Lawyer and superannuation executive David Galloway gives his thoughts on some of the most costly pieces of regulation impacting on members.
Some trustees might feel a justifiable sense of confusion around the issue of regulatory costs savings.
While the government has established a regulatory cost saving initiative, that didn’t prevent it inflicting a new SuperStream levy on funds. Nor did it stop the government increasing ASIC registry fees to prepare the registry for sale, a move that will almost certainly see significant long term cost increases.
It also hasn’t helped that the Accounting Standards Board recently decided to inflict further and greater costs on fund members by introducing AASB 1056 to replace the current financial reporting standard.
So are we in an era of increasing or decreasing regulatory costs?
It’s difficult to be sure, and the answer may depend on how the industry addresses the scope and substance of regulatory cost savings.
While ASIC and APRA are the focus of regulatory cost savings, other bodies that inflict regulatory costs on members such as the Accounting Standards and the Auditing and Assurance Standards Boards seem to have escaped attention.
Perhaps AASB 1056 is a profound innovation with measurable benefits for members, or it could be a profit enhancement scheme for accounting firms. Either way, it’s yet another impost at a time when commentators are claiming superannuation is already too expensive. That makes it entirely reasonable for trustees to insist that AASB 1056 be justified in terms of costs and benefits to members before being required to raid their accounts yet again.
Auditing also presents opportunities for cost-benefit justification. To give just one example, GS007 has been with us for some years yet it’s far from clear that specified assertions reports deliver value for the substantial fees paid to auditors. If GS007 does have worthwhile and unique objectives that make it indispensable then, at the very least, the government should be looking for a more efficient delivery mechanism.
Fund members have much to gain from a broadening of the cost savings initiative, and trustees should be putting that view to the government in clear and unequivocal terms.
For now, the substance of potential regulatory cost savings is largely confined to what is managed by ASIC and APRA. Both regulators have responded positively to the costs initiative, but lack of practical experience in the industries they regulate puts the onus on trustees to formulate well developed options for consideration.
Some objectives that could be considered for further development include the following:
Repeal S 29QC: While ASIC has issued a Class Order to provide twelve months’ relief from the requirement to provide information to other parties using the methods required for APRA statistical reporting, the industry should request repeal on the grounds that:
• 29QC does nothing to protect or inform members that isn’t already done by schedule 10 of the Corporations Regulations; and
• The provision creates a minefield of new and largely meaningless potential infringements that will cost members many millions of dollars to guard against.
Abandon portfolio holdings disclosure: In effect sections 1017BB, BC and BE of the Corporations Act require trustees to twice a year publish assets, and assets derived from assets, down to individual security level, despite investment managers having no obligation to provide that information. The main justification is that disclosure will allow analysis to better compare superannuation funds. That may be so, but why should fund members incur tens of millions of dollars in increased costs to subsidise the consulting industry?
The argument that members want this information lacks substance when MySuper has just been introduced on the grounds that members are disengaged. Nor can it be justified as hypothetical “best practice”, when the country that leads in disclosure (the USA) does so without portfolio holdings disclosure.
Portfolio holdings should be seen for what it is: a massive and unjustifiable transfer of wealth from fund members to consultants in exchange for no tangible benefit to members.
Retain audit timing: Attachment A of SPS 310 requires funds to complete end of year processes in three months, not four, from next year. Reducing work times by 25 per cent can only lead to higher costs, more errors, or both. Why this should be regarded as beneficial to members is unclear, nor does anyone seem to have produced a cost-benefit justification for the change. Until a three month year-end can be justified in terms of benefits to members, end-year processing should remain at four months.
Amend Internal Audit of Outsourcing: Paragraph 33 of SPS 231 requires the internal auditor to review any proposed outsourcing of a material business activity and regularly review and report to the Audit Committee. This amounts to a duplication of the compliance function, at a cost of around $15,000 per contract where internal audit is outsourced. How this might benefit members is unclear, but if internalaudit of outsourcing is necessary it could be done close to the end of the process with a saving of around $10,000 per contract.
Clearly define ORFR review: Paragraph 23 of SPS 114 requires that funds review their ORFR target and tolerance limits each year. That suggests a recalculation costing around $20,000 where an ORFR is actuarially derived. That’s excessive, but with paragraph 25 requiring the ORFR to be reviewed every year by both internal and external audit we seem to be well into overkill. Removal of excessive ORFR review will produce savings for members if actuarial recalculation is set at once every three years, and only one auditor is required to review the ORFR each year.
The government and regulators deserve thanks for their efforts to address excessive regulatory costs, but trustees must also play their part by relentlessly insisting that every imposition be justified in terms of benefits to the fund members who ultimately pay the costs.