While many of the Royal Commission headlines this week have focused on misconduct by specific trustees, initial comments imply a wider conversation about whether the super industry is leaving consumers in the dark – how can this be fixed?
When considering Counsel Assisting Michael Hodge’s opening comments to the Commission – which are based on submissions from industry and consumers – there’s a sense that even though superannuation is a cornerstone of the Australian economy, accounting for around 50% of total household wealth, it’s not particularly transparent. And this lack of transparency may lead to poorer member outcomes, contravening trustees’ obligations under the Superannuation Industry (Supervision) Act.
Of course, as Hodge noted, this problem is exacerbated by the fact that the average Australian isn’t particularly financially literate. Based on statistics from the Australian Bureau thereof, about 44% of Australians aged 15 to 74 have a financial literacy level of two or below – with three being the “minimum required for individuals to meet the complex demands of everyday life and work in the emerging knowledge-based economy,” as per the Cooper Review.
Given the above, where does that leave Australian consumers – and, indeed, the financial advisers looking to assist them?
A regulatory blind spot?
The two main regulatory bodies overseeing the super industry are ASIC and APRA, the latter of which aims to promote financial system safety and stability. Hodge suggested there may be an “inherent tension between, on the one hand, maintaining stability and, on the other hand, the destabilising effect for one or more entities of public enforcement action.”
Referring to ASIC, Hodge said that its regulatory powers with respect to super fund governance and members’ best interests is fundamentally limited. It is, for example, not responsible for overseeing trustee directors’ compliance with their SIS Act obligations, and as a result would need “additional powers” if it were to become a conduct regulator for the industry.
Because of this, Hodge said, “there is not presently a dedicated conduct regulator for superannuation trustees in Australia,” leaving consumers “unable to do anything more than peer dimly through the darkness of their superannuation trustees.”
It follows, then, that the Commission may eventually seek to expand ASIC’s powers so as to give it greater oversight of superannuation trustees.
Grandfathered commissions
Focusing on the retail fund sector, Hodge noted that some funds permit paying grandfathered commissions to financial advisers, which may lead to members being kept in a fund even if it is against their best interests.
“The payment of commission may cause those members to be kept in the fund,” Hodge explained, leading to questions about “structural arrangements of the trustee and whether they are sufficient to monitor advice being provided to members of the fund and paid for out of the superannuation assets by the trustee.”
It stands to reason that as the capital-c Commission progresses, there will be a greater spotlight put on how superannuation members pay for advice and what constitutes value to consumers in this context.
Hidden costs
Costs disclosure in super is already a hot-button issue, especially since ASIC has recently rolled out the independent review of its RG97 disclosure regime. But there were other costs discussed in Hodge’s opening remarks that suggest consumers – and possibly your clients – are interested in more than just investment manager fees.
Marketing collateral – and super funds’ ownership of certain media channels – was highlighted as a particular concern. It was suggested that there are concerns around whether super funds may be eroding existing members’ returns by regularly advertising for new ones.
On the other hand, it can also be argued that the scale advantages of attracting new member funds outweigh these ongoing costs, so it will be interesting to see how these issues are handled in the coming weeks.
Early days
There’s still a lot more to go in this round of hearings, but it’s always important to consider how even these initial conversations may lead to structural changes in Australia’s $2.6 trillion superannuation industry. And more immediately, it’s likely going to lead to more questions from clients about their wealth.
The opinions expressed in this content are those of the author shown, and do not necessarily represent those of No More Practice Education Pty Ltd or its related entities. All content is intended for a professional financial adviser audience only and does not constitute financial advice. To view our full terms and conditions, click here.
