The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry – the Banking Royal Commission – has given its final report, making a number of recommendations on superannuation.
Treasurer Josh Frydenberg says that the Government is “taking action” on all 76 recommendations in the Royal Commission final report, and is going further in a “number of important areas”. However, at least in terms of superannuation, several of the responses don’t go as far as the recommendations.
The Government has had the final report since Friday. It is unclear when there would be further details on action the Government plans in response to the final report, particularly given there are few Parliamentary sitting days before an expected May election.
It is also unclear when the Government plans to fully respond to the recommendations of the Productivity Commission in its recent report on the super system. When it was released the Government said it was waiting on the Banking Royal Commission report before responding; several of its responses to the Royal Commission say that they are also responses to the Productivity Commission recommendations.
Only one default super account
The final report of the Banking Royal Commission recommends that “a person should have only one default [superannuation] account”.
“To that end, machinery should be developed for ‘stapling’ a person to a single default account.”
The Government, in its response, agrees “that a person should have only one default account”, noting that this was also a recommendation of the Productivity Commission.
However the Government has not detailed how a single default account would be chosen or maintained, other than saying that it will apply to “new members entering the system”.
“This also responds to the Productivity Commission’s report Superannuation: Assessing Efficiency and Competitiveness which recommended members without an account only be defaulted once,” says the Government’s response.
The Government says this “builds” on action to reduce multiple accounts in its Protecting Your Super legislation currently before the Parliament, which deals with the consolidation of inactive accounts, capping fees on low-balance accounts and opt-in insurance for younger members.
Civil penalties for inducements to choose default funds
In recent years Industry Super Australia has said banks may be offering benefits to employers to encourage them to make particular super funds the default fund for their employees. ASIC has also warned employers to be wary of such inducements.
Section 68A of the Superannuation Industry (Supervision) Act, in part, says that the trustee (or an associate of a trustee) of a super fund, must not offer goods, services or discounts on the condition that employees will become members of the fund.
The Royal Commission recommends that s68A become a civil penalty provision and be amended to prohibit trustees or associates from doing acts listed in the section 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 Government’s response is somewhat vague, saying: “The Government agrees to amend the Superannuation Industry (Supervision) Act 1993 to facilitate enforcement of this provision.”
Civil penalties for breach of covenants
The Royal Commission recommends that the covenants and obligations on super fund trustees, including those in Section 52 of the SIS Act, become enforceable by civil penalties.
The Government’s response focuses on the best interest of members, which is only one of the covenants. The response says the Government “agrees that trustees and directors should be subject to civil penalties for breaches of their best interests obligations”. However it also points to legislation which goes beyond the best interest obligation, to the covenants in s52A(2).
“The Government has already introduced the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017 into Parliament to establish civil penalties for directors for breaches of the best interests duty and will amend this Bill to extend civil penalties to trustees.”
The Superannuation Measures No. 1 Bill was last debated in the Senate in December 2017.
APRA and ASIC’s roles as regulators
The Royal Commission recommends that the roles of the regulators APRA and ASIC be “adjusted”. For super funds, APRA would be “responsible for establishing and enforcing Prudential Standards and practices designed to ensure that… financial promises made by superannuation entities… are met within a stable, efficient and competitive financial system”. Meanwhile ASIC’s role when it comes to super would primarily be concerned with the “relationship between RSE licensees and individual consumers”.
The Government says it “agrees that the roles of APRA and ASIC in superannuation should be adjusted to align with the general principles of the twin peaks model, whereby APRA is the prudential regulator and responsible for system and fund performance, including for licensing and supervision, and ASIC is the conduct and disclosure regulator”.
“Regulators’ responsibilities under the Superannuation Industry (Supervision) Act 1993 will be shared in a way that aligns with ASIC and APRA’s mandates.”
The Government says this “also responds” to the recommendations of the Productivity Commission about the roles of the regulators. The Productivity Commission, in addition to specific recommendations on ASIC and APRA separately, recommended:
“The Australian Government — with the benefit of this inquiry report and that of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry — should clarify the roles of APRA and ASIC in relation to superannuation. In doing so, it should consider the suitability of each regulator’s powers, the suitability and strength of penalty provisions for misconduct, and whether there are any undesirable constraints on either regulator engaging in strategic conduct regulation.”
No hawking of superannuation products
The Royal Commission recommends the unsolicited offering, “hawking”, of superannuation products be banned.
The Government has agreed with the recommendation, adding that “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 Royal Commission heard evidence of consumers being sold superannuation products in an unsolicited manner which may have led superannuation members to choose products that were not in their best interest.”
Limits on deducting fees from super
The Royal Commission has recommended, and the Government has accepted, limiting the ability to deduct fees from super for advice.
The final report recommends that, other than intra-fund advice, deductions for any advice fee from MySuper accounts be prohibited. The Government has agreed to this recommendation.
The Royal Commission also recommended that for non-MySuper products deductions for advice fees (other than intra-fund) be prohibited unless the “requirements about annual renewal, prior written identification of service and provision of the client’s express written authority… in connection with ongoing fee arrangements are met”. The Government also agreed to this recommendation.
No other role for RSE trustees
The Royal Commission recommends that trustees of RSEs (Registrable Superannuation Entity) 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”.
The Government agrees with the recommendation, pointing to the risks arising from dual regulated entities: “The work of the Royal Commission has indicated that the conflicts of interests that arise between the interests of superannuation members and members of managed investment schemes are difficult to manage where an entity acts as a trustee for both the superannuation fund and the managed investment scheme.”
BEAR-style accountability regime for super funds
The Royal Commission recommends that, “over time”, a system modelled on the BEAR (Banking Executive Accountability Regime) accountability regime be extended to RSE licensees. The Government agrees with the recommendation.
Labor agrees “in principle” to recommendations
Shadow Treasurer Chris Bowen says that Labor accepts all the recommendations of the Banking Royal Commission “in principle”.
For-profit super fund members need protecting: AIST
The Australian Institute of Superannuation Trustees (AIST) has responded to the Banking Royal Commission report by calling on the regulators to protect members in for-profit super funds.
AIST said the final report of the Royal Commission was a “historic opportunity” to restore trust in financial services and prioritise the best interests of consumers.
“What we saw in the Royal Commission, from the banks and other for-profit super funds, were examples of an absolute betrayal of their customers who trusted them with their superannuation. Directors who ignore their duty to act in members’ best interests need credible deterrence to bad behaviour so civil penalties are long overdue,” said AIST CEO Eva Scheerlinck.
AIST represents not-for-profit super funds.
“As Commissioner Hayne succinctly put it, the concept of acting in members’ best interests is not hard to understand. The banks and ‘for-profit’ super funds must be forced to abide by this fundamental principle and if they break the law the community has a right expect that they are properly held to account,” said Ms Scheerlinck.
AIST welcomes the ban on hawking super products, saying it is long overdue.
“The hearings revealed that many consumers were switched into bank-owned super funds that were not in their best interests, so the law needs to be very clear that such hawking is illegal.”
ASFA concerned by potential unintended consequences
The Association of Superannuation Funds of Australia (ASFA) says the superannuation recommendation of the Royal Commission will make the super system even stronger. However it also warns that each recommendation will need to be carefully worked through to consider unintended consequences.
“The Commissioner has acknowledged that the regulatory architecture underpinning our system is strong and that the best interests covenant, and sole purpose test, set high standards for trustees operating superannuation funds,” said ASFA CEO Dr Martin Fahy.
“However, in the course of his forensic inquiry, the Commissioner has identified specific areas for improvement to ensure these standards are better applied in practice. It’s now up to industry and regulators to raise the bar.”
More to come.