Looking ahead to the roasting of superannuation fund leaders that would take place over the coming two weeks at the Hayne royal commission, counsel assisting Michael Hodge said in opening remarks that fund trustees were left “alone in the dark with our money” and “surrounded by temptation”.
By the time he made his preliminary closing remarks on Friday at the end of the superannuation phase of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Hodge was wondering whether those temptations were so unmanageable that they could warrant legislative intervention to eliminate them.
Members of super funds, like most beneficiaries, are “vulnerable”, “disengaged and disadvantaged by a lack of financial literacy”, and “readily able to be taken advantage of”, Hodge said.
Over the last fortnight, the counsel assisting has presented evidence from seven directors of trustees and nine other officers from within trustees or their service providers, cumulatively responsible for $627 billion worth of funds under management.
The evidence as a whole suggested “some RSE [registrable superannuation entity] licensees are not, as they are obliged to do, prioritising the interests of their members over the interests of others”, Hodge said.
Parties given leave to appear – and the public more generally – have been asked to turn their minds in the coming weeks to issues that go to the heart of what constitutes responsible management of $2.6 trillion of Australians’ retirement wealth. The laborious process of sifting through it all will then go to Commissioner Kenneth Hayne.
Some common decisions made by trustees were particularly troubling, Hodge said.
These included charging ongoing financial advice fees to members and not providing services in return, charging grandfathered trailing commissions and other forms of conflicted remuneration, and delaying the transfer of accrued default funds to MySuper products, with the effect of prolonging the payment of trailing commissions in legacy products.
Trustees had also failed to intervene when related parties had charged fees that resulted in negative returns, and hadn’t adequately overseen the distribution channels of their superannuation products that were managed by related parties, Hodge said.
This conduct did “not demonstrate a sufficient prioritisation, or any prioritisation, of the interests of the members over the interests of the trustee or parties related to the trustee”, and might also breach the best-interests duty and other legal obligations, he said.
In some cases, trustees widely outsourced the services required to administer a trust, and while this was not prohibited per se, trustees needed to understand this did “not absolve the trustee of ultimate responsibility for what occurs in relation to the use and application of trust money”.
Misleading or confusing communications with members had also been a problem, on matters such as fees, commissions and tax surpluses, the transfer of accounts to MySuper and why compensation was being paid for past mistakes.
“In most industries, the forces of competition can be relied upon to minimise improper conduct and effective regulation can be expected to address breaches of the law when breaches occur,” Hodge said.
“However, for superannuation, the disengagement of members, amongst other things, may limit the effectiveness of competition, and there are also questions, commissioner, as is apparent, about the effectiveness of regulation in relation to superannuation.”
This left RSE licensees with a strong obligation to comply with fiduciary obligations.
Hodge identified several questions that arose from the proceedings:
- Do certain structures raise inherent problems? For example, if a trustee is a disregarded entity, if funds are invested in related-party insurance policies, or if the superannuation trustee is integrated into a financial advice business.
- Are these structures so unmanageable that legislative intervention is needed?
- What other types of relationships present obvious challenges to a trustee discharging its duties and provide little or no benefit to members?
- Should legislative interventions eliminate some of the industry’s worst temptations?
- Should commissions in the industry be prohibited, for example, along with the grandfathering of commissions in legacy products?
- Should ongoing advice fees be banned, with such fees limited to one-off payments for a service immediately exchanged?
- Should there be stronger laws against misconduct? This could include harsher penalties for directors who breach their covenants imposed under the Superannuation Industry (Supervision) Act, civil penalties for failing to act in the best interests of members, and greater civil penalties for breaches of the sole-purpose test.
- Is the current allocation of roles to regulators appropriate or is one entity better placed than the other to carry the responsibility of protecting consumers if the balance were to be altered? Can more be done to encourage regulators to act promptly on cases of misconduct?
- Also, are there further structural tweaks necessary to make it more likely consumer interests will be best served in the superannuation industry? Some possibilities include the prospect of “stapling” consumers to a single super account so they don’t end up with new accounts each time they change jobs and imposing obligations on shareholders of trustees to exercise their powers in the best interests of members.
In closing, Hodge tendered 41 additional documents, including those relating to case studies that ultimately didn’t publicly front the commission – namely, items involves Cbus Super, Sunsuper and Mercer.
By Friday this week, counsel assisting will provide full closing submissions, address policy issues for consideration, and provide additional case studies. Parties given leave to appear will then have a further seven days to provide written submissions of no more than 20 pages in relation to each of the case studies submitted.
The general public will have until September 21 to make written submissions, with an upper limit of 50 pages on the policy issues raised.
“But as with all page limits, that’s the outer limit, not the necessary extent,” Hayne pleaded.