Superannuation – Page 21 – Digital Finance Analytics (DFA) Blog

Super Needs To Get It’s House In Order – ASIC

In a speech today by Greg Medcraft, Chairman, Australian Securities and Investments Commission “ASIC explained: Who is the corporate watchdog, what does it do and why should Australians care?” at the National Press Club of Australia, he was critical of the super industry:

Around 14 million Australians have a super account. Generally, super doesn’t have a guaranteed outcome – which is why you should be interested in your super. And one day, each and every one of you will retire. Super is often invested in equity and debt capital markets and the funds management sector – all of which are regulated by ASIC. And, with super growing, our regulatory perimeter is increasing. In fact, as of the middle of this year, Australia had super assets of $1.85 trillion, with Treasury estimating that by 2030 this will increase to $5.1 trillion. Ladies and gentlemen, my point is this – we matter to Australians because of superannuation. We matter because most Australians have a lot of skin in the game. And that is the game ASIC is in.

Super generally doesn’t guarantee an outcome. Because of this, Australian investors need to have trust and confidence in financial advice. In fact, Australian investors deserve to have trust and confidence in financial advice. I have long been passionate about lifting trust and confidence in this sector. Only one in five Australians get financial advice. With recent high – profile cases of advisers mis-selling financial products, this is sadly no surprise. The industry needs to get its house in order.

Managed Funds Now Worth $2.44 Trillion

The ABS just released their Managed Funds data to September 2014. The managed funds industry had $2,439.5b funds under management, an increase of $26.6b (1%) on the June quarter 2014 figure of $2,412.8b. The main valuation effects that occurred during the September quarter 2014 were as follows: the S&P/ASX 200 decreased 1.9%; the price of foreign shares, as represented by the MSCI World Index excluding Australia, increased 2.4%; and the A$ depreciated 7.6% against the US$.

The consolidated assets of managed funds institutions were $1,922.7b, an increase of $20.0b (1%) on the June quarter 2014 figure of $1,902.7b. The asset types that increased were overseas assets, $16.8b (5%); deposits, $4.4b (2%); short term securities, $2.5b (3%); units in trusts, $2.3b (1%); land, buildings and equipment, $0.6b (0%); and shares, $0.1b (0%). These were partially offset by decreases in other financial assets, $5.8b (16%); bonds, etc., $0.5b (0%); other non-financial assets, $0.2b (2%); and loans and placements, $0.2b (0%). Derivatives were flat. There were $484.7b of assets cross invested between managed funds institutions.

Unconsolidated assets of superannuation (pension) funds increased $24.3b (1%), life insurance corporations increased $3.0b (1%), public offer (retail) unit trusts increased $1.9b (1%), cash management trusts increased $0.6b (2%), common funds increased $0.2b (2%), and friendly societies increased $0.1b (1%).

Enhanced Financal Adviser Register Necessary, But Not Sufficient

The Treasury has released their proposals for an enhanced Financial Adviser Register for consultation. On 17 July 2014, the Government announced that it would establish an enhanced register of financial advisers, and on 24 October 2014, the Government announced details of the register’s content. Whilst the register is sound (we do not know how many advisers are operating in Australia), and the enhancements are appropriate given the issue of trust with respect to financial advice, DFA is of the view there are still significant gaps in relation to remuneration of advisers and potential conflicts. You can read our recent comments. In addition, further consideration needs to be given to how someone would find a suitable adviser. The MoneySmart Government website refers people to the professional associations, advice from friends and you can check the adviser or licensee’s name on ASIC Connect’s Professional Registers. However, currently advisers who are ’employee representatives’ will not appear on the register as their employer holds the AFSL. This is a muddled processes, and leaves consumers in the dark. More fundamental consideration needs to be given to this from a consumer perspective.

Turning to the current Exposure Draft, the Regulation proposes to make a number of amendments to the Corporations Regulation 2014 to:

enable ASIC to establish and maintain a public register of financial advisers; and
for Australian Financial Service licensees to collect and provide information to ASIC concerning financial advisers that operate under their licence.

A Consultation Note has also been developed to invite feedback from stakeholders on the key drafting issues, to ensure that the Regulation will implement the Government’s policy intent. This Consultation Note also includes: information on timing to enable the Register to be implemented by March 2015; and detail on the form lodgement fee increases necessary to fund the register. Submissions can be made to 17th December 2014.

Picking up on the background in the supporting papers, currently, a person who carries on financial services businesses must obtain and maintain an Australian Financial Services Licence (licence) with the Australian Securities and Investments Commission (ASIC). This person is referred to as a financial services licensee (licensee). Among other things, a person carries on a financial service business if they provide financial product advice. Currently, financial advice is classified under two categories. ‘Personal advice’ is financial product advice which takes into account the personal financial circumstances of the client. Any other financial product advice that does not take into account the client’s personal circumstances is termed ‘general advice.’ Individuals may provide financial product advice in a range of circumstances. They may be licensees themselves; or directors or employees of licensees. They may be non-director/non-employee representatives of licensees – these individuals are referred to as ‘authorised representatives’. In certain circumstances, an authorised representative can ‘sub-authorise’ another authorised representative to act on behalf of the licensee.

‘Representative’ is the overarching term used to describe authorised representatives, director representatives and employee representatives (including those that operate under a related body corporate of the licensee) and any other person acting on behalf of the licensee, that provide financial services under a licence. Responsibility for day-to-day supervision of representatives operating under a licence is devolved to licensees. Financial services licensees are not required to provide ASIC with certain information on director or employee representatives that operate under their licence. This may be contrasted with the requirements imposed on a licensee when it authorises a non-employee or non-director representative to act on its behalf. For these authorised representatives, licensees must lodge certain information with ASIC, and then ASIC must maintain a register of these individuals. Consequentially, there is no register that provides information to consumers, the financial advice industry, or ASIC regarding employee and director representatives of licensees. ASIC is currently only required to maintain public registers of licensees and authorised representatives of licensees. These registers provide information on a licensee or authorised representatives’:

registration/licence number;
licensee name/authorised representative name;
address;
start date of registration/licence;
history of previous licensees (for authorised representatives only);
status (whether the licensee/authorised representative is currently authorised); and
details of any conditions or restrictions about the registration.

As ASIC currently maintains registers of licensees and authorised representatives, but not other representatives of licensees, the total number of financial advisers operating in Australia is not known. There is also limited information available about financial advisers who are director or employee representatives. This transparency gap means consumers cannot easily check whether a particular individual is authorised to give them financial advice, or look up other information that would be valuable to them when verifying the credentials and status of an individual adviser. This gap also means that ASIC has limited visibility of the natural persons providing personal advice on more complex products to retail clients, and is restricted in its ability to identify, track and monitor these individuals who move from licensee to licensee as employees or directors. As a result, this limits ASIC’s ability to take action against individual advisers over and above action that relates to the relevant licensee.

The proposed new law will require a register of all individuals who provide personal advice on more complex products to retail clients under a financial services licence will enable consumers to verify that their individual adviser is appropriately authorised to provide advice and find out more information about the adviser before receiving financial advice. A comprehensive register will also assist ASIC to a regulate advisers who move between licensees as well as enabling the financial advice industry to better protect itself from rogue financial advisers. The new register will be limited to those providing personal advice on more complex products to retail clients – focussing on the area where rogue advisers or ‘bad apples’ present the greatest risk to consumers. The new register will build from the existing registers, and also contain information informing consumers of an adviser’s experience, their recent work history, the eventual owner of licensee they work on behalf, as well as information about whether ASIC has banned, disqualified or obtained enforceable undertakings in relation to them. It is intended that the register will, in time, also contain educational qualifications and professional association membership information. This would require further amendments to the Principal Regulations. The benefits of the enhanced public register include:

providing an easily accessible central record of the competency, employment history and misconduct of individual advisers;
assisting ASIC in its compliance activities and ability to respond to problem advisers;
assisting the industry itself to address risk where ‘bad apples’ are concerned; and
providing broad support for industry efforts to improve professionalism of the industry.

Super Now Worth $1.87 Trillion – APRA

APRA just released their quarterly super statistics to September 2014. Superannuation assets totalled $1.87 trillion at the end of the September 2014 quarter. Over the 12 months to September 2014 this represents a 9.6 per cent increase. Total assets in MySuper products was $378.1 billion at the end of the September 2014 quarter. Over the 12 months to September 2014 this represents a 128.2 per cent increase.

Of these, $1.14 trillion are regulated by APRA and these grew by 2.2% since the previous quarter, whereas $ 557 million are self-managed super assets managed by the ATO and this grew by 0.2% since June 2014.

However, the number of SMSFs grew by 1.6% from the previous quarter, to stand at more than 539,000 funds.

Looking in more detail at the APRA regulated funds, with more than four members, there were $23.6 billion of contributions in the September 2014 quarter, up 7.2 per cent from the September 2013 quarter ($22.0 billion). Total contributions for the year ending September 2014 were $96.8 billion. Outward benefit transfers exceeded inward benefit transfers by $471 million in the September 2014 quarter. There were $15.1 billion in total benefit payments in the September 2014 quarter, an increase of 10.9 per cent from the September 2013 quarter ($13.7 billion). Total benefit payments for the year ending September 2014 were $57.1 billion. Net contribution flows (contributions plus net benefit transfers less benefit payments) totalled $8.0 billion in the September 2014 quarter, an increase of 9.6 per cent from the September 2013 quarter ($7.3 billion). Net contribution flows for the year ending September 2014 were $37.8 billion. Net contribution flows (contributions plus net benefit transfers less benefit payments) totalled $8.0 billion in the September 2014 quarter, an increase of 9.6 per cent from the September 2013 quarter ($7.3 billion). Net contribution flows for the year ending September 2014 were $37.8 billion. The graph below shows the composition of net contribution flows for each quarter from December 2008 to September 2014.

The annual industry-wide rate of return (ROR) for entities with more than four members for the year ending 30 September 2014 was 8.2 per cent. For the five-years to September 2014 the annualised geometric-average ROR was 6.9 per cent. The graph below shows the ROR for each quarter from December 2004 to September 2014. The rate of return (ROR) represents the net earnings on superannuation assets and measures the combined earnings of a superannuation fund’s assets across all its products and investment options.

As at the end of the September 2014 quarter, 51 per cent of the $1,219.7 million investments for entities with at least four members were invested in equities; 33 per cent of investments were invested in fixed income and cash investments; 12 per cent of investments were invested in property and infrastructure and 4 per cent were invested in other assets, including hedge funds, and commodities.

Note that small APRA funds (SAFs) and Single Member Approved Deposit funds (SMADFs) do not report quarterly to APRA. Therefore the quarterly assets of these funds are estimated based on the assets they report to APRA in their annual returns. This is done using a straight line growth methodology.

FOFA Disallowed In Senate

The government’s changes to FoFA are now under threat, following a move which saw four crossbench senators join with the Labor and the Greens to overturn the changes to the financial advice laws. This reverses some of the changes which as we discussed before were aligned with the major banks, and saw consumer protection eroded. As a result, Labor now appears to have secured the support it needs in the Senate to reverse the regulations. This overturns the earlier deal with the government and the minor Palmer United Party (Pup) in July to push through the Senate changes to Labor’s Future of Financial Advice (FoFA) laws.

Pup Senator Jacqui Lambie, and crossbenchers Ricky Muir and John Madigan, and independent senator Nick Xenophon have joined with the opposition on the issue. Xenophon called it “a coalition of common sense”.

“Our common, unequivocal objective is to have the government’s FoFA regulations disallowed today in the Senate because they are unambiguously bad for consumers”

ASIC commented:

ASIC notes the Senate has disallowed the Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014.

ASIC will take a practical and measured approach to administering the law as it now stands following the disallowance of the Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014. We will take into account that – as a result of the change to the law that applies to the provision of financial advice – many Australian financial services (AFS) licensees will now need to make systems changes. ASIC recognises this issue may arise in particular areas, including fee disclosure statements and remuneration arrangements.

We will work with Australian financial services licensees, taking a facilitative approach until 1 July 2015.

We believe this represents an important opportunity to revisit the fundamental flaws in FOFA as originally incarnated, and exacerbated by the recent government amendments. But is also continues the uncertainty around the nature of good financial advice, something which is critically important to get right, given the swelling superannuation balances in Australia, now worth $1.85 trillion.

ASIC Issues Further Guidance On Super Forecasts

ASIC has issued further guidance to assist superannuation fund trustees to provide their members with retirement estimates. The changes will allow a superannuation fund to include an estimate of the age pension which might be available to the member along with the member’s superannuation benefit at retirement. The changes are to ASIC’s existing relief for retirement estimates. A superannuation forecast is an estimate provided to a super fund member of the balance of their superannuation investment at retirement, provided in the form of a statement (retirement estimate) or a calculator. These estimates help members to engage with their superannuation. The revised guidance and relief also make a number of minor technical changes.

ASIC Seeks To Stop Property Promoter’s Unlicensed Financial Advice on SMSFs

ASIC has commenced proceedings in the Supreme Court of New South Wales seeking interim and final orders to prevent property investment promoter, Park Trent Properties Group Pty Ltd (Park Trent), from carrying on an unlicensed financial services business.

Park Trent’s business promotes the use of self-managed superannuation funds (SMSFs) to purchase investment property.

ASIC alleges and is seeking declarations that Park Trent is unlawfully carrying on a financial services business without an Australian financial services (AFS) licence.

ASIC understands that Park Trent has advised at least 500 members of the public to establish and switch funds into an SMSF which are then used to purchase investment properties that are owned or promoted by Park Trent companies.

ASIC is also seeking orders requiring Park Trent to notify current and former clients about the proceeding and to post a notice regarding ASIC’s proceeding on its website.

ASIC Commissioner Greg Tanzer said, ‘Collectively, Australians hold over $1.85 trillion worth of assets in superannuation funds, with $557 billion held in SMSFs. It is important when making decisions regarding superannuation to consider obtaining appropriate advice from an authorised financial adviser.

‘Dealing with an authorised adviser affords specific protections under the law, such as acting in the best interests of clients, a duty to avoid conflicts of interest and providing access to dispute resolution schemes.’

The first hearing of the matter is listed for 26 November 2014.

Early Access To Super Is On The Rise

The Department of Human Services released their 2013-14 Annual Report. One topic of note is the rise in the early release of superannuation savings.

According to the DHS, Superannuation cannot generally be accessed before a person reaches their preservation age. In some limited circumstances the law allows for early access to superannuation. Most of the grounds under which early access is permitted are administered directly by the superannuation funds. These include:

severe financial hardship

terminal illness

permanent incapacity

balances of $200 or less

permanent departure from Australia

The DHS is responsible for assessing applications for the early release of superannuation on compassionate grounds. These include payments for:

medical or dental treatment for you or your dependent

transport for medical or dental treatment for you or your dependent

arrears on your mortgage to prevent your home being sold by your lender

modification to your home or vehicle to accommodate a severe disability for you or your dependent

palliative care for a terminal illness for you or your dependent

expenses associated with your dependent’s death, funeral or burial

The regulations of compassionate grounds are set out in Australian law. While early access to superannuation is possible it is always subject to strict legal criteria. Applications must be supported by evidence. You must not be able to meet the costs by other means, such as savings

There was 7% uplift in withdraws, from last year, but the increase in applications was not matched by a rise in approvals by the department. Two-thirds of all applications were approved in full or part, with the total value of early payouts rising only 3.8%, or $5.4 million, to $151 million. The average payment approved by the department rose only two per cent to $12,874 from $12,643 in 2012/13. This is small beer relative to the $1.85 billion in super held by Australians and will reduce the chatter about the rising hardship levels amongst households. The main motivation is to pay down the mortgage, and this is confirmed by our household surveys.

ASIC Says Life Insurance Industry Needs Higher Standards

ASIC today released their review of activity in the Life Insurance Industry, and finds that consumers interests are not always given priority. The $44bn industry touches superannuation, annuities, and other elements, as shown in a diagram reproduced from the report. We have previously highlighted the issues around annuities. They found that high upfront commissions are more strongly correlated with non-compliant advice, and we think that it is another case, like FOFA of product sales being dressed up as advice.

An ASIC review of life insurance advice has found that the industry needs to improve the quality of advice and ensure that the interests of consumers are given priority. ASIC’s review of more than 200 advice files from large, medium and small Australian financial services (AFS) licensees found that 63% were compliant. However, more than one third (37%) of the advice consumers received failed to comply with the laws relating to appropriate advice and prioritising the needs of the client. ‘This is an unacceptable level of failure, and the life insurance industry is now on notice to lift standards and professionalism. Both insurers and advice firms need to work on delivering a consistently better service for consumers’, ASIC Deputy Chairman Peter Kell said.

‘Life insurance is a key product through which consumers manage risk for themselves and their families. It is therefore important that both the products and the advice meet the consumer’s requirements. ‘There is both a need and a demand for quality life insurance advice, and our report provides examples of advisers delivering a service that meets the needs of their clients. However, this result must be achieved on a more consistent basis’, Mr Kell said. ASIC’s report sets out the various commission models that are used to remunerate advisers in the life insurance sector. The report found that high upfront commissions are more strongly correlated with non-compliant advice, including in situations where the recommendation is to switch products.

‘The industry as a whole needs to consider how remuneration and compliance practices can better support good quality outcomes for consumers’, Mr Kell said. Affordability of insurance is an important issue for consumers, and ASIC’s report includes cases where clients were recommended insurance cover that was likely to be very difficult to afford given their financial circumstances. ASIC’s report confirmed that the high rate at which life insurance policies are lapsing warrants consideration by the life insurance industry to ensure that industry practices are sustainable.

ASIC has made a number of recommendations for insurers, AFS licensees, advisers and their professional associations, including a focus on how to ensure client interests are met and balancing the issue of affordability versus cover. Mr Kell said, ‘ASIC is committed to working with the industry to address the problems we’ve identified and to improve outcomes for consumers.’ Following the surveillance work and the conduct that has been uncovered ASIC has commenced follow-up investigations in certain cases which are ongoing. ‘Where inappropriate advice was provided we are considering enforcement action or other regulatory action’, Mr Kell said.

However, DFA believes that this is part of a wider issue with consumer advice in Financial Services. The problem is the various elements within a consumer’s financial portfolio will fall under different regulatory environments, which are just not consistent. If its mortgage related, then the advice is centred on whether the loan is suitable or not (no best client interest here) and commissions are rife ; if its financial planning related, the FOFA, offers some safeguards, and also significant gaps around general advice, as we discussed recently. Now life insurance is another problematic area. It is time for some joined up thinking. A consumer will require financial service advice across multiple products including loans and investments, but all part of a single financial portfolio. There should be consist consumer-centric processes, irrespective of the products being touted. We applaud ASIC for again championing the interests of the consumer, but there is so much more to be done.

The solution is simple. Separate advice from product sales (a.k.a general advice). Exclude any incentive payments for those providing advice. Clearly disclose any product fees (including trading and transaction fees). Job done.