Super fund members are vulnerable – like most beneficiaries – and many are disengaged and disadvantaged by a lack of financial literacy, Counsel Assisting Mr Hodge QC has told the Banking Royal Commission.
He said that members are “readily able to be taken advantage of”, and the evidence suggests that this has occurred in some cases.
“In most industries, the forces of competition can be relied upon to minimise improper conduct and effective regulation can be expected to address breaches of the law when breaches occur. However, for superannuation, the disengagement of members, amongst other things, may limit the effectiveness of competition.”
There are also “questions” about the effectiveness of regulation when it comes to superannuation.
Unlike at the closing of earlier rounds of hearings, at the end of the superannuation hearings Counsel Assisting raised a number of policy questions – which will be further explored as the Royal Commission continues.
“The first question is this: are there structures that raise inherent problems for a superannuation trustee being able to comply with its fiduciary duties?” asked Mr Hodge, such as DRE’s (Dual Regulated Entities), investment in the insurance policies of related parties or the integration of fund trustees into advice businesses.
“Second, if these structures do raise inherent problems, is structural change of entities, mandated by legislation or otherwise, something that is desirable?”
Mr Hodge went on to ask if there are other types of relationships that create challengers to a trustee doing their duty, and if legislative interventions would be appropriate to “eliminate those temptations and difficulties for trustees”.
“For example, would it be desirable to prohibit all commissions payable from superannuation products and end grandfathering, at least in relation to superannuation products?”
“Might it also be desirable to prohibit ongoing advice fees being deducted by trustees from superannuation accounts?”
Consumers could still arrange for ongoing payments to a financial adviser, just not paid out of their superannuation. Or consumers could authorise a “specific payment for one-off advice” out of their super – if the advice related to superannuation.
“In this way, the risk of a consumer’s superannuation balance being depleted by ongoing advice fees dripping out of the account would be removed. Such a change might act to nudge a consumer to consider more carefully what financial advice she or he wishes to obtain and what she or he wishes to pay for it.”
“It would also remove the risk of a trustee making deductions from a superannuation account to make ongoing payments to a financial adviser or to some other entity for services that were not provided or not provided adequately.”
Mr Hodge said this would protect the member and the trustee, though would have a “detrimental impact” on the provision of financial advice.
Mr Hodge also asked if it is necessary to strengthen laws prohibiting misconduct, or if the current laws just need to be enforced.
“What can be done to encourage the regulators to act promptly on misconduct or potential misconduct and is the present allocation of regulatory roles appropriate to achieve specific and general deterrence from misconduct?”
Finally, Mr Hodge asked: “Are there further structural tweaks necessary to make it more likely that consumer interests will be best served in the superannuation industry?”
The round of hearings on insurance are set to be held in September, followed by hearings on policy questions arising from the earlier hearings in November.
The Royal Commission will be accepting submissions from the public through its website until 28 September 2018.
The interim report of the Royal Commission is expected by the end of September, with the final report due by February 2019.