Financial services royal commission
The Royal Commission into misconduct in the banking, superannuation and financial services industry recently issued its interim report and outlined the policy issues and questions arising from the sixth round of hearings in relation to insurance.
The interim report raises specific issues arising from the first four rounds of hearings, including those addressing consumer lending and financial advice. It also poses a number of questions in relation to regulation and the regulators. These include:
- whether any changes to the law are necessary
- how APRA and ASIC should respond
- whether the regulatory architecture should change
- the proper place for industry codes of conduct
- whether structural change is necessary.
After the sixth round of hearings the Commission highlighted some policy issues in relation to insurance and questions to assist parties in preparing for written submissions. Relevant specifically to insurance provided through superannuation, these include whether:
- universal minimum coverage requirements, key definitions and/or key exclusions should be prescribed for group life policies offered to MySuper members
- group life insurance policies offered to MySuper members should be permitted to use a definition of ‘total and permanent incapacity’ that derogates from the regulatory definition of ‘permanent incapacity’
- registrable superannuation entity (RSE) licensees should be obliged to ensure their members are defaulted to statistically appropriate rates for insurance required to be offered through the fund under the Superannuation Industry (Supervision) Act 1993
- engagement of an associated entity as a fund’s group life insurer should be prohibited or subject to additional prudential requirements
- the terms set out in the Insurance in Superannuation Voluntary Code of Practice are sufficient to protect the interests of fund members.
A seventh and final round of public hearings will be held from 19–30 November, focusing on policy questions arising from the first six rounds of hearings. The Commission is due to provide its final report by 1 February 2019.
Design and distribution obligations and product intervention power
The Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 has been introduced into Parliament. The bill seeks to implement the Government’s response to key recommendations from the Financial System Inquiry.
The proposed design and distribution obligations will require issuers of financial products to:
- identify target markets for their products, having regard to the features of products and consumers in those markets
- select appropriate distribution channels
- periodically review arrangements to ensure they continue to be appropriate.
Distributors of financial products will be required to:
- implement reasonable controls to ensure products are distributed in accordance with the identified target markets
- comply with reasonable requests for information from the issuer in relation to the product’s review.
Some products will be exempt from the design and distribution obligations, including MySuper products and interests in defined benefit superannuation funds and eligible rollover funds. The design and distribution obligations are intended to apply to all financial products two years after the bill receives royal assent.
The proposed intervention power will allow ASIC to regulate, or if necessary, ban potentially harmful financial and credit products where there is a risk of significant consumer detriment. The power is intended to enable ASIC to take action before harm, or further harm, is done to consumers. The intervention power is intended to apply from the day after the bill receives royal assent.
ASIC recently registered the ASIC Corporations and Credit (Transition to AFCA) Instrument 2018/814. This extends the statutory period for an Australian Financial Services licensee to notify ASIC about a change in their external dispute resolution details in relation to the commencement of the Australian Financial Complaints Authority (AFCA). The instrument effectively requires licensees to make this notification to ASIC in the period between 1 November and 30 November 2018.
AFCA has now finalised the terms of its interim funding model that will apply until the end of the 2021 financial year. During the interim funding period, superannuation providers will be subject only to an annual superannuation membership levy, based on the model used to determine the superannuation supervisory levy collected by APRA.
Consultations and inquiries
In addition to the Royal Commission, there are a number of other recent consultations and inquiries either underway or just concluded that have potential impacts for superannuation.
- Work test exemption for recent retirees – the Government has undertaken consultation on its May 2018 Budget proposal to provide a one-year exemption from the contributions work test for eligible recent retirees. Under the proposal, retirees aged 65-74 with a total superannuation balance under $300,000 would be exempt from the contributions work test for 12 months from the end of the financial year in which they last met the work test. The exemption will apply to voluntary contributions made in the 2019-20 and later financial years. Submissions closed on 26 October.
- Family law and superannuation – the Australian Law Reform Commission has released a discussion paper on proposed reforms to the Family Law Act 1975, including aspects of the superannuation splitting rules. Submissions closed on 13 November.
- Penalties for financial sector misconduct – the Government has consulted on draft legislation to strengthen the penalties for corporate and financial sector misconduct. The reforms would increase the penalties for a range of offences in ASIC-administered legislation as well as introducing significant new offences. Submissions closed on 23 October.
- Refundable franking credits – the House of Representatives Standing Committee on Economics has been tasked with inquiring into the use of refundable franking credits, their benefits and the implications of their potential removal. Submissions closed on 2 November. A reporting date for the inquiry has not been advised.
The Government has recently made a number of regulations relevant to superannuation. These include:
- Extension of SuperStream to SMSFs – the Treasury Laws Amendment (2018 Measures No. 2) extend the operation of SuperStream to cover SMSFs. In particular, the regulations apply the SuperStream data standards and process to rollovers to or from SMSFs requested from 30 November 2019.
- Superannuation Guarantee – the Superannuation Guarantee (Administration) Regulations 2018 remake the Superannuation Guarantee (Administration) Regulations 1993, which were due to sunset (expire) in October. According to the explanatory material, the remade regulations make minor technical changes but no changes to the substantive meaning or operation of the existing regulations.
- Statutory declarations – the Statutory Declaration Regulations 2018 repeal and replace the Statutory Declaration Regulations 1993, which were due to sunset in October. The remade regulations alter the prescribed form for a Commonwealth statutory declaration and expand and clarify the list of occupations and persons before whom such declarations can be made.