Date posted: 5/02/2019

How the Royal Commission impacts superannuation advisers and funds

The Financial Services Royal Commission outlines changes to advice fees, default accounts and penalties as well as tweaking the twin peak regulatory model for ASIC and APRA.

In brief

  • The deduction of any advice fee from MySuper accounts will be prohibited
  • Trustees and directors will be subject to civil penalties for breaches of their trustee convenants especially their member best interests obligations
  • Roles of APRA and ASIC in superannuation will be adjusted

No other role or office (Recommendation 3.1)

Trustees of Registrable Superannuation Entities will be prohibited from "assuming obligations other than those arising from, or in the course of, its performance of the duties of a trustee of a superannuation fund".

This is designed to address risks associated with dual regulated entities. The Royal Commission indicated that the conflicts of interests that arise between the interests of superannuation members and members of managed investment schemes are difficult to manage where an entity acts as a trustee for both the superannuation fund and the managed investment scheme.

CA ANZ supports this recommendation and the Government's announcement that it will legislate it.  To be effectively regulated this change will necessitate greater director disclosure to APRA and ASIC. 

It is interesting that other areas were not also targeted such as the issue of the ownership of shares.

No deducting advice fees from MySuper accounts (Recommendation 3.2)

The deduction of any advice fees (other than for intra fund advice) from MySuper accounts will be prohibited.

CA ANZ would like to see no advice fees – whether intra-fund or not – being deducted from MySuper accounts. 

Limitations on deducting advice fees from choice accounts (Recommendation 3.3)

The Superannuation Industry (Supervision) Act (SIS Act) will be amended to prohibit trustees of a regulated superannuation fund and their associates performing acts which may reasonably be understood by the recipient to have a substantial purpose of having the recipient nominate the fund as a default fund, or having one or more employees of the recipient apply or agree to become members of the fund. Acts can include an invitation to the corporate box at the MCG or preferential fees or charges on other products such as loans or bank deposit products. ASIC will enforce a civil penalty provision for any breaches. 

CA ANZ notes that efforts have been made to strengthen these provisions in the past and the Royal Commission's recommendation is the next welcome evolution of this process.

No hawking (Recommendation 3.4)

The hawking of superannuation products will be prohibited, and the definition of hawking clarified to include selling of a financial product during a meeting, call or other contact initiated to discuss an unrelated financial product.

This announcement will not please the "one stop property spruikers" who have been pushing potential clients hard to set up a SMSF and invest in real estate using a Limited Recourse Borrowing Arrangement.

Care will be needed in drafting the enabling legislation to avoid any unintended consequences.

One default account (Recommendation 3.5)

The Government agrees with Commissioner Hayne that a person should have only one default account.

This is also seen as a response to the recent Productivity Commission's report Superannuation: Assessing Efficiency and Competitiveness which recommended members without an account only be defaulted once.

It also builds on the action the Government has taken to address the stock of unintended multiple accounts through the Protecting Your Super Package, which includes the automatic consolidation of low‑balance inactive accounts, capping fees for low‑balance accounts and preventing inappropriate account erosion by ensuring members receive insurance policies that are suitable for them and represent value for money.

CA ANZ sees merit in this policy. However, the key to its success will be how the default is selected.  It has been well telegraphed after the release of the Productivity Commission report into the super sector that some industry players do not like the single default fund model.  

Australians will have ring-side seats watching how a potential new Labor government implements a Royal Commission recommendation that it, and some of its key supporters, do not appear to like.

At some point all employers may need to adjust their nominated default fund.

No treating of employers (Recommendation 3.6)

The Superannuation Industry (Supervision) Act (SIS Act) will be amended to prohibit trustees of a regulated superannuation fund and their associates performing acts which may reasonably be understood by the recipient to have a substantial purpose of having the recipient nominate the fund as a default fund, or having one or more employees of the recipient apply or agree to become members of the fund. Acts can include an invitation to the corporate box at the MCG or preferential fees or charges on other products such as loans or deposit products. ASIC will enforce a civil penalty provision for any breaches.

CA ANZ notes that efforts have been made to strengthen these provisions in the past and the Royal Commission's recommendation is the next welcome evolution of this process.

Civil penalties for breach of covenants and like obligations (Recommendation 3.7)

Trustees and directors will be subject to civil penalties for breaches of their best interests obligations. The Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017 currently before Parliament will establish civil penalties for directors for breaches of the best interests duty. This Bill will be amended to extend civil penalties to trustees.

Although this initiative has not been talked about much, this is a highly significant change. The trustee covenants are a key plank of the SIS Act but to date there has been almost no mechanism for APRA to regulate compliance. And thus far there have been very few court cases against trustees for breaching these covenants.

For APRA and – depending on how regulatory functions are to be altered – potentially ASIC, the regulatory landscape is about to change.

At this point in time it does not appear that similar changes will be made to the trustee covenants applying to SMSF trustees.

Adjustment of APRA and ASIC's roles (Recommendation 3.8)

The roles of APRA and ASIC in superannuation will be adjusted to align with the general principles of the "twin peaks model", whereby APRA is the prudential regulator and responsible for system and fund performance including for licencing and supervision, and ASIC is the conduct and disclosure regulator.

The Royal Commission suggested "ASIC should be given the power to enforce all provisions in the SIS Act that are, or will become, civil penalty provisions or otherwise give rise to a cause of action against an RSE licensee or director for conduct that may harm a consumer. There should be co-regulation by APRA and ASIC of these provisions … APRA should retain its current functions, including responsibility for the licensing and supervision of RSE licensees and the powers and functions that come with it, including any power to issue directions that APRA presently has or is to be given."

In response the Government merely says, "Regulators' responsibilities under the [SIS Act] will be shared in a way that aligns with ASIC and APRA's mandates."  So, we will wait to see how these changes might be implemented.

The Government's response is also seen as a partial answer to the Productivity Commission's recent report which recommended clarifying the regulators' roles and powers.

Accountability regime (Recommendation 3.9)

Over time, provisions modelled on the Banking Executive Accountability Regime should be extended to all RSEs, another fundamental reform.

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