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Although most media coverage following release of the Final Report from the Hayne Royal Commission has been about its impact on Australia’s banking system, the fallout for the super and financial advice industries is likely to be every bit as significant.
The three-volume final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (FSRC), is likely to result in major change for the super industry – both for super fund members and for trustees and executives managing the large super funds holding most Australian employees’ retirement savings.
Financial advisers are also likely to find their world upended yet again, with the FSRC report containing some significant recommendations in relation to their independence, advice fees and disciplinary system.
To help you understand the implications of the FSRC final report on your super fund and financial advice provider, SuperGuide has prepared an overview of the key points in each area.
FSRC final report: 5 areas that could change your super and financial advice
1. Super fund member accounts
A major change recommended in the FSRC report is that employees should only have one default super account and they should not be defaulted into a new super fund every time they change jobs. To assist with this, the report recommends a new mechanism be developed to ‘staple’ people to a single default super account.
If you have your super savings in a MySuper account, the payment of any fees for financial advice from your account balance will be banned. However, fees for simple intra-fund advice on things like consolidating multiple super accounts, selecting a super fund, or changing your investment option will be permitted.
Fund members who have made a choice about which investment options they wish their super savings to be placed into will not be able to use the money in their super account to pay for financial advice unless they agree to it in writing on an annual basis.
Another important recommendation for super fund members is a new ban on ‘hawking’, or the selling of super products. Commissioner Hayne makes it clear in the report “superannuation is not a product to be sold” as it is compulsory, so encouraging fund members to hold multiple accounts, or change their existing super arrangements without good reason should be actively discouraged.
As a result, the report recommends all forms of unsolicited offering of super arrangements to fund members should be banned. However, super funds will still be able to advertise the availability of a fund to the general public.
2. Super fund trustees
Although a bit less headline grabbing, some of the FSRC’s recommendations in relation to super fund trustees and super fund governance are likely to be the ones that create long-term change in Australia’s super system.
A key recommendation is that super fund trustees should no longer be able to take on any other role or office in the course of performing their trustee duties to avoid potential conflicts of interest. During its hearings, the Royal Commission heard examples of situations where trustees were not only acting as a trustee, but also had a role with the fund’s parent company. This recommendation makes it clear fund trustees’ key duty is always to act in the best interest of super fund members, not that of the fund’s parent company.
To help focus fund trustees’ minds on the task at hand, the FSRC report recommends the introduction of civil penalties if trustees breach their obligations under the SIS Act governing Australia’s super system.
In addition, trustees and fund executives of large super funds are likely to find themselves subject to the new Banking Executive Accountability Regime (BEAR), in the same way as the senior executives of banks. This new regime (which came into effect for the big banks on 1 July 2018), gives regulators the power to curb bonuses, vet appointments and force boards to map out executive responsibilities.
3. Governance of super funds
The FSRC final report also suggested tighter control of the marketing activities undertaken by super funds. It recommended super funds be banned from activities like entertaining employers at functions and sports events as a way to encourage the employer to nominate the fund as the business’s default super fund, or to get employees to become members of the super fund.
Commissioner Hayne’s report also had a lot to say about the super industry’s two regulators: ASIC and APRA. He did not, however, recommend the creation of a new superannuation-only regulator, instead opting for adjustment of the role and powers of APRA and ASIC to enable better supervision of super funds and more effective enforcement of trustees’ duties.
4. Financial advice
The FSRC final report made several significant recommendations when it came to the provision of financial advice.
One of the most important recommendations relates to the independence of most financial advisers currently providing advice to Australian consumers. This is an issue SuperGuide has been pursuing for many years, as we believe independent and unbiased advice is vital – and the FSRC agrees.
The final report recommends new legislation in this area. Any financial adviser who does not meet the independence requirements outlined in the Corporations Act will be required to give clients a written statement simply and concisely explaining why they are not ‘independent’, ‘impartial’ or ‘unbiased’ before they provide any personal advice.
This requirement will represent an important win for consumers, as financial advisers will now be required to bring to a client’s attention that they are not independent and free of any potential conflict of interest.
For more on independent finance advice, see the following SuperGuide articles
The final report also recommends that advice clients be required to renew annually any ongoing fee arrangements they have with their adviser. This recommendation aims to eliminate the ‘fee for no service’ scandals highlighted in the Royal Commission hearings.
Annual renewal for ongoing fee arrangements must be in writing and as a client you must be told the services you are entitled to receive under the arrangement and the total fees you will be charged. Fees will no longer be paid from an account held on your behalf by a financial adviser without your express written authority.
The final report also recommends current rules permitting some ‘grandfathering’ (or continuing protection) of payments for conflicted remuneration to financial advisers (which is where an adviser or their business receives a benefit from the product you are sold) should be repealed as soon as possible.
The payment of commissions to financial advisers for the sale of life risk products to their clients may also be a thing of the past, with the final report recommending these be phased out. ASIC is currently reviewing these products and the FSRC report recommends that unless there is clear justification for retaining adviser commissions on these products, they should be banned.
5. Financial adviser misconduct
The FSRC report has also made a number of recommendations in relation to misbehaviour by financial advisers, including the establishment of a new disciplinary body to deal with this type of misconduct.
Under the proposed disciplinary system, all financial advisers providing personal financial advice must be registered, with a new, central body responsible for disciplinary matters. Australian Financial Service Licence (AFSL) holders will be required to report ‘serious compliance concerns’ to this body.
If you are the client of an adviser, you will also be able to report his or her misconduct to this new disciplinary body.
AFSL holders will also be required to report ‘serious compliance concerns’ about individual advisers to ASIC on a quarterly basis. The licence holder will also be required to investigate the full extent of any misconduct by their licensed financial advisers, inform any affected clients and remediate them promptly.
For more information about the FSRC recommendations, see the links below: