Thank you to the Australian Institute of Superannuation Trustees for hosting today’s event. I appreciate the significance of the forum in bringing together the chairs — the custodians — of one of the most important sectors in the Australian economy.
Superannuation is both an important part of the financial system and a pillar of Australia’s retirement income system.
- As at June 2018, superannuation assets totalled $2.7 trillion. This included $750 billion in self-managed superannuation funds.1
- Superannuation is the second-largest savings vehicle in Australia, after owner-occupied housing.2
- As at June 2017, there were 28.6 million superannuation accounts in Australia.3 According to the ATO, 14.8 million people had superannuation accounts, meaning that at least 40 per cent of people have more than one account. Around 15 per cent of people had three or more accounts.
An open dialogue between government and industry is crucial because the long-term nature of superannuation means that improving outcomes for members today can make a significant difference to their retirement outcomes in the future.
Superannuation funds need to ensure members’ interests are always at the fore of their operations — after all, our system is premised on a trust framework and trustees owe fiduciary obligations to their members.
In a mandatory system, it is critical that we have the settings right and that trustees make decisions and provide outcomes that are in members’ best interests – especially when we know that a large proportion of members are not actively choosing a fund.
The Government makes no apology for putting the interests of consumers ahead of self-interest in the superannuation sector. Members have a right to expect the highest levels of transparency, accountability and governance around how the money entrusted to superannuation funds is managed.
Today, I will outline some recent developments including:
- The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry
- The Productivity Commission’s work on the efficiency and competitiveness of the super system, and
- The Government’s action in ensuring Australians keep more of their retirement savings, as well as other reforms to improve outcomes in the financial sector.
The Government announced it would establish the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry on 30 November 2017 with a broad remit to inquire into the practices of financial institutions.
We established the Royal Commission to further ensure Australia’s financial services are working efficiently, effectively and in the interests of consumers. We believe all Australians have the right to be treated honestly and fairly in their dealings with their financial service provider.
The Government provided funding of $75 million to enable the Royal Commission to undertake its work. The Royal Commission has already held six rounds of hearings and received more than 10,000 submissions.
The Royal Commission released an interim report on 28 September 2018 highlighting that entities and individuals in the industry have been motivated by financial gain or short‑term profit at the expense of basic standards of honesty.
The interim report does not make any specific recommendations but addresses policy questions and case studies of misconduct that have arisen in the first four rounds of hearings.
The interim report does not directly consider issues raised in the superannuation hearings. However, some themes – including financial advice and conflicts of interest – are generally relevant to superannuation.
The interim report has highlighted that some financial institutions have fallen short on treating Australians fairly and honestly.
The superannuation hearings, held between 6 – 17 August (2018) focused on the duties of superannuation trustees, the treatment of Indigenous Australian members and the effectiveness of superannuation regulators.
A key focus in the superannuation hearings was whether trustees of superannuation funds have acted in the best interests of members. The hearings have identified evidence of very concerning behaviour by some industry participants.
The Royal Commission’s final report will directly consider superannuation.
The Government will carefully consider the Royal Commission’s final recommendations – and this will be done with the highest level of priority.
We will also need to consider any recommendations in the context of the significant reforms that have recently been implemented by the Government or are currently in train — some of which I will outline later today.
Productivity Commission report
The Government has tasked the Productivity Commission to review the efficiency and competitiveness of the entire system to ensure it is delivering the best outcomes for members.
The Productivity Commission’s review is in progress. A draft report for was released on 29 May 2018. The final report is expected to be delivered to the Government in late December 2018.
The draft report contains 22 draft recommendations and over 40 draft findings.
A key set of recommendations proposes a new default allocation system that involves an independent panel facilitating employee choice via a best in show shortlist of up to ten funds.
The report finds there is room for improvement in all segments of the system.
The draft report highlights problems with duplicate accounts and erosion of small balances by fees and charges and recommends change to default insurance in superannuation.
A number of the Commission’s draft recommendations are consistent with measures which form part of the Government’s Protecting Your Super package, which will address these issues by capping fees, limiting default insurance and allowing the Australian Taxation Office to proactively reunite duplicate accounts.
The Government’s other reforms, currently before the Senate, to strengthen APRA’s powers, introduce a stronger outcomes test for MySuper products and remove restrictions on choice of fund also received endorsement in the draft report.
Protecting your super
Announced as part of the 2018-19 Budget, the Protecting Your Super reforms are a significant step in delivering all Australians higher superannuation savings at retirement.
The Government is improving the superannuation regulatory system to protect Australians from the excessive fees, inappropriate insurance premiums and the inefficiencies which result from inadvertently holding multiple accounts.
The Government has introduced legislation that will:
- empower the ATO to reunite people’s unclaimed, or low and inactive accounts with their active superannuation accounts where possible;
- cap certain fees for low balance accounts;
- ban exit fees on all accounts; and
- require insurance be provided on an opt-in basis only for members with low balances (below $6,000), inactive accounts (without a contribution for 13 months or longer) and new members who are under 25.
Based on the most recent data, in the first year, the reforms are estimated to:
- save 7.2 million people more than half a billion dollars in fees;
- reunite approximately $6 billion of unclaimed or inactive, low-balance super with the active accounts of around 3 million individuals; and
- provide around 5 million people with the opportunity to choose whether they want insurance cover through their super, potentially saving up to $3 billion in premiums.
On 14 September 2017, the Government introduced legislation to give effect to the Member Outcomes Package, which will give Australians more power over their superannuation and strengthen the prudential framework to deliver a more transparent and accountable compulsory retirement savings system.
The package includes Bills that will, among other things, improve the quality of default superannuation products, require higher levels of transparency, introduce stronger prudential supervision requirements, extend choice of fund to more employees and improve the governance arrangements for trustee boards.
The Member Outcomes Package imposes civil and criminal penalties on superannuation directors who fail to execute their responsibilities to act in the best interests of members, or who use their position to further their own interests to the detriment of members.
Under the Package, APRA will, for the first time, be able to issue a direction to trustees based on an anticipated breach of its obligations. This means that they will be able to take action at an early stage – before members’ superannuation savings are lost.
The Package also introduces a minimum independence standard for superannuation trustee boards to strengthen the oversight and conflict management of funds.
This package will deliver a 21st-century superannuation system underpinned by greater accountability and transparency across all superannuation funds – whether they are industry, corporate or retail funds, with a strong prudential regulator.
The reforms are member-focused, apply equally to all APRA-regulated funds, and will make every superannuation fund in the country more accountable for how they manage members’ money.
Other government superannuation reforms:
If Australians are to continue to have confidence in the integrity of the superannuation system, we must ensure employers are paying workers their full entitlements. This is why the Government has introduced measures to modernise Superannuation Guarantee (SG) compliance.
The Government passed legislation in 2016 and 2017 to improve the sustainability, flexibility and integrity of the superannuation system as part of the Superannuation Tax Reform Package.
Financial sector reform
The Government is committed to taking strong action to reform the financial sector and has continued to:
- progress a comprehensive reform agenda to better protect consumers
- ensure institutions and their executives are held to account for illegal behaviour, and
- make sure the financial system is safe and robust.
Legislation passed on 15 June 2017 to introduce Industry funding for ASIC for its regulatory activities. It commenced with the introduction of industry levies from 1 July 2017 and fees for services (e.g. licence applications, applications for relief) from 1 July 2018.
ASIC’s regulatory costs are recovered from 48 industry subsectors based on the actual costs of ASIC’s regulation of each subsector in the previous financial year. It means that industry bears the costs incurred in regulating them.
ASIC’s forecast for the 2017-18 regulatory costs, to be recovered in 2019, is $238 million.
Legislation passed in February 2018 to establish the Australian Financial Complaints Authority (AFCA), creating a one-stop shop for external dispute resolution in the financial sector. AFCA will start accepting complaints from 1 November 2018.
AFCA will replace the three existing external dispute resolution schemes, the Financial Ombudsman Service, the Credit and Investments Ombudsman and Superannuation Complaints Tribunal.
AFCA will enable more consumers and small businesses to access external dispute resolution with an ability to hear complaints regarding matters from individuals of up to $1 million (up from the current limit of $500,000) and, in the case of small businesses, the ability to hear disputes related to a credit facility of up to $5 million (up from $2 million).
AFCA will retain key statutory powers to resolve superannuation disputes, which are often complex and involve third parties. AFCA will also have maximum flexibility to deal with complaints in a timely manner by having control over its funding and processes. In addition, it will have increased transparency and flexibility over funding arrangements. This will allow a more timely resolution of superannuation complaints.
Under AFCA, there will be no monetary limits or compensation caps for superannuation disputes, as is the case under the SCT.
The Government also recognises that the SCT is managing a heavy case load and has provided additional funding to the SCT of $9.5 million from 2017-18 to resolve outstanding complaints and assist in the SCT’s wind-down.
Legislation was passed on 7 February 2018 for the Banking Executive Accountability Regime (BEAR) to impose higher standards of behaviour on banks and their senior executives and directors, applying from 1 July 2018 for the big four banks and from 1 July 2019 for small and medium banks.
Prior to appointing senior executives and directors, ADIs must advise APRA. They must then be registered with APRA and a map of the role and responsibilities of the ADI’s senior executives provided to APRA.
- Senior executives, directors and the entity will have new legal duties to act honestly and with integrity and due care and skill, be open and constructive with APRA, and take reasonable steps to prevent matters arising that would adversely affect the prudential standing or prudential reputation of the ADI.
- For senior executives, APRA gains enhanced disqualification powers and will require a minimum proportion of variable remuneration to be deferred for at least four years, with ADIs expected to have remuneration policies to provide for withdrawal of deferred pay by an amount proportionate to a breach of BEAR.
- APRA will also be able to seek increased sanctions against ADIs, including civil penalties of up to $210 million for large ADIs, $52.5 million for medium ADIS and $10.5 million for small ADIs for breaching their obligations under BEAR.
Legislation was passed in February 2017 to raise the professional, ethical and educational standards of financial advisers, including establishing the Financial Adviser Standards and Ethics Authority (FASEA).
From 1 January 2019, new advisers will be required to hold a degree and pass an exam approved by FASEA, complete a provisional training year and meet continuous professional development requirements.
Existing advisers will be required to meet a range of transitional standards, including completing an approved exam by 1 January 2021 and meeting new educational standards by 1 January 2024.
From 1 January 2020, all advisers will be required to abide by a new Code of Ethics, providing standards of ethical behaviour, client care, quality process and professional commitment. They must also register as a member of a code-monitoring body approved by ASIC.
FASEA is an independent organisation that will set the new standards, including the required educational standards for new and existing advisers, and the new Code of Ethics.
Legislation was introduced to Parliament on 20 September 2018 to impose design and distribution obligations (DDO) on financial institutions to minimise the likelihood of consumers purchasing unsuitable products.
DDO will require financial institutions to determine a target market to ensure the products they sell are designed for, and marketed to, an identified target market and require institutions to take reasonable steps to ensure that dealings in, and advice provided in relation to, a product are consistent with their target market.
For example, in determining a target market a financial institution may consider a consumer’s eligibility to make a claim under an insurance policy and accordingly require that the product only be distributed to a particular class of consumers. Distributors will be required to take reasonable steps so that distribution is consistent with the most recent target market determination.
Legislation was introduced on 20 September 2018 to create a product intervention power (PIP) to enable ASIC to intervene where products could pose significant consumer harm.
The PIP will allow ASIC to proactively intervene in relation to financial and credit products by making orders to prohibit specified conduct in order to protect consumers. For example, if ASIC considers that a financial product is causing or is likely to cause significant detriment, it may impose an intervention order directing that the product (or class of product) not be distributed unless accompanied by an appropriate warning or label.
In accordance with the recommendations of the ASIC Enforcement Review Taskforce, the Government is consulting on legislation to establish higher criminal and civil penalties for corporate misconduct and enhance ASIC’s enforcement powers. Consultation commenced on 26 September 2018.
The legislation will substantially increase penalties and expand the types of offences available for ASIC:
- Double maximum imprisonment penalties for some of the most serious criminal offences. For example, the penalty for someone providing financial advice when they’ve been previously banned will increase from six months to five years.
- Increase the maximum criminal penalties in the Corporations Act:
- for individuals, up to $945,000 or three times the amount of benefit gained, and/or 10 years imprisonment – for example these higher penalties would apply where a financial planner intentionally providing defective statements of advice to consumers or a director not acting in good faith in discharging their directors’ duties.
- for corporations, the greater of $9.45 million, three times the benefit gained or 10 per cent of their annual turnover – for example these higher penalties would apply where a company enters into agreements to avoid paying employee entitlements.
- Increase civil financial penalties from $200,000 to $1.05 million or three times the benefit gained for individuals or from $1 million to $10.50 million for corporations, or three times the benefit gained, or 10% of annual turnover capped at $210 million for corporations so that the risk of a civil penalty is not considered a cost of doing business;
- Give courts the power to strip contraveners of their unlawful gains.
- Add new criminal offences, for example where directors lie about their own interests in a company with a maximum penalty of two years’ imprisonment, and new civil offences where breaches are serious enough to warrant financial penalties but are not characterised as a criminal offence, such as an insurer breaching their duty of utmost good faith.
I thank the Institute for inviting me here today.
It is great to have superannuation leaders gathered here in the one room.
There are many developments taking place in your sector and I welcome your contributions and constructive submissions to our consultations.
It is a pleasure to meet you in person and I look forward to speaking to you again soon.
1 APRA Quarterly Superannuation Performance June 2018 (issued 28 August 2018)
2 ABS Cat. No. 6523.0 Household Income and Wealth Australia, 2015-16, Table 11.2.
3 APRA Annual Superannuation Bulletin June 2017 (issued 28 March 2018)