AIST Policy News - 2 November 2018

AIST Policy News - 2 November 2018

Productivity Commission drills down on profit-to-member outperformance

A new report from the Productivity Commission points to a correlation between good governance and out-performance of profit-to-member funds.

The report – released this week as a supplementary analysis to the Commission’s inquiry into the efficiency and competitiveness of superannuation – also found that at a system level, Australian funds (on average) achieved comparable returns to pension funds in other countries for most major asset classes. This is despite a finding that more than three million Australians are in under-performing super funds – the vast majority of which are retail funds.

Drilling down on the outperformance of the profit-to-member super sector, the Commission suggested that smarter investment decisions within asset classes as well as “governance efficacy” were contributing to the sector’s higher returns.

Commenting on the Commission’s report in the Australian Financial Review this week, AIST CEO Eva Scheerlinck said the Commission’s analysis of performance by asset class put to bed the argument that the outperformance of profit-to-member funds could be simply explained by differences in asset allocation.

While the Commission did not specifically explore funds’ overall governance, the report suggests governance efficacy - as an indicator of key intangibles such as trustee and investment team calibre, investment process and management of conflicts – plays a role in outperformance of the profit-to-member sector.

Noting that the use of related parties was more prevalent in the retail sector, the Commission suggested that the use of related parties might reflect poor governance when it was associated with higher indirect investment expenses. 

AIST has reiterated its call to the Australian Prudential Regulation Authority (APRA) to investigate related party arrangements in the retail sector, which are impacting members’ retirement savings.

The Commission is set to deliver its final report to the Government before Christmas.

Treasury delays CIPR timetable by two years

Treasury has pushed out the implementation deadline for funds to have a Comprehensive Income Product in Retirement (CIPR).

Speaking at the Financial Services Councils (FSC) conference this week, Assistant Treasurer, Stuart Robert announced that there would be two changes to the retirement income framework:

  • Extending the timeframe for trustees to offer a CIPR by two years to 1 July, 2022.
  • Raising the threshold account balance for a CIPR to be offered from $50,000 to $100,000.

Funds must still have a retirement strategy in place by 1 July 2020.

Mr Robert also announced technical changes to correct errors in transactions involving income streams. The changes will:

  • Ensure that death benefits which contain life insurance proceeds are not subject to tax if they are rolled over; and
  • Ensure that innovative income streams which are paid by instalments; commuted, rolled-over or merged market-linked pensions; and reduced and reclassified public sector DB reversionary pensions are appropriately treated under the transfer balance cap.

Royal Commission update

AIST has made two further submissions to the Royal Commission covering a wide range of key questions raised in the hearings and interim report.

The first submission on the policy issues raised in round 6, covers AIST’s responses to questions about the adequacy of the current regulatory regime; whether there is a need for standardised life insurance definitions; the adequacy of the current disclosure regime for insurance in super; conflicted remuneration; and more.

The second submission in response to the FSRC’s Interim report, covers vertical integration; grandfathered commissions; disclosure; and the role of regulators.

Next hearings

Meanwhile, the seventh and final round of the Commission’s public hearings is set to begin in Sydney from Monday 19November to Friday 22 November, before moving to Melbourne where the hearings will run for a final week, from Monday November 26 to Friday 30 November.

The seventh round of hearings will focus on policy questions arising from the first six rounds and so will include a focus on superannuation policy.

AFCA opens for business

The Australian Financial Complaints Authority (AFCA) is now officially open for business. All complaints relating to financial providers, including superannuation funds, will now be heard at AFCA.

With the launch of AFCA yesterday, the Superannuation Complaints Tribunal (SCT) will no longer receive new complaints. The launch of AFCA is also a timely reminder for funds to ensure that all their member communications are up to date and comply with the law.

While membership of AFCA was required from 21 November, there are several entities yet to join, particularly members of the Credit and Investments Ombudsman. All 55 AIST member funds have signed on to AFCA.

To assist member funds with the transition to AFCA, AIST has prepared a ‘transition toolkit’ which is available from our website for download here.

APRA signals tougher approach to misconduct

The Australian Prudential Regulation Authority (APRA) has signaled it will toughen its approach to misconduct in the financial sector in the light of evidence from the Royal Commission hearings.

In its submission to the Royal Commission’s Interim Report, APRA notes that while historically its focus has been on prudential risk taking and long-term financial soundness, the evidence before the Royal Commission highlights the need “for APRA to examine the means by which it can more actively contribute to a regulatory framework that limits the potential for misconduct to occur in the future.”

APRA said it accepted the Commission’s point that prudential supervision could be better leveraged to address and prevent poor conduct.

The regulator further noted that behavioural change will only occur if boards take ownership for the actions of their organisations and the consequences of those actions.

Support for opt-in insurance

In a second submission on the Round 6 hearings into insurance, APRA reiterated its support for limiting the offering of insurance to an opt-in basis for MySuper member below the age of 25 years and on low balance accounts below $6000.

Noting concerns about insurance premiums eroding member balances, APRA said it supported more cost effective and simpler insurance benefits in MySuper products, such as increased standardisation of aspects of the benefits provided.

APRA also acknowledged the need to strengthen trustee requirements in relation to arrangements with potential conflicts, including governance arrangements and assessing performance; and the authority and independence of the RSE Licensee within corporate structures. It notes the need to deepen its supervision of related party arrangements, particularly within conglomerate groups.

AIST warns Senate about flaws in Product Design Bill

AIST has warned the Senate about flaws in the Bill on product design and accountability.

Appearing yesterday before the Senate Economics Legislation Committee examining the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018, AIST’s senior policy manager, David Haynes, said while AIST supported key objectives of the Bill, consumer protections had been weakened by omissions and carve outs.

This included carve outs for legacy products which should be included in the Bill to ensure these products were still appropriate consumer needs.

This included carve outs for legacy products which should be included in the Bill to ensure these products were still appropriate consumer needs.

Mr Haynes also noted that the complete chain of product manufacture should be included in the Bill.  He said obligations needed to be broader than just the PDS issuer and should expanded to include the product provider or parent.

A full transcript of the yesterday’s hearing can be found here. AIST’s most recent submission on the Bill can be found here.

Welcome move to change WA law on de facto super splitting

AIST has welcomed an announcement by the Federal Attorney-General that separated de facto couples in Western Australia will soon be able to achieve a fair split of their superannuation assets in property settlements.

Attorney-General the Hon Christian Porter announced last week that the Morrison Government will amend the Family Law Act 1975 to allow for the move, ending a decade-old stalemate between the WA and Commonwealth Governments.

Earlier this year, AIST and several of our member funds, notably HESTA and WA Super, advocated strongly for the WA family law system to be brought into line with the federal system.

AIST has previously noted that the previous laws were inequitable and out of step with every other Australian State.

Under the existing law in WA, de facto couples are denied the same rights as married couples and are at risk of not achieving the same financial outcomes as others. This has particularly disadvantaged many WA women in property settlements, where their partner’s superannuation is the main asset.

AIST will be urging the Government to introduce the legislation into Parliament as soon as possible.

Work test exemption for recent retirees

AIST lodged its submission to Treasury on the new one-year work test exemption. The submission covers conflicts with the brings forward rule; excessive requirements for trustees and members; uncertainty regarding spouse contributions; and uncertainty regarding reporting.

AIST supports this measure, however we have reservations that the avoidance of conflict with the bring forward rule is designed to solve a problem which is likely to affect few members and is very easily circumvented. 

Access a full copy of our submission here.

AIST also has concerns about the imposition of excessive requirements on members and trustees to implement this measure, and have raised questions about spouse contributions and reporting.

Mandatory reporting on life insurance claims and disputes

The Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) have teamed up to develop a new reporting standard on life insurance claims.

The new standard will make it mandatory for life insurers to report data on claims and disputes, with the two regulatory bodies stating that this will enhance the consistency and quality of life insurance data.

TheLife Insurance Reporting Standard LRS 750.0 Claims and Disputesis aimed at helping the regulators identify emerging problems, assess product value and take action to improve consumer outcomes.

The first public release of data collected under the new standard is due in early 2019, with ongoing publications to be issued every six months.

Copies of LRS 750.0 Claims and Disputes and related documents are available on APRA’s website.

FRC releases audit quality survey

The Financial Reporting Council (FRC) has joined forces with the Australian Auditing and Assurance Standards Board (AUASB) to gather views on auditing quality around Australia.

The FRC is seeking the feedback from those who use audited financial reports as part of decision making in their role such as CIOs, portfolio/investment managers and research analysts.

The short survey explores perceptions of audit quality, the value of auditing, and what influences the process.

The survey can be accessed via and should be completed by 19 November.

AIST recommends sharing this link with others in your fund who use financial reporting to allow them to have their say.

The FRC has a mandate to monitor the quality of audits in Australia, an important issue which has received considerable commentary both in Australia and internationally.

ASIC releases annual report

The Australian Securities and Investments Commission (ASIC) has released its annual report, providing an insight into the regulator’s year.

ASIC’s reported enforcement action for the year includes:

  • $42.2m in civil penalties
  • 27 enforceable undertaking accepted
  • $351.6m in compensation and remediation returned to investors and consumers
  • 50 people disqualified or removed from directing companies

Access the annual report here.

Report on enforceable undertakings

The University of NSW has released findings on how successful the Australian Securities and Investments Commission (ASIC) enforceable undertakings are at deterring financial misconduct.

Participants in the study were from a range of financial sector companies including credit peer providers, financial services peer providers, professional advisers, consumer advocates and ASIC themselves.

Industry perceptions of enforceable undertakings ranged from neutral to generally favourable. One participant described enforceable undertakings as “‘a useful and flexible part of the toolkit which ASIC has for resolving differences and providing certainty.”

The study was in response to a recommendation from the Australian National Audit Office (ANAO) that ASIC should periodically assess the effectiveness of enforceable undertakings.

Read the full report here.

Public Prosecutor flooded with complaints

The Commonwealth Director of Public Prosecutions (CDPP) has warned a Senate Estimates committee that they are under resourced to deal with the increased number of legal cases stemming from the Financial Services Royal Commission.

CDPP director Sarah McNaughton SC said it would have to “de-prioritise” other work if ASIC began referring a significant number of cases to the prosecutor.

Ms McNaughton has met with the Attorney General, Christian Porter and other ministers to discuss possible funding boosts.

Government pledges to increase misconduct penalties

The CDPP’s admission before the senate committee comes at the same time that the Government has announced it will be introducing legislation to strengthen current penalties for serious financial misconduct.

Under the new legislation, individual penalties will rise from 5 years imprisonment up to 10 years, with the possible financial penalty also greatly rising.

Corporations given the maximum penalty will rise from $210,000 to $9.45 million.

Maximum civil penalties will also rise, with individuals facing a fine of $10.5 million, up from $200,000. Corporations will risk a $10.5 million fine, ten times more than the previous penalty.

New chair announced for HESTA

Former Attorney General, Nicola Roxon will become HESTA’s Independent Chair in 2019, with current Chair Angela Emslie due to step down at the end of the year.

Announcing the appointment, HESTA CEO Debby Blakey said Ms Roxon’s rich experience in health and governance would be a huge asset for the fund.

Ms Roxon said she had long admired HESTA “for its leadership in responsible investment and stewardship, and its gutsy advocacy on issues that matter for members.”

Ms Blakey paid tribute to the contribution of current Chair Angela Emslie, who has been a Director of the fund for over 20 years and Chair since 2010.

“A true pioneer in responsible investment, Angela has been an inspiring leader and influential advocate for members and the industry fund sector. Angela’s also been an incredible support and mentor to so many in the industry, including me, for which I am enormously grateful.” Ms Blakey said.