Issue 697, 4 February 2019
The Royal Commission – Final Report
This afternoon the Government released the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission).
The Government also released its response to the report, Restoring trust in Australia’s financial system, briefly outlining its support for all recommendations made by the Commission.
This update provides a snapshot of the Commissioner’s key recommendations relating to superannuation.
In coming weeks, the ASFA policy team will undertake further analysis on the report and recommendations, liaise with our members, and initiate advocacy on policy and implementation issues.
In this issue:
- Major recommendations
- Superannuation – specific recommendations
- Other recommendations to note
Major recommendations
The major recommendations with direct impact on superannuation include:
- a prohibition on trustees assuming any other role or office (recommendation 3.1)
- ‘stapling’ of individuals to a single default account (recommendation 3.5)
- a prohibition on deducting advice fees from MySuper accounts, and limits on deduction of advice fees from choice accounts (recommendations 3.2, 3.3)
- civil penalty offences for breach of the trustees’ and directors’ covenants and certain obligations in relation to MySuper (recommendation 3.7)
- retention of the ‘twin peaks’ regulatory model, but adjustment of the roles of APRA and ASIC (recommendations 3.8, 6.1-6.5)
- extension, ‘over time’ of the Banking Executives Accountability Regime (BEAR) to all APRA-regulated entities (recommendations 6.8, 6.9)
- establishment of a compensation scheme of last resort (recommendation 7.1).
Superannuation – specific recommendations
Trustees’ obligations
No other role or office – The trustee of a registrable superannuation entity (RSE) 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. [Recommendation 3.1]
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. [Recommendation 3.2]
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 specific requirements are met. These requirements involve proposed new obligations in relation to ongoing fee arrangements, around annual renewal, prior written identification of service and provision of the client’s express written authority. [Recommendation 3.3, see also Recommendation 2.1]
Nominating default funds
One default account – A person should have only one default account. Machinery should be developed for ‘stapling’ a person to a single default account. [Recommendation 3.5]
No treating of employers – Section 68A of the Superannuation Industry (Supervision) Act 1993 (SIS Act), which sets out certain conduct prohibited in relation to fund membership, should be amended to prohibit trustees (and associates) doing certain specified acts 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 specified acts relate to supplying (or offering to supply) goods or services to a person or giving or allowing (or offering) a discount, allowance, rebate or credit in relation to the supply of goods or services to a person. The provision should be a civil penalty provision enforceable by ASIC. [Recommendation 3.6]
Regulation
Civil penalties for breach of covenants and like obligations – Breach of the trustees’ and directors’ covenants and certain obligations in relation to MySuper should be enforceable by action for civil penalty. This applies to the covenants and obligations set out in section 29VN, 29VO, 52 and 52A of the SIS Act. [Recommendation 3.7]
Co-regulation – The roles of APRA and ASIC in relation to superannuation should be adjusted to accord with the general principles that:
- APRA, as the prudential regulator for superannuation, is responsible for establishing and enforcing prudential standards and practices designed to ensure that, under all reasonable circumstances, financial promises made by superannuation entities APRA supervises are met within a stable, efficient and competitive financial system
- as the conduct and disclosure regulator, ASIC’s role in superannuation primarily concerns the relationship between RSE licensees and individual consumers. [Recommendations 3.8, 6.3]
ASIC as conduct regulator – Without limiting any powers APRA currently has under the SIS Act, ASIC should be given the power to enforce all provisions in the SIS Act that are, or will become, civil penalty provisions or otherwise give rise to a cause of action against an RSE licensee or director for conduct that may harm a consumer. There should be co-regulation by APRA and ASIC of these provisions. [Recommendation 6.4]
APRA to retain functions – APRA should retain its current functions, including responsibility for the licensing and supervision of RSE licensees and the powers and functions that come with it, including any power to issue directions that APRA presently has or is to be given. [Recommendation 6.5]
Accountability regime – Over time, provisions modelled on the Banking Executives Accountability Regime (BEAR) should be extended to all RSE licensees. [Recommendations 3.9, 6.8]
‘Selling’ superannuation
No hawking – Hawking of superannuation products should be prohibited – 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. [Recommendation 3.4]
Other recommendations to note
The report includes a range of other recommendations in relation to the regulators, insurance and financial advice that have the potential to impact superannuation:
Culture, governance and remuneration
Changing culture and governance – the Commission has recommended a number of steps that all financial services entities should take to assess and monitor their culture and governance and address any issues that have been identified. [Recommendation 5.6]
Supervision of culture and governance – the Commission has outlined a number of key actions that APRA should take in conducting its prudential supervision of APRA-regulated institutions and in revising its prudential standards and guidance, to focus more directly on culture and mitigating the risk of misconduct. [Recommendation 5.7]
Supervision of remuneration – the Commission has made numerous detailed recommendations in relation to how APRA should conduct prudential supervision of remuneration systems and revise its prudential standards and guidance about remuneration. [Recommendation 5.1, 5.2, 5.3, 5.4]
Regulators
Retain twin peaks but adjust roles of ASIC & APRA – The ‘twin peaks’ model of financial regulation should be retained but the roles of ASIC and APRA should be adjusted in relation to superannuation. [Recommendations 3.8, 6.1]
ASIC’s approach to enforcement – The Commission has made a number of recommendations in relation to ASIC’s enforcement approach, in particular its use of enforceable undertakings. [Recommendation 6.2]
Extending the BEAR – Over time, provisions modelled on the Banking Executives Accountability Regime should be extended to all APRA-regulated financial services institutions. APRA and ASIC should jointly administer those new provisions. ASIC and APRA should jointly administer the BEAR. [Recommendations 6.8, 6.9]
Co-ordination and information sharing – The Commission has made a number of detailed recommendations to improve co-operation and information sharing between ASIC and APRA. [Recommendation 6.9, 6.10]
Governance and oversight – The Commission has proposed a number of governance-related changes for the regulators. Critically, it recommends that APRA and ASIC should each be subject to at least quadrennial capability reviews, with a capability review to be undertaken for APRA as soon as is reasonably practicable. It recommends establishment of a new oversight authority for APRA and ASIC, independent of Government to assess the effectiveness of each regulator in discharging its functions and meeting its statutory objects. The authority should report to the Minister in respect of each regulator at least biennially. [Recommendation 6.11, 6.12, 6.13, 6.14]
Compensation scheme of last resort – The recommendations of the Review of the financial system external dispute resolution framework (Ramsay Review) to establish a compensation scheme of last resort should be implemented. [Recommendation 7.1]
Note – The Government response indicates it will establish an industry-funded, forward-looking compensation scheme of last resort (CSLR), consistent with the recommendations of the Ramsay Review. This CSLR will extend beyond disputes in relation to personal financial advice failures and operate as a last resort mechanism to pay out compensation owed to consumers and small businesses that receive a court or tribunal decision in their favour or a determination from the Australian Financial Complaints Authority (AFCA), but are unable to get the compensation owed by the financial firm – for example, because the firm has become insolvent. The CSLR will be established as part of AFCA. The Government has also indicated that it will fund the payment of legacy unpaid determinations from the Financial Ombudsman Service and Credit and Investments Ombudsman.
ASIC Enforcement Review Taskforce – The recommendations of the ASIC Enforcement Review Taskforce that relate to self-reporting of contraventions by financial services licensees should be implemented. The Taskforce’s recommendations included clarification of the ‘significance test’ to ensure that the significance of breaches is determined objectively and extension of the time for reporting from 10 to 30 days, with licensees required to make a report if they are investigating a breach and have not determined, within 30 days, whether it meets the significance threshold. [Recommendation 7.2]
Simplification so the law’s intent is met – As far as possible, exceptions and qualifications to generally applicable norms of conduct in legislation governing financial services entities should be eliminated. [Recommendation 7.3, 7.4]
Insurance in superannuation
Universal terms review – Treasury, in consultation with industry, should determine the practicability, and likely pricing effects, of legislating universal key definitions, terms and exclusions for default MySuper group life policies. [Recommendation 4.13]
Additional scrutiny for related party engagements – APRA should amend Prudential Standard SPS 250 to require RSE licensees that engage a related party to provide group life insurance, or who enter into a contract, arrangement or understanding with a life insurer by which the insurer is given a priority or privilege in connection with the provision of life insurance, to obtain and provide to APRA within a fixed time, independent certification that the arrangements and policies entered into are in the best interests of members and otherwise satisfy legal and regulatory requirements. [Recommendation 4.14]
Status attribution to be fair and reasonable – APRA should amend Prudential Standard SPS 250 to require RSE licensees to be satisfied that the rules by which a particular status is attributed to a member in connection with insurance are fair and reasonable. [Recommendation 4.15]
Enforceable code provisions – The law should be amended to provide for enforceable provisions of industry codes and for the establishment and imposition of mandatory industry codes.
In respect of the Life Insurance Code of Practice, the Insurance in Superannuation Voluntary Code and the General Insurance Code of Practice, the Financial Services Council, the Insurance Council of Australia and ASIC should take all necessary steps, by 30 June 2021, to have the provisions of those codes that govern the terms of the contract made or to be made between the insurer and the policyholder designated as ‘enforceable code provisions’. [Recommendation 4.9]
Extension of the sanctions power – The Life Insurance Code of Practice and the General Insurance Code of Practice should be amended to empower (as the case requires) the Life Code Compliance Committee or the Code Governance Committee to impose sanctions on a subscriber that has breached the applicable Code. [Recommendation 4.10]
Co-operation with AFCA – The Corporations Act should be amended to require that AFSL holders take reasonable steps to co-operate with the AFCA in its resolution of particular disputes, including, in particular, by making available to AFCA all relevant documents and records relating to issues in dispute. [Recommendation 4.11]
Accountability regime – Over time, provisions modelled on the BEAR should be extended to all APRA-regulated insurers, as referred to in Recommendation 6.8. [Recommendation 4.12]
Removal of claims handling exemption – The handling and settlement of insurance claims, or potential insurance claims, should no longer be excluded from the definition of ‘financial service’. [Recommendation 4.8]
Financial advice
Annual renewal and payment – The law should be amended to provide that ongoing fee arrangements (whenever made):
- must be renewed annually by the client
- must record in writing each year the services that the client will be entitled to receive and the total of the fees that are to be charged
- may neither permit nor require payment of fees from any account held for or on behalf of the client except on the client’s express written authority to the entity that conducts that account given at, or immediately after, the latest renewal of the ongoing fee arrangement. [Recommendation 2.1]
Disclosure of lack of independence – The law should be amended to require that a financial adviser who would contravene section 923A of the Corporations Act by assuming or using any of the restricted words or expressions identified in section 923A(5) (including ‘independent’, ‘impartial’ and ‘unbiased’) must, before providing personal advice to a retail client, give to the client a written statement (in or to the effect of a form to be prescribed) explaining simply and concisely why the adviser is not independent, impartial and unbiased. [Recommendation 2.2]
Review of measures to improve the quality of advice – In three years’ time, there should be a review by Government in consultation with ASIC of the effectiveness of measures that have been implemented by the Government, regulators and financial services entities to improve the quality of financial advice. The review should preferably be completed by 30 June 2022, but no later than 31 December 2022. Among other things, that review should consider whether it is necessary to retain the ‘safe harbour’ provision in section 961B(2) of the Corporations Act. Unless there is a clear justification for retaining that provision, it should be repealed. [Recommendation 2.3]
Grandfathered commissions – Grandfathering provisions for conflicted remuneration should be repealed as soon as is reasonably practicable. [Recommendation 2.4]
Life risk insurance commissions – When ASIC conducts its review of conflicted remuneration relating to life risk insurance products and the operation of the ASIC Corporations (Life Insurance Commissions) Instrument 2017/510, ASIC should consider further reducing the cap on commissions in respect of life risk insurance products. Unless there is a clear justification for retaining those commissions, the cap should ultimately be reduced to zero. [Recommendation 2.5]
Professional discipline of financial advisers – The Commission has made a number of recommendations regarding professional discipline of financial advisers. These relate to reference checking and information sharing, reporting of compliance concerns, action taken by AFSL holders in relation to misconduct by advisers, and introduction of a new disciplinary system. [Recommendations 2.7, 2.8, 2.9, 2.10]
ASFA REGULATORY WATCHLIST
ASFA’s Regulatory Watchlist (ARW) tracks developments in Legislation, inquiries, consultations
and other regulatory announcements relevant to superannuation.
