Much has been said and written about Stronger Super and, similarly, much has been said and written about FoFA. This article considers their intersection – an intersection which is considerable and multi-dimensional. Anyone who has done work relating to Stronger Super is unlikely to have been able to leave FoFA untouched, and vice versa.
MySuper trustees and conflicted remuneration
The point of departure is APRA’s application form for a MySuper authorisation, under which the trustee is required to elect that it will not charge a MySuper member, in relation to their MySuper product, a fee which relates to costs the trustee incurs in paying conflicted remuneration, or in paying an amount to someone else that relates to conflicted remuneration that they pay.
Leaving aside the question of whether the election would be effective to prevent, for example, a trustee using their trustee fee or other personal resources to pay conflicted remuneration, this is a very significant election with far-reaching implications. While MySuper account balances in many funds will be small in the period immediately following the commencement of the first MySuper products on 1 July 2013 (initially, MySuper is only mandatory for specified superannuation contributions), they will quickly become very large (superannuation trustees will be required to transfer existing default balances to a MySuper product by 1 July 2017). For funds which “rebadge” their existing default superannuation product as a MySuper product, their MySuper account balances will immediately make up a significant proportion of total account balances. In either case, MySuper assets will quickly become a significant proportion of all superannuation fund assets in Australia.
In this context, two aspects of the election are notable. The election does not include any equivalent to the grandfathering provisions which apply to conflicted remuneration under FoFA. A superannuation trustee may have an obligation under a distribution agreement to pay a commission to a dealer group. The commission entitlement may be grandfathered, so that the dealer group is able to enforce its contractual rights against the trustee. However, the intention of the election is to prevent the trustee from using MySuper assets, in order to meet its contractual obligations. Clearly, this leaves the trustee in a difficult position.
Another key point is that the election requires the trustee not to make a payment if the recipient will pay “related” conflicted remuneration to someone else. A MySuper trustee must, therefore, not only assess the payments it makes – to a fund manager, an insurer or a financial advisory group – but also have some assurances about the benefits that its service providers give to others. This is a heavy burden on superannuation trustees and no doubt an unwelcome intrusion for the service providers.
A superannuation trustee may ask its service provider to attest periodically that it does not give any conflicted remuneration. It may go further and introduce a prohibition into its agreements – many material outsourcing agreements are being renegotiated in order to comply with the new superannuation outsourcing standard. Organisations that will continue to pay conflicted remuneration - for example, because the remuneration is grandfathered and they are contractually obliged to do so - may find it more difficult to do business with a MySuper trustee. (While the SIS Act only requires a trustee not to pay where it knows, or reasonably ought to know, the amount relates to conflicted remuneration to be paid by the recipient, the election itself does not have any corresponding knowledge qualification.)
Superannuation and grandfathering
The exposure draft regulations released by the Government in early March to limit the grandfathering of conflicted remuneration raise some interesting and difficult issues for superannuation.
Consistent with the grandfathering provisions in the Corporations Act itself, the draft regulations have different regimes depending on whether the superannuation trustee giving the benefit is a platform operator or not. The regulations assume that a trustee is either not a platform operator or, if they are, they do not have any non-platform business. This is awkward, because a company may well be a platform operator but also operate non-platform businesses. For example, a superannuation trustee may operate a superannuation platform (or for that matter an IDPS) but it may also be the trustee of funds which are non-platform business.
Since March a number of revised drafts of the regulations have been circulated, some of which attempt to fix this problem by considering the capacity in which a product issuer (including a superannuation trustee) provides benefits. However, in doing so, each draft creates more problems. These regulations, when they are eventually made, are likely to have a significant impact for superannuation trustees (and the whole industry).
Superannuation and client given benefits
A benefit is not conflicted remuneration if it is given by a retail client in specified circumstances. In response to concerns that a benefit given by a superannuation trustee could never be said to be given by the member, words were included in the Explanatory Memorandum to the effect that a benefit is considered to be given by a client if it is given by someone else with their “clear consent”.
In addition to being an unsatisfactory way of dealing with a legitimate policy concern, this approach has created a distortion between benefits given by superannuation trustees and benefits given by others. In the first case, an assessment needs to be made that a member has given their “clear consent”. That can be a difficult assessment to make. In the second case, the assessment is unlikely to be so qualitative or subjective.
In ASIC’s recent Regulatory Guide 246 Conflicted Remuneration, ASIC endorses the statements in the Explanatory Memorandum saying that it “will administer the law as if a benefit has been authorised by a client if the benefit is given at the client’s direction or with their clear consent.” A superannuation trustee cannot act on the client’s direction and must therefore rely on clear consent to provide a benefit to an adviser.
ASIC goes on to say that a client will give their “clear consent” if it is “genuine, express and specific”. It is not clear what the requirement of genuineness adds to “consent” other than imposing a burden on licensees and advisers to make a subjective assessment about the client’s intentions. As to specific, this is also likely to create further uncertainty and therefore risks for superannuation trustees.
FoFA and Stronger Super both require significant changes for participants in the industry. They each raise difficult questions and require views (often untested) to be taken about changes to products and legal relationships. The burden for superannuation trustees dealing with the simultaneous, overlapping and sometimes inconsistent requirements is enormous.