The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Financial Services Royal Commission) commenced its fifth round of public hearings on 6 August. The focus of this round of hearings, which will run until 17 August, is on the conduct of Australian Prudential Regulation Authority (APRA) regulated superannuation trustees. More particularly the hearings will focus on how these funds fulfil their duties to members and the extent to which structural or governance arrangements may affect the fulfilment of those duties.
The hearings will also consider related issues such as selling practices in relation to superannuation, the relationship between trustees and financial advisers, the current legal regime and the effectiveness of regulators.
A high level overview of the issues to be explored during the hearings as highlighted by Counsel Assisting Michael Hodge QC in his opening statement to the Commission and of some of the issues arising in relation to the NULIS (NAB/MLC) case study is below.
Different approach in this round of hearings
As previously, specific topics were explored/will be explored by reference to case studies (as published previously on the Commission's website) though Counsel Assisting Michael Hodge QC explained that there would be no consumer witnesses due to the nature of matters under investigation which he said are 'unobserved and unobservable for most Australians'.
In addition, Mr Hodge said that the closing statement at the end of the round of hearings would not 'address in detail the specific findings' that may be open to the Commissioner to make in relation to specific entities. Instead, the closing statement will provide the Commissioner with a summary of the types of policy issues in respect of which submissions are sought and possible general findings Mr Hodge said.
He indicated that written submissions addressing possible open findings in relation to each of case studies would be provided to the Commissioner by 24 August 2018, together with a written articulation of the policy issues. The provision of those written submissions, Mr Hodge said will mark the formal close of round 5.
Key concerns raised in submissions
Of the 7961 submissions so far received (in total), Mr Hodge said 1244 (15.6%) were identified by the consumer as relating to superannuation. Key themes included: non-disclosure/failure to provide service in exchange for fees for financial advice, management or administration; the 'provision or supposed provision' of insurance by superannuation funds which have not been sought by the member and concerns about the 'the complexity of superannuation, particularly in respect of insurance policies that are included as a default in superannuation products'.
Mr Hodge described the 'significance' of the superannuation sector to the community and to the Australian economy noting that as at March 2018, Australians had superannuation savings comprising $2.6 trillion of assets equivalent to 144% of the country's nominal gross domestic product. He then described the three types of superannuation trustees, noting that the Commission would focus on the conduct of APRA regulated funds (registrable superannuation entity licensees (RSE licensees)).
Mr Hodge went on to describe the three existing 'safeguards' in place to protect 'Australian's retirement savings' namely:
- Consumer oversight: Mr Hodge said that consumer oversight is limited due to various factors including low levels of financial literacy, high levels of disengagement, the 'opaque' nature of available information and the risk of poor financial advice.
- ASIC/APRA oversight: Mr Hodge described the current regulatory framework, noting (among other things) the criticisms made of it in the recent Productivity Commission draft report into the superannuation sector.He observed that there is 'not presently a dedicated conduct regulator for superannuation trustees in Australia. APRA is, and views itself as, a prudential regulator that adopts a different approach to other regulators.ASIC considers that its jurisdiction in relation to superannuation trustees is limited [to disclosure and complaints handling]'.
- 'Compliance by the trustees themselves with their duties and legal obligations'.Mr Hodge commented that 'trustees are surrounded by temptation. To preference the interests of their sponsoring organisations, to act in the interests of other parts of their corporate group, to choose profit over the interests of members, to establish structures that consign to others the responsibility for the fund, and thereby relieve the trustee of visibility of anything that might be troubling. Their duties oblige them to resist all of these temptations'. He went on to say that the Commission's review of documents identified fewer examples 'of conduct of the industry fund trustees that raise questions warranting oral consideration as to whether the conduct is misconduct or conduct falling below community standards or inappropriate use of retirement savings when compared with that of the retail funds that will appear in this round of hearings.In a number of cases, though certainly not all, the conduct of the industry funds which we have identified as warranting consideration during the oral hearings, is very nuanced'.
Two underlying questions for consideration
Mr Hodge identified two underlying questions for investigation.
- 'What happens when we leave these trustees alone in the dark with our money? Can they be trusted to do the right thing?'
- 'If they [trustees] can [be trusted to do the right thing], does that mean that the current regulatory system is adequate? If they can't, what must be done to protect Australians' retirement savings and to what extent do the entities that own or control the trustees who are not obliged to act in members' best interests, act in ways that are ultimately detrimental to members, even if they do not technically cause the trustee to breach the trustees' duties'.
Mr Hodge added that the Commission will not be considering conduct that is presently the subject of litigation before the court.
Mr Hodge also noted said that statements from United Super (CBUS) would be tendered, but no witnesses would be called to give oral evidence.
Further detail: specific questions to be explored
The ways in which trustees or their related entities seek to cause members to join or stay with their fund.
- The selling practices of banks in relation to the superannuation products offered by their related party trustee, including the requirement (as holders of financial services licences) for representatives to act in the customers' best interests when providing advice about superannuation as a complex financial product.
- Marketing payments: Payments by industry funds to their sponsoring organisations or affiliates of the trustee 'to assist, or purportedly to assist, with the marketing of their funds'. Mr Hodge clarified that 'By sponsoring organisations, we mean the organisations that own the shares in the trustee or are associated with those owners'.
- The continued payment of grandfathered Commissions by retail funds. Mr Hodge noted: 'None of the industry funds that we have reviewed were paying Commission. However, save for Mercer, the major retail funds in respect of which you will hear oral evidence are all, five years after FOFA came into effect, paying very substantial amounts of Commission. You may very well wonder, Commissioner, how the payment of Commission to financial advisers could be in the best interests of members of superannuation funds. You may also wonder how the payment of Commission satisfies the sole purpose test'.
- The approach of trustees to members who have multiple superannuation accounts, either within the same fund or in a different fund.
Trustees monitoring of the use and performance of members' funds.
- Fee for no service issues: Mr Hodge said that the Commission would investigate the issue of payment for financial advice or other services being drawn from the assets of the fund. Mr Hodge said that 'The payment for such advice has given rise to a substantial number of fees for no service issues' some of which were addressed in round 2 hearings. He said: 'We return to them here from a different perspective. In round 2 we considered these issues from the perspective of the providers of financial advice. In this round we consider fees for no service from the perspective of the so-called product manufacturer. That is, in this case, the superannuation trustee'.
- Monitoring of product performance: Mr Hodge said that the Commission would investigate the ways in which funds monitor the performance of the products that they are offering and how they engage in performance attribution. He added that the Commission would also consider the way in which trustees go about carrying out their statutory obligation to perform an annual MySuper scale test and the possible reasons behind the low return (by certain retail funds) on the 'very low returns on cash'.
- The transfer of accrued default amounts to a MySuper product.
- Spend on marketing and advertising by industry funds. In particular, Mr Hodge said that the Commission would consider two examples: The New Daily (an online publication that was originally funded by a group of industry funds and was then transferred to Industry Super Holdings) and the 'fox and hen house' ad and 'how it satisfies the sole purpose test. How does it maintain retirement benefits.
The structural and governance arrangements that exist for trustees.
- Provision of advice to members: Mr Hodge said that the Commission would consider 'The structural arrangements for the monitoring of advice provided by financial advisers but paid for out of the assets of the super fund and, therefore, subject to the sole purpose test and the trustees' best interests duties. One example of an issue in relation to the monitoring of advice given by financial advisers is advice to members to make an investment choice'.
- Payments from third party managed investment schemes: Circumstances where 'the entity within a retail group' receives 'payments from third party managed investment schemes where those payments are calculated by reference to the investments of the super fund' would also be considered by the Commission.
- Dual regulated entities: Mr Hodge said that the Commission would consider 'the use of a particular structural arrangement by retail funds whereby the trustee is a dual regulated entity, or DRE. This is, as we understand it, a structure of some concern to APRA. It was the structure of Trio Capital'.
- 'Outsourcing' of breach identification and monitoring: Mr Hodge said that 'The outsourcing of functions to other parts of the retail group in a way that prevents the trustee from having any realistic prospect of being able to identify and monitor breaches and be satisfied that it is acting in the best interests of members'.
- The appointment of directors to the boards of corporate trustees of industry funds. Mr Hodge said that the Commission will consider both 'the exercise by a sponsoring organisation of its constitutional rights to replace directors in a manner that may raise a question as to whether the change of directors was in the best interests of members or detrimental to sound corporate governance'; and 'whether a sponsoring organisation wishing to retain an unfettered right to appoint directors might be a barrier to a merger'.
NULIS Nominees (NAB/MLC) case study
Counsel Assisting Mr Hodge QC questions to Paul Carter and Nicole Smith (NULIS (MLC/NAB) representatives, focused on the following issues (among others).
- How certain fees and/or Commissions were set and charged.
- Grandfathering of Commissions: The basis for the trustee's decision to continue the 'grandfathering' of Commissions from five NAB super funds following the merger of the funds into a single fund, MLC Super Fund in 2016 and more particularly the benefits for members in maintaining commissions. Mr Hodge alleged that 'the approach of the trustee to retaining grandfathered commissions…was not in the best interests of the members and was a failure to prioritise the interests of the members over the interests of members of the NAB group' to which Ms Smith responded in the negative.
- Transitioning members to MySuper products: The approach of the trustee to managing and monitoring the transition of members to the MySuper product was also the subject of questioning. The Commission alleged that the process 'was inadequate and did not involve sufficient systems for the trustee to be satisfied that the best interests of the members were being prioritised over the interests of the NAB Group' which Ms Smith rejected.
- Communication regarding members' ability to switch off fees on request: The clarity of communication with customers regarding the ability to switch certain fees off entirely upon request was the subject of questioning by the Commission. The Commission alleged that references in the Product Disclosure Statement to 'negotiating' a lower fee was not sufficiently clear because no negotiation was required. NAB agreed that that communication could have been clearer on this point.
- (Alleged) fee for no service conduct: The approach taken to investigating whether certain fees could continue to be charged for advice when the customers' accounts were not linked to an adviser was a focus of number of questions from Mr Hodge. It was alleged that 'What you [NAB] did was to systematically look for any way to avoid having to refund all of the money to customers?' (an allegation which NAB rejected). The Commission also alleged that 'the approach of NULIS and the other trustees within the NAB Group of standing by while NAB Wealth and the executive management team sought persistently, over several years, in its interactions with ASIC and with the trustee, to seek to retain fees where it had not properly reviewed or concluded that there was services provided in exchange for those fees was a failure to act in the best interests of the members and a failure to prioritise the interests of the members over the interests of the NAB Group.' This allegation was rejected by Ms Smith.
- (Alleged) delay in turning off fees/determining approach to remediating customers: The time taken to determine whether certain fees could continue to be charged and whether/to what extent customers should be remediated was also a focus of questions, the Commission alleging that the time taken was excessive and the approach to remediating customers flawed. Mr Hodge also queried whether there were 'conflicts' involved in the trustee advising on remediating customers given the refund would reduce profits of the administrator (which was part of the NAB group).Though there were conflicts, Ms Smith disagreed that they 'hopeless' as alleged.
- The adequacy of breach identification and monitoring systems and more particularly, whether the trustee had sufficient oversight over these processes was also a focus of questions.
- The approach taken to dealing with the regulators (ASIC and APRA) including informing ASIC and engaging with ASIC's ongoing investigation into potential breaches, and the timing of informing ASIC of 'significant' breaches. The Commission heard that of 297 significant breaches reported to ASIC in the 2014-2017 period 84 were received by ASIC (according to NAB documents) outside of the 10 business days allowed to report (the Commission heard that ASIC puts the number of reports received after the 10 day reporting period at 110).
With respect to the ongoing ASIC investigation, Ms Smith was asked about the approach taken to engaging with the regulator and whether a civil proceeding had ever been contemplated. The Commissioner also asked whether there had been 'any contemplation of a criminal proceeding… Did you think yourself that taking money to which there was no entitlement raised a question of the criminal law?' the Commissioner asked. Ms Smith responded to this in the negative.
The AFR has since reported that NAB CEO Andrew Thorburn has commented: 'ASIC has made some claims against us that they suspect we have had some breaches and those are unresolved. They are suspected and not proven…We do not believe they are criminal breaches and we certainly do not believe they are criminal acts.
[Sources: Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry 6 August 2018 – Draft Transcript for Day 40; 7 August 2018 – Draft Transcript for Day 41; 8 August 2018 – Draft Transcript for Day 42; 9 August 2018 – Draft Transcript for Day 43;[registration required] The AFR 09/08/2018]