ASFA Action 16 October 2019

Issue 723, 16 October 2019 

In this issue: 

• Complaints handling: update on ASIC consultation 

• Scrutiny of superannuation sector: Parliamentary Committee hearings 

• Member outcomes: APRA comments 

• Effectiveness of disclosure reliance: ASIC research 

• Modern Slavery Act 2018: guidance materials 

• Financial advisers: progress on Royal Commission recommendations 

• APRA: new executive roles 

• Pension tax bonuses: ATO compliance approach 

• Non-arm’s length income: ATO consultation 

• Establishment of a SMSF: ASIC ‘red flag’ situations 

 

Complaints handling: update on ASIC consultation 

As reported in recent ASFA Actions, ASIC has been consulting on substantial proposed reforms to the complaints handling standards for its regulated entities, including superannuation fund trustees (See ASFA Action issue 708 for background). ASIC has now provided an update on some decisions it has made as part of the consultation process and has issued two legislative instruments continuing the current complaints handling standards until 30 June 2020. 

In its recent Consultation Paper 311 Internal Dispute Resolution: Update to RG 165 (CP 311), ASIC indicated it expected to publish updated complaint handling standards, set out in a revised version of Regulatory Guide RG 165, in December 2019. ASIC has now asked ASFA to provide the following update to our members in relation to CP 311: 

Given the number of issues raised in submissions about the requirements for IDR data collection and recording, our guidance on the data specific matters will be postponed to the first half of 2020. 

The following requirements proposed in CP 311 are therefore being temporarily carved out of the updated RG 165, which we are still aiming to publish in December 2019. 

The requirement to: 

• record all complaints, including those resolved immediately or within 5 business days; 
• record a unique identifier for each complaint; 
• collect and record prescribed data for each complaint; 
• report prescribed data to ASIC in accordance with ASIC’s requirements. 

We intend to release final guidance on these matters in mid-2020 after consultation. We still intend to release final guidance on all of the other CP 311 proposals in December 2019. Any transitional timeframes for implementation of the requirements will be set out in RG165. 

In addition, ASIC has registered two legislative instruments to continue its current complaints handling standards in effect until 30 June 2020. 

According to the explanatory material, the ASIC Corporations and Credit (Internal Dispute Resolution—Transitional) Instrument 2019/965 ensures the continuation of “ASIC’s existing policy in relation to approved standards and requirements for an internal dispute resolution procedure, pending the finalisation of ASIC’s proposed new policy on internal dispute resolution”. The ASIC Corporations and Credit (Repeal) Instrument 2019/966 repeals a number of existing ASIC Class Orders relating to complaints handling and effectively provides that the existing policy is maintained through Instrument 2019/965, until 30 June 2020. 

ASIC has advised ASFA that the adoption of 30 June 2020 in these instruments should not be taken as indicative of the timeframes for the publishing of the updated version of RG 165 and/or any associated legislative instruments. 

 

 

Scrutiny of superannuation sector: Parliamentary Committee hearings 

The House of Representatives Standing Committee on Economics has announced that it will “scrutinise the superannuation sector” as part of its ongoing review of the four major banks and other financial institutions, including superannuation funds. 

The Committee will hold two days of hearings in late November. Its examination will include “monitoring the sector’s progress on implementing relevant recommendations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry”. 

 

 

Member outcomes: APRA comments 

In two recent speeches, senior APRA personnel have made strong comments about their intensive focus on member outcomes in superannuation. 

In late September, APRA Chair Wayne Byres noted that both the Productivity Commission and the Royal Commission found the superannuation system “is not delivering sufficiently well. Trustees have not always been focused on their members’ best interests, aggregate fees and costs are too high, insurance has not always been good value for money, and there has been too much inefficiency in the system. And they also said—very loudly and clearly—that regulators should do more to hold trustees to account to address those issues.” 

Mr Byres outlined APRA’s three-pronged approach to respond to these concerns: 

1. stronger standards, backed up by stronger enforcement powers – underlined by the new powers set out in the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 1) Act 2019 and the new prudential standard, SPS 515 Strategic Planning and Member Outcomes. Mr Byres said the “legislation and standards provide a strong platform for APRA to drive a much more intense focus on member outcomes. It will inevitably produce some difficult discussions with trustees who are not delivering for their members—put very bluntly, are you going to get better or get out?—but all have had fair warning given the increased attention on this issue in recent years.” 
2. overhauled and expanded data collection – APRA will shortly commence consultation on a major overhaul of the superannuation data reporting regime, aiming to provide greater coverage, more granularity, enhanced consistency and better quality data. Most of the focus will be on the choice segment of the market, where the largest data gaps remain. 
3. increased transparency and ‘heatmaps’ – APRA will make public as much of the data it collects as possible. Later this year, starting with MySuper products, APRA also plans to publish a selected set of performance-related measures and benchmarks, initially focusing on investment returns, fees and charges, and measures of sustainability/viability. This will subsequently be expanded to include insurance costs. APRA will apply a “simple heat map or traffic light approach giving a snapshot of the performance of each MySuper product against a range of benchmarks. This approach will be expanded to include choice products over time as better, and more reliable, data becomes available”. 

Mr Byres indicated that APRA’s goal, in adopting this approach, is to “identify those trustees that, when looked at across a range of dimensions, do not seem to be delivering value-for-money outcomes. It will add to the pressure on trustees to address persistent underperformance, or reconsider their continued presence in the industry”. 

On 14 October, Deputy Chair Helen Rowell made further comments in relation to APRA’s proposed heatmaps. Ms Rowell noted that APRA is currently finalising the details of the methodology and measures it will use for the heatmap, and how they will be presented. She indicated that the heatmap “will not include a single, overall product level assessment. Rather, the heatmap will display performance across a range of metrics in the areas of investments and fees and costs, and provide indicators of trends in sustainability measures.” 

Ms Rowell said the heatmap “is intended to be a starting point for member outcomes and performance assessment. Trustees will be expected to build on the heatmap and consider a broader range of metrics appropriate to their operations, and to also consider performance at a cohort level. As we’ve said in our guidance supporting SPS 515, assessment at the product level may mask performance issues at the cohort level. The heatmap will also inform APRA’s supervisory intensity and approach, together with the rich sources of additional quantitative data available, and also the qualitative information and analysis we derive from our supervision activities.” 

 

 

Effectiveness of disclosure reliance: ASIC research 

ASIC has released a report highlighting research that found reliance on mandated disclosure as a consumer protection tool has often proved ineffective, and at times even contributed to consumer harm. 

Report 632 Disclosure: Why it shouldn’t be the default jointly published by APRA and the Dutch Authority for the Financial Markets (AFM) looked at the effectiveness of disclosure for financial products on consumer outcomes. The report covers a decade of case studies across a broad range of financial products and services in Australia, the Netherlands, the UK and the US. 

Key limits of disclosure identified in the report, and supported by 33 case studies, include that: 

1. disclosure does not ‘solve’ the complexity in financial services markets 
2. disclosure must compete for consumer attention and 
3. one size disclosure does not fit all – the effects of disclosure are different from person-to-person and situation-to-situation 
4. in the real world, disclosures can backfire in unexpected ways 
5. warnings do not always work as intended and can backfire. 

ASIC’s Deputy Chair, Karen Chester, said disclosure as the default consumer protection is “not the ‹silver bullet’ once thought, nor should it be relied upon as one. Disclosure can and has backfired in unexpected and harmful ways”. 

Ms Chester noted that an over-reliance on disclosure “in some ways proved an enabler of the poor conduct and poor consumer outcomes revealed by the Financial Services Royal Commission. Importantly, the Royal Commission represents more than a tilt away from disclosure”. 

ASIC considers that there is a need to “rebalance the onus from consumers to firms – to become a shared responsibility. To do this, firms need to understand, measure and deliver on consumer outcomes”. Going forward, ASIC will take a more consumer outcome-focused approach, making the most of its enhanced regulatory tool kit, including through use of its new product intervention powers and by setting expectations for firms to deliver good consumer outcomes under their design and distribution obligations (DDO). 

Ms Chester noted that while mandated disclosure still has an important role to play, its value as a consumer protection tool cannot be assumed. 

 

 

Modern Slavery Act 2018: guidance materials 

The Government has finalised guidance material for entities that are required to report under the Modern Slavery Act 2018 (the Act), which may potentially include superannuation funds and other investment organisations. 

As noted in ASFA Action issue 706, the Act was passed by Parliament in late 2018 and entered into force on 1 January 2019. The Act established a national Modern Slavery Reporting Requirement (Reporting Requirement) for certain large businesses and other entities in the Australian market. 

The Modern Slavery Business Engagement Unit in the Department of Home Affairs (DHA) is responsible for implementing the Act, including providing general advice and support to entities about compliance with the Reporting Requirement. 

According to material published by the DHA, the Reporting Requirement is intended to support the Australian business community to identify and address their modern slavery risks and maintain responsible and transparent supply chains. Entities required to comply with the Reporting Requirement must prepare annual Modern Slavery Statements setting out their actions to assess and address modern slavery risks in their operations and supply chains. These statements will be made publicly available through an online central register. 

Following a consultation process earlier this year, the DHA has now finalised its guidance on the Act, Commonwealth Modern Slavery Act 2018 Guidance for Reporting Entities. In particular, the guidance includes a specific example depicting how a large superannuation fund might report on its operations and supply chains. 

 

 

Financial advisers: progress on Royal Commission recommendations 

Amendments to end grandfathered conflicted remuneration arrangements for financial advisers have now been passed by Parliament. Separately, the Government has announced that it will accelerate the establishment of a new disciplinary system and single disciplinary body for financial advisers. 

The Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill 2019 was passed by Parliament without amendment on 14 October and now awaits Royal Assent. The Bill contains amendments to: 

• remove grandfathering arrangements for conflicted remuneration and other banned remuneration from 1 January 2021 

• enable regulations to provide for a scheme under which amounts that would otherwise have been paid as conflicted remuneration are rebated to affected customers. 

The Bill was introduced in August as part of the Government’s response to recommendation 2.4 from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. 

The Government has announced that it will accelerate the establishment of a new disciplinary system and single disciplinary body for financial advisers, consistent with recommendation 2.10 of the Royal Commission. 

The new body will replace the role of code monitoring bodies which were due to be established by industry associations under professional standards reforms. 

The Government will work towards establishing the new body in early 2021, subject to the passage of legislation which will be introduced into the Parliament next year. A Code of Ethics will be applied by law from 1 January 2020. Financial advisers will be expected to meet the code’s ethical standards, and Australian Financial Services licensees will be required to take reasonable steps to ensure their representatives comply with the code. ASIC will be empowered to take action against licensees that fail to do so. 

For background, see ASFA Action issues 719, 700 and 697. 

 

 

APRA: new executive roles 

APRA has announced a number of new executive appointments, reflecting a new organisational structure. 

As it has previously foreshadowed, APRA will move to an industry-based supervision model, with separate supervisory divisions responsible for superannuation, insurance and banking. Ms Suzanne Smith has been appointed as Executive Director, Superannuation. 

Following the recommendations of the recent Capability Review (see ASFA Action issue 716), APRA will also strengthen and intensify its focus and resourcing allocated to the supervision of governance, culture, remuneration and accountability (GCRA), as well as technology-related risks and operational resilience. In addition, a new Accountability Regime unit is also being established, dedicated to delivering on the Government’s planned extension of the Banking Executive Accountability Regime across all the industries APRA regulates. 

The new appointments and organisational changes will formally take effect from 1 December. 

 

 

Pension tax bonuses: ATO compliance approach 

The ATO has finalised guidance for large APRA regulated superannuation funds that provide a pension tax bonus to members. The guideline provides a transitional compliance approach where those funds are facing practical difficulties in complying with certain legislative requirements. 

The guideline, PCG 2019/7 Compliance approach for large APRA regulated superannuation funds in respect of pension tax bonuses not included in members’ opening account balances on commencement of a pension, was released for consultation earlier this year – see ASFA Action issue 716 for background. 

 

 

Non-arm’s length income: ATO consultation 

The ATO has released two pieces of draft guidance relevant to superannuation funds in relation to application of the non-arm’s length income (NALI) provisions to ‘non arm’s length expenditure’. 

The Treasury Laws Amendment (2018 Superannuation Measures No. 1) Act 2019 made amendments to rules in section 295-550 of the Income Tax Assessment Act 1997 that apply where a superannuation entity incurs certain non-arm’s length expenditure (or where expenditure is not incurred) in gaining or producing ordinary or statutory income. The amendments apply in relation to income derived in the 2018-19 income year and later income years, regardless of whether the scheme was entered into before 1 July 2018 (see ASFA Action issues 717 and 721 for background). 

The ATO is now seeking feedback on guidance to assist fund trustees with the application of these amendments: 

• Draft Practical Compliance Guideline PCG 2019/D6 Compliance approach for complying superannuation funds in respect of applying the non-arm’s length income provisions to ‘non arm’s length expenditure’ provides a transitional compliance approach for a complying superannuation entity in relation to recent amendments to the tax legislation regarding NALI 

• Draft Law Companion Ruling LCR 2019/D3 Non-arm’s length income – expenditure incurred under a non-arm’s length arrangement clarifies how the amendments to section 295-550 operate in a scheme where the parties do not deal with each other at arm’s length and the trustee of a complying superannuation entity incurs non-arm’s length expenditure (or where expenditure is not incurred) in gaining or producing ordinary or statutory income. 

In PCG 2019/D6, the ATO notes that it “recognises that trustees of complying superannuation funds may not have realised that the amendments will apply to non-arm’s length expenditure of a general nature that has a sufficient nexus to all ordinary and/or statutory income derived by the fund in an income year”. As a result, the ATO will not allocate compliance resources to determine whether the NALI provisions apply to a complying superannuation fund for the 2018-19 and 2019-20 income years where the fund incurred non-arm’s length expenditure of a general nature that has a sufficient nexus to all ordinary and/or statutory income derived by the fund in those respective income years (for example, non-arm’s length expenditure on accounting services). 

The transitional compliance approach outlined in PCG 2019/D6 will not apply where the fund incurred non-arm’s length expenditure that directly related to the fund deriving particular ordinary or statutory income during the 2018-19 and 2019-20-income years. When finalised, the Guideline is proposed to apply for the 2018-19 and 2019-20-income years. It will not apply to later income years. 

The ATO is seeking comments on PCG 2019/D6 and LCR 2019/D3 by 15 November. 

 

 

Establishment of a SMSF: ASIC ‘red flag’ situations 

ASIC has warned Australian investors considering establishing their own self-managed superannuation fund (SMSF) to be aware of the potential downside to such a strategy, noting that many Australians set up SMSFs that are inappropriate for their circumstances. 

In June 2018, ASIC published two reports about member experiences in setting up and running a SMSF and advice providers’ compliance with the law when providing personal advice to retail clients to set up an SMSF (see ASFA Action issue 678). 

As part of that process, ASIC identified eight ‘red flag’ situations which it considers would (together or in part) make it unlikely for an investor to gain any advantage from using SMSFs to create and safeguard their intended retirement lifestyle: 

• the client has a low superannuation balance, and would have a limited ability to make future contributions 

• the client wants a simple superannuation solution 

• the client wants to delegate all of the running of the SMSF to a paid advice-provider 

• the client wants to delegate all the investment decision-making to someone else 

• the client does not have a lot of time to devote to managing their financial affairs 

• the client has little experience making investment decisions 

• the client, or suggested trustee, is an undischarged bankrupt or has been convicted of an offence involving dishonesty (because undischarged bankrupts and persons convicted of an offence involving dishonesty are prohibited from acting as a trustee) 

• the client has a low level of financial literacy. 

ASIC Commissioner Danielle Press noted that SMSFs are not suitable for members with a low fund balance, particularly where they have limited ability to make future contributions, or for people who want a simple superannuation solution, particularly if they have a low level of financial literacy or limited time to manage their own financial affairs. 

ASIC has released a factsheet, SMSFs: Are they for you? to help consumers and SMSF trustees decide or reassess if a SMSF is appropriate for them. The fact sheet will be sent to all newly registered SMSF trustees as a pilot in November, when they register with and elect to be regulated by the ATO. ASIC will then survey a number of the SMSFs to assess the usefulness of the fact sheet. 

 

 

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