What the Royal Commission has uncovered on superannuation


The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (to give it it’s full name, but we can just call it the Commission) has provided a steady diet of horror stories and shone a not-too-pleasant light into the murky world of corporate financial advice.

While no sector came out unscathed, superannuation and financial advice about superannuation came out among the worst. There will be consequences as a result, and reforms that could stretch into the next decades. Its initial findings are sketched out below (and here’s a link to the full interim report).

MLC delayed transitioning many members from legacy products to MySuper products, incurring fee costs on those members that would not have been made if the transition had happened sooner.

Trustees of the MLC superannuation trust admitted that the profits to the NAB group were included in deliberations about the fee level.

MLC/NAB admitted that that registrable superannuation entity (RSE) licensees had wrongfully charged approximately 220,460 members “plan service fees” since their introduction in September 2012, which amounted to approximately $35 million in fees.

The Commission found that IOOF may have breached s 52(2)(c) SIS Act and prioritised its own interests over the interests of superannuation members, and also in breach of s 52(2)(d) SIS Act by not applying the new pricing to existing members (who would be better off). It also found that IOOF engaged in conduct falling below community standards and expectations by making representations to APRA in circumstances where it had no reasonable basis to do so.

Suncorp delayed the transfer of members into MySuper accounts, and as a result those members paid grandfathered commissions they would otherwise not have been required to pay. Suncorp also contacted advisers to recommend they contact their MySuper clients and encourage them to make “an investment decision” thus allowing the continuation of the grandfathered commissions.

Evidence was provided that Hostplus sought to retain members who would otherwise be deemed “lost members” by contacting the member to arrange for them to permanently exclude their account from being rolled-over to the ATO.

It was also revealed that inactive members would see their account balance diminish each year as an insurance premium was taken out and, for some, it may wipe out their total balance.

In the income year to 30 June 2017, Hostplus spent $21.44 million on marketing expenses, the majority of which spent on wooing corporate clients to keep Hostplus as their default superannuation option.

CBA subsidiary and RSE licensee, Avanteos, continued to charge adviser service fees to member accounts after the member had died. Avanteos was aware of this fact back in 2015 but did not make necessary changes until it was revealed at the Commission in 2018.

The Commission also discovered that CFSIL invested members into related party products, that incurred higher fees than the norm for the industry.

CBA started to offer CFSIL super products through bank tellers, however this was offered as only “general advice” and no advice warnings were given to 85% of shoppers, no product disclosure statements (PDSs) were provided to 40% of shoppers, and no financial services guide (FSG) provided to 85% of shoppers.

AMP super was involved in concerning activities in relation to products from related parties in the AMP group. This included the provision of investment services and insurance products. It was found by the Commission that many of the related party investments were both poorly performing and involved payments to related parties what were well above the norm in the industry. That despite being aware of these issues, the trustees did not seek an urgent review of the products or the fees.

General findings by the Commission
The Commission noted: The difficulties that retail trustees have experienced in prioritising the interests of their members over the interests of financial advisers raises the question of whether legislative intervention is required to address this issue.

And proposed two possible solutions:

  1. to prohibit all commissions payable from superannuation products and end grandfathering, at least in relation to superannuation products;
  2. to prohibit ongoing service fees (including advice fees and plan service fees) being deducted by trustees from superannuation accounts.

The second major finding was that large retail entities often placed the interest of other entities in the retail group above members of superannuation funds they were trustees of.

The Commission did note that there was not support for structural change (including from the regulators) an alternative approach it raised was:

…would it be preferable to extend the obligation to act in the best interests of members of a superannuation fund so that:

    • contravention of the obligation attracts a civil penalty; and
    • the obligation (and the civil penalty for breach) extends to shareholders of trustees and any related bodies corporate (within the meaning of the Corporations Act) of the trustee in respect of any conduct that will affect the interests of the members of the superannuation fund?

The Commission identified three narrower systems issues that if addressed might mitigate some of the poor practice.

These were:

  1. MySuper products might be required to meet an outcomes test in order to be authorised as, and to retain authorisation as, a MySuper product.
  2. The Commission questions the necessity for funds to entertain employers. What is the benefit to members of such entertainment expenditure? It raised changing s68A to limit such expenditure.
  3. Given the reluctance of trustees to support consolidation for fear of losing members and fees, the government should consider some form of “stapling” so that a person’s account for receipt of default contributions is linked to the person and travels with the person when she or he changes job.

As to the performance of the regulators (ASIC and APRA), the Commission said:

…that the approach of neither APRA nor ASIC to regulation of superannuation entities is sufficient to achieve specific or general deterrence.

The Commission is due to shortly release its initial response in relation to superannuation and will then make final recommendations in relation to proposed changes to superannuation regulation. It is clear that the findings will be damning and there are likely to be significant proposed legislative changes.

A future ALP government is likely to be more amenable to changes, though even the LNP will not be able to propose regulation as normal. Expect another decade of changes to superannuation as a result of the Commission’s findings.

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