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What we do as superannuation professionals, how we fulfil our fiduciary duties, service members, and protect and grow members’ retirement savings as stewards of their hard-earned capital has been in the spotlight this past year. In just the last two months, we’ve had to digest both the Hayne royal commission and the Productivity Commission final reports. Both reports carry recommendations that could have significant implications for our sector.
There’s also been plenty happening on the insurance front. Every fund in the room is busy preparing for the rapidly approaching July start date for the Government’s Protecting Your Super reform package. Throw in an April Federal Budget, followed by a likely May federal election, and the year is set to be another hectic one for our industry.
Superannuation seems to be constantly under review, however the Financial Services Royal Commission was different. This wasn’t government and regulators looking into our industry, in closed industry consultations, or a process that went unnoticed: this spotlight was bright, and public, and headline grabbing. The 68 hearing days received extraordinary public attention and scrutiny. And this had an impact.
APRA tells us that almost $11B flowed out of retail funds during 2018, most of that in the second half of the year. This is around three times more than the outflows in 2017. The Royal Commission had an impact. Profit-to-member funds received record inflows. 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 and led to action.
There was also a lot going on away from the public gaze. In the lead up to the hearings on superannuation, the Royal Commission looked into hundreds of thousands of documents supplied by super funds that were subject to notices to produce. More than 20 of the funds investigated were profit-to-member funds. Board appointment processes, third party relationships, member complaints handling, payments, sponsorships, insurance, investments and so much more were all scrutinised. Significantly, the Commissioner did not refer any of the 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 face further investigation and possible prosecution for the practices and behaviours that Commissioner Hayne found may have fallen short of the law.
AIST member funds are now in a prime position to leverage the public’s trust in the profit-to-member brand. There is a real opportunity to further educate members and the wider public about the profit-to-member difference and the benefits this brings to every members’ retirement. AIST is proud to reinforce this message in our dealings with government, the media, regulators and other key stakeholders.
While the Commission hearings revealed that the retail super fund boards failed profoundly on big governance issues, none of us can afford to be complacent. There are plenty of lessons for profit-to-member funds too.
There were practices in our sector that were called out by Counsel assisting the Commissioner as potentially amounting to misconduct and failing to meet community expectations. While not referred to the regulator for further investigation, there is still a strong message to be heard here. The process of the Royal Commission, its exposure of poor practices in banking, insurance and superannuation, aside from the 76 recommendations for reform, have shone a light on areas for improvement. All of us need to be aware that the practices that became ingrained and common in large for-profit institutions, if unwatched, could be replicated in our sector over time.
Hayne put the blame for the misconduct uncovered by the Commission squarely on the boards and top management. But rather than call for far reaching law reform, he made a compelling case for doing the right thing and abiding by existing rules. Many of Hayne’s observations are simply a reminder of what all trustees need to do.
In his final report, Commissioner Hayne says, “if what has happened in the past is to be avoided in the future, entities have no choice but to grapple with culture, governance and remuneration.”
On the issue of culture he goes on to say,” What the recommendation requires is much more than an exercise in box-ticking. Its proper application demands intellectual drive, honesty and rigour. It demands thought, work and action informed by what has happened in the past, why it happened and what steps are now proposed to prevent its recurrence. Above all, it demands recognition that the primary responsibility for misconduct in the financial services industry lies with the entities concerned and with those who manage and control them: their boards and senior management.”
Going forward this will be the challenge for all financial services providers and no doubt a key area of focus for regulators. Our Thursday morning plenary session on culture will delve deeper in these issues.
On the issue of governance, Hayne says,” rules prescribing board numbers or composition or prescribing particular forms of nomination or selection processes distract attention from the basic requirement of ensuring that the board is, as far as possible, constituted at all times, by directors who, together, will form a skilled and efficient board”.
Improving board governance doesn’t require a million dollar spend on consultants or the wholesale drafting of new policies. But all trustee directors and senior managers must be continually across their duties, their fund’s trust deed, the SIS Act and their fund’s policies. The right training of trustees is crucial, and funds should not waste this opportunity for learning and growth for their fund and their fund members.
AIST’s Governance Code is part of our sector’s defence against behaviours that stray over the line. With the Royal Commission behind us, it is more important than ever to show the community, government and regulators that we are serious about good governance in our sector. Adopting the Code, reporting against it each and every year, and living the spirit of the Code will demonstrate that we are not resting on our laurels, but truly dedicated to living members’ best interests.
The way teams and individuals are incentivised has been highlighted as a key failure in some financial services businesses, leading to inappropriate practices and behaviours. Remuneration and incentive structures need to reflect the values and culture of the business and not encourage outcomes that damage the business brand and fail to meet community expectations. While highly incentivised remuneration structures are not the norm in our sector, they do exist in some business units. Perhaps it is time to review this. At our Chair-only session at this conference, we will have a dialogue on how to progress this topic.
The concept of community expectations has been added to the lexicon in our industry. A new, higher bar has been set.
There is a great opportunity for entities in the financial services sector to regroup and rethink their purpose. To really think through their range of key stakeholders, this time not forgetting the customer, and in our case, the member.
So again, this creates an opportunity for profit-to-member super funds. The things that unite profit-to-member funds are the ethos – P2M, the values, the commitment to member representation on our boards and our non-conflicted governance structure, is what stops practices and behaviours that harm consumers from developing and taking hold. We need to be vigilant that we never lose sight of the core of who we are. We are not financial institutions that exclude customers, that dismiss customers, that forget that we are there to serve. We are proud stewards of other people’s hard-earned savings. We take that responsibility seriously. And as our sector grows, and as individual funds grow and become major financial institutions in their own right, we need to ensure that we have the discipline and internal risk management practices and controls in place, to ensure that we never lose sight of our mission – to deliver better retirement futures for our members. And for that, we don’t need more laws, more regulation. We just need to remain true to our purpose and do what is right.
AIST’s Conference of Major Super Funds is held over three days this week from 14 Wed to 16 Friday on the Gold Coast. For information on the conference program click here.
For interviews with AIST CEO Eva Scheerlinck, contact AIST Media team: Janet de Silva: 0448 000 499 or Tyrell Mills: 0431 303 998
13 March 2019