This article was originally published in the print edition of Retirement Magazine Vol. 3

Ask the chief executive of a financial institution, or a lobbyist acting on behalf of one, for their public policy preferences, and chances are they will request that the relevant regulation or legislation be “principles-based.”

The Financial Services Council last year praised the Albanese government for the way in which its so-called Best Practice Principles for retirement were drafted to be “less prescriptive and more principles-based.” The Association of Superannuation Funds of Australia – which is not always aligned with the FSC position – concurred, although warned that some elements of the framework may not “facilitate flexible application” and that some of the principles “present as considerably more prescriptive.”

These are just two examples of the numerous requests from industry in policy debates over the past two decades for principles-based regulation, from the design of product disclosure obligations to the governance standards that followed the Hayne Royal Commission, to the ongoing debate about sustainable investment labelling, where peak bodies have consistently warned that an “overly prescriptive” approach would create unnecessary compliance costs and limit innovation.

The industry’s penchant for principles is not without foundation. The track record of prescriptive regulation in Australian financial services is genuinely troubled, and there are legitimate grounds for scepticism about the bureaucracy’s capacity to draft rules that achieve their stated purpose without producing collateral damage, or “unintended consequences” as they call it in the Canberra bubble. 

For example, the responsible lending obligations introduced after the global financial crisis began as sound principles to ensure credit was not extended to consumers who could not repay it but were perverted by the corporate regulator into close to 100 pages of legalese. This prescriptive guidance became so convoluted that then-Reserve Bank of Australia Governor Philip Lowe told a parliamentary hearing that “the way we’ve translated those principles into reality needs looking at again.” 

Landmark review

The Australian Law Reform Commission, in its landmark review of financial services legislation, identified a similar dynamic. It concluded that “attempts to facilitate compliance through prescription” are counter-productive and often fail to result in meaningful consumer protection. 

“This is because prescriptiveness can itself introduce risks of non-compliance by increasing the complexity and sheer scale of the legislation, thereby making it harder to understand and enforce,” the ALRC review found. 

You would presume, therefore, that given the industry finally was awarded a legislative approach that somewhat resembled its own requests, that regulatory compliance would be relatively simple.

But as the old adage goes: Careful what you wish for. 

The Retirement Income Covenant, which came into force on 1 July 2022, is explicitly described by Treasury as “principles-based”, just as industry advocacy efforts –championed by then-Challenger retirement income chair and former regulator Jeremy Cooper (note 1) – called for. 

It does not mandate a drawdown rate. It does not specify a communication schedule. It requires trustees to formulate and implement a strategy that addresses how they will help their members achieve an income once they cease or reduce work and reach preservation age. The judgment about what that looks like, and how the slew of risks will be managed, is left entirely to the trustee in the very design of the policy.

And yet, mounting evidence, including in the pages of this publication, suggests trustees have not been up to that task.

“Without effective success metrics, how can trustees know that their strategies are working? Members deserve better.”
– Margaret Cole

The joint APRA-ASIC thematic review, published in July 2023, found “a lack of progress and insufficient urgency from RSE licensees in embracing the retirement income covenant.” A year later, the 2024 Pulse Check found that while some incremental improvements had been made, the most concerning gap was trustees’ failure to measure whether their strategies were working at all.

APRA deputy chair Margaret Cole was unambiguous: “Without effective success metrics, how can trustees know that their strategies are working? Members deserve better.”

By the time of the 2025 Pulse Check, the picture had sharpened into something more troubling than slow progress: a widening gap between the minority of funds genuinely investing in their retirement capability and those content to do the minimum.

More than three years after the covenant’s commencement, only 13 per cent of RSE licensees were using cohort-specific communications to help members navigate their retirement income options. One in five provided no information about drawdown strategies beyond the legislated minimum.

ASIC Commissioner Simone Constant noted that trustees had developed “significantly fewer communications targeted at retired members”, a striking finding given that the retirement wave the covenant was designed to address has already arrived.

This is not a regulatory failure. It is a cultural one. The superannuation sector was built around accumulation – a phase that rewards operational rigour, scale and the management of homogeneous, long-horizon mandates. Retirement is structurally different. It is heterogeneous, personalised and inherently strategic. It demands that institutions think about individual member circumstances rather than execute standardised processes. That kind of judgment-based work sits uneasily with a compliance culture conditioned to wait for a rulebook.

Durable excuse

The industry’s most durable excuse – that uncertainty around the financial advice framework has prevented progress – has some merit. Given the widespread consensus among legal practitioners and academics that the provisions governing financial advice in the Corporations Act are complex and duplicative, it follows that the ability to execute a retirement strategy is inhibited by associated risks and complexities. 

But while financial advice reform would almost without question aid the ability of funds to assist and communicate freely with members about the decisions open to them, it would be a stretch to suggest that the laws need to change in order for funds to develop meaningful cohorts based on data they already hold, or to decide what drawdown guidance to provide beyond the statutory minimum.

It is understandable that regulators are losing patience, as the cost of the delay is measurable. Retirement phase assets in APRA-regulated funds are approaching $1 trillion and are projected to double by 2030. The first generation of Australians who should be experiencing the fruits of a world-class system are now attempting to draw on it, and they are doing so with substandard service from the fiduciaries handed oversight of this critical socio-economic function.

ASIC research finds that just one in three Australians on the cusp of retirement are confident they will be financially comfortable in retirement. That figure reflects, in part, the failure of funds to develop the retirement income strategies the covenant asked them to develop three years ago.

Andrew Bailey, a former chief of the UK’s Financial Conduct Authority, told a Bloomberg event in 2019 that regulators and industry alike have historically shown “a tendency to talk principles but write rules.” 

In Australia’s superannuation system, there is still a narrow window of time for principles talk to be supplanted by principles walk. If it closes, industry leaders will have only themselves to blame for the poorly drafted prescription that inevitably follows.

Notes:

1. Jeremy Cooper chairs the Conexus Institute Advisory Board, on which the author also serves.

The Conexus Institute is a not-for-profit think-tank philanthropically funded by Conexus Financial, publisher of Retirement Magazine.

Disclosure: This article was assisted in research and composition by AI technology, but was devised, edited and approved by the author.