A Landmark Year for Financial Services

By Keith Barrett

Minister for Revenue and Financial Services Kelly O’Dwyer pointed to the Financial Services Royal Commission and significant reform underway — in addition to the Productivity Commission’s report — to call 2018 the most important year for the financial services industry.

“The significance of Australia’s $2.6 trillion dollar superannuation industry for the wellbeing of all Australians cannot be overstated,” she said.

“In a mandatory system, it’s absolutely critical that we have the settings right and that trustees are making decisions and providing outcomes that are in members’ best interests – especially when we know that a large proportion of members are not actively choosing a fund.”

The Minister pointed to the Productivity Commission’s draft report as a watershed moment in the future of the industry, illustrating areas where work must be done and highlighting the difficulties facing the regulators already.

“It well and truly bells the cat on some of the system-wide issues that have existed for far too long and recommends some very significant changes, particularly regarding default super,” O’Dwyer said. “Indeed, it’s clear that this is one area of the superannuation system that is not operating in favour of the most important participants – the members themselves.

“The PC also identified shortcomings in the system when it comes to powers for the regulator, fund transparency, trustee governance and information gathering. Tellingly, the PC revealed that even it had experienced issues getting the data it needed trustees in order to properly assess the system.

“It is frustrating to see the very same people in the industry who are championing the need for more granular data and regulatory oversight refuse to cooperate with the PC and to argue against the introduction of such measures in Parliament.” 

O’Dwyer reiterated the Government’s commitment to the Superannuation Accountability and Member Outcomes reform Package, which remains before the Senate.

“These sensible reforms will lift the bar for superannuation fund performance; strengthen supervision and enforcement by the industry regulator, APRA; and empower members to be more engaged with how their contributions are being managed,” she said.

The Government is also looking to improve outcomes in retirement. Despite its obvious importance, O’Dwyer said that the retirement phase of superannuation has not enjoyed the same level of focus as the accumulation stage. 

“We are working to address this discrepancy through a new retirement income framework. The framework will include a covenant, which will give retirees greater choice and flexibility when it comes to their income in retirement.” 

Last year the industry released the Insurance in Superannuation Working Group (ISWG) - Voluntary Code of Conduct for Trustees.

  “I made it clear that where industry would not take action, the government would,” O’Dwyer said. “That’s why we introduced the Protecting Your Super package.”

The Protecting Your Super reforms will mean that trustees can only provide insurance on an opt-in basis to new members under 25, members with balances below $6000 and members with inactive accounts.

“While the government has taken action in the areas where the ISWG Code did not go far enough, I am pleased to hear that the FSC will continue their important work in the life insurance space, by taking the other elements of the ISWG Code forward – and making them binding on the industry,” O’Dwyer continued.

“I commend the FSC on its action to date and encourage the Council to continue its journey towards ASIC approval of a binding and holistic Code for the entire life insurance and superannuation sector.”

In order to strengthen compliance with the mandatory super system, the package of reforms introduced into Parliament earlier this year will give the ATO the visibility it needs to crack down on non-compliance as and when it occurs.

“The reforms will also institute tough new penalties, including, for the first time ever, jail time for employers who repeatedly fail to meet their superannuation guarantee obligations,” O’Dwyer said.

“As part of the transition to this new compliance regime, the Government will provide a one-off amnesty to encourage employers to correct historical underpayment.”

The amnesty is expected to provide $230 million of superannuation and interest to around 50,000 employees.

O’Dwyer also warned the superannuation system that the Royal Commission’s focus will likely find areas of concern.

“It is fair to say that many Australians have been shocked by some of the case studies examined so far by the Royal Commission. And I’m sure it will be no different when the Commission turns its attention to the superannuation sector,” the Minister said.

“The Royal Commission presents an unprecedented opportunity for the industry to reflect on the practices and actions which have resulted in the Commission – and so too for regulators. Reflect and reform is an appropriate motto.

“Independent of government action, the financial services industry has a duty to repair trust with Australian customers. Key to this is for firms to have effective leadership, good governance and appropriate cultures. From an industry perspective, I urge you, as its leaders, to use the Royal Commission as an opportunity to draw a line in the sand.”