Jayson Forrest is the managing editor of Money & Life Magazine.
A review of the Royal Commission’s recommendations into Misconduct in the Banking, Superannuation and Financial Services Industry relating to superannuation, with a focus on how these recommendations specifically impact licensees and planners.
Following is of a wrap-up of some of the key recommendations relating to superannuation made in the Royal Commission’s recommendations into Misconduct in the Banking, Superannuation and Financial Services Industry by Commissioner Kenneth Hayne that may affect the provision of financial advice.
The FPA’s full response to all six sections of the Royal Commission’s Final Report can be accessed at fpa.com.au.
Recommendation 3.1 – No other role or office
The trustee of an Registrable Superannuation Entity should be prohibited from assuming any obligations other than those arising from, or in the course of, its performance of the duties of a trustee of a superannuation fund.
FPA comment: The purpose of this recommendation is to remove the conflict of interest of trustees, where the entity acts as a trustee for both the superannuation fund and the managed investment scheme (MIS). This creates a direct conflict between what is in the best interest of the members of the fund, and the entity’s financial and shareholder interests in relation to the MIS. Such a conflict cannot be avoided or effectively managed in the best interest of fund members.
Removing conflicts of interest of super funds should deliver a positive outcome for fund members. This change is likely to have implications for the structure, cost and availability of MISs.
The FPA supports Recommendation 3.1. We will work with the Government to ensure any potential unintended consequences for the provision of advice are clearly identified, considered and appropriately resolved.
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.
FPA comment: The FPA is concerned about Recommendation 3.2 and the accuracy of Commissioner Hayne’s interpretation of the definition of intra-fund advice:
“….‘intra-fund advice’: the provision of advice that is not personal advice, to members of a particular fund about their interest in that fund, where the cost of the advice is charged collectively to members of the fund in accordance with the SIS Act.”
This is partly accurate in that ‘intra-fund advice’ is advice to members about their interest in that fund, and the cost of such advice is charged collectively to all members.
However, as per the provisions in s99F of the SIS Act, explained in paragraph 1.3 of the Explanatory Memorandum to the ‘Stronger Super’ Bill that established ‘intra-fund advice’ and stated by ASIC, intra-fund advice is personal advice that takes into consideration the individual’s circumstances as they relate to the member’s interest in the fund only. For example, a member’s risk profile, age, income or occupation may be considerations in the provision of intra-fund advice.
Section 99F sets out the circumstances under which personal advice is not ‘intra-fund advice’ and cannot be charged in this manner. These circumstances relate to matters outside of the member’s interest in the fund. Ongoing advice is also excluded from intra-fund advice.
The FPA is concerned by this recommendation as it’s currently worded. That’s because it’s based on this interpretation of ‘intra-fund advice’ and would restrict payment choices for different sets of consumers depending on the type of personal financial advice they receive and who it’s provided by. It may also lead to consumers making choices to switch products or investment options just to facilitate the ability to pay for advice, rather than being in the best interest of their financial position.
The FPA supports a legal framework that permits or restricts remuneration practices consistently across the industry, and will work with the Government and Opposition regarding our concerns.
Recommendation 3.3 – Limitations on deducting advice fees from choice accounts
Deduction of any advice fee (other than for intra‑fund advice) from superannuation accounts other than MySuper accounts should be prohibited, unless the requirements about annual renewal, prior written identification of service and provision of the client’s express written authority set out in Recommendation 2.1 in connection with ongoing fee arrangements, are met.
FPA comment: The FPA supports Recommendation 3.3 and the Government’s response. The FPA does not condone any situation where a client is charged fees for no service or given advice that is not in the best interest of the client. The FPA supports the ability for consumers to choose how they pay for advice.
This recommendation permits consumers to choose how they would like to pay for the personal financial advice received, including from their choice superannuation account, by the client agreeing to renew the ongoing fee arrangement they have with their financial planner annually and the client providing express written authority to the fund trustee that these arrangements have been met.
As discussed in response to Recommendation 2.1, upon implementation of the recommendation, financial planners will be required to seek their client’s agreement on an annual basis to continue the ongoing fee arrangement for the provision of advice services the client is seeking. This would require members to review their current renewal practices and processes, as it changes the current biannual opt-in to yearly. This must include the prior written identification of the services the client will receive in the coming 12 months. This may lead to a positive and more manageable outcome for businesses, as it would align the renewal process with the Fee Disclosure Statement requirements and the client annual review.
Recommendation 3.3 permits clients to pay for personal advice out of their superannuation (except MySuper accounts). Should your client choose to do so, the client must provide written authority to the super fund agreeing to the ongoing fee arrangement and providing the fund with permission to make such payments from the client’s account. This permission must be provided annually following the client’s annual renewal.
Recommendation 3.4 – No hawking
Hawking of superannuation products should be prohibited. That is, the unsolicited offer or sale of
superannuation should be prohibited except to those who are not retail clients and except for offers made under an eligible employee share scheme.
The law should be amended to make clear that contact with a person, during which one kind of product is offered, is unsolicited unless the person attended the meeting, made or received the telephone call, or initiated the contact for the express purpose of enquiring about, discussing or entering into negotiations in relation to the offer of that kind of product.
FPA comment: The FPA supports Recommendation 3.4 as it is intended to prohibit the unsolicited spruiking and selling of superannuation products. It should not impact the provision of financial advice.
Recommendation 3.5 – One default account
A person should have only one default account. To that end, machinery should be developed for ‘stapling’ a person to a single default account.
FPA comment: The FPA is concerned about the potential for unintended consequences of this recommendation (in conjunction with the Protecting Your Super Package currently before Parliament) on individuals who make an informed decision to hold multiple superannuation accounts (potentially both default accounts) for insurance purposes.
As detailed in the FPA’s submission to the Productivity Commission and the draft legislation for the Protecting Your Super Package, a significant barrier to consolidation of superannuation is the lack of portability of insurance. Individuals may hold cover inside their superannuation account, however, this insurance cover is not portable. The cover cannot be transferred to the new or consolidated superannuation account, even though the insured is the same person.
In the absence of implementing a solution to the above insurance issue, the FPA suggests the system should be flexible and permit an individual to choose to take out and hold a second superannuation account, including a default super account, for insurance purposes.
Recommendation 3.6 — No treating of employers
Section 68A of the SIS Act should be amended to prohibit 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) where the act may reasonably be understood by the recipient to have a substantial purpose of having the recipient nominate the fund as a default fund or having one or more employees of the recipient apply or agree to become members of the fund.
The provision should be a civil penalty provision enforceable by ASIC.
FPA comment: The purpose of Recommendation 3.6 is to remove the ability of trustees to provide non-monetary benefits (such as entertainment, tickets, sporting events and so forth) to entice employers to nominate the fund as their default fund.
The FPA supports a default system where funds are awarded based on the suitability and value offered to employees. Recommendation 3.6 and the Government’s response will assist in this regard.
Recommendation 3.7 — Civil penalties for breach of covenants and like obligations
Breach of the trustee’s covenants set out in section 52 or obligations set out in section 29VN, or the director’s covenants set out in section 52A or obligations set out in section 29VO of the SIS Act should be enforceable by action for civil penalty.
FPA comment: The purpose of Recommendation 3.7 is to enhance the accountability of trustees and directors of superannuation funds. The FPA supports Recommendation 3.7 and the Government’s response.
Recommendation 3.8 — Adjustment of APRA and ASIC’s roles
The roles of APRA and ASIC with respect to superannuation should be adjusted, as referred to in Recommendation 6.3.
FPA comment: The FPA supports this recommendation and the Government’s response, which are intended to improve the clarity and transparency of the regulatory oversight of the superannuation industry.
Recommendation 3.9 — Accountability regime
Over time, provisions modelled on the BEAR should be extended to all RSE licensees, as referred to in Recommendation 6.8.
FPA comment: The FPA supports Recommendation 3.9 and the Government’s response, the purpose of which is to enhance the accountability of trustees and directors of superannuation funds.
Please note: Due to space restrictions, this article only outlines the key recommendations from the Final Report that specifically impact licensees and planners in relation to Superannuation. The May issue of Money & Life will look at Insurance. To read the FPA’s full response to the Royal Commission’s Final Report into ‘Misconduct in the Banking, Superannuation and Financial Services Industry’, go to fpa.com.au.