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The Future of Super

There needs to be more of a focus to protect the interest of members, rather than those of the superannuation funds. In other words, regulators need to be member champions.

These are findings of the final report that forms part of stage three of the Productivity Commission’s (PC) report, released recently.

The focus of the PC inquiry into superannuation was on outcomes for members, and the report highlighted many of the issues singled out by the Royal Commission last year, including:

  • Excessive and unwarranted fees;

  • Unintended multiple accounts eroding savings: The report suggests that the 1/3 of all supper accounts are unintended multiple accounts; and

  • The fact that not all members receive value of default insurance in superannuation.

It is possible that the report’s recommendations could provide a preview of some of the findings that will come out in the final report of the Kenneth Hayne Royal Commission Report next month—especially since this inquiry has drawn on some of the revelations that came out of the hearings of the Royal Commission.

The question for the risk and compliance functions in this industry will be focused on the regulatory changes and enforcement priorities that might result from this report.

In addition, a review of the Australian Securities and Investments Commission (ASIC) toolkit will give the corporate regulator product intervention powers to tackle inappropriate products in the market.

APRA Deputy Chair, Helen Rowell, embraced the findings of the PC report.

“I’m particularly pleased to see the Productivity Commission back our call for parliament to pass legislation that would give APRA greater powers, including to direct superannuation licensees to take specific actions, such as merging or winding up, and should that be in the best interests of members,” she said.

Super challenges

Ley issues identified in the PC report of the superannuation industry include competition, governance and regulation, all of which have led to poor outcomes, many of which were examined in last year’s Royal Commission into Misconduct in Banking, Superannuation and the Financial Services Sector.

The PC suggested that the rivalry in the default segment itself is ‘superficial’ and it highlighted that many of the superfunds lack scale, suggesting half of the funds have assets under $1 billion.

According to the report, the way members have been allocated to default funds means that around 1.6 million members have ended up with an under-performing fund.

The PC also found that the regulations had a disproportionate focus on the interest of the funds, rather than on members.

While the report acknowledges that there is a ‘cornucopia’ of regulations to protect member interests, the problem lies with the effective enforcement of these regulations.

According to the report, “But steadfast and confident enforcement of the existing rules seems lacking. In particular, strategic conduct regulation appears to be largely missing in action—especially when it comes to public deterrence.”

The report continues that:

Ideally, a regulator would proactively identify actual or potential instances of material member harm, investigate the underlying conduct and take strategic enforcement action in a way that provides a valuable public deterrent to future poor conduct. But the requisite data analytics (akin to those in this report) and consequential strategic surveillance have fallen short.

Regulatory overlap

One of issues identified in the report is the role clarity and failures on behalf of the regulators, ASIC and APRA, something that was highlighted in the Hayne Royal Commission when it came deterrence of poor conduct in the financial industry:

In part, this is attributable to confusing and opaque arrangements for regulating trustee conduct, with significant overlap and no clear delineation between the roles of APRA and ASIC. There is a very real and ongoing risk that regulatory breaches ‘fall through the cracks’ as a result of divided responsibilities — with each regulator believing the other should be dealing with a matter, and neither being held accountable for not doing so. It has also led to heavy reliance on cooperation between the regulators.

While there has been some concern about the regulatory overlap between the prudential and corporate regulator, APRA’s Helen Rowell said, in her statement last week, that APRA has been doubling their efforts and that the two regulators—APRA and ASIC—have been working together to effectively regulate the Australian financial system:

APRA has intensified our scrutiny of board governance practices and conflicts-of-interest management. Further, we have significantly stepped up our efforts to improve co-ordination with other regulators, including the Australian Securities and Investments Commission (ASIC), and are well-progressed with a review of APRA’s enforcement strategy. APRA has previously indicated its willingness to take part in a capability review led by appropriately experienced and qualified experts.

Click here to go to the Productivity Commission website to read the report.

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