In a speech to the Financial Services Council Summit: The trust deficit and superannuation, Australian Securities and Investments Commission (ASIC) Chair James Shipton has called on the superannuation sector to address the 'trust deficit' stating that 'To be blunt, there has been too much focus in many parts of the superannuation sector on exploiting opportunities to make money from Australians instead of focussing on the responsibilities that come from being the custodians of other people’s money'.  

Context: The Royal Commission

Mr Shipton prefaced his comments by stating that ‘The Royal Commission has highlighted, for the community, the costs and consequences of financial services misconduct’ much of which, is the same misconduct that ASIC has been investigating and acting on for many years and is ‘reflective of a trust deficit facing the financial services sector in Australia’.  He reiterated that it is up to the financial services industry to address the issues being highlighted, many of which have been apparent for some time. 

Restoring the trust deficit in the financial sector generally: Three ‘suggestions’ for industry.

Mr Shipton said that ‘There has been a great deal of talk, indeed rhetoric, around the trust deficit and the cultural reforms needed in finance. Now is the time to move from rhetoric to reality’. Mr Shipton outlined three ‘suggestions’ to industry.

1. Address conflicts of interest: ‘there needs to be wholesale review of conflicts of interests in firms, sectors and markets to identify, manage and, if appropriate, remove every single conflict of interest’ Mr Shipton said.  He added noted that conflicts of interest had been highlighted during the Financial Services Royal Commission hearings as a ‘root cause’ of much of the identified misconduct and that the historical ‘reluctance’ and/or ‘resistance to addressing the issue, even when pointed out by ASIC, ‘must change’.  ‘This must change because conflicts of interest that are imbedded in remuneration become imbedded in corporate culture. With the result being that the culture is not one that will have the best interests of its customer in mind. Moreover, as we all know, shifting these cultural norms is firstly a question of leadership. Accordingly, addressing conflicts of interests requires attention from the most senior leaders in finance’ he said.
2. Greater management oversight and investment in systems and processes: Mr Shipton said that there is a need for both greater senior management attention to conduct issues and a need for more investment in management systems and processes to ‘capture, diagnose and remediate conduct issues earlier, quicker and more efficiently’ including the adoption of ‘emerging regtech solutions’.  Mr Shipton added, that in his view, there has not been sufficient investment in these systems and processes to date, with the result that it takes ‘far too long for management to meaningfully address’ conduct problems.
   • Need for improvement in Breach Reporting practices:  Mr Shipton used the example of breach reporting as to illustrate the need for improvement.  He said that one of the key findings of the review into breach reporting practices in 12 banking groups to be released next month by ASIC is that it takes an institution over four years to identify an issue for investigation internally.  Accordingly Mr Shipton said ‘there is an urgent need for investment in systems, procedures and policies that better and more quickly identify emerging conduct and systemic issues so that they can not only be reported to us more quickly, but so that can be resolved more quickly’.
   • 30% increase in breach reports in the 2017-2018 financial year is an indication that there is ‘enhanced attention to these issues right now’ but there needs to be supporting ‘industrialisation and institutionalisation of these processes to ensure management and thus the institution itself, doesn’t fall back into bad habits’.  
3. Strategy for dealing with regulators.  Based on discussions with financial services leaders and their advisers Mr Shipton said that he had observed there is often no coherent and consistent strategy for dealing with regulators, ‘In fact, there does not appear to be a single example of a strategic plan that articulates the principles of engagement with regulatory agencies’.  This means that issues are often dealt with in an ad-hoc and/or inconsistent way, particularly in larger and more diverse organisations.  Mr Shiptson added: ‘as the Royal Commission hearings have highlighted, some of these dealings with regulators are totally unacceptable and arguably illegal. So, I want to encourage industry leaders to ask themselves if they have a clear strategy for engaging with ASIC and other regulators? And importantly – are your actions consistent with your strategy? And is there appropriate accountability to ensure this happens? I am not calling for another policy document with motherhood statements. Instead, there needs to be genuine change and genuine vision on how to be a responsible corporate citizen vis-à-vis regulatory agencies specifically, and the community more generally’.  

Issues in superannuation 

Mr Shipton outlined a number of examples of the types of conduct that he identified as ‘contributing to the trust deficit in superannuation’.  These included: 

• ‘the exploitation of consumer disengagement and consumers’ knowledge and decision biases’ (eg processes by funds that make it unreasonably difficult for consumers to opt out of insurance); 
• ‘failures to promote informed decision making’ (eg misleading promotions that prioritise marketing over accurate disclosure of key terms); 
• ‘poor financial advice about superannuation issues and options’ (eg in relation to setting up a SMSF or switching superannuation products); 
•  ‘poor treatment of consumers in their interactions with the super system’ (eg delays and difficult processes in insurance claims handling and general complaints handling);
• ‘practices that make it difficult for vulnerable consumers to access their super’ (eg indigenous Australians in remote areas whom are eligible to access superannuation benefits, but are unable, or whom have significant difficulty, in doing so); and
• ‘defensiveness when it comes to transparency about fund operations’ (eg a resistance to disclosing investment holdings which he said is ‘indefensible when…it is other people’s money’. 

ASIC’s planned response: Enhanced supervisory approach

Mr Shipton said that the regulator is ‘currently looking to deliver an enhanced supervisory approach for superannuation and have already strengthened our team focused on this area’.  He said that the new approach would ‘heighten the intensity of our regulatory scrutiny in superannuation’ and would involve the following.

• Use a range of supervisory techniques, including more frequent on-site visits. 
• Move towards a more intensive engagement model, where superannuation stakeholders will deal with specific ASIC staff on a more consistent and regular basis.
• Build ‘significant public actions in the superannuation sector’, including more enforcement outcomes.
• Better leveraging the data currently available to ASIC, and APRA: 'We will also make use of new data sources, including internal dispute resolution data that must be reported to ASIC, as well as data on life insurance claims coming from joint ASIC and APRA work'.
• Increased focus on the consumer perspective through the incorporation of more consumer testing and shadow shopping.
• Mr Shipton noted ASIC ‘are not the only ones regulating the superannuation sector’ and that industry can ‘expect our approach to continue to build on and enhance our close working relationship with these agencies’.

Forthcoming reports/investigations

Mr Shipton also flagged a number of forthcoming reports/investigations.  There included the following.

• Breach Reporting: ASIC's review into breach reporting practices in 12 banking groups will be released next month.
• Insurance in Super Report (and 'further work' on Employers and Super and in relation to Total and Permanent Disablement Insurance).
• Personal advice by superannuation funds: ASIC is 'planning a project looking at personal advice provided by superannuation funds'.
• Internal Dispute Resolution — time to review complaints handling practices: In addition, Mr Shipton said that ASIC will also focus on the implementation of dispute resolution reform, which he commented is 'an area where there is significant scope to improve outcomes in superannuation'.  He said that ASIC will consult with stakeholders about internal dispute resolution policy settings contained in regulatory guide RG165, after the commencement of the Australian Financial Complaints Authority – AFCA on 1 November 2018.  He added that a 'key focus of this consultation will be the maximum internal dispute resolution timeframes, and how and when the current 90 day resolution deadline should be reduced'.  Mr Shipton commented that 'now is a good opportunity to get ahead of the changes that will come in relation to internal dispute resolution reform - by reviewing your complaints handling practices to ensure they are providing timely resolutions for consumers'.

[Sources: A speech by James Shipton, Chair, Australian Securities and Investments Commission at the Financial Services Council Summit 2018 (Melbourne, Australia), The trust deficit and superannuation 26/07/2018; [registration required] The AFR 26/07/2018; [registration required] The Australian 27/07/2018]