Superannuation and group life insurance

The Royal Commission was widely expected to bring the superannuation industry to its knees, and certainly there are findings that make sobering reading. How some of those play out over the coming months and years remains to be seen.  

At the very least, we need to see the Commissioner’s Report as an important reminder to keep customer and client needs, interests and objectives firmly in sight. For us, although the Commissioner’s recommendations were - mostly - to be expected, it was the findings of Commissioner Hayne in respect of the obligations that already exist for trustees of superannuation funds that resonated most. 

The message is loud and clear: the law already contains the obligations that underpin the unique “trustee” role, for example, those concerning the best interests duty, the avoidance of conflicts and the sole purpose test, but trustees are in many cases simply not discharging their obligations completely nor are regulators enforcing them with appropriate vigour.

Commissioner Hayne stopped short of prohibiting vertical integration, prohibiting trustees from making a profit, extending the best interests duty to shareholders or prescribing the composition of trustee boards. However, there were some important structural aspects of the superannuation system that Commissioner Hayne considered needed to be specifically addressed, that we discuss further below.

The bottom line is that superannuation trustees (and regulators) will have to review (and in some instances recalibrate) urgently how these rules and principles guide their decision-making, their processes and the very institutional structures in which the decisions are occurring. Norms of behaviour and business practices that once might have been accepted as common industry practice will have to be reviewed to ensure they respect what the Commissioner has demonstrated to be contemporary community expectations.

Policy recommendations

Set out below are the formal recommendations in relation to superannuation and group life insurance.

However, these do not provide a complete picture as Commissioner Hayne has made some key comments in relation to current practices in the superannuation industry.

The big picture

It is important to recognise that the recommendations of the Royal Commission have been crafted in the midst of a range of other policy and regulatory initiatives related to the superannuation sector.  2018 was an extremely busy year in terms of proposals to reform different aspects of the superannuation industry. A number of Commissioner Hayne’s recommendations and findings in the report complement and develop some of these proposals, and some depart. We set out below an indication of where the final Royal Commission findings sit against the backdrop of what is already a complex set of proposed reforms.

The culmination of all this is a set of proposals that reflect different perspectives within the industry (i.e. economics, law, academic) and it will be interesting to see how these are reconciled in the changes that are ultimately implemented given uncertainty in the political and regulatory processes.

Insights and trends

Some aspects of the superannuation system that Commissioner Hayne considered needed to be specifically addressed include:

• In relation to conflicts of interest and duty:
  • superannuation trustees being prohibited from assuming any other obligations (e.g. dual regulated entities);
  • avoidance (and not just management) of conflicts in certain circumstances; and
  • requirements in relation to engaging related party service providers.
• In relation to the selling of superannuation:
  • prohibiting hawking;
  • prohibiting 'treating' employers;
  • abolishing grandfathered commissions;
  • materially limiting advice fees being deducted from superannuation accounts; and
  • ’stapling’ a worker to one default fund.
• In relation to governance and accountability:
  • extension of the BEAR regime to superannuation as has already been foreshadowed by APRA in its response to the Senate Economics Legislation Committee in November 2017;
  • remuneration reforms and APRA’s proposed directions making power to require mergers; and
  • civil penalties for breaches of covenants.  
• In relation to life insurance through superannuation:
  • standardisation of terms, definitions and exclusions for group life insurance for MySuper products;
  • licensing of claims handling; and
  • amendments to Prudential Standards in relation to additional requirements when a related party service provider is engaged and in relation to attributing a status under the policy to a default member.  
• In relation to regulators:
  • the adjustment of the roles and regulatory stance of APRA and ASIC in policing the superannuation industry; and
  • due to the importance of superannuation to society, regulators’ focus “must” be on member outcomes.

Importantly, the superannuation proposals need to be considered in the context of the overall proposals including that culture changes from the top-down are critical if trust is to be restored in the Australian superannuation system that is so important to the nation. 

The six norms of conduct identified by Commissioner Hayne (obey the law, do not mislead or deceive, act fairly, provide services that are fit for purpose, deliver services with reasonable care and skill and when acting for another, act in their best interests) that he has suggested that legislation be connected to may be an appropriate cornerstone on which to build cultural change.

So what does this mean for the industry?

There are a number of important outcomes for the industry in relation to how superannuation funds are structured, the governance framework in which they operate, how products are managed and distributed, the legal duties and obligations of trustees and how life insurance is provided through super.

We look forward to sharing more detailed analysis with you on this in the coming weeks, but for now, we see the following points to be practical next steps:

Conflicts of interest and duty

• Begin to consider how to transition into a new (separate) structure if your trustee business is arranged as a dual-regulated entity and keep a watching brief on whether the prohibition on other obligations will impact situations where, for example, a trustee has an advice business or life insurer as an investment of the fund.
• Consider the arrangements with related entities and ensure that these are given special consideration - was the process of appointment rigorous, with independent information? Is the trustee overly reliant on information provided to it by a related entity or unwilling to challenge that information? Is the office of the trustee sufficiently resourced to verify the information provided to it by its related party service providers?
• Revisit conflict management frameworks and ensure that these are not simply in existence to ‘tick a box’ – what action do these frameworks trigger and are they robust? Do they appropriately address where a trustee needs to avoid a conflict (instead of simply managing it)?

Selling

• Begin to plan for the unwinding of all arrangements under which advice fees (other than intra-fund advice fees) are deducted from MySuper accounts.
• Review advice fee arrangements from choice accounts and to the extent that fees are deducted for advice that goes beyond just superannuation, consider how these arrangements will be unwound.
• To the extent that any grandfathered commissions are still being paid, prepare to unwind these.
• Consider the proposal on superannuation sales practices to retail clients (given the no hawking recommendation) and consider redesigning remuneration structures for front line staff so that these no longer encourage unsolicited recommendations of superannuation products.
• Consider business strategy – what differentiates your fund and how do you ensure that members and employers choose it given the proposals to staple a default fund to each worker and that hawking and treating employers will no longer be permitted? What is the impact on fund cash flows, resourcing and sustainability?
• If the Productivity Commission’s ‘best in show’ proposal is legislated would it be a commercial advantage to address Commissioner Hayne’s recommendations earlier than required?

Governance and accountability

• Give due attention to the processes in place that address the turnover of trustee directors and board skills. Are nomination processes for new trustee directors properly designed? Do these processes ensure that the board is, as far as possible, constituted at all times by directors who, together, will form a skilled and efficient board?
• Consider whether the superannuation trustee’s remuneration arrangements are consistent with the Financial Stability Board’s publications concerning sound compensation and Commissioner Hayne’s recommendations.
• Review the changes made under the BEAR regime and prepare for directors and senior executives to be subject to similar statutory obligations.
• Review any remediation or other client-complaint related activities currently underway to ensure they are proceeding expeditiously and in a transparent and independent manner, and under the close watch of the most senior executives and Board of the organisation.
• Begin to consider how you will assess and manage the trustee’s culture and governance.

Life Insurance through superannuation

• Consider the fund’s membership and whether standard terms, definitions and exclusions for default insurance in MySuper is feasible and respond to the consultation accordingly – for example, are standard definitions appropriate if your membership is made up of a large number of heavy industry workers?
• Identify where you have deviated from the Life Insurance Code of Practice and consider what steps you would need to take to comply with it, if this becomes law.

Other consequences

• Consider your disclosure obligations to members in light of any findings by Commissioner Hayne.
• Consider the adequacy of your decision-making processes and what enhancements can be made in light of Commissioner Hayne’s findings in relation to the application and enforcement of existing legal duties and obligations of trustees, especially in relation to conflicts of interest, standard of care, fairness and the best interests of members.
• Consider the adequacy of your breach reporting framework and the extent to which it is adhered to.
• Keep a watching brief on the Government’s announcement that the remit of the Australian Financial Complaints Authority (AFCA) will be expanded for a period of 12 months to accept ‘applications for disputes’ dating back to 1 January 2008 to ensure that consumers who have suffered from misconduct, but have not yet been heard, will be able to have these considered – will claims that were dismissed for being ‘out of time’ be brought back into the fore? It will be prudent to reconsider your records management policies and practices in light of this.  
• Review and consider the contractual arrangement with the trustee’s administrator – who is responsible under that agreement for implementing any of the changes, how should it be done and what is the cost? 
• If you have not already done so, review any Directors and Officers insurance policies in place in light of the report to ensure there are no limits or restrictions that may be relevant.

There will be a lot to do, so ensure the office of the trustee (or equivalent) is sufficiently resourced and that you have sufficient compliance, risk, legal and audit capabilities to hand.

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