There is broad consensus in industry and Canberra that the collapses of the Shield and First Guardian master funds – and failures that led to them – demand a regulatory response. 

More than 11,000 Australians lost somewhere in the order of a billion dollars of retirement savings in circumstances that exposed serious gaps in platform trustee due diligence, research house and licensee accountability, lead generation oversight and the penalty and compensation frameworks. 

Those gaps are real and there is a role for government in closing them. 

But getting the response wrong could create an uneven playing field in the industry and counterproductive consumer outcomes. 

Earlier this month, Treasury released three consultation papers framed as the government’s response to those collapses. Most of what is in those papers is defensible. 

Platform trustee governance needs strengthening. Lead generation needs a proper regulatory framework (to put it mildly). Penalties are currently too low to act as a deterrent. The Compensation Scheme of Last Resort needs structural repair. 

But sitting alongside these legitimate reform ideas, and quietly inserted into the second part of the Treasury consultation paper on “Enhancing member protections in the superannuation system”, are two proposals that do something profoundly different. 

Proposal 3 would impose a mandatory waiting period on inter-fund rollovers, while Proposal 4 would prohibit a member from paying for financial advice out of their super balance where that advice recommends a change of superannuation – from a fund less suited to a more suitable fund. 

Neither proposal addresses the conduct that caused the losses at Shield and First Guardian. Both would protect the outflow position of the one sector that has been most visibly advocating for the changes. 

A small but powerful section of the industry super lobby is seemingly using the Shield and First Guardian crisis as cover to rewrite the rules of legitimate member choice. And this is happening at precisely the same time that many members are choosing to leave them over perceived poor performance across administration and insurance claims handling, or due to a desire for more advice or investment choice. 

This publication and author campaigned hard for what became the Hayne royal commission. We did so because we believed, and still believe, that the financial services sector had drifted into arrangements that prioritised institutional interests over consumer ones, and that only a royal commission could force the structural reforms needed to put the consumer first. 

We know what good consumer protection looks like. We also know what it does not look like. Proposals 3 and 4 do not look like genuine consumer protection.

The losses at Shield and First Guardian were caused by identifiable failures at specific points in the supply chain. Lead generators operated in a legal grey zone that the anti-hawking rules did not reach, a gap ASIC chair Joe Longo has publicly acknowledged.

Research houses produced ratings that gave platform trustees a piece of paper to rely on. Platform trustees approved products without adequate due diligence, with ASIC’s case against InterPrac Financial Planning specifically alleging the licensee “relied entirely on external research” to add the failed funds to its approved list.

Financial advisers recommended those products in circumstances that ASIC alleges breached the best interests duty. The regulator has more than a dozen proceedings afoot. 

These proposals do not touch any of that. Changing where the member writes the cheque for advice does not improve research house accountability, does not make platform due diligence more rigorous and does not give ASIC a single additional tool.

What it does is make it harder for members to act on advice that recommends they leave a particular fund and join another, introducing more friction and anti-competitive forces into an industry that has long been known for both.

Competition under threat 

There is a very strange equation underlying the proposal to prohibit advice fee deductions from a member’s super balance where the advice recommends they exit a less suited fund and join one that is better suited,  or which offers features that they prefer and value.

Advice to stay could still be paid from super; advice to leave could not. Surely this should draw the attention of the competition watchdog.

The proposal is marketed as protection for vulnerable members. But in practice, a professional on six figures with a share portfolio can pay the asking price for professional advice and carry on exercising their choice. A cleaner, a shift worker, a retiree living off a modest balance cannot.

This proposal denies advice to exactly the people who most need it to navigate a complex decision, and it does so under the banner of protecting them.

Access to quality financial advice has been one of the defining public policy failures of the past decade. The advice gap is the direct result of regulatory settings that have progressively made it harder and more expensive for advisers to serve ordinary members.

This proposal would widen the gap further, creating a two-tier system in which the right to act on professional advice depends on whether you can pay for it out of savings outside super, at the precise moment when the reformed, professionalised advice sector has begun to rebuild its capacity to serve ordinary Australians.

War on choice

Member choice is a condition of the superannuation system’s legitimacy. We settled that argument nearly two decades ago.

In a country that compels working people to direct a growing share of their wages into savings they cannot access for decades, the right to decide where those savings go is what keeps the deal honest.

The greater the compulsion, the greater the obligation to preserve the member’s control over their own money. This principle was the foundation of the Choice of Fund reforms of 2005 and has been reaffirmed in every substantive piece of superannuation legislation since.

To narrow choice now, without public debate, under the cover of a scandal that has nothing to do with it, would be a quiet repudiation of one of the founding promises of the system.

Industry super funds have played an outsized role in helping Australians save for retirement, and Conexus Financial has long advocated for the model and its growing international clout. 

The profit-for-member sector has delivered strong long-term returns for millions of working Australians and came out of the royal commission markedly less tarnished than the retail sector. None of that is in dispute.

The difficulty is that a sector which built its political brand on the language of consumer protection, on the “compare the pair” campaign, on its opposition to commissions and conflicted remuneration, is now the loudest voice in the room arguing for measures that restrict member mobility and hand a competitive advantage to the sector holding the most default-allocated money.

The Super Members Council, the peak body for profit-for-member funds, welcomed the April package with a statement that described recent misconduct as having “funnelled Australians out of well-regulated super funds”. Money leaving an APRA-regulated pooled fund is not described as a choice. It is described as a direction of travel that needs to be stopped. 

If these problematic proposals become law, one part of the superannuation industry will have used a crisis it did not cause to entrench an inbuilt advantage. 

Proposals 3 and 4 should be separated from the rest of the package and assessed on their own merits, in public, with proper disclosure of who is advocating for them and why.

Experts expect incidents of fraud and cybercrime targeting super to increase. It is imperative the industry work in unison to defend against it and not give the public more reasons to be sceptical with their trust. 

Colin Tate AM is founder and managing director of Conexus Financial, publisher of Investment Magazine. He is currently on long service leave.