AIST Policy News - 24 August 2018

AIST Policy News - 24 August 2018

Royal Commission open findings due out today

The Royal Commission is due to hand down “open findings” on the Round Five hearings on superannuation later today.

This follows an intense fortnight of hearings into superannuation, which culminated last Friday with a powerful closing statement by Senior Counsel Assisting, Michael Hodge, QC.

Further submissions are now being sought by the Commission (see key dates below) ahead of the next round of hearings on insurance, which will commence on September 10.

The Round Five hearings examined a range of issues in superannuation including the charging of fees for no service, conflicts of interests, commissions, marketing expenses, multiple accounts, related parties, delayed transitions to MySuper and failed mergers.

AIST has a long history of raising concerns to the Government, Treasury and the regulators about the delayed transition of accrued default accounts [ADAs] to MySuper, dating back to 2011. Our advocacy on this issue was noted in media coverage in the Age/SMH newspaper and also in the Australian newspaper, which pointed to a 2014 AIST media release calling on APRA to shed light on the high fees being charged on ADAs.

AIST will provide a full summary of the open findings to Round Five next week. In the meantime, here is a summary of the key questions and observations raised by Mr Hodge in his closing statement:

  • Some trustees fail to put the interests of members ahead of other interests. Particular examples of this include charging fees for no service, grandfathered commissions, delaying transitioning members to MySuper to entrench trail commissions, fees resulting in members receiving negative returns, and failure to oversee products distributed by related parties.
  • Some trustees fail to exercise their discretion independently, in breach of their fiduciary duties. Outsourcing to related parties is a particular concern.
  • There are problems with confusing and misleading communications to members, including disclosure about fees, tax surpluses, transitioning to MySuper, compensation and commissions.
  • Members are vulnerable, and can be readily taken advantage of, like most beneficiaries

Mr Hodge asked six questions:

  1. Do structural arrangements such as related party investment managers and advice business create problems for trustees complying with fiduciary duties?
  2. If yes, is structural change through law reform warranted?
  3. Is other law reform, for example banning grandfathered commissions or ongoing advice fees deducted from member accounts, warranted?
  4. Do laws prohibiting misconduct need to be strengthened, or should regulators make better use of existing laws?
  5. What would prompt regulators to act. For example is the allocation of regulatory roles right?
  6. Are other structural tweaks required, for example stapling members to a fund to prevent multiple accounts, or requiring shareholders to act in the best interest of members?

Key dates ahead for the Commission are as follows:

  • 10 to 21, September Round 6 hearings on insurance
  • 28 September: Closing date for online submissions. 
  • By 30 September: Interim report due
  • October: Commission reviewing submissions
  • 19-30 November: Round 7 – consideration of policy issues
  • 1 February, 2019: Final report submitted

Morrison to announce ministry over the weekend

Newly-appointed Prime Minister, Scott Morrison, has said that he will announce his ministry over the weekend. This may mean a change of portfolio for the current Minister of Financial Services, Kelly O’Dwyer. As always with a new prime minister, wholesale changes are expected. Former Assistant Treasurer, Josh Frydenberg, who at one stage had responsibility for superannuation, is the new deputy PM.

The Government has until May next year to call a general election, but much will depend on its performance in the expected by-election for former Prime Minister Malcolm Turnbull’s seat of Wentworth.

AIST calls for extension to implementation deadline for Budget reform package

AIST has urged the current Federal Minister of Financial Services, Kelly O’Dwyer, to extend the implementation deadline for the Budget package of super reforms.

In meetings with Minister O’Dwyer and other key politicians this week in Canberra, AIST CEO Eva Scheerlinck called for an additional 12 months transition timeframe for the key reform package, now before the Senate.

The key reforms include the banning of exit fees and the capping of administration fees; all inactive accounts under $6000 to be transferred to the ATO; and funds having to switch to opt-in insurance for the under 25s, small accounts and inactive accounts.

AIST notes that the industry faces many challenges in implementing key reforms by the current July 2019 deadline, which will require every fund to re-price its fees and insurance for every member.  AIST is particularly concerned that the tight timeframe will leave the industry vulnerable to having to quickly renegotiate group insurance contracts with a small number of insurers. This could result in steep premium increases for members.  

Government’s rejection of Senate recommendations a setback for the Australian women

AIST has expressed its disappointment on the Government’s rejection of key recommendations contained in the 2016 Senate report - ‘A Husband is Not a Retirement Plan - Achieving economic security for women in retirement’.

The Senate report recommended much-needed reforms to improve the outcomes of Australian working women in retirement including scrapping the $450 monthly payment threshold for super; bringing forward the raising of the Superannuation Guarantee to 12%; super on paid parental leave and better targeting of super tax contributions. These reforms were rejected by the Government, which noted instead it had extended the spouse offset for superannuation contributions and (from July 2018) will allow people with low super balances of less than $500,000 to make significant catch up contributions.

AIST CEO Eva Scheerlinck said the Government’s rejection of crucial reforms to improve retirement outcomes for women and its emphasis instead on measures to extend the spouse offset for superannuation contributions and encourage women to make catch-up contributions was inadequate and out of step with reality.

“Extending the spouse offset and allowing higher catch up contributions will do nothing to help ordinary working women who may not have the spare cash to put more into super, nor will it do anything to help divorced and single women who experience some of the poorest outcomes in retirement,” Ms Scheerlinck said, who noted it was also disappointing that the Government had taken more than two years to respond to the Senate report.

The 2017 Australian Services Union/Per Capita report ‘Not So Super for Women’ found that women retire with 47 percent less super than men and that one of the main sources of retirement poverty was the breakdown in relationships.

AIST raises concerns to Treasury about proposed legislation on product design

AIST has met with Treasury to raise concerns about draft legislation on product design and distribution obligations.

AIST believes that the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Power) Bill 2018 are likely to be ineffective due to the lack of consistent disclosure and reporting regulation across the super industry.

The Bill (if enacted) would require entities issuing PDSs to undertake target market assessments of products and will give the Australian Securities Investment Commission product intervention power where there is a significant consumer detriment risk.

Concerns raised in AIST’s submission include:

  • That systemic gaps in the disclosure and reporting framework puts a question mark onevidence-based triggers for ASIC and whether all stages of the chain of intermediated models of product and distribution would be captured, and should be.
  • The proposals would have target market obligations only being imposed on entities issuing PDSs.
  • International trends are that the product ‘manufacturers’ should also be caught by the obligations.

Government releases draft legislation to combat phoenix activity

The Government has released draft legislation for a comprehensive package of reforms to combat illegal phoenixing. These measures will both deter and disrupt the core behaviours of illegal phoenixing and more harshly punish those who engage in and facilitate this illegal activity, including pre-insolvency advisers.

Phoenixing occurs when the controllers of a company strip the company’s assets and transfer them to another company, to avoid paying the original company’s debts. The Phoenixing Taskforce’s recently published report estimates the cost of illegal phoenxing to the Australian economy at between $2.85 billion and $5.13 billion annually, which includes employees missing out on superannuation payments.

The reforms include:

  • Creating new phoenix offences to target those who engage in and facilitate illegal phoenix transactions;
  • Preventing directors from backdating their resignations to avoid personal liability;Preventing sole directors from resigning and leaving a company as an empty corporate shell with no directors;
  • Restricting the voting rights of related creditors of the phoenix company at meetings regarding the appointment or removal and replacement of a liquidator;
  • Making directors personally liable for GST liabilities, as part of extended director penalty provisions;
  • Extending the ATO’s existing power to retain refunds where there are outstanding tax lodgements.

Stakeholders are invited to lodge submissions online via the Treasury website by 27 September 2018.

New second deputy chair for APRA

The Government has created a second Deputy Chair which it says will ensure APRA has the capabilities to effectively carry out its mandate.

Mr John Lonsdale has been nominated for a five year term to fill the second Deputy Chair position. Mr Lonsdale was most recently the Deputy Secretary, Markets Group at the Treasury.

Announcing the appointment, then Treasurer Scott Morrison, said Mr Lonsdale would bring to APRA a deep knowledge of the financial system and policy expertise acquired in his over 30 years at Treasury. Mr Morrison said Mr Lonsdale also played a critical role in helping to shape the current regulatory agenda in Australia through his role as head of the Secretariat of the Financial System Inquiry in 2014.

Vale John Burge

It is with sadness that AIST announces the death of long-serving CareSuper director, John Burge who resigned from the CareSuper board in 2014.

John’s talent as a super fund director and his commitment to the profit-to-member super sector was acknowledged in 2007, when he received AIST’s Trustee of the Year Award at the Conference of Major Superannuation Funds.

John was chair of Finsuper prior to its merger with Superannuation Trust of Australia in 2005. He was also independent director on the board of Hostplus from 2003 to 2006.