Sticks and stones: Banking Royal Commission Final Report signals further regulatory shake up for superannuation

07 February 2019

The Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Commission) recognised the importance of improving the regulation and supervision of the superannuation industry.

Given its size and significance to the Australian economy – more than 14.8 million Australians have superannuation accounts and superannuation savings comprise assets worth approximately $2.6 trillion – this comes as no surprise.

Many of us are familiar with the popular children’s rhyme ‘[s]ticks and stones may break my bones but names will never harm me’. The Commission heard all sorts of descriptions levelled at the superannuation industry – some positive and some not so glowing in their assessment. Although the superannuation industry is accustomed to reviews, investigations, and inquiries where various name-calling has taken place, the Commission has taken it to a whole new level.

It remains to be seen whether Commissioner Kenneth Hayne’s recommendations will form the basis of the ‘sticks and stones’ that break the superannuation industry in Australia.The six norms identified by Commissioner Hayne in the Interim Report, and again in the opening chapter of the Final Report are as follows:

Obey the law
Do not mislead or deceive
Act fairly
Provide services that are fit for purpose
Deliver services with reasonable care and skill
When acting for another, act in the best interests of that other.

Commissioner Hayne argues that these underlying norms of conduct are “fundamental precepts” and that “[e]ach is well-established, widely accepted, and easily understood”. The norms are legislated for in a variety of ways across banks, insurers and the superannuation sector. Even though the norms are reflected in the existing law, he argues that the reflection is “piecemeal” and hence the need for change.

The history of financial services reform in Australia shows us that legislative simplification can often be a difficult and costly endeavour – and especially so in the case of superannuation.

Many, if not all, of the superannuation recommendations in the Final Report will require legislation for their introduction. It is clear that if they are legislated, even though they are not radical, the recommendations will create further regulatory shake up for the superannuation industry.

Final Report superannuation recommendations

Below is a summary of the key recommendations for the superannuation industry, the government’s response to the recommendations and our preliminary commentary on them.

RECOMMENDATION	GOVERNMENT RESPONSE	COMMENTS/KEY TAKEAWAYS
Recommendation 3.1 – No other role or office To avoid conflicts that arise in the industry, registrable superannuation entity (RSE) licensees should be prohibited from acting in any other capacity and should be solely focused on the performance of their duties as a superannuation fund trustee.	The Government agrees to address the risks associated with dual regulated entities by prohibiting trustees of a RSE assuming obligations other than those arising from, or in the course of, its performance of the duties of a trustee of a superannuation fund.	Evidence before the Commission found that dual-regulated trustee entities create conflict issues and difficulties to which the trustees and regulators need to give close and continuing attention. It appears that the Commission is unconvinced that the existing APRA Prudential Standards on conflicts and legislative covenants dealing with conflicts (and the priority to be afforded to the interests of beneficiaries) are sufficient. It is unclear whether more legislation (which prohibits certain conduct) is the answer to this issue of conflicts. It wasn’t that long ago when APRA had a standard RSE licence condition that addressed this issue. In some instances, the conflicts issue stems from structural and organisational matters within a company group that do not appear to have been addressed by the Commission, which has decided not to interfere with vertical integration. Perhaps Commissioner Hayne considers self-regulation to be the key here?
Recommendation 3.2 – No deducting advice fees from MySuper accounts Deduction of any advice fee (other than for intra-fund advice) from a MySuper account should be prohibited.	The Government agrees to prohibit the deduction of any advice fees from a MySuper account (other than for intra-fund advice)	This recommendation is linked to other findings in the Royal Commission that fees had been charged for no service. Given the carve-out for intra-fund advice, this appears to be a logical step forward for MySuper accounts where trustees are essentially dealing with default superannuation arrangements. The recommendation also keeps such accounts closer to the original policy rationale for MySuper under the 2011 Stronger Super reforms (which was to introduce a new default system using low cost and simple superannuation products). It will be interesting to see how the Government reconciles this move with recent recommendations in the Productivity Commission’s report on superannuation – in particular the proposal to fundamentally redesign the selection of default superannuation funds in Australia.
Recommendation 3.3 – Limitations on deducting advice fees from choice accounts Deduction of any advice fee (other than intra-fund advice) from superannuation accounts other than MySuper should be prohibited, unless certain requirements are met (relating to annual renewal of ongoing fees, a written record of services to be provided and the relevant fees, and express client authority).	The Government agrees to limit deductions of advice fees levied on non-MySuper superannuation accounts and indicated that it will respond to this recommendation in a similar fashion to Recommendation 2.1 and require advisers for choice accounts to seek annual renewal from the client in writing of ongoing fee arrangements, together with the client’s express consent.	This proposal is clearly targeting the fees for no service issues which came to the attention of the Commission in a very stark fashion. Although Commissioner Hayne has expressed his extreme disapproval of ongoing fees for choice accounts, he has left the window open for such fees to continue to be charged if advisers are able to meet the new conditions proposed in Recommendation 2.1. As explained above, no such carve out has been proposed for the prohibition on any advice fees for MySuper accounts (except for intra fund advice which, by definition, is not personal advice).
Recommendation 3.4 – No Hawking The Prohibition is on the unsolicited offer or sale of superannuation products.	The Government agrees that hawking of superannuation products should be prohibited, and the definition of hawking should be clarified to include selling of a financial product during a meeting, call or other contact initiated to discuss an unrelated financial product.	The recommendation follows from evidence in the Commission that consumers were being sold superannuation products in an unsolicited manner which may have led to members choosing products which were not necessarily in their best interests. This recommendation is set to have a significant impact on the superannuation industry and will switch the debate away from the current difficulties the industry faces in distinguishing between general advice and personal advice, and in turn, the way superannuation products are marketed to consumers.
Recommendation 3.5 – One default account A single, default superannuation account for each person (created for new workers, or workers without a superannuation account).	The Government agrees that a person should only have one default account.	The recommendation is a welcome move and was already flagged in the long-awaited Productivity Commission’s final report on Superannuation which was released in January 2019. This recommendation addresses the erosion of multiple accounts through secretive and unknown account fees, particularly for young and part-time workers.
Recommendation 3.6 – No treating of employers The SIS Act should be amended to prohibit the trustees of a regulated superannuation fund, and associates of a trustee, doing any of the acts specified in section 68A(1)(a), (b) or (c) especially where the act may reasonable be understood by the recipient to have a substantial purpose of having the recipient nominate the fund as a default fund. The provision should be a civil penalty provision.	The Government agrees to amend the SIS Act to facilitate this recommendation.	The effect of this recommendation is to prevent funds entertaining (or ‘treating’) employers who are responsible for nominating the default fund for their employees. If legislated, civil penalties will apply to trustees and associates of superannuation funds who ‘treat employers’ as a means of inducing employers to nominate the particular fund for their business. In a competitive market landscape, it is difficult to see how funds will be able to genuinely compete without offending this new provision. It wasn’t that long ago that the Financial System Inquiry led by David Murray concluded by telling the financial services industry at large (including the superannuation funds) to focus on competition and greater efficiency in running their operations. As such, the superannuation funds might be forgiven if they’re feeling a tad confused about this recommendation from Commissioner Hayne.
Recommendation 3.7 – civil penalties for breach of covenants and like obligations Breach of the following covenants should have civil penalty consequences under the SIS Act: Trustee’s covenants section 52 or section 29VN; Director’s covenants in section 52A or 29VO.	The Government agrees that trustees and directors should be subject to civil penalties for “breaches of their best interests obligations”.	This recommendation should come as no surprise. A Bill to make a number of changes to the SIS Act, including making breach of section 52A and section 29VO civil penalty provisions, has been introduced into the Federal Parliament but has not yet been passed. It is worthwhile querying whether the Government’s response to this recommendation is intended to be limited to the ‘best interests’ covenants or, as Commissioner Hayne intended, all the relevant covenants in the SIS Act.
Recommendations 3.8 and 6.3 – adjustment of APRA and ASIC’s roles The roles of APRA and ASIC with respect to superannuation should be adjusted as follows: APRA is responsible for establishing and enforcing Prudential Standards for superannuation funds; and ASIC’s role is the conduct and disclosure regulator in superannuation concerning the relationship between RSE Licensees and individual consumers.	The Government agrees that the roles of APRA and ASIC in superannuation should be aligned to the twin peaks model.	The recommendation provides clarity for the role of each regulator in the superannuation industry: APRA is the prudential regulator and responsible for system and fund performance, and ASIC is the conduct and disclosure regulator. It is difficult to object to the notion that our regulators should have stronger powers to enforce provisions that are civil penalty provisions and other provisions relating to conduct that may harm a consumer.
Recommendation 3.9 and 6.8 – accountability regime Commissioner Hayne has also recommended that the existing Banking Executive Accountability Regime (BEAR) (which clarifies standards of accountability and governance in the banking sector) be extended to apply to all RSE Licensees Further, the BEAR should be jointly administered by APRA and ASIC, with the latter assuming responsibility for the consumer protection and market conduct aspects of the BEAR.	The Government agrees with the recommendations and will extend the BEAR to all APRA regulated entities, including insurers and superannuation RSEs. Further, the government has taken the recommendations a step further and indicated that a similar regime will apply to all Australian financial services licensees, Australian Credit licensees, market operators, and clearing settlement facilities – in other words, if legislated, the new BEAR will also apply to non-prudentially regulated entities.	Commissioner Hayne said the extension of the BEAR is intended to make trustees and senior executives of superannuation funds and insurers accountable in the same way as bank executives. Regulatory attempts to streamline the regulation of financial products and services have not always generated better outcomes for consumers, nor the industry at large. The Government will need to ensure the role of regulators in enforcing the BEAR are made clear and it provides regulators with adequate resources to enforce the regime.

RECOMMENDATION

GOVERNMENT RESPONSE

COMMENTS/KEY TAKEAWAYS

Recommendation 3.1 – No other role or office

To avoid conflicts that arise in the industry, registrable superannuation entity (RSE) licensees should be prohibited from acting in any other capacity and should be solely focused on the performance of their duties as a superannuation fund trustee.

The Government agrees to address the risks associated with dual regulated entities by prohibiting trustees of a RSE assuming obligations other than those arising from, or in the course of, its performance of the duties of a trustee of a superannuation fund.

Evidence before the Commission found that dual-regulated trustee entities create conflict issues and difficulties to which the trustees and regulators need to give close and continuing attention.

It appears that the Commission is unconvinced that the existing APRA Prudential Standards on conflicts and legislative covenants dealing with conflicts (and the priority to be afforded to the interests of beneficiaries) are sufficient.

It is unclear whether more legislation (which prohibits certain conduct) is the answer to this issue of conflicts. It wasn’t that long ago when APRA had a standard RSE licence condition that addressed this issue.

In some instances, the conflicts issue stems from structural and organisational matters within a company group that do not appear to have been addressed by the Commission, which has decided not to interfere with vertical integration. Perhaps Commissioner Hayne considers self-regulation to be the key here?

Recommendation 3.2 – No deducting advice fees from MySuper accounts

Deduction of any advice fee (other than for intra-fund advice) from a MySuper account should be prohibited.

The Government agrees to prohibit the deduction of any advice fees from a MySuper account (other than for intra-fund advice)

This recommendation is linked to other findings in the Royal Commission that fees had been charged for no service. Given the carve-out for intra-fund advice, this appears to be a logical step forward for MySuper accounts where trustees are essentially dealing with default superannuation arrangements. The recommendation also keeps such accounts closer to the original policy rationale for MySuper under the 2011 Stronger Super reforms (which was to introduce a new default system using low cost and simple superannuation products).

It will be interesting to see how the Government reconciles this move with recent recommendations in the Productivity Commission’s report on superannuation – in particular the proposal to fundamentally redesign the selection of default superannuation funds in Australia.

Recommendation 3.3 – Limitations on deducting advice fees from choice accounts

Deduction of any advice fee (other than intra-fund advice) from superannuation accounts other than MySuper should be prohibited, unless certain requirements are met (relating to annual renewal of ongoing fees, a written record of services to be provided and the relevant fees, and express client authority).

The Government agrees to limit deductions of advice fees levied on non-MySuper superannuation accounts and indicated that it will respond to this recommendation in a similar fashion to Recommendation 2.1 and require advisers for choice accounts to seek annual renewal from the client in writing of ongoing fee arrangements, together with the client’s express consent.

This proposal is clearly targeting the fees for no service issues which came to the attention of the Commission in a very stark fashion. Although Commissioner Hayne has expressed his extreme disapproval of ongoing fees for choice accounts, he has left the window open for such fees to continue to be charged if advisers are able to meet the new conditions proposed in Recommendation 2.1.

As explained above, no such carve out has been proposed for the prohibition on any advice fees for MySuper accounts (except for intra fund advice which, by definition, is not personal advice).

Recommendation 3.4 – No Hawking

The Prohibition is on the unsolicited offer or sale of superannuation products.

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

The recommendation follows from evidence in the Commission that consumers were being sold superannuation products in an unsolicited manner which may have led to members choosing products which were not necessarily in their best interests.

This recommendation is set to have a significant impact on the superannuation industry and will switch the debate away from the current difficulties the industry faces in distinguishing between general advice and personal advice, and in turn, the way superannuation products are marketed to consumers.

Recommendation 3.5 – One default account

A single, default superannuation account for each person (created for new workers, or workers without a superannuation account).

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

The recommendation is a welcome move and was already flagged in the long-awaited Productivity Commission’s final report on Superannuation which was released in January 2019.

This recommendation addresses the erosion of multiple accounts through secretive and unknown account fees, particularly for young and part-time workers.

Recommendation 3.6 – No treating of employers

The SIS Act should be amended to prohibit the trustees of a regulated superannuation fund, and associates of a trustee, doing any of the acts specified in section 68A(1)(a), (b) or (c) especially where the act may reasonable be understood by the recipient to have a substantial purpose of having the recipient nominate the fund as a default fund.

The provision should be a civil penalty provision.

The Government agrees to amend the SIS Act to facilitate this recommendation.

The effect of this recommendation is to prevent funds entertaining (or ‘treating’) employers who are responsible for nominating the default fund for their employees.

If legislated, civil penalties will apply to trustees and associates of superannuation funds who ‘treat employers’ as a means of inducing employers to nominate the particular fund for their business.

In a competitive market landscape, it is difficult to see how funds will be able to genuinely compete without offending this new provision. It wasn’t that long ago that the Financial System Inquiry led by David Murray concluded by telling the financial services industry at large (including the superannuation funds) to focus on competition and greater efficiency in running their operations. As such, the superannuation funds might be forgiven if they’re feeling a tad confused about this recommendation from Commissioner Hayne.

Recommendation 3.7 – civil penalties for breach of covenants and like obligations

Breach of the following covenants should have civil penalty consequences under the SIS Act:

Trustee’s covenants section 52 or section 29VN;
Director’s covenants in section 52A or 29VO.

The Government agrees that trustees and directors should be subject to civil penalties for “breaches of their best interests obligations”.

This recommendation should come as no surprise. A Bill to make a number of changes to the SIS Act, including making breach of section 52A and section 29VO civil penalty provisions, has been introduced into the Federal Parliament but has not yet been passed.

It is worthwhile querying whether the Government’s response to this recommendation is intended to be limited to the ‘best interests’ covenants or, as Commissioner Hayne intended, all the relevant covenants in the SIS Act.

Recommendations 3.8 and 6.3 – adjustment of APRA and ASIC’s roles

The roles of APRA and ASIC with respect to superannuation should be adjusted as follows:

APRA is responsible for establishing and enforcing Prudential Standards for superannuation funds; and
ASIC’s role is the conduct and disclosure regulator in superannuation concerning the relationship between RSE Licensees and individual consumers.

The Government agrees that the roles of APRA and ASIC in superannuation should be aligned to the twin peaks model.

The recommendation provides clarity for the role of each regulator in the superannuation industry: APRA is the prudential regulator and responsible for system and fund performance, and ASIC is the conduct and disclosure regulator.

It is difficult to object to the notion that our regulators should have stronger powers to enforce provisions that are civil penalty provisions and other provisions relating to conduct that may harm a consumer.

Recommendation 3.9 and 6.8 – accountability regime

Commissioner Hayne has also recommended that the existing Banking Executive Accountability Regime (BEAR) (which clarifies standards of accountability and governance in the banking sector) be extended to apply to all RSE Licensees

Further, the BEAR should be jointly administered by APRA and ASIC, with the latter assuming responsibility for the consumer protection and market conduct aspects of the BEAR.

The Government agrees with the recommendations and will extend the BEAR to all APRA regulated entities, including insurers and superannuation RSEs.

Further, the government has taken the recommendations a step further and indicated that a similar regime will apply to all Australian financial services licensees, Australian Credit licensees, market operators, and clearing settlement facilities – in other words, if legislated, the new BEAR will also apply to non-prudentially regulated entities.

Commissioner Hayne said the extension of the BEAR is intended to make trustees and senior executives of superannuation funds and insurers accountable in the same way as bank executives.

Regulatory attempts to streamline the regulation of financial products and services have not always generated better outcomes for consumers, nor the industry at large. The Government will need to ensure the role of regulators in enforcing the BEAR are made clear and it provides regulators with adequate resources to enforce the regime.

Looking forward

The ultimate report card on the effectiveness of the Commission in reforming the financial services sector is likely to come in 2022. This is the time the Commission has recommended that ASIC complete its review of measures taken by Government, regulators and financial services industry players to reform the financial services sector, including in response to the issues identified in the Final Report.

In the interim, both major political parties have indicated their emphatic support for all 76 recommendations in the Final Report. However, with a grand total of 14 sitting days for the House of Representatives before a Federal Election is due in May 2019, it is difficult to see how any of the recommendations will see the legislative light of day until members of the 46th Parliament of Australia have assumed office. And even then, it will likely only be after adequate industry consultation has taken place in the second half of this calendar year.

Name-calling has rarely harmed the superannuation industry to date. It may have created more regulatory headaches for the industry but it has not generated any fundamental structural or cultural change.

The superannuation recommendations in the Final Report will mean further regulatory change for the industry, but it seems unlikely that the ‘sticks and stones’ of the Commission will break it. As Commissioner Hayne himself concedes, culture plays a significant part: “[c]ulture, governance and remuneration march together. Improvements in one area will reinforce improvements in others; inaction in one area will undermine progress in others”.

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