The corporate watchdog is keeping a close eye on two major trends playing out in the $2.9 trillion super sector – the creation of in-house investment teams and the uptick in merger activity.
Speaking at AIST’s flagship superannuation investment conference in Hobart on Tuesday, ASIC commissioner Danielle Press flagged these industry trends are concerning to the country’s regulators.
“By bringing their assets in-house, industry funds become perfectly vertically- integrated businesses and could potentially violate conflict of interest rules.” she said.
“The investment team does not have to be the world’s greatest manager but the trustee must ensure that the operation is ‘fit for purpose’. If it is not, they’re not doing their job as a trustee,” she added.
For instance, she argued, the performance of a portfolio, after costs, run by an internal team should not lag the performance achieved by an external manager.
“You could mount a scenario whereby funds bring all of their investments in-house and they underperform the market. This begs the question: how is in-housing that investment in the best interests of members?,” she said.
The former Equipsuper chief executive hastened to add that the corporate cop has not yet seen any evidence of “conflict management challenges” even though industry funds are struggling to generate returns in a ‘lower for longer’ environment.
But she warned that super funds should ensure that internalisation strategies have the right structures in place as well as the right products. “These strategies change the obligation of the board to understand what the internal team is actually doing.”
While the prudential regulator is the lead regulator when it comes to fund mergers, following the banking royal commission, the government has clarified that ASIC is the primary conduct regulator for superannuation.
“We will step in if there is a conflict of interest that prevents a merger from going ahead, she said. “Further, we will be interested if it is clear that members’ best interests are not a priority or if disclosure is inadequate,” she added.
“We will look at how funds talk to members about the merger and check whether they are providing the information members need to make the right choice.
Press said ASIC is well aware of the difficulties of mergers between funds. “But if we see mergers falling over for poor reasons, ASIC and APRA will work together to look at which regulator has the best toolbox to deal with the situation and which is likely to win if parties were taken through the courts.”
During the conference, Press confirmed that supervision and surveillance of trustees will increase. “ASIC has made it clear that will consider persistent underperformance as a red flag to help identify misconduct in superannuation,” she told delegates.
During a speech, she emphasised that underperformance is not illegal. Nor is it a problem for ASIC. “The problem is when the funds have significantly underperformed their benchmark for a significant period of time and the trustees either don’t know they’ve underperformed or they failed to act in members’ best interests and there’s potentially a breach of their trustee duties,” she said.
“That for us is a red flag. It tells us something is going on with that trustee.
“It’s the best interests duty we are concerned with, not the performance – performance is the red flag.”
Press pointed to the 44,000 superannuation products in the market and argued some are performing poorly, and should have been closed, while others are not structured to meet any obligation of the trustee to the members of the fund.
“We will be looking closely at those in terms of what does the trustee know, how have they acted, is their product dodgy and should be shifted out of the system?”