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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, click on the boxes below:
Recommendations for superannuation
Recommendation 3.1 – No other role or office
The trustee of an RSE should be prohibited from assuming any obligations other than those arising from or in the course of its performance of the duties of a trustee of a superannuation fund.
Recommendation 3.2 – No deducting advice fees from MySuper accounts
Deduction of any advice fee (other than for intra-fund advice) from a MySuper account should be prohibited.
Recommendation 3.3 – Limitations on deducting advice fees from choice accounts
Deduction of any advice fee (other than for intra-fund advice) from superannuation accounts other than MySuper accounts should be prohibited unless the requirements about annual renewal, prior written identification of service and provision of the client’s express written authority set out in Recommendation 2.1 in connection with ongoing fee arrangements are met.
Recommendation 3.4 – No hawking
Hawking of superannuation products should be prohibited. That is, the unsolicited offer or sale of superannuation should be prohibited except to those who are not retail clients and except for offers made under an eligible employee share scheme. The law should be amended to make clear that contact with a person during which one kind of product is offered is unsolicited unless the person attended the meeting, made or received the telephone call, or initiated the contact for the express purpose of inquiring about, discussing or entering into negotiations in relation to the offer of that kind of product.
Nominating default funds
Recommendation 3.5 – One default account
A person should have only one default account. To that end, machinery should be developed for ‘stapling’ a person to a single default account. Recommendation 3.6 – No treating of employers Section 68A of the SIS Act should be amended to prohibit trustees of a regulated superannuation fund, and associates of a trustee, doing any of the acts specified in section 68A(1)(a), (b) or (c) where the act may reasonably be understood by the recipient to have a substantial purpose of having the recipient nominate the fund as a default fund or having one or more employees of the recipient apply or agree to become members of the fund. The provision should be a civil penalty provision enforceable by ASIC.
Recommendation 3.7 – Civil penalties for breach of covenants and like obligations
Breach of the trustee’s covenants set out in section 52 or obligations set out in section 29VN, or the director’s covenants set out in section 52A or obligations set out in section 29VO of the SIS Act should be enforceable by action for civil penalty.
Recommendation 3.8 – Adjustment of APRA and ASIC’s roles
The roles of APRA and ASIC with respect to superannuation should be adjusted, as referred to in Recommendation 6.3.
Recommendation 3.9 – Accountability regime
Over time, provisions modelled on the BEAR should be extended to all RSE licensees, as referred to in Recommendation 6.8.
Recommendations for financial advice
Ongoing fee arrangements
Recommendation 2.1 – Annual renewal and payment
The law should be amended to provide that ongoing fee arrangements (whenever made):
- must be renewed annually by the client;
- must record in writing each year the services that the client will be entitled to receive and the total of the fees that are to be charged; and
- may neither permit nor require payment of fees from any account held for or on behalf of the client except on the client’s express written authority to the entity that conducts that account given at, or immediately after, the latest renewal of the ongoing fee arrangement.
Lack of independence
Recommendation 2.2 – Disclosure of lack of independence
The law should be amended to require that a financial adviser who would contravene section 923A of the Corporations Act by assuming or using any of the restricted words or expressions identified in section 923A(5) (including ‘independent’, ‘impartial’ and ‘unbiased’) must, before providing personal advice to a retail client, give to the client a written statement (in or to the effect of a form to be prescribed) explaining simply and concisely why the adviser is not independent, impartial and unbiased.
Quality of advice
Recommendation 2.3 – Review of measures to improve the quality of advice
In three years’ time, there should be a review by Government in consultation with ASIC of the effectiveness of measures that have been implemented by the Government, regulators and financial services entities to improve the quality of financial advice. The review should preferably be completed by 30 June 2022, but no later than 31 December 2022.
Among other things, that review should consider whether it is necessary to retain the ‘safe harbour’ provision in section 961B(2) of the Corporations Act. Unless there is a clear justification for retaining that provision, it should be repealed.
Recommendation 2.4 – Grandfathered commissions
Grandfathering provisions for conflicted remuneration should be repealed as soon as is reasonably practicable.
Recommendation 2.5 – Life risk insurance commissions
When ASIC conducts its review of conflicted remuneration relating to life risk insurance products and the operation of the ASIC Corporations (Life Insurance Commissions) Instrument 2017/510, ASIC should consider further reducing the cap on commissions in respect of life risk insurance products. Unless there is a clear justification for retaining those commissions, the cap should ultimately be reduced to zero.
Recommendation 2.6 – General insurance and consumer credit insurance commissions
The review referred to in Recommendation 2.3 should also consider whether each remaining exemption to the ban on conflicted remuneration remains justified, including:
- the exemptions for general insurance products and consumer credit insurance products; and
- the exemptions for non-monetary benefits set out in section 963C of the Corporations Act.
Professional discipline of financial advisers
Recommendation 2.7 – Reference checking and information sharing
All AFSL holders should be required, as a condition of their licence, to give effect to reference checking and information-sharing protocols for financial advisers, to the same effect as now provided by the ABA in its ‘Financial Advice – Recruitment and Termination Reference Checking and Information Sharing Protocol’.
Recommendation 2.8 – Reporting compliance concerns
All AFSL holders should be required, as a condition of their licence, to report ‘serious compliance concerns’ about individual financial advisers to ASIC on a quarterly basis.
Recommendation 2.9 – Misconduct by financial advisers
All AFSL holders should be required, as a condition of their licence, to take the following steps when they detect that a financial adviser has engaged in misconduct in respect of financial advice given to a retail client (whether by giving inappropriate advice or otherwise):
- make whatever inquiries are reasonably necessary to determine the nature and full extent of the adviser’s misconduct; and
- where there is sufficient information to suggest that an adviser has engaged in misconduct, tell affected clients and remediate those clients promptly.
Recommendation 2.10 – A new disciplinary system
The law should be amended to establish a new disciplinary system for financial advisers that:
- requires all financial advisers who provide personal financial advice to retail clients to be registered;
- provides for a single, central, disciplinary body;
- requires AFSL holders to report ‘serious compliance concerns’ to the disciplinary body; and
- allows clients and other stakeholders to report information about the conduct of financial advisers to the disciplinary body.