Australia: Sticks and stones: Banking Royal Commission Final Report signals further regulatory shake up for superannuation

The Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Commission) recognised the importance of improving the regulation and supervision of the superannuation industry.

Given its size and significance to the Australian economy – more than 14.8 million Australians have superannuation accounts and superannuation savings comprise assets worth approximately $2.6 trillion – this comes as no surprise.

Many of us are familiar with the popular children’s rhyme ‘[s]ticks and stones may break my bones but names will never harm me’. The Commission heard all sorts of descriptions levelled at the superannuation industry – some positive and some not so glowing in their assessment. Although the superannuation industry is accustomed to reviews, investigations, and inquiries where various name-calling has taken place, the Commission has taken it to a whole new level.

It remains to be seen whether Commissioner Kenneth Hayne’s recommendations will form the basis of the ‘sticks and stones’ that break the superannuation industry in Australia.The six norms identified by Commissioner Hayne in the Interim Report, and again in the opening chapter of the Final Report are as follows:

  1. Obey the law
  2. Do not mislead or deceive
  3. Act fairly
  4. Provide services that are fit for purpose
  5. Deliver services with reasonable care and skill
  6. When acting for another, act in the best interests of that other.

Commissioner Hayne argues that these underlying norms of conduct are “fundamental precepts” and that “[e]ach is well-established, widely accepted, and easily understood”. The norms are legislated for in a variety of ways across banks, insurers and the superannuation sector. Even though the norms are reflected in the existing law, he argues that the reflection is “piecemeal” and hence the need for change.

The history of financial services reform in Australia shows us that legislative simplification can often be a difficult and costly endeavour – and especially so in the case of superannuation.

Many, if not all, of the superannuation recommendations in the Final Report will require legislation for their introduction. It is clear that if they are legislated, even though they are not radical, the recommendations will create further regulatory shake up for the superannuation industry.

Final Report superannuation recommendations

Below is a summary of the key recommendations for the superannuation industry, the government’s response to the recommendations and our preliminary commentary on them.

RECOMMENDATION

GOVERNMENT RESPONSE

COMMENTS/KEY TAKEAWAYS

Recommendation 3.1 – No other role or office

To avoid conflicts that arise in the industry, registrable superannuation entity (RSE) licensees should be prohibited from acting in any other capacity and should be solely focused on the performance of their duties as a superannuation fund trustee.

 

The Government agrees to address the risks associated with dual regulated entities by prohibiting trustees of a RSE assuming obligations other than those arising from, or in the course of, its performance of the duties of a trustee of a superannuation fund.

Evidence before the Commission found that dual-regulated trustee entities create conflict issues and difficulties to which the trustees and regulators need to give close and continuing attention.

It appears that the Commission is unconvinced that the existing APRA Prudential Standards on conflicts and legislative covenants dealing with conflicts (and the priority to be afforded to the interests of beneficiaries) are sufficient.

It is unclear whether more legislation (which prohibits certain conduct) is the answer to this issue of conflicts. It wasn’t that long ago when APRA had a standard RSE licence condition that addressed this issue.

In some instances, the conflicts issue stems from structural and organisational matters within a company group that do not appear to have been addressed by the Commission, which has decided not to interfere with vertical integration. Perhaps Commissioner Hayne considers self-regulation to be the key here?

Recommendation 3.2 – No deducting advice fees from MySuper accounts

Deduction of any advice fee (other than for intra-fund advice) from a MySuper account should be prohibited.

The Government agrees to prohibit the deduction of any advice fees from a MySuper account (other than for intra-fund advice)

This recommendation is linked to other findings in the Royal Commission that fees had been charged for no service. Given the carve-out for intra-fund advice, this appears to be a logical step forward for MySuper accounts where trustees are essentially dealing with default superannuation arrangements. The recommendation also keeps such accounts closer to the original policy rationale for MySuper under the 2011 Stronger Super reforms (which was to introduce a new default system using low cost and simple superannuation products).

It will be interesting to see how the Government reconciles this move with recent recommendations in the Productivity Commission’s report on superannuation – in particular the proposal to fundamentally redesign the selection of default superannuation funds in Australia.

Recommendation 3.3 – Limitations on deducting advice fees from choice accounts

Deduction of any advice fee (other than intra-fund advice) from superannuation accounts other than MySuper should be prohibited, unless certain requirements are met (relating to annual renewal of ongoing fees, a written record of services to be provided and the relevant fees, and express client authority).

The Government agrees to limit deductions of advice fees levied on non-MySuper superannuation accounts and indicated that it will respond to this recommendation in a similar fashion to Recommendation 2.1 and require advisers for choice accounts to seek annual renewal from the client in writing of ongoing fee arrangements, together with the client’s express consent.

This proposal is clearly targeting the fees for no service issues which came to the attention of the Commission in a very stark fashion.  Although Commissioner Hayne has expressed his extreme disapproval of ongoing fees for choice accounts, he has left the window open for such fees to continue to be charged if advisers are able to meet the new conditions proposed in Recommendation 2.1.

As explained above, no such carve out has been proposed for the prohibition on any advice fees for MySuper accounts (except for intra fund advice which, by definition, is not personal advice).

Recommendation 3.4 – No Hawking

The Prohibition is on the unsolicited offer or sale of superannuation products.

 

 

The Government agrees that hawking of superannuation products should be prohibited, and the definition of hawking should be clarified to include selling of a financial product during a meeting, call or other contact initiated to discuss an unrelated financial product.

The recommendation follows from evidence in the Commission that consumers were being sold superannuation products in an unsolicited manner which may have led to members choosing products which were not necessarily in their best interests.

This recommendation is set to have a significant impact on the superannuation industry and will switch the debate away from the current difficulties the industry faces in distinguishing between general advice and personal advice, and in turn, the way superannuation products are marketed to consumers.

Recommendation 3.5 – One default account

A single, default superannuation account for each person (created for new workers, or workers without a superannuation account).

The Government agrees that a person should only have one default account.

The recommendation is a welcome move and was already flagged in the long-awaited Productivity Commission’s final report on Superannuation which was released in January 2019.

This recommendation addresses the erosion of multiple accounts through secretive and unknown account fees, particularly for young and part-time workers.

Recommendation 3.6 – No treating of employers

The SIS Act should be amended to prohibit the trustees of a regulated superannuation fund, and associates of a trustee, doing any of the acts specified in section 68A(1)(a), (b) or (c) especially where the act may reasonable be understood by the recipient to have a substantial purpose of having the recipient nominate the fund as a default fund.

The provision should be a civil penalty provision.

 

The Government agrees to amend the SIS Act to facilitate this recommendation.

The effect of this recommendation is to prevent funds entertaining (or ‘treating’) employers who are responsible for nominating the default fund for their employees.

If legislated, civil penalties will apply to trustees and associates of superannuation funds who ‘treat employers’ as a means of inducing employers to nominate the particular fund for their business.

In a competitive market landscape, it is difficult to see how funds will be able to genuinely compete without offending this new provision. It wasn’t that long ago that the Financial System Inquiry led by David Murray concluded by telling the financial services industry at large (including the superannuation funds) to focus on competition and greater efficiency in running their operations. As such, the superannuation funds might be forgiven if they’re feeling a tad confused about this recommendation from Commissioner Hayne.

Recommendation 3.7 – civil penalties for breach of covenants and like obligations

Breach of the following covenants should have civil penalty consequences under the SIS Act:

  • Trustee’s covenants section 52 or section 29VN;
  • Director’s covenants in section 52A or 29VO.

The Government agrees that trustees and directors should be subject to civil penalties for “breaches of their best interests obligations”.

This recommendation should come as no surprise. A Bill to make a number of changes to the SIS Act, including making breach of section 52A and section 29VO civil penalty provisions, has been introduced into the Federal Parliament but has not yet been passed.

It is worthwhile querying whether the Government’s response to this recommendation is intended to be limited to the ‘best interests’ covenants or, as Commissioner Hayne intended, all the relevant covenants in the SIS Act.

Recommendations 3.8 and 6.3 – adjustment of APRA and ASIC’s roles

The roles of APRA and ASIC with respect to superannuation should be adjusted as follows:

  • APRA is responsible for establishing and enforcing Prudential Standards for superannuation funds; and
  • ASIC’s role is the conduct and disclosure regulator in superannuation concerning the relationship between RSE Licensees and individual consumers.

The Government agrees that the roles of APRA and ASIC in superannuation should be aligned to the twin peaks model.

The recommendation provides clarity for the role of each regulator in the superannuation industry: APRA is the prudential regulator and responsible for system and fund performance, and ASIC is the conduct and disclosure regulator.

It is difficult to object to the notion that our regulators should have stronger powers to enforce provisions that are civil penalty provisions and other provisions relating to conduct that may harm a consumer.

Recommendation 3.9 and 6.8 – accountability regime

Commissioner Hayne has also recommended that the existing Banking Executive Accountability Regime (BEAR) (which clarifies standards of accountability and governance in the banking sector) be extended to apply to all RSE Licensees

Further, the BEAR should be jointly administered by APRA and ASIC, with the latter assuming responsibility for the consumer protection and market conduct aspects of the BEAR.

The Government agrees with the recommendations and will extend the BEAR to all APRA regulated entities, including insurers and superannuation RSEs.

Further, the government has taken the recommendations a step further and indicated that a similar regime will apply to all Australian financial services licensees, Australian Credit licensees, market operators, and clearing settlement facilities – in other words, if legislated, the new BEAR will also apply to non-prudentially regulated entities. 

Commissioner Hayne said the extension of the BEAR is intended to make trustees and senior executives of superannuation funds and insurers accountable in the same way as bank executives.

Regulatory attempts to streamline the regulation of financial products and services have not always generated better outcomes for consumers, nor the industry at large. The Government will need to ensure the role of regulators in enforcing the BEAR are made clear and it provides regulators with adequate resources to enforce the regime.


Looking forward

The ultimate report card on the effectiveness of the Commission in reforming the financial services sector is likely to come in 2022. This is the time the Commission has recommended that ASIC complete its review of measures taken by Government, regulators and financial services industry players to reform the financial services sector, including in response to the issues identified in the Final Report.

In the interim, both major political parties have indicated their emphatic support for all 76 recommendations in the Final Report. However, with a grand total of 14 sitting days for the House of Representatives before a Federal Election is due in May 2019, it is difficult to see how any of the recommendations will see the legislative light of day until members of the 46th Parliament of Australia have assumed office. And even then, it will likely only be after adequate industry consultation has taken place in the second half of this calendar year.

Name-calling has rarely harmed the superannuation industry to date. It may have created more regulatory headaches for the industry but it has not generated any fundamental structural or cultural change.

The superannuation recommendations in the Final Report will mean further regulatory change for the industry, but it seems unlikely that the ‘sticks and stones’ of the Commission will break it. As Commissioner Hayne himself concedes, culture plays a significant part: “[c]ulture, governance and remuneration march together. Improvements in one area will reinforce improvements in others; inaction in one area will undermine progress in others”.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Chambers Asia Pacific Awards 2016 Winner – Australia
Client Service Award
Employer of Choice for Gender Equality (WGEA)

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions