Post Royal Commission Governance - Part 3

Recommendations

The recommendations from Hayne’s Royal Commission into banking and superannuation have now been released.  In some ways, the reactions from the relevant public policy leaders in Canberra have been more interesting than the recommendations themselves. 

For superannuation, the recommendations are pretty straightforward and likely to affect retail funds more than industry funds.  But of course the devil will be in the detail and depend both on the fine print in the legislation and how regulators choose to enforce it.  For instance, Shadow Treasurer Chris Bowen has indicated that he intends giving APRA greater powers to shut down underperforming funds if the upcoming Federal election goes his way. 

Both Kenneth Hayne and Chris Bowen have given support for the Productivity Commission’s view that workers should be defaulted into one fund for life, to avoid accumulating multiple funds over a working life. 

Fund performance and attracting members a likely to be two key issues for industry funds to consider going forward. 

Let’s comment briefly on each of Hayne’s recommendations relating to super:

Recommendation 1 – No other role or office

What it says

The Trustee of an 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.

What that means

This could be read two ways.  It seems as though Hayne wants to ensure that bankers who primarily rely on their remuneration as a bank executive to not also act as Trustees for a bank managed super fund. The Commission demonstrated the impact of the obvious conflicts of interest.  However a literal interpretation of the recommendation, without considering Hayne’s intent, would mean that if you are a Trustee of an RSE Fund then you cannot take on any role (even one with an employer, union or even some other independent vocation).

What might happen

Which route we go down will be highly dependant on how the legislation is drafted, and politically this could be one of the most contentious.  We think Labor’s approach will be to follow Hayne’s intent and limit the restriction to stop employees of the managing institution acting as Trustees, however the Coalition may want to push for some other definition.    

Recommendation 2 – No deducting advice fees from MySuper accounts

What it says

Deduction of any advice fee (other than for intra-fund advice) from a MySuper account should be prohibited.

What that means

This recommendation aims to stop institutions that offer multiple financial products using a MySuper account as a honey-pot to collect fees from.  Only advice relating to say the appropriateness of the Balanced Option versus the Cash Option can have a fee deducted.  This recommendation clearly hurts banks more than industry funds given the latter don’t really offer multiple products, however many industry funds offer a full financial planning service and care will need to be taken to ensure that fees for non-super advice are not taken from the Fund.

What might happen

We expect this to be adopted without too much fuss, regardless of which side of parliament drafts the legislation.  Regulators may well use this as a discussion point with Funds they have already identified as generating high levels of income from in-house planners.

Recommendation 3 – Limitations on deducting advice fees from choice accounts

What it says

Deduction of any advice fee (other than for intra-fund advice) from superannuation accounts other than MySuper accounts should be prohibited unless the requirements about annual renewal, prior written identification of service and provision of the client’s express written authority set out [in a recommendation relating to Financial Advice] in connection with ongoing fee arrangements are met.

What that means

This allows Funds that have acquired clients via a choice mechanism to charge for financial advice from their Fund only if the client is fully informed and clearly authorises it in writing.

What might happen

We don’t think this will create any political hurdles.  This recommendation will nonetheless provide some scope for both retail and industry funds to provide full financial planning services to clients.

Recommendation 4 - No Hawking

What it says

Hawking of superannuation products should be prohibited. That is, 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. The law should be amended to make clear that contact with a person during which one kind of product is offered is unsolicited unless the person attended the meeting, made or received the telephone call, or initiated the contact for the express purpose of inquiring about, discussing or entering into negotiations in relation to the offer of that kind of product.

What that means

This recommendation aims to stop an institution selling a superannuation product in the same meeting that a client intended to discuss some other product.  This sales tactic previously used by a number of retail funds was highlighted by the “In good hands” commercials.

What might happen

We don’t think this will create any real political hurdles.

Recommendation 5 - One default account

What it says

A person should have only one default account. To that end, machinery should be developed for ‘stapling’ a person to a single default account.

What that means

The Productivity Commission’s report into Superannuation recommended workers default into one of 10 government recommended Funds.  With this recommendation Hayne is putting his support, and substantially more political capital behind the idea of doing something to ensure workers only have one super fund for life.

What might happen

Recommendations from the Productivity Commission are routinely ignored by parliament.  On the release of the PC report however, Bowen indicated he supported the principle of one-fund-for-life.   Hayne’s support brings that recommendation much closer to political reality, however we are very dubious whether the concept of a “Best in Show” panel of 10 will be politically acceptable.

Recommendation 6 – No treating of employers

What it says

Section 68A of the SIS Act should be amended to prohibit trustees of a regulated superannuation fund, and associates of a trustee, doing any of the acts specified in section 68A(1)(a), (b) or (c) 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 provision should be a civil penalty provision enforceable by ASIC.

What that means

This would have to be one of Hayne’s most convoluted recommendations.  If you replace the word ‘treating’ with the word ‘schmoozing’ it makes a lot more sense.  This is the recommendation that the AFR is referring to as the ‘Hostplus clause’.

What might happen

The Royal Commission has clearly been good to industry funds and going forward the suite of recommendations from Hayne are likely to make retail funds far less competitive.  We therefore think the need for this kind of marketing to diminish from industry funds, and ultimately this recommendation to be legislated without any real political hurdles.

Recommendation 7 – Civil penalties for breach of covenants and like obligations

What it says

Breach of the trustee’s covenants set out in section 52 or obligations set out in section 29VN, or the director’s covenants set out in section 52A or obligations set out in section 29VO of the SIS Act should be enforceable by action for civil penalty.

What that means

Trustees are fiduciaries.  Their primary responsibility is to members.  If you’re a Trustee and ignore this rule, you might just wind up in court.

What might happen

We don’t think this will create any real political hurdles.

Recommendation 8 – Adjustment of APRA and ASIC’s roles

What it says

The roles of APRA and ASIC with respect to superannuation should be adjusted [as detailed in another recommendation]

What that means

Going forward APRA should be responsible for ensuring the overall superannuation system retains its integrity.  Specifically, Hayne referred to the maintenance of stability, efficiency and competition.

ASIC on the other hand should be responsible for policing the conduct of Fund’s in relation to individual members.

What might happen

Try as they might, no one has yet been able to regulate an appropriate culture – and this goes for developing an appropriate culture within regulators as well.  Another Hayne recommendation is to introduce a government entity to oversee both APRA and ASIC. 

Don’t be surprised if a change of duties between regulators becomes clumsy at times.  There is also a risk of over-compliance and over-reach.

This will probably be the biggest threat to Fund’s with less than $10b under management.

Recommendation 9 – Accountability regime

What it says

Over time, provisions modelled on the BEAR should be extended to all RSE licensees, as referred to in [another recommendation]

What that means

The Bank Executive Accountability Regime (BEAR) was designed to ensure that banks nominated an accountable executive for each responsibility the bank has to the system and to consumers.  This lets regulators know who to hold personally accountable if something falls over. Hayne wants that to be extended to RSE Funds.

What might happen

We don’t think this will create any real political hurdles.  Indeed, we think the concept of attaching accountability to individuals within an organisation is a component of good governance.  However, unless the culture of the broader organisation allows the accountable executive to really change how a business operates the biggest impact may be on the personal risks individual executives take.

Other commentary in the report

In addition to the specific recommendations made by Hayne, the body of the Final Report also provided his views on some matters that may well be taken up by the Regulators. 

In a section on Governance, Hayne discusses the importance of board composition to ensure that “all directors must give priority to the interests of members over the interests of any other person (including whatever person or body may have nominated the director to serve in that office)”.

Hayne also includes a section on mergers and says “a MySuper product must determine annually that there is sufficient scale, in terms of assets and beneficiaries, such that the financial interests of beneficiaries are not disadvantaged relative to the financial interests of beneficiaries in MySuper products of other RSEs”. 

Our view is that true member interests are not just a function of scale and costs. Would car buyers and restaurant goers feel their interests are always best served with the lowest cost option?  Ensuring that regulators agree may not be so easy.

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