Jonathan Steffanoni, principal consultant, legal and risk, at professional services firm QMV, is a lawyer specialising in superannuation. Here is his take on the explosive fifth round of hearings in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which has focused on the $2.6 trillion sector. He also provides some lessons for industry participants ahead of Commissioner Kenneth Hayne’s interim report, due by September 30, 2018.
Investment Magazine: What lessons can superannuation funds learn about being clear with members on fees following the hearings?
Jonathan Steffanoni: The first week of hearings at the royal commission focused heavily on issues related to the inappropriate charging of fees, and whether these had been inappropriately or illegally deducted from member accounts.
More fundamentally, attention has been directed at whether decisions have been made that don’t prioritise the interests of members of the fund over conflicting interests such as profits for related entities.
Those of us working in the superannuation industry should take away a heightened awareness of the nature of the responsibilities superannuation trustees have in making decisions where there are possible competing interests. Industry, retail and corporate superannuation fund trustees are all equally required to always, in every instance, prioritise the interests of members where a conflict exists.
Superannuation funds, and service providers, should also take away a heightened awareness of the importance of having a robust operational risk-control environment in place, including the use of genuinely independent expert assurance and technology designed to identify instances of possible non-compliance with product and regulatory requirements.
IM: In a departure from previous rounds, there have been no consumer case studies. Why has that decision been made?
JS: The royal commission made it clear that there would be no consumer case studies in the current round of hearings. While the royal commission acknowledged there had been many cases of grievance, it wasn’t its responsibility to remedy such cases, as this was a matter for the courts.
The decision to focus on the internal workings of the superannuation industry may also reflect the fact that consumer involvement in superannuation is not as prevalent as in other financial services and that more investigative value can be gained by focusing on the internal workings, rather than on the touch points with consumers.
This is primarily due to the long-term nature of the product and hyperbolic discounting of younger superannuation members.
IM: What financial advice-related issues have been considered?
JS: The key focus for financial advice in superannuation is likely be whether the nature of advice being provided is appropriate and consistent with the statutory best-interests obligations under the Future of Financial Advice (FoFA) laws. There is also the related question of whether fees deducted from member balances to pay for financial advice are consistent with the sole-purpose test.
We’re likely to see a consistent theme around the potential conflict between the interests of members and the interests of those who derive revenue from advice fees (including grandfathered fees). How trustees deal with this potential conflict will be central to the course of the hearings and, ultimately, the recommendations.
IM: Finally, how will the appointment of board directors be scrutinised by Commissioner Hayne in his interim report, due by September 30, 2018?
JS: The commission also stated that some time would be directed at structural and governance issues, which will include the appointment procedures for trustee directors. The position of trustee director is unique to the superannuation industry and requires that, where there is a conflict between the duties owed to the interests of the company and the interests of members, the interests of members must be prioritised. Trustee directors are also required to exercise a heightened degree of care, skill and diligence…that of a prudent superannuation trustee, rather than that of a prudent person.
The appointment of trustee directors is governed by the constitution of the trustee company and the supervisory statute. The Superannuation Industry (Supervision) Act requires that employer-sponsored superannuation funds (meaning those with at least one contract with an employer concerning the making of contributions) comply with equal representation rules.
These rules require that employer and employee representatives appoint equal numbers of trustee directors. It found its origins in an environment where employer contribution rates were flexible; questions were common concerning the level of contributions required and treatment of any surplus.
The royal commission is likely to consider whether the manner in which trustee directors have been appointed is consistent with the appropriate rules but also whether trustee directors have an appropriate mix of skills and satisfy the fit-and-proper requirements.