A further warning to trustees 6 min read
On 9 May 2024, ASIC released its report, REP 781 Review of superannuation trustee practices: Protecting members from harmful advice charges, outlining findings from its review of progress by superannuation trustees in addressing risks of member harm from poor financial advice and inappropriate advice fee charging to member accounts. The report includes a number of 'calls to action' for trustees to better monitor advisers and fee charging.
Trustees should consider the findings in the report and review their existing practices to ensure they comply with their obligations and minimise enforcement risk.
In this Insight, we examine ASIC's key concerns and lay out a number of recommended steps to ensure your organisation is observing best practice.
Key takeaways
- ASIC's REP 781 summarises the outcome of its recent review of how a number of trustees are complying with their obligations in allowing advisers to charge members for financial advice.
- ASIC identified concerns that some trustees were failing to proactively check samples of advice, failing to implement appropriate fee caps, had limited onboarding processes for new advisers and did not adequately monitor advisers and their practices.
- The 'calls to action' in the report reiterate many of the recommendations previously made by APRA and ASIC in their joint letters to trustees in 2019 and 2021, and encourage trustees to address the areas of concern ASIC has identified.
- ASIC's current enforcement priorities include a focus on member account balance erosion and service failures in superannuation, as well as a focus on 'gatekeepers'—which ASIC views as including trustees. We expect ASIC to continue to monitor trustee conduct in this area and to take action. Trustees should see the report as a further warning by ASIC to review processes and make improvements where necessary.
Background
ASIC recently reviewed the progress by 10 large superannuation trustees in addressing concerns and expectations set out in the 2019 and 2021 ASIC/APRA joint letters to superannuation trustees. ASIC reviewed steps trustees were taking to improve oversight of fees charged to members' superannuation accounts. ASIC sees trustees as playing an important role in protecting members from poor conduct by advisers, including harms resulting from 'cold calling' and pressure tactics designed to influence members to switch funds.
The review forms part of a broader focus by ASIC on conduct by superannuation trustees. Earlier this year, ASIC announced its enforcement priorities for 2024, which include member services failures, erosion of superannuation balances and enforcement action targeting 'gatekeepers' facilitating misconduct. ASIC clearly sees superannuation trustees as 'gatekeepers' whose role includes protecting members from misconduct by other service providers, including advisers.
Trustees' duties
ASIC's report reminds trustees about their duties and obligations when charging advice fees to member accounts. These include their general licensee obligation to provide financial services efficiently, honestly and fairly, as well as the trustee covenants in the SIS Act (including to perform their duties and exercise their powers in the best financial interests of beneficiaries), and the sole purpose test which restricts the payments trustees can make from superannuation funds. Trustees are also subject to specific restrictions on fee deduction from member accounts, including requirements to obtain member consents.
Many of the steps recommended by ASIC are not specifically required by the law, although ASIC views them as forming part of how trustees can ensure compliance with their general obligations. While some trustees may take a different view of what is required of them, there is clearly a risk in departing from ASIC's expectations, which could draw regulatory scrutiny and (potentially) enforcement action.
ASIC's key concerns
ASIC's key concerns following its recent review of trustee practices were focused on the following areas:
- Proactive checks of sample advice documents: ASIC was concerned some trustees were not conducting any checks, either on a risk or random basis.
- Use of fee caps: ASIC felt some caps used by trustees were too high and not based on relevant factors, and few trustees had controls for low-balance members.
- Onboarding processes: While ASIC expects trustees to check its registers, it also expects trustees to take further steps in undertaking due diligence of advisers.
- Ongoing monitoring of advisers: ASIC expects periodic checks against its registers, but also 'maintaining intelligence and watchlists' on advisers and interrogating information to better pick up risky practices.
- Sole purpose test: ASIC thought some advisers over-relied on attestations, including from members about the purpose of the advice provided.
- Fee labels: ASIC was also concerned by some trustees using a large number of poorly distinguished advice-related fees for some products, which risked both confusing members and balance erosion from multiple fees being charged (possibly for similar services).
Actions you can take now
There are a number of practical steps trustees can take to address the concerns raised by ASIC. Given its ongoing focus on trustee conduct and its current enforcement priorities, trustees should consider reviewing their existing monitoring of advisers and advice fee deductions to confirm if they meet the regulator's expectations or if changes are required.
Key steps trustees can take include:
- Undertake regular, proactive reviews of advice documents using risk-based or random sampling. The checks should confirm that advice was provided, and that it is consistent with the sole purpose test. ASIC confirms again that in its view 'trustees need not determine the quality, value or appropriateness of the advice provided to their members'.
- Trustees should consider the risk factors they incorporate into their process for identifying advisers to review, and should ensure these are set at appropriate levels. ASIC notes that trustees have used adviser or licensee watchlists, complaints, high fees, variation in frequency and amount of advice fee deductions, failures to respond to trustee requests, and inactivity. Trustees will need to think about the right combination of factors that will identify poor advice and fee charging practices, but also be practical and workable.
- Consider the appropriateness of fee caps that are in place, and whether they may be too high and if both a dollar and percentage cap should be applied.
- Review processes for allowing exceptions to caps and whether they are too easily given.
- Consider factors used in determining fee caps, including the cost of advice and advice needs of members in various products.
- Set a minimum balance for advice fee deductions to protect members with low superannuation balances.
- Have in place a formal process for reviewing identification and qualification of financial advisers.
- Reconcile databases of advisers against ASIC's registers to avoid advisers who are banned, and assess risks of advisers who move between licensees frequently.
- Review the business model to screen dubious advice practices, including those that use cold calling, high-pressure sales and online click-bait advertisements.
- Review adviser processes for generating advice and dealing with complaints and conflicts.
- Decide on factors and strategies you will use to identify potentially problematic advisers.
- This could include a combination of checking ASIC registers, maintaining watchlists of advisers where there are concerns (including complaints or withdrawn consents), checking adviser activity on the trustee's portals and platforms, considering adviser responses to requests for documents and information, identifying new practices or rapid growth, and identifying frequent moves between licensees.
- Trustees can also verify member signatures against records (to help pick up fraudulent or unauthorised consents), and monitor member accounts for multiple instances of high fees or suspicious fee activity.
- Have a process to monitor for, and promptly investigate, complaints about adviser conduct and fee deduction.
- Take action against high-risk advisers, including reporting to ASIC when appropriate.
- Ensure fee labels are clear and distinguish between the services being provided for different fees.
- Clearly distinguish between ongoing and non-ongoing advice fees.
- Consider whether there are too many different types of fees, which could cause confusion and double charging.