Welcome to Issue 56 of the FSC Policy Update. The implications of the first ‘Your Super’ performance assessments continue to reverberate through the superannuation industry after thirteen MySuper products, holding $56.2 billion, were shown to have ‘underperformed’ across all sectors of the superannuation industry.
The implications for members, and the response of some trustees, will ensure the sector continues to remain under intense political and public scrutiny, even as the Government’s various inquiries turn their attention to new topics, such as capital concentration.
The FSC is continuing to engage with the Government and regulators on design features of the Your Super reforms that remain unresolved, such as the application of Your Super assessments to Trustee Directed Products and regulations for the Portfolio Holdings Disclosure regime.
The FSC is also pleased that there is genuine openness to consult with the industry and act to correct design flaws in reforms currently being implemented, such as the ‘nil reporting’ requirements in the Design and Distribution Obligations (DDO) and the application of DDO upon the reissue of life insurance products.
The October commencement for many reforms is looming large and we recognise, and are also experiencing, the significant capacity constraints currently facing many businesses. We are providing this feedback to the Government and regulators and are encouraging demands on the industry to be better sequenced to accommodate current pressures.
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Blake Briggs, FSC Deputy CEO
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Click on the topic of interest below to read more
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Single disciplinary body legislation is in the Senate
Occupational exclusions in group life policies
Treasury-led work on product modernisation continues
Design and Distribution Obligations (DDO) update
Corporate Collective Investment Vehicle (CCIV) update
Your Future, Your Super – Joint fund manager and superannuation Working Group
Exchange Traded Fund (ETF) Product Issuers Working Group
House of Representatives Common Ownership and Capital Concentration Inquiry
New Guidance Notes – Vulnerable Customers & Claims Handling
Superannuation financial reporting and auditing requirements
Strengthening of protections against Unfair Contract Terms (UCT)
Exemption application to ASIC regarding DDO regime and reissuing insurance products
Life Insurance Code of Practice
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PARLIAMENT, LEGISLATION AND REGULATION
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Single disciplinary body legislation is in the Senate
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The Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Bill 2021 is to continue its Second Reading in the Senate. When passed, the legislation will;
- implement a single disciplinary body for financial advisers,
- enable individual registration of financial advisers by 2023,
- introduce new penalties and sanctions for advisers who breach their obligations.
- Transfer functions from the Financial Adviser Standards and Ethics Authority (FASEA) to ASIC and the Federal Government.
The FSC is supporting the passage of the Bill and attention is now turned to the release of the FSC's financial advice White Paper in October.
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Occupational exclusions in group life policies
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The FSC has commenced public consultation on a proposed approach to removing occupational exclusions from group life policies in MySuper products. The FSC has received feedback from superannuation funds and consumer groups, and has held preliminary discussions with ASIC, APRA and the ACCC.
The Government has also initiated consultation on the same issue, in much the same terms as the FSC’s consultation paper. The Government is seeking feedback by mid-October and will take into account industry progress to proactively resolve this issue.
The FSC intends to be in a position to publicly announce our final proposed approach by the close of the Government’s consultation process in October.
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Treasury-led work on product modernisation continues
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Treasury has progressed its work by establishing separate streams for life insurance and Management Investment Schemes (MIS). Treasury is also currently meeting with its Industry Technical Expert Groups.
The FSC has provided input into this process by submitting a policy position paper for Treasury to consider as it works through sector specific design and taxation issues for Treasury on the mechanism design process.
The proposed mechanism is expected to be released for public consultation in late November, with legislation to be drafted and introduced some time in 2022. The FSC will contribute to both processes.
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Design and Distribution Obligations (DDO) update
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The FSC and industry was pleased to see the Government respond to our concerns by announcing that the DDO nil complaints reporting requirement would be removed. The FSC had argued for some time that this requirement was an onerous and unnecessary burden that would particularly harm financial advisers.
The Government has also responded positively to two other FSC concerns, including that it would ensure the personal advice exemption applies when a PDS is provided as part of the personal advice process, and the DDO exemption operate correctly for employers when the employer provides employees with the PDS for the employer default superannuation fund.
The FSC and our members had been strongly arguing for these improvements to the DDO regime. Following a series of detailed discussions over the past few months with ASIC, Treasury and the Government, we are pleased to see their commitment to genuine consultation and action.
On Thursday 16 September, the FSC hosted a DDO online event with speakers from industry and ASIC. Attendees were able to ask numerous questions of industry experts and regulators, helping to clarify the operation of the DDO. FSC members will shortly be able to view the first session (hearing from industry experts on how the DDO is being implemented) on demand on the FSC website.
The FSC has developed guidance on how to apply significant dealings to funds management – this guidance is part of the FSC’s template Target Market Determination (TMD) for funds management), and is preparing guidance on this issue for life insurance. The FSC’s templates are now being licensed by over 280 non-member businesses, a tribute to the work that members have put into developing the templates in the interests of greater industry alignment.
The FSC met with stockbrokers to discuss issues related to DDO for Exchange Traded Products (ETPs) and products listed on mFunds, including how stockbrokers can receive TMDs, the way complaints and significant dealings work for ETPs, and issuers that are asking distributors to complete due diligence surveys due to DDO.
The FSC has been informed that ASIC will be providing a DDO no-action position and an exemption in relation to the reissue of life insurance products – see the life insurance section for details.
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Corporate Collective Investment Vehicle (CCIV) update
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The Government released revised draft legislation to implement a Corporate Collective Investment Vehicle (CCIV). The Government has committed to implementing the CCIV by 1 July 2022. The FSC is consulting with Treasury and the office of the Assistant Treasurer to discuss the draft, and is developing a submission to detail FSC comments on the draft legislation.
The draft FSC submission argues in summary:
- There are many improvements to the CCIV model compared to the previous draft, particularly in the tax area.
- There should be increased flexibility for issuing and redeeming capital, and the restrictions on distributions should be relaxed.
- Wholesale CCIVs should, to the largest extent possible, be regulated the same way as wholesale Managed Investment Trusts.
- The tax rules for a CCIV that fails the ‘widely held’ test need to be amended so that complex trust difficulties from Division 6 are not imported into the CCIV.
- The CCIV should be able to access tax treaty benefits on behalf of investors.
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INVESTMENTS
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Your Future Your Super – Joint fund manager and superannuation Working Group
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FSC fund manager and superannuation members have been meeting to discuss the Your Future, Your Super performance assessment is impacting trustee decision making, and how the assessments should apply to Trustee Directed Products.
The FSC is currently seeking new information on how the reforms will operate as they are being implemented and would welcome feedback from members and their clients.
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Exchange Traded Fund (ETF) Product Issuers Working Group
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ETF Working Group members discussed three issues at the last meeting relating to dual access funds, having another pricing data point for funds which do not trade on a daily basis and moving all ETFs to the end of the ASX open - which will help to address the difficulty market makers have in pricing a number of ETFs at open.
Working Group members have been asked to provide further feedback by COB 21 September 2021.
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House of Representatives Common Ownership and Capital Concentration Inquiry
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The House of Representatives Standing Committee on Economics is currently inquiring into the implications of capital concentration and common ownership in Australia. The key issue being explored is whether common owners across competitor companies within a given industry has negative anti-competitive effects such as higher prices and lower output.
One key recommendation made in a paper by the Deputy Chair of the committee, Dr Andrew Leigh, calls for a beneficial ownership register for publicly listed companies.
The FSC is providing a submission to the committee and is expected to be asked to appear to give evidence.
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SUPERANNUATION
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New Guidance Notes – Vulnerable Customers & Claims Handling
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The FSC Board has approved two new Guidance Notes being:
- Guidance Note 41 - Developing a vulnerable member policy
- Guidance Note 42 - Claims handling standards for superannuation funds
These Guidance Notes have been developed due to the recission of the Insurance in Superannuation Voluntary Code (the Voluntary Code). Former Voluntary Code Owners (FSC, AIST and ASFA) agreed to developed common guidance relating to:
- improving outcomes for vulnerable members and
- claims handling for life insurance in group superannuation.
The FSC adopted these documents as FSC Guidance Notes to demonstrate commitment in each of these areas. These Guidance Notes are effective from 15 September 2021.
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Superannuation financial reporting and auditing requirements
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Treasury has released draft legislation for consultation relating to financial and auditing requirements for super funds. The new legislation will require Registrable Superannuation Entities (RSEs) to lodge financial reports with ASIC and make them public, as well as strengthening audit requirements.
The FSC’s submission has raised concerns about the requirement in the draft legislation to report on a half-yearly basis, as well as a requirement to prepare financial reports for ‘sub-funds’. The FSC has submitted that a longer implementation period will be needed.
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For more superannuation news, please see the Your Future, Your Super – Joint fund manager and superannuation Working Group update included in the investment section.
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LIFE INSURANCE
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Strengthening of protections against Unfair Contract Terms (UCT)
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The FSC and its members are finalising a submission to Treasury’s consultation on the Government’s exposure draft legislation in relation to strengthening the protections against UCT for consumers, small businesses and insurance contracts. The consultation recognises the Government’s intention to have the UCT regime apply across the whole economy consistently.
The key recommendations in the FSC’s submission are:
- Exclude insurance contracts that are reissued on substantially the same level of cover and were originally entered into before 5 April 2021;
- The penalty and remedy aspects of the UCT regime should be considered against the significant prudential issues it raises and the Government’s broader objective of promoting Australia as a financial centre; and
- Amend the draft bill so that it allows for a 12-month transition period for insurance contracts.
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Exemption application to ASIC regarding DDO regime and reissuing insurance products
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The FSC has been in discussions with ASIC regarding the FSC request for a no-action position and an exemption from the DDO regime for the reissuing of life insurance products.
To recap, these reissuing transactions include the reissue of an expired life insurance policy after a customer’s credit card has expired, and the movement of a policy into or out of superannuation. However, after the commencement of the DDO regime, to fulfil such requests will likely mean issuing a new financial product, triggering the DDO requirements.
These include the requirement to have a TMD, the reasonable steps requirements, the record keeping requirements, the requirement to review TMDs, and the requirement to report significant dealings to ASIC.
The FSC has been told that ASIC has decided to issue a no-action position letter, which is expected to state that the reissue of life insurance products in certain prescribed circumstances as requested by the FSC will not require compliance with DDO provided that (a) the reissue is on the same or substantially same terms as the original policy issue, and (b) no new underwriting is carried out.
ASIC have indicated that the no-action position letter will be issued as soon as possible and in any event before 5 October 2021.
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Life Insurance Code of Practice
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The FSC began a 6-week consultation on 18 August on its revised Life Insurance Code of Practice (Life Code), which takes into account substantial feedback from the Life Code Compliance Committee (LCCC), ASIC and consumer groups. The FSC was pleased to host a stakeholder roundtable on 8 September, which demonstrated strong and constructive discussion on the revised Code and indicates that a substantial amount of feedback is to be received as well.
ASIC has also indicated that it may not be able to approve the Code until they have finalised its Regulatory Guide, which is currently understood to occur by early 2022. In the meantime, the FSC and members are considering which provisions of the Life Code might be put forward as potential enforceable code provisions having regard to implications of also including a community benefit payment sanction within the revised Life Code.
The FSC aims to have the revised Life Code finalised for approval by the end of November 2021.
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ADVICE
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In August, the Government announced temporary relief to reduce the cost recovery levies charged to the financial advice industry by ASIC.
- The levy charged for personal advice to retail clients will be restored to its 2018/19 level of $1,142 per adviser for two years.
- The licensee levy will be held at $1,500.
- The Government is reviewing the ASIC Industry Funding Model while this relief is in place.
The FSC has welcomed the move to release the cost burden on advice businesses and financial advisers.
As the industry collaborates on ways the cost of financial advice can be reduced, this announcement gives hope of more substantive deregulation following the Government’s Review of the Quality of Financial Advice post 2022. Reforms to reduce the cost of advice have been proposed in the FSC’s Green Paper and soon to be released White Paper on Financial Advice.
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TAX
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- The Government released draft legislation to implement a Corporate Collective Investment Vehicle (CCIV) – see discussion under regulation above.
- The FSC discussed the tax treatment of non-arms’ length income by superannuation funds with the Government and with Treasury. The FSC raised concerns that the existing law, and the ATO’s interpretation of the law, would expose large super funds to the possibility of extremely large tax penalties for small errors, and funds would face substantial compliance burdens to avoid these possible tax penalties.
- The FSC provided the ATO with an interim response to several ATO questions relating to Foreign Income Tax Credits after the Burton decision. The FSC noted that the ATO’s questions were predicated on there being a clear way at law to implement the Burton decision, when in fact the FSC has been arguing (for some time) that the law is unclear.
- The Government announced it would work towards a significant expansion of Australia’s bilateral tax treaty network, including importantly an expansion to Luxembourg which is a long-standing FSC policy request. This will involve Australia entering into 10 “new and updated” tax treaties by 2023, and will cover 80 per cent of foreign investment into Australia.
- The Government announced a consultation on the key outcomes Australia should seek in negotiating these tax treaties and any other issues.
- The FSC provided the Government with proposals to extend the access to the Managed Investment Trust (MIT) start-up concession, given the time that it takes for MITs to become widely held.
- The FSC joined with other global investment fund associations to raise concerns with how the OECD’s Pillar 2 reforms (a global minimum tax rate) work for investment funds. The OECD has indicated in response that it is exploring these issues.
- Separately, the FSC is developing a letter to Treasury raising issues with how the Pillar 2 reforms work for Australian life insurers.
- The ATO indicated to the FSC that is it has now provided several items of public guidance on tax issues relating to remediation, and is not proposing to provide further guidance in future.
- The FSC is working with the Australian Custodial Services Association (ACSA) to develop proposals in relation to the tax treatment of foreign exchange hedging, which currently causes substantial tax issues for investment managers. The Government has committed to addressing industry issues by 1 July 2022.
- The FSC is working with ACSA to progress the development of a Tax Data standard for custodians and asset managers.
- The FSC is working with the ATO and custodians to help develop the ATO’s guidance on the governance of third party data relating to tax, and the ability for fund managers to rely on the tax data provided by third parties.
- The FSC co-signed a joint letter to the ATO with the Australian Bankers Association and the Australian Financial Markets Association recommending approaches to the tax treatment of contract changes due to the ending of the London Interbank Offer Rate (LIBOR).
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GST
- The FSC provided a paper to the ATO on the GST issues relating to the ending of grandfathered conflicted remuneration (including commissions).
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