Super-size reforms: increased superannuation oversight by ASIC and APRA now in force

With the commencement of the Financial Sector Reform (Hayne Royal Commission Response No. 2) Act 2021 (Reform), registrable superannuation entity (RSE) licensees are likely to face heightened scrutiny and should ensure they have robust governance and assurance arrangements in place.

To help superannuation trustees comply with their new obligations under the Reform, ASIC and APRA have released a follow-up to their joint April 2019 letter, providing guidance on the oversight of advice fees charged to members’ superannuation accounts. Many will recall that the 2019 letter preceded a wave of regulatory investigations and litigation by both regulators. 

As a result of these amendments, and APRA and ASIC’s updated guidance, RSE licensees should be prepared to answer questions from APRA and ASIC, and be ready for possible enforcement action in the event of actual or perceived noncompliance.

What the Reform means for licensees

In the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Commissioner Hayne expressed concern about the lack of visibility members have over ongoing advice fees charged to superannuation products and instances where fees were charged without the provision of a service.

Schedule 3 of the Reform implements recommendation 3.2 and 3.3 of the Final Report by amending Part 2C of the Superannuation Industry (Supervision) Act 1993 (SIS Act), to prohibit the deduction of ongoing advice fees from MySuper accounts. 

The Reform also amends the general fee rules under Part 11A of the SIS Act to ensure that a superannuation trustee can only charge advice fees (other than fees for intra-fund advice) to a member where the fee is in accordance with an arrangement that the member has entered into, the member has consented in writing to being charged the fee and the trustee has the written consent or a copy of it.

These amendments: 

• ensure that third parties, such as an employer, cannot provide consent on the member’s behalf;
  
  
• apply to all advice fees (regardless of whether or not a fee is described as an ‘advice fee’) that are charged to a member; and
  
  
• apply irrespective of whether the trustee provided the advice directly to the member, or whether the advice was provided by a third party.

Schedule 3 of the Reform applies from 1 July 2021, with a 12-month transitional period commencing 1 July 2021 for arrangements entered into before 1 July 2021.

ASIC has also introduced the ASIC Corporations (Consent to Deductions—Ongoing Fee Arrangements) Instrument 2021/124 (Ongoing Fees Instrument) and ASIC Superannuation (Consent to Pass on Costs of Providing Advice) Instrument 2021/126 (Non-Ongoing Fees Instrument) which specify the requirements for advice fee consents as contemplated by the Reform.  

In particular, in relation to non-ongoing fees, written consent must include information about the services the member will be entitled to receive for the fee.

Practical tips for RSE licensees

RSE licensees should expect continual engagement from APRA and ASIC about the robustness of their policies and practices for the management and oversight of all fees charged to the superannuation account of members.

We set out below some guidelines to help RSE licensees satisfy their regulatory obligations:

• Aim for best in market: having an approach that puts the RSE licensee at the forefront of the industry will protect the organisation from shifts in behaviour (such as the concept of community expectations) and changes in the legislative framework;
  
  
• Get ahead of the curve: trustees should regularly review, test and audit their control environment for compliance, not just after non-compliance is detected or a complaint is received. To this end RSE licensees are encouraged to implement automated preventative controls to reduce the risk of human error;
  
  
• Simple straight forward language: consider whether disclosure is sufficient and appropriate for members to ensure that members can understand the nature and amount of the fees being deducted from their account;
  
  
• Once is not enough: disclosure should be ongoing so that members have multiple points in time where they can test for themselves if the services they are being provided reflect written agreements;
  
  
• Understanding and assessing complaints: where it is detected that services are not being provided, act accordingly. One of the most commonly received complaints made by members to APRA is in relation to incorrect fees charged to members. Complaints about superannuation, and the services provided by super funds, are continuing to increase and now make up 10 per cent of the complaints received by APRA;
  
  
• Document Retention: following the Reforms it will be necessary to have sufficient evidence to show consent was both obtained and what it was obtained for. Having an excellent document management system which can be easily updated and revisited will be critical to demonstrating compliance;
  
  
• Don’t delay: ASIC has been critical of licensees’ delays in investigating systematic deficiencies in control and assurance arrangements and in reporting identified breaches. The new breach reporting requirements for AFSL holders will require open investigations of more than 30 days to be reported irrespective of the outcome. Accordingly, acting quickly will be critical; and
  
  
• Root Cause Analysis: where a problem is detected, it is essential to undertake a proper root cause analysis prior to advancing to remediation. This will enable fully informed decision making and prevent similar issues from occurring in the future.

Conclusion

By the joint letter ASIC and APRA have demonstrated an intention to investigate any actions they believe fall below community expectations.

ASIC and APRA are refocusing their attention on RSE licensees to ensure adequate systems, controls, resources and accountability are in place so that the services for which members are charged are both monitored and adequate.

With the introduction of the Reform and the Ongoing Fees and Non-Ongoing Fees Instruments, over the coming months licensees should be ready to demonstrate that they have developed policies and made the appropriate process changes necessary to comply with these new requirements.

To ensure that financial services are provided efficiently, honestly and fairly, trustees should always consider the basis on which a particular fee for financial product advice is charged and be satisfied that the fee relates to a cost that is to be paid in accordance with an arrangement that the member has agreed to.