The landmark final report from the banking and financial services Royal Commission sets out a blueprint for substantial reform of the industry that is likely to be embraced by both sides of politics as we move toward the upcoming election. Meanwhile, the Government has forged ahead with its legislative agenda despite challenges in the Senate. Important progress has been made on some superannuation bills while others remain stalled and seem unlikely to pass before the election is called.
Banking and financial services Royal Commission
The Government released the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry on 4 February. Commissioner Hayne’s report makes 76 recommendations, with a number that will impact directly and specifically on superannuation. These include:
- Trustees’ obligations: the trustee of a registrable superannuation entity (RSE) should only perform that one role or office – it should not assume any obligations other than those arising from or in the course of its performance of its duties as fund trustee. Deduction of any advice fees—other than for intra-fund advice—should be entirely prohibited from MySuper accounts and only permitted from other superannuation accounts where specific requirements are met
- Nominating default funds: a person should have only one default account. Machinery should be developed for ‘stapling’ a person to a single default account. There should be no treating of employers. Trustees (and associates) should be prohibited from doing certain specified acts that may reasonably be understood to have a substantial purpose of influencing a person to nominate the fund as a default fund or to have their employees agree to become members of the fund
- Regulation: breach of the trustees’ and directors’ covenants and certain obligations in relation to MySuper should be enforceable by action for civil penalty. The co-regulatory roles of APRA and ASIC in relation to superannuation should be adjusted to reflect that APRA is the prudential regulator for superannuation and ASIC’s role as the conduct and disclosure regulator primarily concerns the relationship between RSE licensees and individual consumers. The Banking Executives Accountability Regime should be extended to RSE licensees. The unsolicited offer or sale (‘hawking’) of superannuation to retail clients should be prohibited.
The Commission’s report also includes a range of other recommendations in relation to the regulators, insurance and financial advice that have the potential to impact superannuation. These include:
- Culture, governance and remuneration – the Commission has recommended steps that all financial services entities should take to assess and monitor their culture and governance and address any issues that have been identified. It has also outlined actions APRA should take when conducting its prudential supervision of APRA-regulated institutions and revising its prudential standards and guidance, to focus more directly on culture and mitigating the risk of misconduct. Additional recommendations focus on how APRA should conduct prudential supervision of remuneration systems and revise its prudential standards and guidance about remuneration
- Regulators – the ‘twin peaks’ model of financial regulation should be retained but the roles of ASIC and APRA should be adjusted in relation to superannuation and ASIC should strengthen its approach to enforcement. There should also be key governance-related changes for the regulators, including capability reviews (at least every four years and commencing with APRA as soon as practicable) and a new oversight authority for APRA and ASIC. Recommendations of the ASIC Enforcement Review Taskforce relating to self-reporting of contraventions by financial services licensees should be implemented (these include changes to the ‘significance test’ for breach reporting)
- A compensation scheme of last resort should be implemented, as recommended in December 2017 by Professor Ramsay’s review of the financial system external dispute resolution framework
- Insurance in superannuation: there should be close consideration of legislating universal key definitions, terms and exclusions for default MySuper group life policies. APRA’s prudential standards should provide for additional scrutiny of related party insurer engagements and a greater focus on ensuring the rules by which a particular status is attributed to a member in connection with insurance are fair and reasonable. Key provisions in the Insurance in Superannuation Voluntary Code should be enforceable by ASIC.
- Financial advice: The law should be amended to provide that ongoing fee arrangements must be renewed annually by the client, must detail the services the client will be entitled to receive and the total fees to be charged, and must only permit the deduction of fees from an account with the client’s express written authority. Disclosure should be strengthened in situations where an adviser does not meet the statutory concepts of ‘independent’, ‘impartial’ and ‘unbiased’. The Government should review, by the end of 2022, the effectiveness of measures implemented by the Government, regulators and financial services entities to improve the quality of financial advice. Grandfathering provisions for conflicted remuneration should be repealed as soon as is reasonably practicable.
The Government’s initial response to the report, Restoring trust in Australia’s financial system, briefly outlined its intent to take action in relation to all recommendations made by the Commission. The Government has subsequently released further details of its proposed response to particular recommendations, and has proceeded to implement some of those actions. In particular, the Government has:
- introduced amendments to the Superannuation Industry (Supervision) Act 1993 (SIS Act) to ensure that breach of a trustee or trustee director’s covenants or obligations would be enforceable by action for civil penalty and to prohibit trustees from ‘treating’ employers (see discussion below in relation to the ‘Member Outcomes Bill’)
- confirmed the details for capability review of APRA to be undertaken in the first half of 2019.
The Government has also announced it has given a direction extending the remit of the Australian Financial Complaints Authority’s (AFCA). This will require AFCA to consider financial complaints dating back to 1 January 2008 (the start of the timeframe considered by the Royal Commission) that have not previously been heard and which fall within AFCA’s current monetary limits and compensation thresholds. The Government will also strengthen regulatory oversight and transparency of remediation activities through increasing the role of AFCA in the establishment and public reporting of firm remediation activities. The Government’s proposals in relation to AFCA are more expansive than the recommendations made by the Commissioner.
The Opposition has also announced a more extensive compensation scheme and more expansive powers for AFCA than those strictly recommended by the Commission. The initial response from the Opposition confirmed its in-principle support for each of the Commission’s recommendations, and released a more detailed outline of its proposed actions on 22 February.
It is anticipated that the response to the Royal Commission will continue to feature heavily in pre-election policy announcements from both the Government and the Opposition.
APRA has indicated its commitment to expeditiously implementing the recommendations relating to its prudential and supervisory framework. Many of these will be addressed during 2019 and 2020, flowing from
APRA’s current post-implementation review of the prudential and reporting standards, while others will require legislative amendment.
ASIC has outlined its proposed response to the 12 Royal Commission recommendations that are directed at ASIC, or where the Government’s response requires action by ASIC, without the need for legislative change. The action to be taken by ASIC includes:
- working with industry in anticipation of the Parliament legislating reforms in relation to codes—including the Insurance in Superannuation Voluntary Code—and ASIC’s powers to provide for ‘enforceable code provisions’
- monitoring and reporting on the extent to which product issuers are acting to end the grandfathering of conflicted remuneration
- continuing to implement its commitment toward a stronger enforcement policy, including a ‘why not litigate?’ stance, and creating a separate Office of Enforcement within ASIC during 2019.
Superannuation reforms – progress of bills
Parliament concluded its current sitting on 21 February and is not scheduled to sit again until 2 April, the date of the Federal Budget. While progress was made on some important reforms during February, a long list of superannuation bills remains before Parliament. The future of these bills will depend on how quickly the Government moves to prorogue Parliament and call the election after the Budget is handed down.
‘Protecting Your Super Package’ and ‘Putting Members’ Interests First’
The Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 (“PYS Bill”) has now been passed by Parliament with significant amendments. The Bill seeks to implement the Government’s ‘protecting your super’ reforms, by modifying the circumstances in which insurance can be offered to members, imposing caps and a prohibition on the charging of certain fees, and expanding the circumstances in which inactive, low-balance accounts must be transferred to the ATO for consolidation. These reforms were announced by the Government in its May 2018 Budget.
The PYS Bill passed through the Senate in mid-February, with detailed amendments made by the Greens in agreement with the Government and later accepted by the House of Representatives.
In particular, the amendments:
- remove from the Bill provisions which would have made insurance opt-in for members under age 25 and for low-balance accounts (provisions effectively requiring members with inactive accounts to opt-in for insurance remain)
- extend the period of inactivity for an ‘inactive account’ and an ‘inactive low-balance account’ from 13 months to 16 months and prescribe a list of member actions that will mean the account is taken not to be an inactive low-balance account
- require the ATO to pay inactive account balances transferred to it under the new rules to an active account for the member, where satisfied it is possible to do so, within 28 days.
There were no amendments to the provisions in the Bill that impose a cap on administration and investment fees charged to members and prohibit the charging of exit fees. The commencement date for the PYS measures remains at 1 July 2019.
On 22 February, Treasury released a draft of regulations to implement the reforms in the PYS Bill, with submissions closing 1 March. The draft regulations address the details of certain notices that trustees must give to impacted members, administration of the fee cap, and how the ATO will determine which fund a member’s low-balance account should be consolidated into, where the member has more than one active fund.
On 20 February the Government introduced into Parliament the Treasury Laws Amendment (Putting Members’ Interests First) Bill 2019 (“PMIF Bill”), to progress the insurance reforms that were removed from the PYS Bill by the Senate.
The PMIF Bill includes amendments that prevent trustees from providing insurance on an opt-out basis to members who are under 25 years old and begin to hold a new choice or MySuper product on or after 1 October 2019, and to members who hold products with balances below $6,000. In all circumstances, the member may opt-in to insurance by making a direction to the trustee. The new measure builds on reforms implemented by the PYS Bill.
The explanatory material indicates that, generally a person who is under 25 years old and who began to hold a MySuper product or choice product before 1 October 2019 will not be impacted unless the product had, as at 1 July 2019, been inactive for 16 months or the balance of the product had not been more than $6,000 since that date. However, the measure will apply to members who hold a product on 1 October 2019 which has not had a balance of $6,000 or more since 1 July 2019. The amendments impose obligations on trustees to notify members who have insurance arrangements in place before 1 October 2019 and who might be affected by the new measure to provide these members with an opportunity to elect for their insurance to continue.
The PMIF Bill remains before the House of Representatives, awaiting debate.
Member outcomes
The Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 1) Bill 2017 (‘Member Outcomes Bill’) has been passed by the Senate with significant amendments, and now awaits consideration by the House of Representatives. The Bill proposes a wide range of reforms intended to enhance trustee accountability.
The Member Outcomes Bill was passed by the Senate in mid-February, with detailed amendments made by the Government, Opposition and Greens. The key amendments made in the Senate:
- impose civil and criminal penalties for contravention of the trustee and directors’ covenants in sections 52 and 52A of the SIS Act occurring from the day after the Bill receives royal assent. These amendments represent part of the Government’s response to the Royal Commission
- apply new criminal and civil penalties for breach of an expanded prohibition on ‘treating’ or ‘incentivising’ employers. Penalties will be imposed on trustees who use goods or services to influence employers to nominate the fund as their default fund, or influence employers to encourage their employees to nominate the fund as their chosen fund, where the contravention occurs from the day after the Bill receives royal assent. These amendments represent part of the Government’s response to the Royal Commission
- completely rewrite the annual outcomes assessment for superannuation products so it applies to both MySuper and choice products, with relevant ‘benchmarks’ and ‘comparable choice products’ to be specified in regulations. The outcomes assessment measure will continue to apply from the day after the Bill receives royal assent
- modify the portfolio holdings disclosure regime, to require trustees to ‘look through’ pooled superannuation trusts, clarify the disclosure obligation to ensure it applies equally in respect of all MySuper and choice products, and defer the first reporting date to 31 December 2019 (rather than 2018).
- The Bill, which was initiated in the Senate, now awaits consideration by the House of Representatives.
Other bills
In addition to the PYS Bill, several more bills relevant to superannuation were passed by Parliament during February:
- Treasury Laws Amendment (2018 Measures No 4) Bill 2018 – this Bill makes a number of amendments in relation to superannuation guarantee compliance and penalties, single touch payroll (extension to small employers from 1 July 2019), fund reporting, employee commencement, Superannuation Complaints Tribunal secrecy provisions, and the taxation treatment of deferred annuities and reversionary transition to retirement income streams.
- Social Services and Other Legislation Amendment (Supporting Retirement Incomes) Bill 2018 – this Bill implements changes announced in the Government’s May 2018 Budget, including new means testing rules to encourage the development and take-up of lifetime retirement income stream products.
- Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018 – this Bill the Senate l proposes a number of reforms to the penalties for certain criminal offences in ASIC-administered legislation, introduces new offences and significantly increases the penalties for others. The Bill, which implements some of the recommendations of the ASIC Enforcement Review Taskforce, was substantially amended by the Senate.
- Treasury Laws Amendment (Enhancing Whistleblower Protections) Bill 2017 – this Bill amends the various whistleblower protections so a single, strengthened whistleblower protection regime covers the corporate, financial and credit sectors – including superannuation funds. It also inserts a comprehensive regime into the tax legislation for the protection of individuals who report breaches of the tax laws or misconduct.
A number of other relevant bills remain before Parliament – some were recently introduced while others have been on the legislative program for some time:
- Treasury Laws Amendment (2019 Measures No. 1) Bill 2019 – this Bill was introduced into the house of Representatives during February and is yet to be debated. It includes amendments to the First Home Super Saver Scheme to bring forward the time that an individual can enter into a contract to purchase or construct their first home under the scheme. It also increases the maximum number of members for a self-managed superannuation fund or small APRA fund from four to six.
- Treasury Laws Amendment (Consumer Data Right) Bill 2019 – this Bill was introduced into the house of Representatives during February and is yet to be debated. The Consumer Data Right (CDR) is intended to provide individuals and businesses with a right to efficiently and conveniently access specified data in relation to them held by businesses, and will authorise secure access to this data by trusted and accredited third parties. The CDR will require businesses in designated industry sectors to provide public access to information on specified products they have on offer. The CDR will initially to banking (‘open banking’) and the energy sector, however the Productivity Commission recently recommended that it be extended to superannuation.
- Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 2) Bill 2017 – this Bill amends the superannuation guarantee (SG) law to provide that employees under workplace determinations or enterprise agreements made on or after 1 July 2018 have the right to choose their superannuation fund. It also provides that salary sacrificed amounts will not reduce an employer’s mandated superannuation guarantee contributions. The Bill remains before the Senate.
- Treasury Laws Amendment (2018 Superannuation Measures No 1) Bill 2018 – this Bill provides a one-off 12-month amnesty for unpaid superannuation guarantee (SG), allows a partial opt-out from SG for higher income earners with multiple employers, and makes integrity measures to support the 2016-17 Budget reforms. The Bill remains before the Senate.
- Treasury Laws Amendment (2019 Measures No. 1) Bill 2019 – this Bill makes minor amendments to the First Home Super Saver Scheme, increases the maximum number of members for a self-managed superannuation fund or small APRA fund from four to six, and repeals redundant rules that related to the transition of funds to the Superannuation Industry (Supervision) Act 1993. The Bill was introduced into the house of Representatives during February and is yet to be debated.
- Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 – this Bill seeks to impose design and distribution obligations on issuers of financial products and provide ASIC with a product intervention power. The Bill remains before the House of Representatives.
- Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017 – this Bill introduces a requirement that superannuation trustees have at least one third independent directors. The Government placed debate on this Bill on hold in the Senate and it is yet to come before the House of Representatives.
- Superannuation Objective Bill 2016 – this Bill seeks to legislate primary and subsidiary objectives for the superannuation system. The Bill was passed by the House of Representatives in November 2016 but has not been debated by the Senate.
- Corporations Amendment (Strengthening Protections for Employee Entitlements) Bill 2018 – this Bill proposes amendments to the Corporations Act 2001 to deter behaviours that prevent, avoid or significantly reduce the recovery of employment entitlements–including superannuation contributions–in insolvency. The Bill has been passed by the House of Representatives but has not been debated by the Senate.
- Treasury Laws Amendment (2018 Measures No 2) Bill 2018 – this Bill creates the framework for an enhanced ‘regulatory sandbox’ to support innovation in financial services. The Bill has been passed by the House of Representatives but has not been debated by the Senate.
