How not-for-profit funds are held accountable without members taking a hit to their retirement savings is an issue that’s been escalated since ASIC commenced civil proceedings against StatePlus Super in the past week, industry participants have said.
While the latest ASIC StatePlus action is aimed squarely at the First State Super’s financial planning subsidiary, industry participants believe the ultimate impact on the fund’s broader member base remains unclear.
“I believe we are in uncharted territory here in that we have never had a significant penalty from the regulator aimed at profit for member funds and as such we have never had to deal with how such a potential cost might be incurred by members,” David Coogan, a partner with PwC’s superannuation practice commented.
Coogan went on to comment that he believed actions against not for profit funds could have the adverse effect of unfairly penalising members or increasing the indemnity cover for directors of these funds to untenable levels, all of which he said reduces member benefits in the longer term.
Others industry sources close to the situation supported Coogan’s belief that costs associated with compensation in civil matters could end up being an impost on member benefits, either directly or indirectly via increasing insurance premiums and the like.
A First State Super spokesperson confirmed the ASIC action is against the subsidiary and not the owner First State Super nor the fund’s trustee company FTC Trustee Corporation but he declined to comment on how future possible penalties and remediation might be funded.
Regulating balance sheets
Civil proceedings and remediation programs in the superannuation sector have to-date focused on for-profit funds where shareholder capital and broader balance sheets have absorbed the impost of regulatory retorts since Hayne’s Royal Commission.
ASIC’s latest action against StatePlus is unique based on its crossover into the profit-for-member segment, Scott Donald, director of the Centre for Law, Markets and Regulation at UNSW Law (pictured) commented.
“While I’d hope ASIC and APRA are sensitive to these issues, I also hope the regulators don’t hold back on regulatory sanctions around this issue… there is a danger the regulator looks at a fund and says there is no balance sheet and that the only way it can penalise the fund is by taking money out of the fund. That I believe is a structural issue,” Donald said.
In the last year and a half ASIC has opened Federal Court proceedings against three of the four big banks for breaches involving advice to superannuation fund members, including a fee-for-no-service action against National Australia Bank, an alleged agreement between Colonial First State and Commonwealth Bank to promote super products to bank customers, and an action against Westpac’s program to roll super balances into inhouse products which the regulator subsequently won on appeal.
An ASIC spokesperson commented that while the regulator is mindful penalising not for profit funds could result member accounts being impacted, this did not factor in its regulatory activities.
The maximum civil penalty for contraventions alleged against StatePlus is between $1.7 million and $2.1 million per contravention; ASIC’s civil penalty proceedings relate to at least 36,592 members fees for financial advice promised but not provided, the regular has stated.
StatePlus has already paid $100 million in remediation since First State Super acquired the business in 2016 and subsequently replaced the StatePlus board and became aware the business’s clients had not received their annual review service.
Long before ASIC’s recent action against StatePlus, regulators have had to contend with the idea that penalising a not for profit fund could mean penalising it’s members, Donald acknowledged.
The way profit for member funds are structured, balance sheets are effectively representative of policyholders’ equity, the size and growth of which is dictated by the net inflow of contributions and the rate of earnings on their assets, a paper previously published by the Reserve Bank of Australia characterised.
Generally the borrowings of these funds are quite small, being limited by trust deeds and other regulatory requirements, this paper stated.
“This is not to say that these institutions don’t compete for funds. They compete to raise their net contributions, often on the basis of their recent earnings records, and they can also compete for the increasingly important ‘discretionary’ component of members’ equity such as in rollover funds and insurance bonds. But they do not engage in liability management in the same sense as banks,” it noted.
The $1 billion acquisition of StatePlus by First State Super from SAS Trustee Corporation in mid-2016 was funded with a promissory note – debt funding which now sits as an investment in the fund’s portfolio holdings.
The funding arrangement allowed the fund to make its acquisition in lieu of having a balance sheet for such acquisitions, an arrangement First State Super CEO Deanne Stewart described in a recent interview with Investment Magazine’s Market Narratives.