Regulator update - 2019 Annual Superannuation Law Conference
A speech by ASIC Commissioner, Sean Hughes delievered at the 2019 Annual Superannuation Law Conference, Law Council of Australia, Friday, 8 March 2019, QT Hotel Gold Coast, QLD
Thank you to the Law Council for inviting me to speak today. I am delighted to be sharing this session with my colleague Eve Brown from APRA.
Let me begin by acknowledging the traditional owners’ ongoing connection to and custodianship of the lands on which we meet today. I pay my respects to elders past, present and emerging.
I also acknowledge International Women’s Day today, and the important work being done to redress imbalance, distortion and discrimination in our society.
I am grateful for the opportunity to speak to you today. It is – as it always seems to be the case – a time of change in superannuation.
My focus for today will be to discuss and reflect on the findings and recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (or the ‘Financial Services Royal Commission’ as it is more commonly known), and what this means for the superannuation industry, with a focus on rebuilding trust.
Whilst most of the discussion today will be in one form or another on the Financial Services Royal Commission, I want to focus my remarks on three important aspects. Firstly, the Royal Commission and how we ended up here. Next, the focus for ASIC in 2019 and beyond. And lastly, what this means for the superannuation industry.
While the work that lies ahead may seem challenging, it is an effort that must be made. It is important to remember that these changes have one critical purpose—to rebuild community trust. And we all have a part to play.
Financial Services Royal Commission—poor conduct in superannuation
Before considering the implication of the recommendations it is important to first remember the ‘why’, why did we have a Royal Commission in this area? In other words, what failed our community?
Poor consumer experience is the why and the what—and specifically, unjustly poor consumer experience. This is highlighted by the case studies presented to the Royal Commission and the many other stories featured in public reporting. Regardless of legal technicalities, these stories matter not just to individual members and consumers, but to the reputation of the market as a whole, and in combination, led to the erosion of public trust and the failure by industry to meet community expectations.
The Financial Services Royal Commission has allowed the world to see the bad behaviour that we, as regulators, come across all too often in our everyday work. The public hearings held by the Royal Commission helped to bring this behaviour to life by highlighting the human impacts and personal costs of misconduct.
To those critics who would say the case studies presented an unrepresentative vista of consumers’ and members’ experiences, we would point out that there were (and are) many, many other stories which went untold in the time the Royal Commission had available to it.
The Royal Commission has made important recommendations about changes needed to Australia’s financial services regulatory framework to address this behaviour, with a number of these recommendations being specific to superannuation.
While industry superannuation was not front and centre of the focus of the hearings, there were significant areas of concern highlighted including in relation to the best interest obligation.
The Royal Commission case studies concerning superannuation highlighted that superannuation trustees do not always act in the interests of their members. As you may be aware, 9 of the Royal Commission recommendations relate specifically to superannuation, as do a number of the 11 referrals to ASIC. The behaviour that has been highlighted in the Royal Commission has led to unacceptably poor member outcomes in superannuation which must stop if Australians are to have real trust in the superannuation system.
Some examples of the types of unacceptable conduct that were highlighted in the Royal Commission that relates to superannuation include:
- poor governance and the management of conflicts of interest
- failing to act in the best interests of members, including in fees charged, grandfathered commissions or in the delays to the transitioning of members to MySuper
- issues around fees for no service, and
- poor practices to gain and retain members, including the use of inducements to encourage employers to select a fund as the default for their employees, as well as the use of fund monies for expenses that may not be appropriate.
The Royal Commission report also highlighted the considerable consumer harm arising from the complexity and misunderstanding about insurance and claims handling.
ASIC welcomes the Royal Commission report recommendations. Not only do they align with the changes we have called for, they also align with the work we have been doing in superannuation. Something I will now speak about.
ASIC’s work in superannuation
Before I turn to ASIC’s work and focus in superannuation, I want to first highlight ASIC’s approach to superannuation.
ASIC’s approach to the work we do in superannuation is guided by our vision statement that aims:
- for a fair, strong and efficient financial system for all Australians.
Similarly, in super we are seeking to oversee a fair, strong and efficient superannuation sector.
To realise this vision, we use all our regulatory tools to:
- change behaviours to drive good consumer and investor outcomes
- act against misconduct to maintain trust and integrity in the financial system
- promote the strong and innovative development of the financial system, and
- help Australians to be in control of their financial lives.
Our work in superannuation is focussed on consumers, and on promoting good consumer outcomes. This focus should be the same for the superannuation industry as you seek to rebuild consumer confidence and trust.
To achieve our aim, our interest in superannuation is broad and covers topics such as insurance, complaints, advice, promotional activities, as well as disclosure and those conduct obligations that come with having a financial services licence. So, we focus on member outcomes to minimise the harm from behaviour falling within our jurisdiction.
Consistent with this, let me take you through some of our recent work in superannuation:
Insurance in Super
In September last year, we issued Report 591 Insurance in Super which highlighted some of the issues relevant to the consumer experience of insurance provided through superannuation such as claims and complaints handling problems and the use of smoker defaults.
Following on from this, ASIC is doing follow up work on the issues highlighted in Report 591 to improve industry practices. This includes:
- working with APRA to see how the implementation and coverage of the Insurance in Superannuation Code of Practice improves industry practices
- taking regulatory action against trustees that consistently fail to comply with their legal obligations in relation to disclosure and complaints handling, including potential enforcement action, and
- helping consumers understand insurance in superannuation by providing them with useful and independent information on ASIC’s MoneySmart website that helps them engage with their superannuation.
Particularly following the recommendations from the Royal Commission, there is heightened regulatory focus on the provision of insurance through superannuation funds. Aligned to the work ASIC is doing in this space, the Royal Commission report recommended that:
- insurance codes become enforceable
- a review be undertaken of universal terms, and
- APRA increase its expectations in relation to insurance provider choice and status for insurance purposes.
Additionally, the passing in the Senate of the Protecting Your Super package provisions which make insurance opt out for accounts inactive for 16 months means there are immediate issues for trustees to consider. On this, we encourage trustees to message consumers as consistently across the industry as possible and to take care to ensure that consumers are provided with accurate not misleading information about their inactive account.
The next area of work I want to discuss is the changes to internal dispute resolution arrangements which are tied to the work on insurance in super.
As you may be aware, AFCA has been the external dispute resolution body since 1 November 2018. In their first month, 8% of the complaints were about superannuation.
In December last year we released a report (Report 603) on the consumer journey through the internal dispute process of financial services providers. It showed that this is not always a positive experience for consumers, including in superannuation. The report found that in the past year, 3.2 million adult Australians considered making a complaint about a financial services firm. Of that number:
- 1.5 million complained, and
- 408,000 expressed their dissatisfaction to the firm.
Further to this, our regulatory work has also shown poor practices by some superannuation trustees, in terms of the time taken to resolve complaints and failure to provide adequate written reasons for decisions.
Unfortunately, as well, testimony in the Royal Commission has also provided a sobering snapshot of a serious disconnect between community expectations and consumer experiences.
To this end, ASIC will consult with stakeholders about internal dispute resolution policy settings contained in our regulatory guide 165.
A key focus of this consultation will be the maximum internal dispute resolution timeframes, and how and when the current 90-day resolution deadline should be reduced. We will also focus on strengthening the obligations regarding providing written reasons.
The Royal Commission report has also recommended that claims handling for insurance should be a ‘financial service’.
There are some real opportunities for trustees to review and update their IDR requirements, which should lead to fewer external disputes and which shows that the trustee really does have a focus on members.
Advice in super
The next area of work I want to speak about is advice in super.
The Royal Commission has recently highlighted some of the harms that can arise when advice fees are deducted regularly from superannuation accounts.
For many years, ASIC has had a focus on fees for no advice service.
Currently, we are undertaking a project looking at the different models for delivering advice to superannuation members.
We are commencing with a survey to 25 super trustees and will move onto looking at some examples of personal advice. We are expecting the initial surveys to be returned around the time of this conference.
As part of this project, we are particularly interested in whether conflicts affect the quality of advice. Conflicts are not restricted to retail super funds and can arise in different ways across the industry.
The Royal Commission report also made recommendations to:
- prohibit the deduction of advice fees from MySuper accounts and limit the deduction of advice fees from choice accounts
- repeal grandfathering provisions for conflicted remuneration by 1 January 2021.
We think that there is scope for trustees to improve their oversight practices in this area, including having regard to the sole purpose and best interest requirements in the law.
Employer decision making
Another area which has been highlighted in the Royal Commission recommendations is employer decision making.
As part of our ongoing work in this area, we are continuing to look at the role of employer choice of fund, as this affects outcomes for many consumers particularly those who are disengaged. There is no regulatory requirement for employers to make a good choice.
Our work to date has looked at advice and benefits. If the proposed changes to s68A about employer inducements are made, there may be more scope for active work by ASIC in this area.
Fees and costs disclosure—RG 97
The last area of work I want to touch on before I speak about the Royal Commission more generally is on fees and costs disclosure.
You’ll no doubt be aware that fees and costs has been a difficult issue for some time. ASIC is committed to ensuring that information on fees and costs is clear, transparent and useable for consumers, and has undertaken significant work over the years to improve fees and costs disclosure.
Most recently, ASIC issued a consultation paper in January this year responding to the recommendations of the external expert’s report published in July 2018. We are keen to hear from industry on the proposed changes and whether the changes will improve fee and cost disclosure for consumers while making the regime practicable for industry to implement.
In brief, our proposals involve:
- simplifying how fee and cost information is presented to consumers
- reducing some of the data inputs (e.g. property operating costs, implicit transaction costs), and
- making the regime more consistent across superannuation and managed investment schemes.
Our consultation period ends on 2 April 2019 and we aim to finalise the requirements in the second half of 2019.
We are currently undertaking consumer testing of some of the proposed changes and also invited the industry through our website to attend industry roundtables which were held earlier this week.
In light of potential changes to the requirements, ASIC's oversight of fees and costs disclosure will continue to focus on ensuring that issuers are not misleading consumers about fees and costs.
On this point, I want to re-iterate ASIC’s stance that disclosure, advertising and promotions should always be clear, accurate and balanced, and should not be misleading. Concerns were raised in the Royal Commission around potentially misleading disclosure to attract new members and advertising of superannuation products more generally. ASIC regularly monitors disclosure, advertising and promotions in superannuation and takes a great interest in advertisements that do not meet our good practice guidance when considering the exercise of our regulatory powers.
Royal Commission recommendations
In addition to some of the recommendations mentioned earlier, I want to briefly touch on some of the other recommendations relevant to ASIC and the superannuation industry.
By way of overview, some of the recommendations relevant to superannuation include:
- that trustees have no other role
- no deduction of advice fees from MySuper accounts and more limited ability to deduct advice fees from choice accounts
- prohibition on hawking of superannuation products—there are already anti-hawking provisions that apply but the Government’s response contemplates a tightening of this
- people only ever have one default account
- improving the effectiveness of employer inducement prohibitions;
- the introduction of additional civil penalties – the Member Outcomes Bill, which recently passed the Senate, takes a first step towards this by making key trustee and director obligations a civil penalty provision
- the adjustment to ASIC/APRA roles to give ASIC an expanded conduct role, and
- the extension of the EAR regime to superannuation entities.
Additionally, some of the advice and insurance recommendations coming out of the Royal Commission Report will also have a significant impact on superannuation. These include:
- ending grandfathering for commissions by 1 January 2021
- making claims handling a financial service
- making the insurance codes enforceable
- undertaking a review of universal terms
- APRA increasing its expectations in relation to insurance provider choice and status for insurance purposes.
There are 12 recommendations from the Royal Commission Report that are directed at ASIC, or where the Government’s response requires action now by ASIC, without the need for legislative change. ASIC is committed to fully implementing each of these.
On 19 February this year, ASIC released an update on its planned actions in response to the Royal Commission Report. I now want to briefly touch on some of these actions ASIC will be focussed on in 2019.
Misconduct actions and a focus on enforcement
In 2019, ASIC will have a greater focus on court-based outcomes to provide strong public denunciation and punishment of wrongdoing. We will start by asking ‘why not litigate?’ While we recognise that in some cases other regulatory actions may be a better targeted and appropriate response—and we certainly cannot litigate all the breaches and reports of misconduct we receive—general and specific deterrence requires the sanction of a court.
In addition to the specific referrals from the Royal Commission, ASIC is also undertaking investigations into 12 matters that were case studies before the Royal Commission, with some of these relating to superannuation.
We however note that some of the matters identified at the Royal Commission were already the subject of advanced work by ASIC.
Most notably, in September last year ASIC commenced action against NAB superannuation trustees (Nulis and MLC) seeking declarations of contravention and a civil penalty in relation to deductions of advice fees from members’ superannuation accounts, where there was no adviser or no adviser services being provided. This matter is due back in court in May this year (see 18-259MR).
ASIC will also establish a separate Office of Enforcement within ASIC in 2019.
Enhanced supervisory approach by ASIC
In addition to this already full agenda of superannuation work, we are continually looking for ways to evolve and enhance our regulatory approaches.
We are currently looking to deliver an enhanced supervisory approach for superannuation and have already strengthened and bolstered our team focused on this area.
Our planned enhanced supervisory approach will:
- use a range of supervisory techniques, including more frequent on-site visits
- build on our already significant public actions in the superannuation sector, include more enforcement outcomes, and
- better leverage the data currently available to ASIC, and APRA. We will also make use of new data sources, including internal dispute resolution data that must be reported to ASIC, as well as data on life insurance claims coming from joint ASIC and APRA work.
By building on our existing work in this way, we plan to heighten the intensity of our regulatory scrutiny in superannuation.
You should be expect us to be more visible, in your office, and asking questions about conduct, challenging you on what you say is in your members’ best interests
I want to pause here quickly to recognise that we are not the only regulator in superannuation. ASIC, APRA and the ATO all have a common interest in this area. Accordingly, you can expect our approach to continue to build on and enhance our close working relationship with these agencies.
'Twin peaks' model—the ASIC/APRA relationship
On this point, importantly for both ASIC and APRA, the Royal Commission endorsed the current ‘twin peaks’ model of financial regulation and recommended that it should remain. That is, responsibility for conduct and disclosure regulation lies primarily with ASIC and responsibility for prudential regulation with APRA—with some subtle, though important, realignments.
ASIC supports an expansion of its role in relation to superannuation to provide it with stronger conduct regulation powers, but believes that it is important that this expansion does not diminish the role of APRA.
ASIC and APRA already have joint work underway to enhance our cooperation arrangements in order to improve outcomes across the financial system, increase efficiency of regulation and promote a whole-of-system oversight.
In closing, I want to challenge each of you here today, and all those in the superannuation industry to rise to the challenges that the current trust deficit revealed through the Royal Commission presents and to encourage all of you to aim high. Aim to exceed, rather than meet community expectations. Be proactive in addressing known issues and identifying new ones. As lawyers you have an important role in advising superannuation trustees about their behaviour.
The Royal Commission report is a reminder that at the heart of the superannuation industry are the significant fiduciary duties of a trustee. The scope of these duties is not simply determined by usual practices or what the trustee has always done. I would encourage each of you to think about how the Royal Commission report might positively influence your dealings with your clients.
We need to look to the future. None of us can stand back and wait for yet another Inquiry or Royal Commission for answers to issues which we can resolve for ourselves. ASIC stands ready to work with the Parliament, the Government, APRA and other regulators to implement the reform agenda. Beyond that, ASIC looks forward to working with enhanced powers and resourcing, its strengthened enforcement culture and the full range of other regulatory tools available to it, to strive for a fair, strong and efficient financial system for all Australians.
Thank you for your time and I look forward to your questions of Eve and me.