The final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry includes numerous recommendations with wide-ranging implications for Australia's superannuation industry.
After former Justice of the High Court and Commissioner Kenneth Hayne offered a searing rebuke of the financial sector’s greed during the hearings, some were expecting more fireworks from the report, which was tabled in parliament on 4 February.
In the words of The CEO Magazine contributor David Walker, the final product is “less dramatic than most people thought it might be”. Scott Donald, Director of the Centre for Law, Markets and Regulation, UNSW Law, told The CEO Magazine that some “were expecting more of a fire and brimstone report, with names and heads on sticks”, but the end statement was instead a “very measured report”.
One area where the report did urge major changes was the superannuation industry. With both major parties vowing to implement its proposals, it is likely to be heavily influential in shaping how the sector develops and how it is regulated in the coming years.
The superannuation sector will undergo a radical transformation under the Hayne recommendations, with new job entrants able to carry one default account with them through their careers, ending the proliferation of fee-draining multiple accounts #auspol https://t.co/XsBLv8pX6J
— Greg Brown (@gregbrown_TheOz) February 4, 2019
Role of regulators in the superannuation industry
Among the recommendations is a suggestion that ASIC becomes the chief conduct regulator for superannuation. The other relevant watchdog, APRA, will also be equipped with new powers in the form of civil penalties for superannuation trustees and directors who breach the law.
Donald believes the report’s emphasis on providing tools to punish bad actors will lead to increased efficiency in the sector and is preferable to raising the regulatory burden across the board. The latter option may have simply imposed additional costs which would ultimately be largely borne by those doing the right thing. “It will enable regulators to go after bad apples more decisively,” he reasons.
He adds that APRA and ASIC are still “developing” the necessary tools to properly regulate superannuation. Previously they had been seen as somewhat passive, a perception that was not entirely fair in his view, but that reflected their tendency to favour negotiation over litigation for the industry’s ‘bad apples’.
A move towards one default account
Professor Carsten Murawski, from the University of Melbourne’s Department of Finance, is an authority on financial decision-making. He says that regulators will continue to be an important part of Australia’s superannuation framework, but also considers that there is a broader and very necessary project “in terms of making the entire the retirement-readiness space more accessible and easier to use” and which would extend beyond the purview of the watchdogs.
One recommendation which may help make the industry more user-friendly is the suggested move to a default single account. There is currently significant confusion and duplication in this area, with many Australians having multiple accounts from different employers.
Murawksi sees it as a positive step. “A big question in the superannuation space has been: how can we make it easier for end users to make good decisions or at least avoid bad decisions?” he says.
Banks should face criminal charges over the fees-for-no-service scandal, while the superannuation and home loan sectors need to be radically overhauled, under sweeping recommendations by the #bankingroyalcommission https://t.co/cMOFsiAiQB
— The Sydney Morning Herald (@smh) February 4, 2019
Hayne Report on duties of trustees
Donald has previously advocated for greater clarity around conflict of duties for superannuation trustees. This area was covered in recommendation 3.1 of the report, which states that trustees of superannuation entities should be precluded from having any obligations other than those stemming from their trustee duties.
Donald says it would be easy to overlook this recommendation, but it is valuable in clearly articulating the role of trustees going forward.
“One of the problems that have occurred in some organisations is that the same corporate entity has been (doing) multiple jobs.
“That creates what is, in my view, frankly an impossible situation. It is impossible to work out to do in that situation and Commissioner Hayne has called that out…he has said that norm of conduct and that structuring institutionally is untenable.”
Hayne stopped short of recommending a legislative change to enshrine the role of the trustee and like many of the recommendations here, it will take some time to see how it is ultimately implemented into industry practice.
An end to ‘hawking’ and the issue of financial literacy
The report also envisages a crackdown on superannuation firms making unsolicited approaches to customers. In one particularly galling case study uncovered by the Commission, a young man with Down syndrome was cold called and coaxed into buying insurance protection he neither understood nor wanted.
Donald himself has previously been the recipient of an unwanted cold call selling a financial product and considers the recommendation on this point “very sensible”.
Murawski says the industry has allowed a “sales culture” to develop and, in many instances, superannuation products were sold out of the self-interest of the company and not because they were in any way aligned with the needs of the end user.
He also considers the recommendation “a step in the right direction” in limiting the self-interest of superannuation providers, though he says greater financial literacy would also play a valuable role in preventing customers ending up with unnecessary and unwanted products. He has advocated for high schools to play a much larger role in teaching financial literacy and believes this should be combined with measures to improve the transparency and accessibility around the superannuation products themselves.
— Federal Politics (@Politics_SMHAGE) February 4, 2019
The next phase will be implementing recommendations from the report
Murawski acknowledges that the report includes fixes for some recurring problems, but says he would have liked to have seen “more ideas on how we can make the superannuation system more effective for the end users” and says the general trend in recent years has been the government shifting more and more responsibility for retirement planning back onto individuals.
“A lot of people probably need help with (retirement) but that is a) out of reach financially for most people and b) we know from numerous studies, the quality of advice could be higher than it is. We would like to see some innovation that makes it easier for people to get ready for retirement.”
Donald says the impact of the recommendations may not permanently revamp the sector, but their impact will be profound, for a time at least and that there is now significant political capital in adhering to the report and it will now be “exceptionally difficult” for either major party to back away from implementing the recommendations without facing public disapproval.
Ultimately, he believes that the Commission and Hayne’s final report has “changed the discourse” around the financial industry.
“I don’t know how long that will last and I’ve heard these sorts of calls at least three times in my 30-year career, but for this generation this will be a clarion call that this behaviour is unacceptable and that attitudes need to change”