Why the focus on superannuation?
For a change, the focus of the recent Royal Commission hearings has been on superannuation and how funds' structures and governance arrangements may lead to poor retirement outcomes for members. The hearings also considered related issues such as selling practices in relation to superannuation, the relationship between trustees and financial advisers, the current legal regime and the effectiveness of regulators.
The $2.6 trillion Australian superannuation industry has been under scrutiny for the regulatory gaps created by the way APRA and ASIC regulate the sector, with the focus more so on the retail funds operated by the big banks and the relationship between the two. The industry has been accused by APRA of having a herd mentality, focusing on the same investment strategies rather than on delivering the best outcomes for members.
The Commission as a whole has really been a strong reminder around how the superannuation industry, and financial services industry as a whole, treats members and customers – and these latest hearings were no different. A positive result at least is that they have shone a light on this – and the regulators will be challenged to respond. We look forward to regulators changing their focus to a better balance between members and customers outcomes versus risk & compliance.
Following these hearings, it was interesting to hear from some of our superannuation clients at a recent roundtable in Melbourne on their key take outs. The current state of politics also shaped our discussion, with the new Liberal party cabinet, a new Minister for Financial Services and uncertainty around the future of the government. Some of the highlights from the discussion are below.
Concentration impacts on choice
Concentration risk is a live issue due to the small number of outsourced service providers, being administrators and custodians, in the market. Industry consolidation has occurred more in the outsourced service provider market than in the funds themselves. As with responsible lending, the focus hasn’t necessarily been on individual member outcomes, but instead on internal policies and risk frameworks.
Just last week, the Australian Financial Review reported that the Royal Commission has had a positive impact on industry super funds, allegedly due to transfers out of bank-owned super funds in response to the Royal Commission findings. However, while we might be seeing noticeable changes for industry super funds as a result of the Commission, we’re still not necessarily seeing rollovers from a wholesale perspective.
It will be interesting to see if large businesses do start looking at different default fund options for their employees, perhaps pre-empting the Productivity Commission’s review of the default fund selection mechanism.
It comes down to trust
One of the main discussion points that came up with our clients was around the structure of financial services organisations and the nature of being an organisation where success is rewarded by commission. The very nature of a sales-based model can drive aggressive behaviours and affect organisational culture. By placing expectations on employees to achieve unrealistic short term results without the checks and balances needed to maximise members’ interests, it perpetuates a culture of growth and financial outcomes which may not be sustainable. It’s not realistic to expect to achieve cultural change at an organisational level by bringing in broad-brush regulation.
Culture plays a massive part in driving behaviours. A focus on profitability, using volume based incentives and a lack of attention to member outcomes leads to a range of undesirable results – including poor advice, misuse of member’s money and conflicts of interest. The cultural focus of financial organisations needs to shift from money and personal status, back to the customer – rebuilding their trust, delivering them value and creating an environment of sustainable financial performance be delivering financial outcomes for members.
What can different industries learn from the Royal Commission?
Hearing from some of our retail clients at a recent roundtable discussion, it was clear that other industries are watching the Commission closely with a “risk lens” to take on board some of the learnings and regulatory outcomes. A lot of the issues discussed in the hearings have a much broader application – there’s a lot that other industries can learn in regards to greater transparency and putting the customers’ needs first. It’s an opportunity for other industries to look at their own positioning and branding in the market.
A case for proportionate regulation
The submissions that were released last week raised more questions around regulation and concern around a broad-brush approach to regulation following the findings of the Commission. The Commission primarily focused on the major banks and their vertically integrated businesses and the inherent conflicts of interest that subsist therein. This is not representative of the whole of the financial services sector.
As discussed in our recent report, A case for proportionate regulation there is a strong need to revisit the case for proportionate regulation across the financial services sector, with consideration to all changes including prudential, conduct, industry, data and competition requirements.
In the UK there is a five tiered model for regulation to distinguish financial institutions and their need for supervision based on their relative impact on the UK financial sector. The time is ripe for government to regulate appropriately – the Royal Commission shows us all that the one size fits all model is inadequate.
The next round of hearings, from 10 – 21 September will focus on insurance. There is a strong theme on life insurance including group life insurance in superannuation. We can expect more discussion on superannuation in this next round of hearings.
The seventh round of public hearings, from 19 – 30 November, will focus on policy questions arising from the first six rounds. Organisations should expect more intense supervision from regulators in the coming months, as well as emerging clarity on what regulatory impact the Royal Commission will actually have on the industry in the longer term.
You can read all of our previous insights into the Royal Commission here.