Banking Royal Commission turns attention to superannuation

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has started public hearings into superannuation.

Superannuation hearings – Day Ten: regulators and policy

In the final day of the Royal Commission superannuation hearings we are set to hear from ASIC and APRA, concluding with a summary of policy issues by Counsel Assisting.

Deputy Chair of APRA Helen Rowell was asked about a potentially misleading phone call script used by Colonial First State when communicating with fund members, and approved by APRA, which could lead members to make a investment decision and so not be transferred to a MySuper product.

The Royal Commission was told the letter said, in part:

“There has been a recent change to legislation which requires us to confirm the
investment options into which you would like your superannuation
contributions paid. Would you like me to complete this now on your behalf
over the phone?”

Rowell said that it’s “not desirable” that members are misled by fund trustees. Mr Hodge said it should be “unacceptable” to the regulator.

(an earlier version of the article described the communication with members as a letter.)

Later Stephen Glenfield, also from APRA, said that he viewed a super fund reserve as an asset of the fund and so the members. Chris Kelaher of IOOF had earlier told the Royal Commission that he didn’t regard reserves as assets of the members. In that case the reserve had been used to compensate fund members.

Mr Glenfield was shown documents that showed the reserve policy of the fund had been updated to allow for compensation to be made from the reserve to members, though this was done after the compensation was paid. APRA apparently hadn’t detected this as part of their investigation.

After lunch Mr Hodge QC questioned Tim Mullaly of ASIC about the action of the regulator in response to ANZ’s ‘A-Z review’ from yesterday.

ASIC Commissioner Peter Kell was asked about the use of licence conditions versus Enforceable Undertakings, and fees-for-no-service.

Superannuation hearings – Day Nine: general v personal advice


Questioning of Mark Pankhurst, from ANZ/OnePath, have focussed on the distribuion of the Smart Choice Super through branches involving a ‘A-Z review’. This was subject of an Enforceable Undertaking with ASIC.

Related: ANZ & CBA accept Undertaking over distribution of super products in branches

Richard Allert of AMP/NM Super then took the witness stand. The questioning focused on reporting to the board of underperformance and the returns on cash investments. He was followed by Rachel Sansom, also of AMP/NM Super.

The Royal Commission is likely to hear from ASIC and APRA tomorrow.

Superannuation hearings – Day Eight: MySuper


The Royal Commission continued to hear from Linda Elkins of Colonial First State (CFS) in relation to the MySuper transition.

The Commission has been uncovering a range of issues with the transition to MySuper funds in retail fund – including slow transition, systems incapable of identifying members required to be moved to MySuper, and encouraging financial advisers to get members to make an investment choice so the member could be kept in a higher fee (and commission paying) product. These issues don’t appear isolated to a single retail fund, and are likely to be put to APRA when its representatives appear before the Commission later in the week.

Despite 91% of members being either better off or in the same position in a MySuper product, CFS didn’t agree when APRA wanted the transition accelerated. Counsel Assisting Mr Hodge asked if this was out of concern for the relationship between CFS and advisers.

Questioning then moved on to the returns and commissions paid on cash investments, the competitiveness of CFS insurance premiums, and fees charged to deceased customers.

In the afternoon the Commission heard from Peter Haysey of Catholic Super, in regards to a failed fund merger. Questioning then moved to conflicts of interests – where a spouse and a relative of a Catholic Super executive worked for organisations from which the fund bought services, but this conflict wasn’t disclosed for years.

Mark Pankhurst and Victoria Weekes – both from ANZ/OnePath – are listed next on the witness list.

Superannuation hearings – Day Seven: Suncorp, Hostplus, CFS


The Royal Commission is set to continue to hear from Mr Pinto from Suncorp.

 

Counsel Assisting Mr Hodge asked if the true administration fees were disclosed that the disclosed fees would rise. Mr Pinto said it would depend on the disclosure. Mr Hodge asked if the Suncorp super fees were already high relative to competitors. Mr Pinto said he wasn’t sure.

The Commission had asked Suncorp to justify its claim on its website that its super fund was ‘low-fee’. Mr Pinto said Suncorp was removing the claim, to align it with description of ‘competitive’ in the PDS.

Questioning then moved to the timeliness of Suncorp’s transition to MSuper products. Mr Hodge asked if an email was encouraging advisers to get members to make an investment decision – which would mean they would say in commission-paying Choice products instead of moving to MySuper.

The next witness was David Elia of Hostplus, followed by Linda Elkins of Colonial First State (CFS).

The CFS questioning is initially focused on MySuper, including encouraging members – at times through misleading call-centre scripts – to make investment decisions so members wouldn’t need to be moved to cheaper MySuper products.

Elkins is set to return to the witness box at 9:30am on Wednesday.

Superannuation hearings – Day Six: Aboriginal and Torres Strait Islander super fund members, NAB remediation, Sunsuper


The Royal Commission has started day six of the superannuation hearings by moving to the topic of the difficulties around superannuation faced by Aboriginal and Torres Strait Islander people.

The Commission heard from Lyn Melcer from QSuper on this issue.

Questions by Senior Counsel Assisting Rowena Orr about the impost of additional and more flexible processes suggests the Royal Commission could recommend more super funds follow the lead of Qsuper.

Melcer was excused and, after a short break, Andrew Hagger of NAB was re-sworn in.

After Mr Hagger was excused the Royal Commission heard from Maurizio Pinto of Suncorp, seemingly relating to how the fund handled a surplus from insurance.

Mr Pinto is set to return to the witness box at 9:30 am tomorrow.

Are super fund trustees serving the best interest of members? – Banking Royal Commission superannuation hearings week 1 summary


The Banking Royal Commission has spent much of the first week of superannuation hearings focused on questions around the best interest of members.

Senior counsel assisting Michael Hodge QC told the Royal Commission on the first day of the super hearings that super fund trustees are “surrounded by temptation”.

Mr Hodge went on to ask :”What happens when we leave these trustees alone in the dark with our money?”

Much of the inquiries in the first week of the superannuation hearings can be summarised as revolving around duyy to act in the best interest of members, including

  • How can it be in the best interest of members to continue to pay fees when they don’t need to pay the fees? Or how can it be in the best interest of members to not be fully compensated for fees for no service?
  • How can it be in the best interest of members to continue to pay commissions they don’t need to, including for no service, when the super fund is concerned that ceasing commissions could lead financial advisers to recommend clients move to another fund?

Superannuation hearings – Day Five: grandfathered commissions, Dual Regulated Entities (DRE)

Mark Oliver, General Manager of Distribution for IOOF, has continued in the witness stand. The questioning seems to relate to payments between entities and grandfathering provisions, including volume-based and shelf-space fees..

Counsel Assisting Hodge QC took Mr Oliver through a number of issue with his statement to the Commission, and asked if Mr Oliver thought his answers would be helpful to the Commision – he said he had “general knowledge”.

Mr Hodge said the Commission had suggested Mr Oliver was not the appropriate person to answer questions, but IOOF insisted. The Commission viewed Christopher Kelaher, Managing Director of IOOF, as the more appropriate witness. Kelaher is listed as the next witness.

The Commissioner has been critical of IOOF’s production of documents.

“Prompt and proper compliance with Notices to Produce is required by law and is
essential to the proper execution of the Commission’s work. Delays of the kind that have occurred in this case impede the proper work of the Commission. Ill based claims for privilege further impede its work,” said Commissioner Hayne.

Kelaher has now taken the witness stand and being asked about the board structure and practices of IOOF.

Concerns with Dual Regulated Entities (DRE) – a company is both the trustee of a super fund and responsible entity for Managed Investments Scheme/s (MIS) – are raised.

Later the questioning turns to how members were compensated, following from an over-distribution that was then recovered over time. Some of the compensation appears to have come from a reserve of the fund – compensating members with their own money.

After lunch, it appears that this is not the only time that IOOF used a reserve of the fund to compensate members of the fund. Kelaher said that it was not his understanding that a reserve of the fund was an asset belonging to the members.

Mr Hodge put it to Kelaher that Questor (IOOF) hadn’t displayed an understanding of its best interest duty to members, or its obligation to prioritise the interests of members over those of Questor and related entities – to both of which Kelaher answered “I don’t agree”.

Kelaher was excused and Scott Wilson, Chairman of Energy Super took the witness stand. The line of questioning appears to be to the appointment of union representatives to the board of the fund and the handling of director fees and other payments

More to come.

Superannuation hearings – Day Four: fees for no service continued, industry super funds, payment of commissions


The fourth day of the superannuation hearings opened with the Commissioner refusing NABs request for non-publication directions. Nicole Smith then continued to give evidence.

Ian Silk, CEO of AustralianSuper, is listed as the next witness, to be followed Mark Oliver and Christopher Kelaher of IOOF, if time allows.

In the afternoon the Commission moved on to Mr Silk, though seemingly may return to the NAB/NULIS case study. Questions put to Mr Silk revolved around the tenure and compisition of the super fund board.

AustralianSuper currently has only one independent director. Mr Silk said the fund was open to more independent directors, but prefers skills over a quote – such as the Government’s proposed minimum one-third independent directors.

The Commission then moved on to the ‘investment’ by AustralianSuper in the publication The New Daily. Though AustralianSuper doesn’t regard the shareholding as an investment, but rather a “tool to enhance engagement with members,” in the words of Mr Silk. The money put into The New Daily was paid from the same fee that pays for marketing expenses.

‘Fox and henhouse’ ad campaign

The final topic covered on day four of the superannuation hearings was the ‘fox and henhouse’ ad campaign. This ad was released in early-mid 2017 and aimed at heading off potential changes to how default super funds are selected. At the time the Productivity Commission was working on a report on how default funds were chosen.

Mark Oliver, General Manager of Distribution for IOOF, briefly took the witness stand at the close of the Thursday hearings. The line of questioning appeared to relate to if the payment of commissions was in the best interest of members and grandfathering.

Superannuation hearings – Day Three: fees for no service continued, best interest of members, speed of MySuper transition, infrastructure investment


On Wednesday the Banking Royal Commission continued to hear from witness Nicole Smith in regards to NULIS. The focus of the questioning was on fees for no service, how it can be in the best interest of members to continue to pay commissions when they don’t need to, and the speed – or lack thereof – of transition to MySuper products and their relative performance.

Late in the afternoon the Commission switched witnesses to Australian Super, with Nicole Smith to return on Thursday, due to a question of confidentiality.

Jason Peasley, Head of Mid-Risk Portfolios with the industry fund and formerly Head of Infrastructure, is being asked about Australian Super’s investment in Pacific Hydro, through fund manager IFM Investors (formerly Industry Funds Management).

It was reported in 2014 that IFM wrote down the investment in Pacific Hydro by $685 million. When this claim was published again recently Industry Super Australia made a statement to “correct the record”, without disputing the write-down figure:

“The sale of Pacific Hydro by IFM.

The sale of Pacific Hydro, in January 2016, by the IFM Australian Infrastructure Fund delivered the Fund proceeds well above Pacific Hydro’s carrying value and at an exit multiple of 22 times Enterprise Value/EBITDA, above other industry comparables.

This successful exit contributed to the Fund delivering almost 22% (net of fees and investor taxes) for FY16 on behalf of its institutional investors, in a Fund which has generated average investment returns of 12.0% per annum, net of fees and taxes, since inception (1 August 1995).”

 

 

Ian Silk and Jason Peasley, both from Australian Super, are listed on the witness list for Wednesday.

Mark Oliver and Christopher Kelaher, in relation to IOOF, have been added to the witness list.

More to come.

Superannuation hearings – Day Two: fees for no service continued

The Royal Commission is expected to continue to hear from witnesses relating to NAB super trustee NULIS.

Nicole Smith, former Chair of NULIS is set to return to the witness box on Wednesday morning.

The Chief Executive of Australian Super Ian Silk and Jason Peasley, who appears to have a role with Australian Super’s infrastructure portfolio, were scheduled for Tuesday but the Commission is running behind schedule. Their appearance seems to relate to the investment by Australian Super in Pacific Hydro through fund managed by IFM.

ASIC gets bigger budget and new powers

The Government has announced that ASIC will receive $70.1 million in additional funding to ensure it has the “resources and powers it needs to combat misconduct in the financial services industry and across all corporations for the protection of Australian consumers”.

“This new funding will bolster ASIC’s enforcement capabilities and enable it to undertake new regulatory activities and investigations, so as to better deliver on its mandate of combating misconduct in corporations and in the financial services industry,” said a joint statement by the Treasurer and Minister for Financial Services.

This follows from ASIC’s decision to “re-focus” on “proactive enforcement and increase onsite supervisory approaches”.

The funding includes $26.2 million for the enhanced pursuit of serious misconduct by “well-funded litigants” and $9.4 million to boost supervision of the superannuation sector.

ASIC staff will also be embedded in the big four banks and AMP.

Refunds for fees for no service estimated at over $364 million

As the Banking Royal Commission was asking about fees for no service in relation to NAB’s superannuation trustee NULIS, ASIC provided an update on the refund programs from the banks.

“AMP, ANZ, CBA, NAB and Westpac have now paid or offered customers $222.3 million in refunds and interest for failing to provide advice to customers while charging them ongoing advice fees,” said ASIC.

NULIS Nominees – which was the first case study before the Royal Commission in its superannuation hearings – has paid or offered almost $36 million in compensation, with a further $67 million estimated for a total of $102,900,408 in compensation relating to general advice.

All up, the refunds for fees for no service are currently estimated to be $364,264,630.

However ASIC also says if provisions made by five organisations are paid in full the fee for no service remediation may exceed $850 million.

 

Data source: ASIC, see notes related to figures

ASIC says it will continue to monitor the fee for no service compensation programs.

Superannuation hearings – Day One (07/08/2018): fees for no service

“Trustees are surrounded by temptation”

“Trustees are surrounded by temptation,” Senior counsel assisting Michael Hodge QC told the Royal Commission on day one of the superannuation public hearings.

“To preference the interests of their sponsoring organisations, to act in the interests of other parts of their corporate group, to choose profit over the interests of members, to establish structures that consign to others the responsibility for the fund, and thereby relieve the trustee of visibility of anything that might be troubling. Their duties oblige them to resist all of these temptations.”

“What happens when we leave these trustees alone in the dark with our money?”

“Can they be trusted to do the right thing? If they can, does that mean that the current regulatory system is adequate? If they can’t, what must be done to protect Australians’ retirement savings and to what extent do the entities that own or control the trustees who are not obliged to act in members’ best interests, act in ways that are ultimately detrimental to members, even if they do not technically cause the trustee to breach the trustees’ duties?”

Hodge said that a review of documents had found fewer examples of potential misconduct, or conduct below community standards, or inappropriate use of retirement savings from industry funds compared to retail funds.

There will be no consumer witnesses in the superannuation round of hearings, as this “reflects the nature of the matters that we are investigating”.

“The conduct and decisions with which we are concerned are unobserved and unobservable for most Australians.”

“At the end of your working life, you know how much you have. You do not know how much you might have had but for certain decisions made by your trustee of which you were not aware or of which you were only notified in an obscure way, if at all.”

Unlike earlier rounds of hearings the superannuation hearings will not conclude with findings about specific entities, but instead a summary of policy issues.

Only courts can make binding decisions on remedies

The Commissioner explained that not every case can be explored by the Royal Commission, but emphasised that every submission is read

“…it is critical to recognise that the Commission is not a court and cannot and will not adjudicate on the rights and wrongs of particular cases.”

“The Commission’s task is to inquire, and the Commission cannot and does not make any decisions about whether those who have been affected by misconduct should have some remedy. Only the courts can make binding decisions of that kind.”

NULIS (NAB/MLC)

The first day of the public hearing focused on NULIS, the superannuation trustee for NAB and MLC super funds, around the level, disclosure and grandfathering of fees.

In late July NAB released a statement to the stockmarket, saying: “MLC’s superannuation Trustee, NULIS, will stop deducting the Plan Service Fee from MLC MasterKey Personal Super (MKPS) member accounts from 30 September 2018 and all MKPS members will be fully refunded for Plan Service Fees paid while in the product.”

MLC Super CEO Matthew Lawrence said the fee was being refunded because MLC hadn’t clearly communicated to customers that thee fee could be turned off if they weren’t using the general advice service.

Overview of superannuation in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry

What does the Banking Royal Commission want to know about superannuation?


The Terms of Reference for the Banking Royal Commission require it to inquire into:

“whether the use by financial services entities of superannuation members’ retirement savings, for any purpose, does not meet community standards and expectations or is otherwise not in the best interests of those members;”

The scheduled two weeks of hearings will focus on three broad topics:

  • Duties of RSE [Registrable Superannuation Entity] Licensees (including structural and governance arrangements, the relationship between trustees and financial advisers and selling practices)
  • Superannuation funds and Aboriginal and Torres Strait Islander members
  • Effectiveness of superannuation regulators

The first topic, duties of RSEs, includes a number of sub-topics to be explored during the superannuation hearings, which Senior Counsel Assisting Michael Hodge QC split into three groups:

  1. The ways in which trustees or their related entities seek to cause members to join or stay with their fund
  2. Monitoring by Trustees of the use and performance of members’ funds
  3. The structural and governance arrangements that exist for trustees.

The individual topics, as set out in the opening to the superannuation hearings by Mr Hodge, are:

The ways in which trustees or their related entities seek to cause members to join or stay with their fund:

  1. The selling practices of banks in relation to the superannuation products offered by their related party trustee
  2. The making of payments by industry funds to their sponsoring organisations or affiliates of the trustee to assist, or purportedly to assist, with the marketing of their funds.
  3. The continued payment of grandfathered commissions by retail funds.
  4. The approach of trustees to members who have multiple superannuation accounts, in the same fund or a different fund.

Monitoring by Trustees of the use and performance of members’ funds:

  1. The payment for financial advice or other services from the assets of the fund, including fees for no service
  2. The ways in which funds monitor the performance of the products that they are offering and how they engage in performance attribution.
  3. The way in which trustees go about carrying out their statutory obligation to perform an annual MySuper scale test.
  4. The transfer of accrued default amounts to a MySuper product.
  5. The consideration of cash returns by certain retail funds.
  6. The sixth topic in this group is spending on marketing and advertising by industry funds – including The New Daily publication and the ‘fox and hen house’ ad campaign

The structural and governance arrangements that exist for trustees:

  1. The structural arrangements for the monitoring of advice provided by financial advisers but paid for out of the assets of the super fund – and so subject to the Sole Purpose Test and best interests duties
  2. An entity within a retail group receiving payments from third party managed investment schemes where those payments are calculated by reference to the investments of the super fund.
  3. The use of a particular structural arrangement by retail funds whereby the trustee is a dual regulated entity (DRE) – where a company is the trustee of the super fund and responsible entity for one or more managed investment schemes, which was the structure of Trio Capital
  4. Another potential problem with structural arrangements within retail funds – outsourcing within the retail group that prevents trustees from being able to identify and monitor breaches or satisfy the best interests duty
  5. The appointment of directors to the boards of corporate trustees of industry funds.

Witnesses

Duties of RSE

  • AMP Super and NM Super (AMP)
  • Australian Super
  • Catholic Super (CSF)
  • Colonial First State (CBA)
  • Electricity Supply Industry Superannuation (Qld)
  • Host-Plus
  • IOOF
  • Mercer
  • NULIS (MLC/NAB)
  • Onepath and Oasis (ANZ)
  • Suncorp
  • Sunsuper
  • United Super (CBUS)

Superannuation funds and Aboriginal and Torres Strait Islander members

  • QSuper

Effectiveness of superannuation regulators

  • APRA
  • ASIC

When is the interim and final report of the Banking Royal Commission expected?

The interim report is expected in September, with the final report due by February 2019.

Earlier Royal Commission hearings relating to super:

 

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