Commissioner Kenneth Hayne

Commissioner Kenneth Hayne is not one for crystal ball-gazing, or making hasty recommendations. But as he crisply wrote in an executive summary accompanying the searing royal commission interim report, this has not stopped the industry rushing to get ahead of the game.

“As the Commission’s work has gone on, entities and regulators have increasingly sought to anticipate what will come out, or respond to what has been revealed, with a range of announcements,” Hayne wrote in the executive summary released on Friday. “There have been changes in industry structure and industry remuneration.”

Participants in the inquiry’s process, and bystanders, have had to grapple with the unexpected. Who will be called? How long will they be on the stand? Toward what specific areas will the range of whip-smart counsel assisting direct their questions?

For companies that maintained a semblance of control over their customers, this was an about turn, and a chance for them to feel some of what customers disempowered by banks’ myriad examples of misconduct suffered through.

But it was Hayne’s 1000-page interim report, with its complete lack of recommendations, that was perhaps the most surprising turn yet. Instead of outlining suggestions for additional, prescriptive regulation, Hayne laid out a series of questions relating to the earlier, non-superannuation rounds of the commission, which included consumer lending and financial advice.

He also lambasted the regulators for their inaction, and financial services entities for putting “greed” and profits and ahead of their customers.

Worrying structural issues

For the superannuation industry, Hayne’s tone and the areas where he chose to focus might provide something of a breadcrumb trail to follow ahead of his final report due in February; perhaps it’s time to consider exactly what about the $2.7 trillion super system isn’t working in favour of members.

I think many people agree there is room for change – a perfect system this isn’t.

The hearings at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in August, focusing on super, revealed a range of worrying structural issues, and raised the spectre of whether funds, both retail and not-for-profit, were suitably concerned with members’ best interests. Round five and its interrogation of National Australia Bank officials is emblematic of some of the deeper issues associated with super in this country.

Counsel assisting put to the former chair of NAB’s superannuation trustee, NULIS Nominees, Nicole Smith that the company had failed in its trustee duty to act in the best interests of the members, and ultimately favoured NAB’s interests over its customers, by delaying the transition of members to its MySuper offering.

This disregard for members’ retirement funds led one industry insider to tell me he believed the regulators would place adeservedly greater focus members’ best interests, rather than providers’ best interests, going forward.

He said he would be surprised if vertical integration would be outlawed in Hayne’s final report, but predicted more stringent safeguards would be implemented to ensure that trustees act solely in members’ best interests. The Australian Institute of Superannuation Trustees’ submission to the royal commission has suggested, wisely, an independent director model for retail funds that removes the provider’s executives from the trustee board to ensure these conflicts can be managed.

In addition, legislation that would introduce tougher penalties, including fines and imprisonment, for fund trustees has stalled in the Senate but Nationals Senator John Williams has urged the government to push ahead with it.

Given what we have heard from the commission so far, perhaps the bill’s opposers, the Greens and Labor, should look at it again.

Mealy mouthed regulators

Hayne gave the regulators, ASIC and APRA, a well-deserved pasting for their mealy-mouthed approach to oversight. The royal commission laid bare a culture of infringement notices and enforceable undertakings that let the big banks feel it was they who were in the driver’s seat.

A key example to emerge during the super hearings was a line of questioning courtesy of counsel assisting Michael ‘Babyface’ Hodge, who asked APRA deputy chair Helen Rowell about why the organisation had taken just one super case court in the last 10 years.

Since 2008, APRA has applied only once to the court to disqualify someone – a director of the fraudulent Trio Capital, which was home to the biggest superannuation fraud in Australian history. A 2012 parliamentary joint committee inquiry into Trio’s collapse was critical of both regulators for their glacial approach to action even while getting tip-offs from the public.

APRA certainly granted far too many MySuper licences initially, with scant consideration towards excising underperformers from the industry.

Howell defended the regulator’s strategy, however, telling the royal commission that achieving enforceable undertakings was a more efficient and timely way to remove someone from the industry than going through a court proceeding.

This may change. Hayne wondered in the interim report whether both APRA and ASIC had “responded sufficiently to the conduct identified and criticised in this report?”

Are commercial obligations at cross-purposes with super?

A key consideration for the super industry is whether for-profit funds, which are run by boards and trustees with commercial obligations to their shareholders, can also administer a fund in the interests of members, as the SIS Act requires.

AIST boss Eva Scheerlinck said earlier this year that the group would recommend to the royal commission, regulators and Parliament that retail banks be stripped of their ability to offer a MySuper product, following damning evidence at the hearings.

A superannuation expert suggested to me that, while there was not a problem with retail banks running super funds, MySuper licences for banks could be problematic.

The argument about the underperformance of retail funds is something that should be addressed. It is within Hayne’s remit to recommend that banks be banned from running default products and believe grandfathered commissions are unlikely to be permitted going forward; fee-for-service models are expected to proliferate.

Instead, Hayne could recommend is cutting out some of the hundreds of default products suggested by the Productivity Commission – a limit of 40 is a number that has been bandied about – and lighting a fire under the “wet lettuce” regulators to act rather than mediate, is the correct way forward to ensure members’ retirement futures are safeguarded.

Also, the threat of jail time or fines that could run into the hundreds of thousands, might make trustees consider whether it’s worth it not to toe that line in the future.

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