Financial Services Regulation

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Unravelled: Product rationalisation – again

8 December 2015

Written by Partner Michelle Levy

The FSI report recommended that the Government facilitate rationalisation of legacy products in the life insurance and managed investment scheme industries. The need for ways to close legacy products has been kicking around for at least a decade and, in 2007, Treasury released a very thorough options paper covering product rationalisation in the managed funds sector. Treasury said that sector was represented by life insurance, managed investment schemes and superannuation.

The latest proposal

Last month, in a media release dealing chiefly with more tinkering with FOFA, the Assistant Treasurer said that the Government would amend the Corporations Act to facilitate rationalisation of legacy products in life insurance and managed investment scheme industries.

The announcement was surprising in a number of ways – not least because of the proposal to amend the Corporations Act – it is not clear why, nor how it would work. It is also not clear why superannuation has been excluded.

Former proposals

To be able to appreciate how surprising the announcement is, it is worth recalling the options in Treasury's 2007 paper. There were six and they each grappled with the complexity of product rationalisation and the compromises in adopting any particular approach. Not one of them involved amending the Corporations Act (or at least not on its own).

The options considered were:

  • Do nothing – Superannuation funds could continue to transfer members' benefits from legacy (and other) products, life companies could undertake Part 9 transfers under the Life Insurance Act and managed investment schemes might be able to be merged with the agreement of scheme members.
  • A one-off process – In this option, a special tribunal would be established with power to clear legacy products from the system, but only once. Participants would have to establish that their products were legacy products and that their rationalisation proposal would provide customers with equivalent rights and benefits. The tribunal would have the assistance of an opinion provided by an independent expert on the equivalent rights and benefits standard and everyone – beneficiaries, the product issuers and regulators – could be heard by the tribunal. Beneficiaries would be able to submit claims for compensation to the tribunal, presumably where they were not able to be given equivalent rights and benefits.
  • Product provider self-assessment with independent confirmation – This option would give the product issuer power to undertake the legacy product rationalisation subject to satisfying a number of conditions. The conditions that were proposed are, again, that the product be a legacy product and that the proposal provide equivalent rights to benefits to beneficiaries. The provider's proposal would have to be supported by an independent expert's opinion. The provider's proposal and the opinion would be provided to the regulator and a complaint and compensation scheme would need to be established for the benefit of beneficiaries.
  • Regulatory approval – This option is very similar to the product provider self-assessment option except that the responsible regulator would be required to consult with beneficiaries and it would have the power to approve the scheme and potentially hear and decide compensation claims.
  • Independent tribunal approval – This option is the same as the one-off process described above, but it would remain available on an ongoing basis, recognising that contemporary products may well become legacy products over time.
  • Court approval – This is one for the lawyers, but it is also arguably one for beneficiaries – it recognises and respects their proprietary interests. Under this option, all product rationalisation proposals would need court approval. Compensation claims would also be determined by the court.
The differences

Every one of these options (leaving aside doing nothing) imposes significantly higher hurdles on product issuers than the current successor fund regime available to superannuation fund trustees. In each case, the option requires the product to be a legacy product – they have to be closed to new investors, and there needs to be a review and compensation scheme in place. Even in the product provider self-assessment option, the product issuer isn't left to its own devices. There is no option that just would leave it to the product issuer.

Superannuation and successor fund transfers

It's interesting that both the FSI and the Assistant Treasurer confined their product rationalisation to just life insurance and managed investment schemes – maybe they think that things are going swimmingly in superannuation. And it is true that products are closed and merged frequently. But I query whether more oversight is needed.

Last year, the SCT found that a trustee had acted unfairly and unreasonably when it approved a successor fund transfer of a member's benefit from a fund where he paid no fees to a fund where he paid thousands of dollars in fees in a year. While this might have been an extreme case, there is very little scrutiny of successor fund transfers and so it is quite hard to test.

Trustees are now required to notify APRA of a proposal to transfer members to a successor fund, but APRA is not required, and, in my experience, is unwilling, to express a view about a transfer and whether the successor fund transfer has been met in any particular case. APRA says it is a matter for the trustee to determine after having undertaken a proper process, and, while in the ordinary course, I would agree wholeheartedly, I am less sure where the trustee is deciding whether to move members, without their consent, from one fund to another. While the successor fund power is undoubtedly useful and beneficial to members when exercised to close legacy products, increasingly it is used to transfer members between employer plans according to the commercial imperatives of their employers and the commercial pressure exerted on trustees.

None of this mentions tax – tax relief is also going to be important if the Government is going to facilitate legacy product rationalisation and the Assistant Treasurer's announcement does acknowledge this – it will be considered in the tax white paper. But even leaving tax aside, one can only think that the Assistant Treasurer was unduly optimistic about facilitating legacy product rationalisation with an amendment to the Corporations Act.

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