AIST influences policy to make Australia’s
super system fair & sustainable for everyone.

 

AIST response to the 2018 Financial Services Royal Commission

AIST welcomed the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Banking Financial Services as a historic opportunity to restore community trust in financial services and prioritise consumer best interests ahead of banking profits and executive bonuses.

The Final Report – released in February 2019 - emphasised that trustees must always be acting in accordance with members’ best interests and recommended civil penalties to apply if this duty is breached. AIST supports this recommendation. This underpins and helps explain many of the Commissioner’s other recommendations.

While each of the superannuation recommendations require legislative changes, Commissioner Hayne also provided a range of additional commentary that is informing the public debate about superannuation reform.

In total, Commissioner Kenneth Hayne’s final report made 76 recommendations, with nine relating directly to superannuation. To date, just three recommendations have been subject to the legislative process.

It is crucial for restoring consumer trust in Australia’s financial system that the recommendations made by the Commissioner are implemented in a way that will improve outcomes for all Australians from their interactions with financial services.

Impact on profit-to-member superannuation

Significantly, the Commissioner Hayne did not refer any profit-to-member super funds subject to investigation to the regulators for further action. Rather it is the retail super funds, along with the major banks and other for-profit entities – 14 entities in total – that are being subjected to further investigation and possible prosecution for the practices and behaviours that Commissioner Hayne found may have fallen short of the law.

Against this background, many consumers took decisive action. During the second half of 2018, there were record inflows to profit-to-member funds and a three-fold increase in outflows from retail funds. Some members of the community made the switch understanding the fundamental difference that a fund that returns profits to members is looking after their best interests and not anyone else’s. Employers too made the switch. Outraged at some of the behaviour and practices uncovered by the Royal Commission they decided to change their employees’ default fund to one that puts members’ interests first. The Royal Commission has increased awareness of the benefits of belonging to a profit-to-member fund.

Here is AIST’s view on the Royal Commission recommendations that relate to superannuation and financial advice.

Recommendation 3.1
No other role or office The trustee of an RSE should be prohibited from assuming any obligations other than those arising from or in the course of its performance of the duties of a trustee of a superannuation fund.
AIST response:
AIST supports this recommendation, and notes that our submission to the Commission recommended this change. The recommendation would prevent a trustee from undertaking any obligation that does not arise out of its holding the office of trustee. This deals with the issue of conflicts at a fundamental level. Not only does it mean the trustee cannot also be the trustee of another fund, it would also be prohibited from undertaking an obligation of any other kind. The recommendation (and the associated decision not to extend the best interest duty) keeps the ultimate responsibility for the fund with the trustee. The Commission’s commentary addresses fund trustees rather than individual directors. While managing conflicts is also an important consideration for individuals it is not canvassed in this recommendation. There is some uncertainty about the detail and impact of this recommendation and AIST calls on the Government to commence a process of consultation on its detailed design and implementation.
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.
Response:
This recommendation is not supported by AIST. Banning the deduction of advice fees from MySuper accounts will exacerbate existing difficulties members face accessing high quality, reasonably priced advice that is in the in best interests. Advice needs to be affordable for both MySuper and Choice members, and the deductibility of super advice fees encourages members to seek advice they might not otherwise obtain. A majority of Australians are in a MySuper product. While they include disengaged and low-account balance members, they also include highly engaged and high account balance members. Regardless of which category they fall into or the type of super fund they belong to, super fund members should be able to access advice on the same basis. The increased requirements recommended for member approval on advice (i.e. annual consent etc) should also apply to advice paid for by members from their MySuper product, as this is an appropriate level of consumer protection for all fund members. At a practical level, the parameters of what constitutes superannuation advice can be unclear and should be clarified in additional ASIC guidance. It is also noted that some members have an interest in both a MySuper and a Choice product within a fund, and that many MySuper members have made an active decision to be there.
Recommendation 3.3
Limitations on deducting advice fees from choice accounts Deduction of any advice fee (other than for intra-fund advice) from superannuation accounts other than MySuper accounts should be prohibited unless the requirements about annual renewal, prior written identification of service and provision of the client’s express written authority set out in Recommendation 2.1 in connection with ongoing fee arrangements are met.
Response:
AIST does not support this recommendation as it discriminates against the majority of Australians who have a MySuper account. Taken together, there is a risk that recommendations 3.2 and 3.3 may incentivise financial advisers to switch members out of a MySuper product and into a choice product, so the adviser can enter into an ongoing advice arrangement with the member. This is a concern given that MySuper products have on average outperformed choice products over the long term and that choice products are more expensive than MySuper products.
Recommendation 3. 4 
No Hawking Hawking of superannuation products should be prohibited. That is, the unsolicited offer or sale of superannuation should be prohibited except to those who are not retail clients and except for offers made under an eligible employee share scheme. The law should be amended to make clear that contact with a person during which one kind of product is offered is unsolicited unless the person attended the meeting, made or received the telephone call, or initiated the contact for the express purpose of inquiring about, discussing or entering into negotiations in relation to the offer of that kind of product. Response: AIST supports this recommendation.
Recommendation 3.5
One default account A person should have only one default account. To that end, machinery should be developed for ‘stapling’ a person to a single default account.
Response:
AIST does not support this recommendation. We are concerned that members could be stapled for life to an underperforming fund.
Recommendation 3.6
No treating of employers Section 68A of the SIS Act should be amended to prohibit 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) where the act may reasonably be understood by the recipient to have a substantial purpose of having the recipient nominate the fund as a default fund or having one or more employees of the recipient apply or agree to become members of the fund. The provision should be a civil penalty provision enforceable by ASIC.
Response:
AIST welcomed the Government’s move to amend the SIS Act to ban the trustees from influencing employers in regards to choosing default funds. The Australian Investments and Securities Commission (ASIC) has since released an information sheet to provide more clarity on how the new rules will apply.
Recommendation 3.7
Civil penalties for breach of covenants and like obligations Breach of the trustee’s covenants set out in section 52 or obligations set out in section 29VN, or the director’s covenants set out in section 52A or obligations set out in section 29VO of the SIS Act should be enforceable by action for civil penalty.
Response:
AIST supported this recommendation and note that new legislation has been introduced to implement it.
Recommendation 3.8
Adjustment of APRA and ASIC’s roles The roles of APRA and ASIC with respect to superannuation should be adjusted, as referred to in Recommendation 6.3.
Response:
AIST supports this recommendation. The recommendation does not go far enough in addressing the uncertainly and overlap between the roles of APRA and ASIC, and the extent to which the Commission’s evidence revealed issues with their fulfillment of these roles. This is particularly noticeable in the response to the case studies where in some instances regulators have been directed to continue existing investigations. There should be a further standalone review of the regulators, their efficiency and their relationship to each other.
Recommendation 3.9
Accountability regime Over time, provisions modelled on the BEAR should be extended to all RSE licensees, as referred to in Recommendation 6.8.
Response:
AIST supports this recommendation. There is some uncertainty about the detail and impact of this recommendation and AIST calls on the Government to commence a process of consultation on its detailed design and implementation.
Recommendation 2.4
Grandfathered commissions Grandfathering provisions for conflicted remuneration should be repealed as soon as is reasonably practicable.
Response:
This is one of the few Royal Commission recommendations that the Government has been swift to act upon. However while AIST strongly supported this recommendation we have concerns about the Government’s legislated response, notably that it fails to fully addresses the Royal Commission recommendations on conflicted remuneration and that the implementation date is too far off. The simplest solution and the one that puts members’ interests front and centre is for a complete ban on the payment of conflicted remuneration through immediate rebates directly into the accounts of clients. Instead, the new law allows for a commission rebate scheme whose administration is in the hands of product issuers. The rebate of commissions approach is subjective and will be difficult to be properly monitored by the regulator. Given the evidence before the Royal Commission that grandfathered conflicted remuneration causes extensive harm to consumers – and that these commissions are at a huge annual cost – a 2020 implementation date should be provided, rather than 2021.
AIST’s submission on the government’s approach can be found here.

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