- Three new inquiries have identified a range of problems with the superannuation and SMSF sector.
- Conflicted advice is a theme of all three reports.
- As a result, regulatory changes are likely over the coming years.
By Tony Negline, Louise McCabe and David Walker
The future for Australia’s self-managed superannuation funds (SMSFs) has been turned upside down in the past few months.
The disruption stems from probes by three government bodies: The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the Productivity Commission (PC) and the Australian Securities and Investments Commission (ASIC). The Royal Commission is to start examining the super industry and SMSFs this week.
Most of what we know about the politics of superannuation and financial advice suggests these probes will trigger new regulation in the years ahead. Indeed, SMSFs have already experienced successive waves of regulatory change. The 2017 alterations included reduced concessional and non-concessional contribution caps and a A$1.6 million cap on pension balances. And this year’s Budget raised the prospect of a reduction in SMSF audits from yearly to every three years.
Productivity Commission looks at returns
The Australian Government’s independent economic adviser, the Productivity Commission, first stirred the sector in late May with its draft report on the superannuation industry. (It will make its final recommendations to government towards the end of 2018.)
Despite reluctance among many larger players to hand over important data, the PC did receive sufficient information to find there is much room for improvement in the super sector. Fees, by international standards, are too high. Compulsory group insurance arrangements are often unnecessarily wasting investors’ money and the default fund system is broken and needs radical reform.
Chartered Accountants Australia and New Zealand has concerns about the Commission’s use of total investment returns to make some of its conclusions. However, this does not mean its findings are invalid.
The commission acknowledges that SMSFs have been an important competitive aspect in the super system. But looking at Australian Taxation Office annual return data, the commission found SMSFs with less than A$1 million in total assets are producing poorer overall results for the average investor. The relatively high costs of running these smaller SMSFs are eating heavily into investment returns, it said.
ASIC probes SMSF set-ups
An ASIC report released in late May underlined these concerns about running costs. Its focus was the experience of people setting up a fund and, where relevant, whether Australian Financial Services Licence holders are complying with personal financial advice provisions.
The headlines this review generated were dramatic: of the 250 client files examined, ASIC found various serious deficiencies in the set-up process in more than 90% of cases. In 10% of cases, ASIC and an external reviewer determined that investors risk being significantly worse off because of the SMSF advice they receive. Limited recourse borrowing arrangements often feature in problem cases.
Hayne Royal Commission
The Financial Services Royal Commission under former judge Kenneth Hayne is focusing on case studies to identify problems. His counsel assisting, including Rowena Orr QC and Michael Hodge QC, are detailing the worst misbehaviour of financial sector institutions and personnel, including financial advisers. The implication is that regulatory settings allow this type of unethical behaviour to exist. Therefore, it will be somewhat surprising if Commissioner Hayne does not conclude that regulatory reform is needed.
Hayne and his counsel assisting ... have shown they intend to detail the worst misbehaviour.
To date, superannuation has been a side issue while the commission has been looking into other activities, such as financial advisers.
But the commission flagged its intention to examine superannuation and has asked providers for detailed documentation. Its August hearings may well reveal issues in the set-up and administration of SMSFs.
And the commission has already unearthed a case of apparently dubious advice from Westpac-owned BT to a client couple who were told to take their money out of two industry funds and set up an SMSF. They were also advised to sell their home, purchase insurance and buy a bed-and-breakfast. The Westpac adviser received commissions of more than A$30,000 for the advice, but the couple found out the properties they had been told to buy were inappropriate and they could not live in them.
The commission’s findings seem certain to have repercussions across the financial system through the rest of 2018 and beyond. The commission’s hearings are expected to run well into 2019, with an extension to its current deadline.
Where to next for SMSFs?
Conflicted remuneration has been a theme of all the latest reports and inquiries. Meg Heffron, head of SMSF Technical & Education Services at Heffron SMSF Solutions, suspects this will be an early target of a new round of regulation. Like many experts in the field, she is concerned that repeated changes to tax and regulatory structures of a long-term investment vehicle such as superannuation erode trust in the system.
The total number of SMSFs has grown steadily over the past five years to close to 600,000 in June 2017 from around 501,600 in June 2013. And according to Deloitte, in the post-retirement super segment at least, they’re set to outweigh other funds in terms of value, with SMSFs predicted to hold a staggering A$900 billion worth of assets in 2035.
Heffron believes SMSF growth will continue, mainly because average super balances are going to increase as more people have lifelong compulsory super. “Larger balances mean you’re more likely to want control,” she says, “which leads to [people choosing] an SMSF.” She also believes continued criticism of large superannuation groups could encourage a “flight to SMSFs” due to the same desire for control.
The financial services industry is important to the economy and it will be vital to make sure the regulatory settings are lucid and rational.
The various recommendations from the latest round of inquiries will be considered by a slew of government bodies, including Treasury, ASIC, the Australian Prudential Regulatory Authority, the ATO and the Reserve Bank of Australia.
CA ANZ will be very active in scrutinising any proposed changes. The best solutions will change the law in ways that do not add new layers to the existing regulatory framework, but that do improve the services and benefits consumers receive from the industry.
Tony Negline is superannuation leader at CA ANZ, Louise McCabe is a senior writer at Crafted Financial Writing, and David Walker edits Acuity.
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