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Financial Services Royal Commission Round 5 superannuation wrap up: Possible open findings and general submissions

10 mins  27.08.2018

Open and General Findings: Royal Commission Round 5: 6 August 2018 – 17 August 2018

Overview of general and open findings arising from round 5 of the Financial Services Royal Commission hearings into superannuation.


Key takeouts


Cultural issues with internal leadership: Among the questions arising from this round of hearings was the extent to which the conduct issues identified were 'To 'attributable to the views of internal leadership within organisations?'  Mr Hodge suggested that ‘some conduct of certain retail superannuation trustees suggests that there may be a cultural issue within the entities arising from a lack of insight into why certain conduct is unacceptable'.  

 

Lack of effective regulatory oversight?  The effectiveness of the enforcement approach adopted by APRA and ASIC was questioned.  Counsel Assisting Mr Hodge QC questioned to what extent the approach of the regulators has ‘adequately addressed problematic cultures at different times’ and invited submissions on 'What can be done to encourage the regulators to act promptly on misconduct or potential misconduct' and on whether the 'present allocation of regulatory roles appropriate to achieve specific and general deterrence from misconduct.'

 

Prohibition of commissions, structural and systems change? Mr Hodge invited submissions on broad questions of whether structural/systemic changes should be considered, including whether legislative intervention is warranted or whether it is 'simply necessary to enforce existing laws'. 

 

Context

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Financial Services Royal Commission) fifth round of public hearings into the superannuation sector commenced on 6 August and ran until 17 August. The hearings considered three topics (and accompanying case studies): the duties of RSE licensees; issues arising in relation to Indigenous members and the effectiveness of superannuation regulators.  A high level overview of the open findings and general submissions identified by Counsel Assisting Michel Hodge QC in written submissions to the Commissioner is below. 
[Note: The case studies considered over the course of the Round 5 hearings have been reported previously in Governance News 13/08/2018 and 20/08/2018.]   

Closing statement: Policy Questions

In his closing statement to the Commission, Counsel Assisting Michael Hodge raised several 'policy questions' on which he invited submissions.

  •  'Are there structures that raise inherent problems for a superannuation trustee being able to comply with its fiduciary duties'.
  • 'If these structures do raise inherent problems, is structural change of entities, mandated by legislation or otherwise, something that is desirable'.  
  • 'Apart from structural arrangements, are there other types of relationships that present obvious challenges to a trustee in discharging its duties, or where the benefits to the member of those relationships are limited or non-existent'.  If so, 'would it be appropriate to make legislative interventions to eliminate those temptations and difficulties for trustees' eg by prohibiting all commissions payable from superannuation products and end grandfathering, at least in relation to superannuation products, and/or to prohibit ongoing advice fees being deducted by trustees from superannuation accounts'.
  • 'Is it necessary to strengthen existing laws prohibiting misconduct so as to address misconduct identified during the course of the hearings or potential misconduct identified during the course of the hearings, or is it simply necessary to enforce existing laws'.  
  • 'What can be done to encourage the regulators to act promptly on misconduct or potential misconduct and is the present allocation of regulatory roles appropriate to achieve specific and general deterrence from misconduct'.  
  •  'Are there further structural tweaks necessary to make it more likely that consumer interests will be best served in the superannuation industry' eg attaching consumers to a single superannuation account, imposing 'obligations on the shareholders of trustees to exercise powers under their constitution, or when otherwise acting in relation to the trustee, to do so in the best interests of the members'.

Further Detail: Policy Questions by topic

Subsequently, in written submissions to the Commission, Counsel Assisting Michael Hodge QC outlined the findings that may be open to the Commissioner to make (or not to make) with respect to each of the case studies considered over the course of the two weeks of the hearings as well as providing further detail in relation to the policy questions identified in his closing statement.  

Advertising

  • Is political advertising consistent with the intention behind section 62 of the SIS Act? Is any amendment to the SIS Act warranted, and if so, why?
  • Is there identifiable detriment to consumers from advertising by super funds or particular advertising (such as Fox and Henhouse)? Is there identifiable benefit to consumers from advertising by super funds or particular advertising?

Section 68A of the Superannuation Industry (Supervision) Act 1993 (SIS Act)

  • Is it appropriate, as a response to conduct of superannuation trustees that seeks to induce employers to select funds, or affect their decisions as to default funds, to make alterations to section 68A of the SIS Act to widen the prohibition?
  • How wide should the prohibition be – should it extend to prohibiting providing benefits to employers for the purpose or with the intention of inducing the selection of the fund as the default fund for employees, or affecting the decision, or being likely to induce or affect?
  • Are there matters of principle that would justify such a change? Are there problems that would arise in the application of the law?

Payments from external responsible entities of managed investment schemes

  • Is it appropriate for the trustee of a superannuation funds to retain payments from the responsible entity of a managed investment scheme where that payment is derived from the investment of members’ money?

Selling of superannuation (branch selling)

  • Is it appropriate that superannuation be sold through bank branches? Is it reasonable to think that there is any prospect that this is likely to produce an outcome that is in the best interests of consumers?
  • Are there statutory reforms that are required to address this problem (if it is a problem) or are the existing laws with respect to personal financial advice and general financial advice sufficient? What is the nature of the “advice” that a customer of a bank receives when told by a bank branch staff member about the availability of a superannuation product offered by a bank?

Engagement by superannuation funds with Aboriginal and Torres Strait Islander people

  • Are the identification procedures used by superannuation funds appropriate for their Aboriginal and Torres Strait Islander members?  If those procedures are appropriate, are those identification procedures sufficiently understood and implemented by staff on the ground? If those procedures are not appropriate, what should be changed?
  • Should superannuation funds be required to record whether their members identify as Aboriginal or Torres Strait Islander people?
  • Should those superannuation funds who do not currently permit the early release of superannuation on the basis of severe financial hardship do so?
  • Should the lower life expectancy of Aboriginal and Torres Strait Islander people be taken into account in the decision-making processes of superannuation funds when considering how to administer or release the funds of Aboriginal and Torres Strait Islander people? If so, how?
  • Should the categories of person permitted by legislation to be the subject of a binding nomination be changed to reflect Aboriginal and Torres Strait Islander kinship structures? If so, how should the categories be broadened?

Discretion to appoint and remove directors

  • Is it appropriate for shareholders of RSE Licensees to retain a broad discretion to appoint and remove directors? Or should there be an obligation imposed on shareholders to exercise such powers in the best interests of the members?

Culture and Governance Practices

Mr Hodge noted that the Terms of Reference require the Commissioner to inquire into whether any findings made in respect of conduct is attributable to: 'the particular culture and governance practices of a financial services entity; or broader cultural or governance practices in the relevant industry'.  Mr Hodge said that there are ‘several cultural and governance practices that may offer explanations for misconduct seen across a range of entities’.  These include the following.

Deterrence and Insight

  •  To what extent are conduct issues attributable to the views of internal leadership within organisations?  Giving examples of the evidence heard by some witnesses (eg NAB) Mr Hodge suggested that ‘some conduct of certain retail superannuation trustees suggests that there may be a cultural issue within the entities arising from a lack of insight into why certain conduct is unacceptable'.  He went on to say that ‘The disparity between the levels of insight demonstrated by different entities suggests that this is not a universal industry-wide issue. However, with respect to the identified entities, the evidence suggests that it is a problem that is reflective of the views of leaders within the organisation’.
  • Lack of effective regulatory oversight?  Mr Hodge questioned to what extent the approach of the regulators has ‘adequately addressed problematic cultures at different times’.  With respect to ASIC, Mr Hodge said that in light of examples (NAB, ANZ and CBA)  there are questions as ‘to whether it has struggled to date to act as an effective conduct regulator.’  In particular, Mr Hodge said that ‘a significant problem with not commencing court proceedings is that no pecuniary penalty or other relief is obtained which would achieve specific and general deterrence.  Moreover, it might be thought that the practice of ASIC of accepting enforceable undertakings is more likely to encourage conduct that courts contraventions of statute.’  With respect to APRA, Mr Hodge said: ‘It might be thought APRA’s objective of ensuring financial system stability is not readily reconciled with being an effective conduct regulator’.  
  • General Questions
    •  What can be done to encourage the regulators to act promptly on misconduct or potential misconduct?
    • Is the present allocation of regulatory roles appropriate to achieve specific and general deterrence from misconduct?
    • Given that what we are fundamentally concerned with is conduct that in subtle but ongoing ways negatively affects the retirement outcomes of consumers, are either of the regulators best placed to carry the responsibility to protect consumers should the balance between them be restructured or significantly altered?

    Relationship between trustees and financial advisers

    Mr Hodge said that a ‘significant category of misconduct identified in relation to a number of the retail entities the subject of case studies is conduct that benefits financial advisers to the detriment of the members of a superannuation fund.’ He then outlined a number of examples including (among others): ‘maintaining grandfathered commissions in the absence of proper consideration as to whether the trustee is legally entitled to cease paying those commissions’ and deducting adviser fees without adequate systems in place to assess whether services had been provided.  Mr Hodge went on to question whether these issues indicate that legislative intervention is warranted.  More particularly he suggested that the following changes might be considered.

    • To prohibit all commissions payable from superannuation products and end grandfathering, at least in relation to superannuation products;
    • To prohibit ongoing service fees (including advice fees and plan service fees) being deducted by trustees from superannuation accounts. Submissions were invited on the following questions.

    Mr Hodge invited submissions on the following general questions:

    • Are legislative interventions to remove grandfathered commissions and ongoing service fees from superannuation accounts appropriate? If so, why? If not, why not?
    • Are there possible detrimental effects on the provision of high quality financial advice by such changes? If it is said that there are such detrimental effects, then the detriments and the reasons for the detriments should be precisely identified. 

    Managing conflicts

    Another category of misconduct identified by Mr Hodge was around the issue of the ‘financial interests of other members of the retail group’ being ‘preferred…to the interests of the members of the superannuation trustee’. He identified the following general questions in relation to this.

    • Are there structures that raise inherent problems for a superannuation trustee being able to comply with its fiduciary duties (eg where a trustee is a dual regulated entity (DRE))? Are there other structures such as investment of funds in insurance policies issued by related party insurers or the integration of a superannuation trustee into an advice business that also raise inherent problems? Is it possible to say that these conflicts are ever manageable?
    • If certain structures do raise inherent problems, is structural change of entities, mandated by legislation or otherwise, something that is desirable?
    • 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 2001 (Cth)) of the trustee in respect of any conduct that will affect the interests of the members of the superannuation fund?
    • Are there unforeseen consequences of such a legislative intervention that would make it undesirable to strengthen the SIS Act in this way?

    System Changes

    • Is one way of addressing and discouraging misconduct on the part of superannuation trustees to seek to encourage improvements to outcomes for members whose contributions are made to MySuper products or is the link too tenuous to justify recommending any system changes to the default system?
    • Is it appropriate, as a response to misconduct of superannuation trustees, to apply an additional filter to MySuper authorisations so as to require outcome assessments? If so, what are the general parameters for such a system change and who is appropriate to apply the test?
    •  Is it appropriate, as a response to the conduct of superannuation trustees that might inhibit the consolidation of multiple superannuation accounts of a person, to introduce 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? Is this is a practical method of addressing this type of conduct noting that it is not suggested to be misconduct?
    • Are there other system changes that might be appropriately tailored responses to misconduct or conduct falling below community standards and expectations of superannuation trustees? If so, what are the general parameters for such a system change?

    Open findings in relation to each of the case studies

    Topic 1 — Duties of RSE Licensees: Possible open findings in relation to each of the case studies

    Nulis Nominees (NAB/MLC) case study

    The issues explored in this case study largely concerned the setting and charging of fees.  For an overview of the facts and issues explored see: Governance News 13/08/2018.

    Possible Open Findings

    Possible open findings of misconduct, or conduct falling below community standards and expectations included the following. 

    • Available findings in relation to the charging of certain fees: Mr Hodge said that it is open to the Commissioner to find that the charging of certain fees ‘where no service was provided by an adviser to the member may have amounted to misconduct’.  He also suggested that the charging of certain fees where no service was provided by an adviser to the member may have amounted to conduct that fell below community standards and expectations.  Mr Hodge went on to suggest that it is also open to the Commissioner to find that the conduct of NAB and Nulis in respect of remediation and negotiations with the Australian Securities and Investments Commission (ASIC) may also have ‘departed from community standards and expectations’ (Mr Hodge suggested that NAB acted in a way that was ‘not full and frank with the regulator in respect of the quantum of loss to members or the amount of expected remediation’). 
    • Available findings in relation to grandfathering of trailing commissions: Mr Hodge said that it is open to the Commissioner to find that by ‘resolving to retain grandfathered commissions in respect of members that were to be transferred to the MLC Super Fund as part of the successor fund transfer which occurred in July 2016, Nulis may have contravened the covenants set out in section 52(2)(c) of the SIS Act which required it to exercise its powers and to perform its duties in the best interests of members’.  He added that it is also open to the Commissioner to find that NULIS may have contravened ‘the covenants set out in section 52(2)(d)(i) and (d)(iii) of the SIS Act by failing to prioritise the interests of members over the interests of advisers who continued to receive trailing commissions at the expense of those members, as well as the financial interests of the NAB Group’.
    • Available findings in relation to MySuper products: Mr Hodge said the delay the transitioning members to their respective fund’s MySuper offering, resulted in members continuing to pay grandfathered commissions, and other fees, including where no adviser was providing any service to the relevant members.  As such he said that it is open to the Commissioner to find that MLC Nominees Pty Ltd and Nulis ‘may have contravened the covenants set out in s52(2)(c) of the SIS Act which required it to exercise its powers and to perform its duties in the best interests of members’.  Mr Hodge went on to say that it is also open to the Commissioner to find that MLC Nominees Pty Ltd and Nulis may have contravened s29VN(a) of the SIS Act by failing to ‘promote the financial interests of beneficiaries of their respective funds who held the MySuper product in the period 2013-2017, in particular the returns to those beneficiaries (after the deduction of fees, costs and taxes). The relevant conduct in that regard comprise the failure to appropriately allocate the investment management fee in order to ensure the prudent and diligent investment of funds attributed to the MySuper products’.
    • Culture and governance practices: Mr Hodge said that it is open to the Commissioner to find that the misconduct in respect of certain fees and grandfathered commissions ‘may be attributable, at least in part, to the culture and governance practices within the NAB Group’. 

AustralianSuper case study

The issues explored in this case study largely concerned the use of member funds to pay for online news site The New Daily and to contribute to the 'fox and henhouse' industry advertising campaign. See: Governance News 20/08/2018.  
Mr Hodge said that ‘it is not open to the Commissioner to find that any of the conduct constituted misconduct or conduct falling short of community standards and expectations’. 

Policy Questions

Mr Hodge said that the consideration of advertising gives rise to the certain general questions.  Namely:

  • Is political advertising consistent with the intention behind s62 (Sole Purpose Test) of the SIS Act? Is any amendment to the SIS Act warranted, and if so, why?
  • Is there identifiable detriment to consumers from advertising by super funds or particular advertising (such as 'Fox and Henhouse')? Is there identifiable benefit to consumers from advertising by super funds or particular advertising? 

Hostplus case study

The issues explored in this case study largely concerned the approach Hostplus takes to attracting and retaining members and the role of the Trustee in respect to 'inactives, smalls, and multiples'.  See: Governance News 20/08/2018

Possible open findings

Possible of conduct falling below community standards and expectations included the following.

  • Member retention strategies: Mr Hodge said that it is open to the Commissioner to find that, communication with inactive low balance members, ‘omitted certain details and gave the impression that the member would lose their superannuation balance to the ATO, which conduct may have fell below community standards and expectations’.  More particularly, Mr Hodge said that the letters to members did not sufficiently explain ‘the consequence of their choice, there was no explanation of the fees and returns relevant to the member’s balance were it to remain with Hostplus in comparison with it being rolled-over to the ATO’.  Mr Hodge added that there was no evidence that the trustee had, ‘at the relevant time, engaged in’ an analysis of whether the exclusion of some members from the ATO roll-over process was in the best interests of those members (though he noted that Hostplus is now undertaking a review of the position of these members).  Mr Hodge went on to suggest that it is open to the Commissioner to find that ‘Hostplus may have engaged in conduct falling below community standards and expectations by keeping inactive, low balance members in the fund’. .  

Policy Questions: corporate hospitality expenditure/’inadequacies’ in s68A of the SIS Act?

Mr Hodge said that the evidence ‘in respect of corporate hospitality expenditure’ by Hostplus ‘highlights potential inadequacies in section 68A of the SIS Act, as currently framed, and the role of employers in choosing a default fund for their employees’.  Mr Hodge said that despite ‘any obligations that may exist at common law or in equity, employers have no express obligation under the SIS Act to act in the best interests of their employees in selecting a default fund. And the SIS Act does not currently proscribe conduct that would prevent funds, including underperforming ones, from offering inducements to employers, such as gifts or hospitality, with a view to persuading an employer to nominate that fund as the default fund for their employees. Section 68A is only enlivened if an offer is made on the “condition” that the person’s employees will become members of the trustee’s superannuation fund, which criterion will rarely be present in the context raised by Mr Elia’s evidence’.  In view of these considerations, Mr Hodge said, submissions are invited in respect of the following questions:

  • Is it appropriate, as a response to conduct of superannuation trustees that seeks to induce employers to select funds, or affect their decisions as to default funds, to make alterations to section 68A of the SIS Act to widen the prohibition? 
  • How wide should the prohibition be – should it extend to prohibiting providing benefits to employers for the purpose or with the intention of inducing the selection of the fund as the default fund for employees, or affecting the decision, or being likely to induce or affect? 
  • Are there matters of principle that would justify such a change? Are there problems that would arise in the application of the law? 

Energy Superannuation Fund (ESF) case study

The issues explored in this case study largely concern operation of the 'equal representation model' of governance (where employers and unions each nominate directors) and with the reasons for the failed merger between ESF and EquipSuper. For an overview of the facts and issues explored see: Governance News 20/08/2018

Mr Hodge said that it is ‘not open to the Commissioner to find that any of the conduct of Energy Super the subject of the evidence constituted misconduct or conduct falling short of community standards and expectations’. 

Catholic Super (CSF) case study 

The focus of this case study was largely on two issues: (alleged) conflicted payments/the effectiveness of conflict management systems at board level and the reasons for the failed merger between Catholic Super and the Australian Catholic Superannuation Retirement Fund.  For an overview of the facts and issues explored see: Governance News 20/08/2018

Possible open findings

Possible of conduct falling below community standards and expectations included the following.

  • In relation to the failed merger, Mr Hodge said that it ‘It is not open to the Commissioner to find that any of the conduct of CSF in relation to the merger constituted misconduct or conduct falling short of community standards and expectations’.
  • Conflict management systems: Mr Hodge said that it is open to the Commissioner to find that the ‘may have breached Prudential Standard SPS 521 by failing to have a conflicts management framework which ensured that the RSE licensee identified all potential and actual conflicts in the RSE licensee’s business operations and took all reasonably practicable actions to ensure that potential and actual conflicts were avoided or prudently managed’.  He added that it ‘is also open to the Commissioner to conclude that the insufficient monitoring of the corporate credit card use is, at least, conduct falling below community standards and expectations’.

Colonial First State (CFS) case study 

This case study focused (among other issues) on the approach taken by Colonial First State (CFS) to transferring members to MySuper accounts; the continued payment of 'grandfathered' commissions; and the fee model around CBA financial advisers recommending CFS. For an overview of the facts and issues explored see: Governance News 20/08/2018

Possible open findings

Available findings of misconduct, or conduct falling below community standards and expectations included the following.

  • Transferring members to MySuper products: Mr Hodge noted that CFIL acknowledged in a breach notification to APRA in 2014 that it was in breach of s29WA of the SIS Act in respect of the contributions of 13,000 members.  Mr Hodge said that it is open to the Commissioner to find that CFSIL was right to acknowledge this contravention and that it is also open for the Commissioner to find that this may give rise to further contraventions.  These include (among others): possible breach of s 912A(1)(a) of the Corporations Act (‘failure to do all things necessary to ensure the financial services covered by its AFSL are provided efficiently, honestly and fairly’); possible breach of section 52(2)(b) and (c) of the SIS Act (‘failure to exercise the degree of care, skill and diligence as a prudent superannuation trustee would exercise and to perform their duties and exercise their powers in the best interests of the affected members’);  possible breach of section 52(2)(d)(i) and (d)(iii) of the SIS Act (‘failure to prioritise the interests of the affected members over the interests of advisers, in, in circumstances where the latter received ongoing commissions which would not otherwise have been received if members’ contributions were attributed to a MySuper product and in circumstances where advisers were given the opportunity to maintain those fees by diverting clients from the MySuper product within the time afforded by CFSIL and supported by the communications promulgated by CFSIL’).  In addition, Mr Hodge said that CFSIL’s communications to members in respect of the MySuper transition may have been in breach of section 52(2)(d)(i) and (d)(iii) of the SIS Act (eg failure to prioritise the interests of affected members over the interests of advisers). 
  • Payment of commissions: Mr Hodge said that it was open to the Commissioner to find (among other things) that CFSIL breached s912(1)(a) if the Corporations Act eg by charging ‘conflicted remuneration past the disallowance date of 1 July 2014’.  In addition, Mr Hodge said that it was open to the Commissioner to find that CFSIL breached ‘s52(2)(c) of the SIS Act in respect of continuing to pay conflicted remuneration past the disallowance date of 1 July 2014’. 
  • Fee arrangements: Mr Hodge said that it ‘is open to the Commission to find that the Distribution Agreement between CBA and CFSIL may have contravened the conflicted remuneration provisions of the Corporations Act introduced by FOFA [Future of Financial Advice Reforms]. This is because the Distribution Agreement provides for a benefit (an annual fee of 30% of the total net revenue earned by the trustee in relation to the fund) given to an AFS licensee (CBA) that could reasonably be expected to influence the financial product advice given to a retail client’.
  • Cash fund performance:  Mr Hodge said that it is open to the Commissioner to find that CFSIL may have engaged in misconduct in respect of the cash fund investments of CFSIL members who were not members of the CBA staff fund: ‘it is possible that CFSIL contravened sections 29E(1)(a) and 52(2)(c) of the SIS Act by failing to perform its duties, and exercise its powers, in the best interests of members in circumstances where members are still paying a trailing commission on cash investment options and there is no evidence that the trustee has considered whether this is in the best interests of members. Such conduct may also have fallen short of community expectations and standards’ Mr Hodge said.  

Suncorp case study

This case study was largely concerned with fee arrangements: the monitoring of fee arrangements, the clarity of communication with members concerning fees and the approach taken by Suncorp to transitioning members to MySuper accounts (see: Governance News 20/08/2018). 

Possible findings

Available findings of misconduct, or conduct falling below community standards and expectations included the following.

  • Retention/use of ‘tax surplus’: Mr Hodge said that it is open to the Commissioner to find that SPSL may have contravened its statutory obligations in relation to the use of the tax surplus and representations to members regarding this.  For example, Mr Hodge said that it may have contravened ss 29E(1)(a) and 52(2)(c), (d)(i) and (d)(iii) of the SIS Act. This conduct included payment of the surplus to SLSL in circumstances where this failed to prioritise the financial interests of members over the interests of SLSL which obtained a financial benefit to the detriment of members.  Mr Hodge also suggested that SPSL may have contravened Prudential Standard SPS 231 (Outsourcing).  Mr Hodge went on to say that SPSL ‘may also have engaged in conduct in relation to a financial service that was misleading or deceptive, or likely to misleading or deceive, contrary to section 12DA of the ASIC Act and section 1041H of the Corporations Act’ eg representations in the Everyday Super PDS regarding the use of the amount of the administration fees which would be charged to members, and the omission of information which would inform members that the cost of administering the fund included the payment of the tax surplus to SLSL.  Mr Hodge added that it is open to the Commissioner to find that the above conduct also departed from community standards and expectations.
  • Transition to MySuper product: Mr Hodge said that it is open to the Commissioner to find that in relation to the transition of members to MySuper products, and communications with members and advisers regarding this, SPSL may have contravened its statutory obligations. For example, he suggested that ‘SPSL may have contravened sections 29E(1)(a) and 52(2)(c) of the SIS Act which required it to exercise its powers and to perform its duties in the best interests of members, for whom the delayed transition to a MySuper product may have resulted in greater fees and ongoing commission payments being deducted from their accounts’. He also suggested that ‘SPSL may have contravened sections 29E(1)(a) and 52(2)(d)(i), (d)(iii) of the SIS Act by failing to prioritise the interests of members over the interests of financial advisers who obtained a financial benefit, at the expense of members, in the form of ongoing commission payments as a result of SPSL’s delayed transition and assistance provided in respect of communications to their clients to take steps to ensure they would not be moved into the fund’s MySuper product’.

IOOF case study

Among the issues explored in this case study were (alleged) conflicts of interest arising from the structure of IOOF group, and more particularly the DRE structures within the group.  Counsel Assisting explored with the IOOF witnesses a number of examples of instances in which it was alleged that profit interests had (allegedly) outweighed the best interests of members (see: Governance News 20/08/2018). 

Possible open findings

Possible open findings of misconduct or conduct falling below community standards and expectations included the following.

  • Use of member funds (general reserve) to compensate members: Mr Hodge said that it is open to the Commissioner to find that Questor may have breached its statutory obligations in a number of ways including: breaching s 52(2)(c) of the SIS Act (by reducing distributions to unaffected members by using the general reserve (an asset of the Fund) to compensate those members, and refusing to replenish the general reserve); breaching s 52(2)(d) of the SIS Act; ‘engaged in misleading or deceptive conduct in breach of s 12DA ASIC Act’ by sending the letter to members ‘asserting they would receive compensation for a “historical distribution error”’.  
  • Failure to transition members to new pricing model: In addition, Mr Hodge said that it is open for the Commissioner to find that IIML may have breached s 52(2)(c) SIS Act, and prioritised its own interests over the interests of superannuation members over in breach of s 52(2)(d) SIS Act, by not applying the new pricing to existing members who would be better off, particularly in circumstances in which IIML considered it was unlikely that members would move of their own accord.
  • Duty to act in the best interests of members: Mr Hodge said that it ‘is open to the Commissioner to find that the continued failure of IIML and IOOF Holdings to understand their duties to superannuation members, and to take steps to properly recognise and manage conflicts of interest, constitutes conduct falling below community standards and expectations’.

ANZ/One Path case study

This case study was largely concerned issues arising in relation to the practice of ANZ bankers selling an ANZ superannuation product (Smart Choice Super) through ANZ branches.  The Commission heard that ASIC had raised concerns about the practice, including that because the product was being sold in close proximity to personal financial advice (the A to Z review) that it might have been perceived by customers, despite 'de-linking' statements, and cautions that the advice was general advice by ANZ bankers, as 'akin to personal financial advice' when it was actually, 'trying to sell something to the customer'.  The Commission also heard that ANZ had recently given an enforceable undertaking to the regulator in relation to the issue.  ANZ witness, Mr Pankhurst was questioned about the approach taken by ANZ to selling the My Choice product, and more particularly the adequacy of the controls in place in ensure customers were aware that they were not receiving personal advice.  Mr Hodge asked: 'And it's indifferent, isn't it, as to whether or not this particular product is in the best interests of the customer?' in that it 'does not care whether or not a customer coming into the ANZ branch would be better off in a superannuation product offered by a different entity compared with the ANZ product?'.  Mr Pankhurst agreed that no comparison between products was offered, but noted that the banker selling the product, could refer a person to a full financial planner to go through that process.  Mr Pankhurst also disagreed that the 'key risk' in relation to the sales practice was that customers could end up with a less suitable product than their existing funds (because they did not understand the consequences of switching products), stating that in his view, it 'is a general risk with all superannuation products, that customers make decisions without fully understanding exactly what they're…in'.   Asked whether 'any of the customer who signed up and made contributions or rollovers into the Smart Choice product were worse off as a result of doing that rather than sticking with their existing superannuation fund' Mr Pankhurst replied in the negative.  

Possible open findings 

Possible open findings of misconduct, or conduct falling below community standards and expectations included the following. 
  • Branch selling practices: Mr Hodge said that because ANZ was aware there was a risk that customers would believe that branch staff had taken their relevant circumstances into account and were recommending Smart Choice Super; and as a result, customers would switch their superannuation and end up with a less suitable product’ it is open to the Commissioner to find that ANZ ‘may not have done all things necessary to ensure ‘that the financial services covered by its license were provided efficiently, honestly, and fairly in breach of s 912A(1)(a) of the Corporations Act’.  Mr Hodge also said that it was open to the Commissioner to find that this conduct departed from community standards and expectations.
  • Questions for written submissions: Is it appropriate for the trustee of a superannuation funds to retain payments from the responsible entity of a managed investment scheme where that payment is derived from the investment of members’ money? Is it appropriate that superannuation be sold through bank branches? Is it reasonable to think that there is any prospect that this is likely to produce an outcome that is in the best interests of consumers? Are there statutory reforms that are required to address this problem (if it is a problem) or are the existing laws with respect to personal financial advice and general financial advice sufficient? What is the nature of the “advice” that a customer of a bank receives when told by a bank branch staff member about the availability of a superannuation product offered by a bank?

AMP/NM Super case study

The focus of this case study was largely on the approach taken to transitioning members to MySuper products, the monitoring and oversight of product performance and fee arrangements and the (alleged) negative performance of 'cash' investments over a period of time, the (alleged) conflicts arising from the AMP structure and the trustee's oversight/monitoring of functions 'subcontracted' or ‘outsourced’ to other agents.
  • Outsourcing day to day functions and operations of the funds:  Mr Hodge said that it is open to the Commissioner to find that in outsourcing the day-to-day functions and operations of the Funds the trustees were ‘wholly dependent on the information provided to them by Trustee Services’, and, ‘in turn, Trustee Services were wholly dependent on the information provided to them by the related entities to whom the services had been outsourced’.  Mr Hodge added that it is open to the Commissioner to find that this ‘may have presented a number of challenges to the trustees in performing their duties and exercising their powers’ in the best interest of their members under s 52(2)(c) and s 52(2)(d) of the SIS Act.  Mr Hodge went on to say, ‘In particular, it is open to the Commissioner to find that the trustees may have breached their duties under ss 52(2)(c) and 52(2)(d) of the SIS Act eg by ‘being unable to lower the fees and charges to members on their investments in cash through the SDF Cash Management Trust, or with respect to the MySuper products of the Funds, in that the lowering of fees was a decision to be made ultimately by others in the AMP Group’.  Mr Hodge added that it is open to the Commissioner to find that by entering into the outsourcing agreement for the day-to-day administration and operation of the Funds, ‘the trustees may have breached their duties under s 52(2)(h) of the SIS Act not to enter into any contract that would prevent the trustees from, or hinder the trustees in, properly performing or exercising the trustees’ functions and powers’ eg by ‘rendering the trustees unable to make the ultimate decision as to the pricing of the MySuper products of the Funds’ and ‘allowed others in the AMP Group to make decisions as to the timing of the transfer of ADAs to MySuper products that may ultimately not have been in the best interests of members’ (among others). 
  • Best interests duty: Mr Hodge said that it  is ‘open to the Commissioner to find that the trustees may have breached their duties to ensure that, where there was a conflict between the duties of the trustee to the members, or the interests of the members, and interests of an associate of the trustee, the interests of the members could and would be given priority in accordance with s 52(2)(d) of the SIS Act’.
  • Negative return on cash investments: Mr Hodge said that it is ‘open to the Commissioner to find that by generating a negative return on cash investments in the SDF Cash Management Trust, the trustees may have breached their duties under s 52(2)(b) and s 52(6) of the SIS Act, and their obligations under Prudential Standard SPS 530 and s 912A of the Corporations Act’. Mr Hodge went on to say that it is ‘open to the Commission to find that the trustees may have breached their obligation under s 29VN(a) of the SIS Act to promote the financial interests of the beneficiaries of the Funds who hold a MySuper product’.  

Topic 2: Superannuation funds and Indigenous members

In introducing the Q Super case study, Counsel Assisting Rowena Orr QC noted that the issues arising follow on from evidence that was given in the previous round of hearings (see: Governance News 09/07/2018; 16/07/2018) concerning dealings between Indigenous people living in regional and remote communities and financial service providers.  

 Questions arising from the Q Super case study

  • Are the identification procedures used by superannuation funds appropriate for their Aboriginal and Torres Strait Islander members?
  • If those procedures are appropriate, are those identification procedures sufficiently understood and implemented by staff on the ground?
  • If those procedures are not appropriate, what should be changed?
  • Should superannuation funds be required to record whether their members identify as Aboriginal or Torres Strait Islander people?
  • Should those superannuation funds who do not currently permit the early release of superannuation on the basis of severe financial hardship do so?
  • Should the lower life expectancy of Aboriginal and Torres Strait Islander people be taken into account in the decision-making processes of superannuation funds when considering how to administer or release the funds of Aboriginal and Torres Strait Islander people? If so, how?
  • Should the categories of person permitted by legislation to be the subject of a binding nomination be changed to reflect Aboriginal and Torres Strait Islander kinship structures? If so, how should the categories be broadened?

Topic 3: Effectiveness of superannuation regulators APRA and ASIC 

The focus of questions was on the enforcement approach taken by both the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) in relation to the superannuation sector.  In particular, the effectiveness of the regulators' current approach to enforcement, the extent to which the regulators use their existing powers to address misconduct and deter future misconduct and the effectiveness of their respective approaches.  

Australian Prudential Regulation Authority (APRA) case study

 The Commission heard evidence from two APRA witnesses: Deputy Chairman, Helen Rowell and Stephen Glenfield, General Manager of APRA’s Specialised Institutions Division.   
Deputy APRA Chair Helen Rowell described the approach APRA takes to enforcement in some detail, explaining that APRA's preferred approach is 'engagement' with industry as opposed to more 'formal action'.  Citing various examples of (alleged) misconduct, Mr Hodge questioned the effectiveness of this approach, both from the perspective of deterrence/prevention and from the perspective of ensuring trustees are acting in the best interests of members.  He suggested that 'APRA is concerned with the stability of the system and the entities within the system as its primary focus' (as opposed to ensuring trustees are acting in the best interests of members).   Ms Rowell denied this is the case, stating that regulator is also concerned ensuring that RSEs 'meet their promises and their obligations to members'.   Mr Hodge went on to question the effectiveness of APRA's approach to ensuring compliance with the sole purpose test.  Ms Rowell agreed that APRA has not required any trustee to enter into an enforceable undertaking over the last ten years and has never commenced a civil proceeding in relation to the sole purpose test.  The Commission also heard that APRA is awaiting the conclusion of ASIC's work in relation to alleged fee for no service conduct, before investigating whether further action on the issue may be warranted – an approach that was questioned by Mr Hodge.

On the topic of commissions, and the transition of members to MySuper products, Mr Hodge queried whether APRA undertaken any project to evaluation whether RSE licensees acted in their own financial interests.  Ms Rowell confirmed that no project has been undertaken and that 'there had not been concern internally at a general level' regarding the issue.   

On the issue of extending the regulators' powers (eg permitting APRA to direct a trustee to merge the fund with another trustee'), Mr Hodge queried whether APRA would be likely to use them.  Ms Rowell said: 'You couldn't rule it out.  Yes, we would do that'.  

Prudential standards: High level drafting makes establishing a breach ‘very difficult’? 

In his written submission to the Commission, Counsel Assisting Michael Hodge QC noted that under s 34C of the SIS Act, APRA has the power to determine prudential standards and that APRA takes a ‘principles-based’ approach to setting these standards.  He added that the Commission heard that the approach is intended to enable entities to ‘use a variety of approaches to comply with high-level principles, rather than APRA seeking to control a regulated entity through detailed prescription’.  Mr Hodge noted that consequently, the standards are ‘directed towards the development of policies and frameworks. To the extent they provide concrete guidance, that guidance tends to be expressed at a high level’.  Mr Hodge observed that ‘whatever the other merits of this approach [principles based approach], such high level drafting means that establishing a breach of a standard — except in the most obvious way, such as failing to have a Fit and Proper Policy at all — is likely to be very difficult’.

Australian Securities and Investments Commission (ASIC) case study 

 The focus of questions in this case study was on the approach ASIC takes to enforcement and more particularly ASIC's (alleged) preference for entering into enforceable undertakings as opposed to going to court.  In one example, the Commission heard that even where ASIC threatened, having completed its investigation, to take a financial institution (ANZ) to court, it failed to follow through agreeing instead to resolve the matter by way of an enforceable undertaking (the whole issue taking over three years to resolve).  Asked why this approach was taken, ASIC witness Mr Mullaly said that 'the focus of this was to stop the conduct…We were able to achieve that without having to go to court'.  Later, in questioning Deputy Chair Peter Kell, Mr Hodge asked whether, in circumstances where ASIC has identified conduct that it considers to be a breach of the law, it will commence a proceeding, Mr Kell said that it would be considered.
Asked whether, were the regulator granted stronger powers (eg in relation to commencing civil penalty proceedings for failure to comply with the best interests duty) the regulator would exercise those powers, Mr Kell said that the regulator would do so.  

Commissioner Hayne asked Mr Kell 'Do you regard civil penalty proceedings as the best ultimate means of achieving public denunciation of misconduct?' to which Mr Kell responded:  'I think they can be a very effective means, but it will, Commissioner, it would depend on the circumstances.  It might be that criminal proceedings are in some cases an appropriate tool.  It might be that in other circumstances banning someone for life from the industry in which they’re working sends a very, very powerful message as well.  But certainly, I would say that civil penalty proceedings are a very important part of the – the deterrence tool kit'.  Asked by the Commissioner whether ASIC had in the last five years 'given consideration to submitting a brief to Commonwealth DPP in respect of any aspect of the fees for no service matter?' Mr Kell responded in the affirmative.   

Reasons for ‘so little action’ are unclear?

In written submissions to the Commission, Mr Hodge outlined Mr Kell’s evidence with respect to ASIC’s preferred enforcement approach.  Mr Hodge commented that ‘On the evidence, it is not clear why so little action [court action] has been taken. Nevertheless, Mr Kell told the Commission that if ASIC were to have a greater role as conduct regulator of RSE licensees, it would require expanded powers to match.  Mr Kell asserted that, notwithstanding its failure to bring proceedings against trustees to date, if ASIC were responsible for commencing proceedings for a failure to comply with the sole purpose test it might do so.’

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