paid from super accounts.
The Royal Commission found that these fees were often "invisible" and where the service rendered was "broad financial advice", deduction of these fees from a member's superannuation account is inconsistent with the legislative requirement that a RSE ensure that the fund is maintained solely for the identified purposes.
The Royal Commission found that advice that may be paid for out of a superannuation account is limited to advice about particular actual or intended superannuation investments, ie consolidation of accounts, selection of funds, products or asset allocation within a fund. It does not include broad advice on how the member might provide for their retirement or maximise their wealth generally. The Royal Commission stated that any practice by trustees of allowing fees for this type of broad financial advice to be deducted from superannuation accounts must end.
Whilst the Royal Commission conceded that prohibiting ongoing advice fees may reduce access to financial advice for some Australians, it considered that the risks of ongoing service fees (such as the "fee for no service" scandal), outweigh the limited benefits the existing arrangements may provide.
The Royal Commission said that if ongoing advice fees are to be permitted, then they should be controlled in at least two ways:
(a) The advice in respect of which fees may be charged is limited to advice about particular superannuation investments; and
(b) Any such arrangement should require annual renewal.
For MySuper accounts, the Royal Commission recommended that no deduction for advice of any kind should be made – the simpler the arrangement, the better. If a member wants advice, that should be charged and paid by the member directly.
Commissioner Hayne noted that superannuation is not a product to be sold. Commissioner Hayne observed that attempts by ANZ and CBA to sell superannuation in bank branches under a 'general advice' model may have contravened the law.
Commissioner Hayne recommended that all forms of unsolicited offering of superannuation arrangements should be prohibited and that the relevant legislation be amended accordingly.
Commissioner Hayne noted that funds compete to be nominated as default funds, with some large funds "treating" employers, perhaps by way of entertainment and sporting events, in order to gain members.
Commissioner Hayne recommended that the legislation be amended accordingly and that a breach of the prohibition should be a civil penalty provision, enforceable by ASIC.
The often cited criticism of the superannuation sector of individuals inadvertently holding multiple superannuation accounts, being charged multiple sets of administration fees and holding multiple life insurance policies, was again touched on by the Royal Commission. The Royal Commission recommended that machinery be developed which "staples" a person to a single default account.
Currently superannuation is regulated by APRA and ASIC. Commissioner Hayne did not support the creation of a superannuation-only regulator, finding that the twin peaks model of regulation should be maintained with slight adjustments.
In particular, Commissioner Hayne recommended that the SIS Act be amended to make breach of the SIS Act covenants a civil penalty provision, with both APRA and ASIC being able to enforce breach of the covenants.
Commissioner Hayne also said that conflicts of interest should be of immediate concern to APRA as prudential regulator and ASIC as conduct regulator.
Finally, Commissioner Hayne also considered that over time, an accountability regime, perhaps modelled on the BEAR, should be extended to all RSE licensees.
The Australian Government has already agreed to take action on all of the superannuation recommendations, so it is likely that we will see a bill with proposed amendments to the SIS Act tabled before parliament shortly.
In the interim, funds should carefully review the ongoing service fees (if any) being deducted from members accounts and ensure that fees for "broad financial advice" are not being deducted from members accounts. Funds which operate as part of a for-profit group should also carefully review their frameworks to ensure that conflicts are either avoided or carefully managed. We are likely to see more regulator activity in this area, so RSEs need to look beyond whether there is a conflict policy in place and take proactive steps to ensure that it is acting in the best interests of its members and its conflict policy is being applied effectively. For example, for-profit funds which are part of a corporate group which have an investment management service, should consider multiple providers and be able to demonstrate that proceeding with the investment management services from the related entity is in the best interest of members.
Should you require advice as to any component of the Royal Commission's findings on superannuation or regulatory advice on superannuation more broadly, please contact our Superannuation Team to discuss.