Royal Commission finds superannuation failures in big funds
The final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has just been released. The recommendations leave SMSFs largely untouched, and also states that large super funds must change their ways.
Early in the report, the Royal Commissioner Kenneth Hayne QC (a former High Court judge) drew attention to the size of Australia’s super savings. As at March 2018, super savings comprised assets worth around $2.6 trillion. This is nearly one and a half times the value of all goods and services that the nation produces in a year (that is, the super industry is larger than the annual nominal gross domestic product). Further, as at June 2017, more than 14.8 million Australians had a super account, with 40% having more than one account. Royal Commissioner Hayne also pointed out that super represents about half of all household financial assets.
Reducing multiple super accounts
In the Royal Commission’s superannuation report, a central super recommendation was to put in place mechanisms to ensure super fund members only have one account. A separate government report by the Productivity Commission released earlier this year recommended the same thing.
Commissioner Hayne recommended that a first-time super member (i.e. a new worker receiving super payments for the first time) should essentially have their super account “stapled” to them at the start of their working life. This would mean keeping their super account as they move jobs, instead of falling into the default trap of opening a new super account with each job. Over 40% of working Australians have multiple superannuation accounts. This has long been regarded as a problem because having multiple accounts with different funds means multiple sets of fees.
Taking immediate action to remove multiple super accounts in the system appears to be the most obvious and straightforward fix that would yield a significant and lasting improvement to the efficiency of the system.
The fact is that large APRA regulated superannuation funds -retail and industry alike- have put forward a concerted effort, leveraging political influence and lobbying aggressively via associations like the ASFA, to derail and delay previous attempts to address the issue of multiple accounts. Hopefully the Royal Commission’s superannuation investigation has brought the issue to a level of prominence sufficient to overcome the vested interest from large cashed up super funds.
Fees deducted from super accounts for financial advice
The Royal Commission also recommended limiting advice fees that get deducted from super accounts. The recommendation is that fees should be limited to matters specifically relating to super, for example: consolidating super accounts, selection of super funds and asset allocation. Super should not be used to pay for broad financial advice, eg advice about how to best provide for retirement or maximise a person’s wealth generally. This comment stemmed from Commissioner Hayne pointing out the legislation known as the sole purpose test, which already states that super funds should be maintained solely for providing benefits on death or retirement. The sole purpose test doesn’t allow super funds to be used for general wealth planning or even for retirement income planning.
Stronger penalties for super fund trustees
If the Royal Commission’s superannuation recommendations are taken up, stronger penalties will also apply if trustees of large funds misbehave. The final report recommended both trustees and directors be subject to civil penalties for breaches of their trustee duties. Commissioner Hayne took aim at trustee behaviour, stating:
It should be concerning to regulators that professional trustees apparently struggle to understand their most fundamental obligation… The concept of acting in members’ best interests is not hard to understand.
SMSFs left largely untouched but impacted by financial advice recommendations
While the SMSF sector was largely untouched by the recommendations of the Royal Commission superannuation findings, the recommendations made in respect of financial advice are likely to have an indirect impact on many SMSF trustees and members. The recommendations including for the annual renewal and payment for advice fees, and changes to how financial advisers are remunerated (i.e. restrictions on commissions) are particularly likely to have a material impact on how advice is delivered on an ongoing basis, and are likely to increase the cost for financial advice as a whole. Additionally, general compliance as well as best interest tests and independence thresholds for financial advisers will become more onerous as a result of the recommendations. The impact on advisers is likely to be that they will move further to a focus on high balance clients, moving away from middle and low balance clients. Overall this seems to be a negative for the sector with over 50% of SMSF trustees wanting more advice.
The overwhelming challenge for the regulators, government and the industry as a whole is to find a solution that will enable the financial advice industry to profitably deliver quality advice services to the middle and lower end of the market. The current regulatory environment is not conducive to fostering this, and it's highly likely that changes to legislation are required to facilitate the evolution of this end of the market. Selfmade expects this will probably come via the adoption of new financial technologies to stream line processes and reduce costs associated with advice.
Where does this leave SMSFs?
Many of the revelations and recommendations hark back to early August 2018, when Michael Hodge QC scrutinised large superannuation fund trustees, asking: “What happens when we leave these trustees alone in the dark with our money?”. The question was related to the fact that there is apparently no dedicated conduct regulator or watchdog to 'shine a spotlight' on the bad behaviour of superannuation trustees.
Many of the problems highlighted by the Royal Commission stem from superannuation funds being so large and distant from members that their practices have strayed away from members’ interests. But there is one kind of super fund – SMSFs – where the members don’t leave their money with 'unknown' trustees. Of course, the members of an SMSF self manage the fund and act as trustees. SMSFs hold around 30% of all the super assets in Australia. Given the benefits of an SMSF, they are set to continue to give big funds a run for their money. For those who know how they want to invest and want control and transparency, SMSFs can be a viable option. Detailed reading of the report is available .