Royal Commission

Royal commission turns attention to super industry

The Hayne royal commission has been a gripping saga. It has claimed the jobs of high-level executives, wiped billions from the market value of financial services giants, and brought to light story after story of financial ruin caused by bad advice.

Its hearings into the country’s banking industry and the media attention surrounding them are a forewarning of what to expect when round five of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry turns its attention to superannuation next week.

A team has been assigned to sift through submissions and super funds have been asked to nominate a board member to front the commission and prepare board papers and documents dating back five years.

The Productivity Commission’s recent draft report on the competitiveness and efficiency of the Australian superannuation system will certainly feature in the commission’s research. It delivered troubling findings into industry governance and accountability. This included persistent underperformance in a quarter of the nation’s super funds, a widespread inability or refusal of funds to provide data such as net rates of return, and questions about the skills composition of boards.

Here we provide some background into the commission and what to expect when hearings begin in Melbourne on August 6.

How it all started

Royal commissions are not to be taken lightly. These inquiries are held in a range of monarchies around the world and are granted enormous powers, albeit restricted to within the terms of reference the government sets.

Previous royal commissions in Australia have investigated the disappearance of documents relating to strategy during World War II, the covert practices of the country’s intelligence agencies, organised crime and drug trafficking in a union in the 1980s and, more recently, deaths of Aboriginals in custody and child sexual abuse.

Launched by the governor-general on advice of the government, they can take on momentum the government is unable to stop and usually receive a high degree of media coverage. For this reason, there is usually a haggle over the framing of the terms of reference and governments set a date when they must finish to contain the fallout.

Such was the case this time around. In November 2017, under mounting political pressure, Prime Minister Malcolm Turnbull and Treasurer Scott Morrison announced plans for the commission, following a series of scandals involving allegations directed at all of Australia’s big four banks.

They allegations included, among other things, fraud and inappropriate financial advice, rigging of the Bank Bill Swap Rate – a key benchmark interest rate – and breaching of anti-money laundering and terrorism finance laws.

Labour shadow treasurer Chris Bowen challenged the terms of reference in media interviews, labelling them as a political attack on industry funds and calling for more consultation with consumer groups and victims of financial scandals. The 12-month timeline set for the commission was “ambitious”, he said.

What’s happened so far

 Hearings have already been held into consumer lending, financial advice, loans to SMEs and the experience of regional and remote communities with financial services entities.

The public has heard wide and varied allegations around the conflict of interest created by the commissions banks make to mortgage brokers, exploitation of indigenous Australians via dodgy insurance products, and lending practices that have forced farmers off their land.

AMP was hit particularly hard in a fees-for-no-service scandal that claimed high-level scalps including the jobs of chair Catherine Brenner and chief executive Craig Meller, and wiped billions from the company’s market value.

Super next in line

 Round five will consider how registrable superannuation entity (RSE) Licensees fulfil their duties to members of regulated super funds, and will look at whether those duties are affected by structural or governance arrangements.

With the superannuation industry so large – at $2.6 trillion it is bigger than the country’s GDP – and intrinsic to the interests of every Australian, the scrutiny is expected to cut deep.

The Productivity Commission’s recent review has no doubt provided a glimpse of things to come and raised a range of questions that will probably emerge during the royal commission.

It found 1 in 4 funds persistently underperform, including 12 retail funds and 10 industry funds representing $62 billion of assets and 1.7 million member accounts. Why haven’t there been more mergers? What actions have board trustees taken to address these problems in the interests of their members?

Almost a third of the country’s 30 million superannuation accounts were unintended multiple accounts, the Productivity Commission found, with many gradually eroding from insurance premiums and administrative fees. This represents an enormous amount of money and strengthened calls for legislation that all Australians should have a single default fund unless they opt to change.

When the commission asked the funds to provide information on things such as net rates of return and the number of inactive accounts on their books, the majority flatly declined to answer. This called into question the performance attribution work being undertaken “and could arguably imply a contumelious disregard for members by those who elected not to respond”, the draft report found.

Other issues that may come up include barriers to indigenous Australians in remote communities accessing their super, the flow of industry fund members’ money to sponsoring unions, and whether board positions are determined by the interests of members or the interests of related parties.

The Productivity Commission’s report is not the only one to call into question transparency in the superannuation industry. Darren McShane’s external report into the country’s fees and costs disclosure regime, commissioned by ASIC, also highlighted the difficulty for consumers looking for practical information that would allow them to compare the performance of funds. This will probably be an ongoing theme.

The commissioner, Justice Kenneth Hayne, will submit an interim report on his findings by September 30 and a final report by February 1 next year. And while the recommendations of royal commissions aren’t always taken up in full by governments of the day, the issues they raise and momentum they create make them impossible to ignore. A raft of reforms will certainly follow.