QMV: Opportunities from Hayne final report

Pockets of opportunity remain after Hayne: GSFM
January 31, 2019
Financial services industry not populated by monsters
February 4, 2019


Loyalty, prudence, and an opportunity to improve culture

The Hayne Royal Commission’s superannuation related recommendations are first and foremost focused on promoting changes to the ways in which superannuation trustees deal with conflicts of interest and raising the standard of care which trustees adopt in managing members retirement savings.

Hayne has also made sensible recommendations in relation to distribution activities, administration of duplicate accounts, and advice fees in promoting a simpler, principles-based approach to regulating the financial sector.

Loyalty – Conflicts of Interest

Hayne has called out dual regulated entities (DREs) for “baking in” conflicts of duty or interest too deeply, warranting a prohibition and requirement that registerable superannuation entities (RSE) licensees hold no other role or office such as that in a DRE. He has also highlighted the need for greater scrutiny for outsourced arrangements with related parties such as insurers, custodians, administrators, and investment managers.

However, Hayne has taken a differing position to the Productivity Commission in relation to the ability of for-profit superannuation trustees to be able to manage conflicts. While accepting that trustees of for-profit superannuation funds may be conflicted, they were not hopelessly so.

Hayne also placed weight on the importance of ensuring that there is adequate competition in the superannuation system from both for-profit and not-for-profit models.

The suggestion that parallel fiduciary or best-interests obligations could be imposed on material service providers was dismissed in the Final Report, with concerns that such a measure could distract from the responsibilities which superannuation trustees have in overseeing any outsourced business activities.

Prudence – Civil penalties and SEAR

Recommendations have also been made to create a civil penalty regime for breaches of the SIS Act covenants (which protect the erosion of the irreducible core of the trust structure) to be imposed on superannuation trustees and trustee directors. Such a change is directed at heightening the actual standard of care adopted by superannuation trustees, while not changing the existing legal standard required – that of a prudent superannuation trustee.

The civil penalties under the SIS Act would also be able to be initiated by either ASIC as conduct and consumer protection regulator, or APRA as prudential regulator as appropriate. This would significantly heighten the level of scrutiny placed on the business of superannuation trustees with a goal of uplifting the standard of superannuation fund activities.

The eventual extension of the Banking Executive Accountability Regime (BEAR) to superannuation funds has also been recommended (I guess we’ll call it SEAR?). Such a recommendation will shift the focus onto executives and would be expected to further heighten the standard of care adopted by senior management in conducting themselves in their position. Such a change would heighten the standard and consequences of inappropriate conduct by senior executives.

Hawking and treating

Commissioner Hayne has provided clear recommendations related to ensuring that the distribution of superannuation products is not a point of exploitation. A recommended prohibition on hawking – or the direct solicitation – of superannuation products to retail clients may challenge the distribution or selling strategies of some superannuation funds.

In a similar move, Hayne has recommended changes to the existing SIS Act obligations preventing superannuation trustees from providing inducements to employers on condition of obtaining default status. Hayne proposes broadening the application to include more speculative inducements in connection with employer default arrangement decisions.

The recommendation intends to capture entertainment and hospitality related activities, where the intention is to influence employers to nominate the superannuation fund as a default. Such a change would likely result in changes to the ways in which some superannuation trustees manage relationships with contributing or prospective default employers.

Efficiency – focusing financial advice fees addressing unintended multiple accounts

The recommendations put forward by Commissioner Hayne unsurprisingly take a razor to grandfathered commissions being deducted from superannuation accounts.  The recommendations go further still, seeking to better focus financial advice costs by prohibiting deductions from MySuper products (as these are default arrangements) and imposing further obligations and limitations of financial advice fees applied to choice products – albeit with a carve out for intra-fund advice.

Hayne has also joined the chorus of voices calling for a solution to the problem of unintended multiple accounts, by recommending that default fund arrangements are stapled once for an individual. This echoes the least controversial aspect of the Protecting Your Super Bill which has stalled in the senate and is likely to be implemented with little politicisation.

Principles based regulation

In what are arguably the most important recommendations, Hayne has signalled a shift towards a principles-based approach to regulation of superannuation and financial services. The importance of this should not be understated.

In recommending that there is a greater focus in the fundamental norms over the often complex and confusing myriad of exceptions and qualifications which currently exist in the regulation of financial products and superannuation, Hayne seeks to address the problem that complexity poses to the development of more responsible and accountable organisational culture.

In advocating for regulatory law based on a set of simple principles which are easily understood and applied by regulators, financial institutions, and consumers alike, the Hayne Commission might open the door to replacing loopholes, mere compliance, process adherence and box checking with organisational culture founded in greater individual responsibility and accountability from junior employees right through to senior management.