Shaping the future with confidence: Your business post-Financial Services Royal Commission
Round 5: Superannuation
Recommendations relating to superannuation
Perhaps the biggest issue dealt with in the superannuation hearings is how various forms of conflicts create perverse incentives for trustees to not comply with their duties.
Although the Commissioner seemed to be of the view that a trustee could not 'manage' conflicts between its duties to members and its own financial interests, in the end the Commissioner did not recommend prohibiting for-profit funds or breaking up vertically integrated business models. In the double-negative that is perhaps more familiar to criminal lawyers, the Commissioner says that he is not satisfied that for-profit funds cannot comply with their best interests duties and the duty to give members’ interests priority. He has, however, recommended a number of measures and provided analysis of trustee's duties which may affect the way trustees go about 'managing' conflicts in future.
Recommendation 3.1 – No other role or office
First, the Commissioner suggests that superannuation trustees should not be able to have another ‘role or office' – specifically, they should be prohibited from assuming any obligations that do not arise from or in the course of its performance of the duties of trustee of a superannuation fund. Some superannuation trustees currently also act as responsible entities of managed investment schemes. This would no longer be possible if this recommendation were implemented.
Trustees also commonly assume other obligations which do not arise from their role as trustee of a super fund, such as obligations as a financial adviser. In future, advice may need to be provided by a separate entity.
Dealing with related entities
The Commissioner also has quite a bit to say about trustees dealing with related entities. He does not favour requiring structural separation of super trustees from other entities, particularly service providers. Trustees can deal with related party administrators, investment managers and life insurers. But this needs to be done carefully.
The Commissioner does not recommend changes to the legal obligations of trustees in this area. Trustees should comply with the existing best interests covenant (which he thinks is a fairly simple concept – a surprise perhaps to those who have had to advise trustees on what it means) and prudential standards. But he thinks more scrutiny is required of related party arrangements and how they are entered into.
He draws attention to the fact that the information provided to trustees may be influenced by the interests of other parties within the group. Trustees need to think about who from management is advising them and what conflicts may exist. Related party administrators and life company may have different interests to those of members.
Trustees need to apply additional scrutiny and be clear about the reasons for selecting a related party as a service provider. In the Commissioner's view, the existing requirements in SPS 231 (Outsourcing) has not led to sufficient rigour. But he does not favour extending trustees’ duties to other entities such as administrators.
Policy and reality
While trustees rely on their conflicts management policies to satisfy themselves that they are managing conflicts appropriately, APRA comes in for criticism for reviewing conflicts frameworks by looking only at policy, and not looking closely enough at the way frameworks are in fact implemented in practice. So expect more scrutiny about how conflicts are dealt with in specific cases.
Additional assurance for related-party insurance
In the insurance section, the Commissioner also recommends that SPS 250 (Insurance in super) be amended to require RSE licensees to obtain independent certification that arrangements and policies entered into with a related party life insurer are in the best interests of members and otherwise satisfy legal and regulatory requirements. It is not clear why this is required in the insurance context and not in relation to other outsourcing arrangements.
While the Commissioner says that governance in superannuation is a matter for APRA to supervise, he has some views about how it could be improved. He thinks boards need to have directors with the right skills. Who they represent and how they are appointed is irrelevant. All directors in his view have the same duties.
He thinks term limits are critical to allow for board renewal. He does not recommend changes to the law in this area – this is a matter for the trustee, and ultimately for APRA as the prudential regulator if trustees fail to put in place appropriate term limits and ensure board renewal.
In relation to fund mergers, the Commissioner makes the point that merger decisions must be made based on consideration of the interests of members, certainly not of directors or shareholder organisations. He thinks a stalled merger might be an appropriate situation for APRA to use the proposed directions power currently before parliament.
Selling superannuation (and insurance): Recommendation 3.4 – No hawking
The report recommends that all forms of unsolicited selling (hawking) of superannuation should be prohibited. The same recommendation is made in relation to insurance products. He says the prohibition should not prevent trustees or related entities advertising generally the availability of the product. But cross-selling of products in branches or over the phone would be difficult.
His proposed definition of 'unsolicited' would be more restrictive than the current understanding of the existing anti-hawking provisions and may be difficult to apply. Contact would be unsolicited unless the customer initiates contact for the express purpose of inquiring about, discussing or entering into negotiation about that kind of product. Banking, insurance and superannuation products would each be different kinds of products. So a customer who asks about banking products in a branch will not have initiated contact for the express purpose of discussing superannuation and could not be sold a superannuation product.
He recommends prohibiting the taking of advice fees from MySuper products. While ongoing advice fees from other types of products could continue, they should be subject to annual renewal, prior written identification of services, and the client's express written authority before being deducted. He also recommends that the grandfathering arrangements made in the FOFA reforms for superannuation now end.
The Commissioner agrees with the Productivity Commission that employees should have one default fund which is opened when they start employment and which follows them through jobs.
The Commissioner also clearly thinks the entertainment provided by super trustees to employers is not appropriate. The existing restriction on benefits given to employers in section 68A of the SIS Act is quite narrow. The Commissioner recommends that it be broadened to prevent any sort of ‘treating’ of employers where it may be reasonably understood by those employers to have the substantial purpose of influencing decisions about default funds or choice of fund by employees. So employers can expect fewer invitations to the tennis!
Finally, the Commissioner recommends that both the trustee and director duties be civil penalty provisions, and that both ASIC and APRA have jurisdiction in their respective roles. He also says that a version of BEAR should be extended to super trustees.