This potential policy shift was prompted by growing concerns about governance standards within the superannuation sector, as noted by the committee's chair, Andrew Bragg, a Coalition Senator from New South Wales. He stated that the recommendations aim to address conflicts, enhance competency, and ensure independence within the industry.
The recommendations suggest that the Australian Prudential Regulation Authority (APRA) should take charge of assessing superannuation fund compliance with the Best Financial Interest Duty. Additional proposals include mandating a majority of independent directors on trustee boards, competency requirements for directors and chairs, and developing mandatory insurance service standards with input from consumer advocates and industry stakeholders.
Crucially, the committee advocates for superannuation funds to turn to shareholders for financial remedies related to fines and penalties, eliminating the practice of using members' assets to establish financial reserves for such contingencies. This has raised alarms about potential insolvency risks, as APRA pointed out the threat of financial destitution, even from relatively minor infractions.
This echoes changes following the Hayne royal commission, which led to amendments in the Superannuation Industry (Supervision) Act, demanding trustees could not use members’ funds for personal fines. Previous court directions allowed some funds to circumvent this, creating financial reserves funded by members' assets, a decision that the interim report opposes.
A particular case highlighted involves a trustee fined for a minor late submission to APRA, which sparked significant concerns. APRA executive board member Margaret Cole warned during a Standing Committee on Economics hearing in February 2022 of the impending risk: "A disorderly failure of an otherwise sound and sustainable licensee would be likely to be severely detrimental to members, as it would likely impose material costs and create significant operational risks."
Moreover, the report criticizes APRA's involvement in facilitating such financial workarounds, implying these measures do not serve superannuation members' best interests. The committee is adamant that members should not shoulder the burden of trustee misconduct, advocating instead for sufficient shareholder-sourced capital.
The Super Members Council (SMC) has raised objections to these recommendations, arguing that requiring non-financial shareholders to cover regulatory fines is unprecedented and could lead to significant financial burdens. Misha Schubert, CEO of the SMC, emphasized that this approach threatens to dismantle a model that has yielded positive returns for members for decades. "We do not support proposals that would undermine or dismantle a successful model that has delivered strong returns for members for over three decades," Schubert explained, according to Investment Magazine.
As the recommendations undergo further scrutiny, debate continues over the necessity and impact of these regulatory changes. Labor Senator Jess Walsh, deputy chair of the inquiry, has denounced the report for its expedited approval process and alleged underlying biases against the superannuation system. In her dissenting view, Walsh criticized Bragg's leadership for lacking bipartisan collaboration and not fostering innovation within the retirement system.
Further developments will undoubtedly continue to shape the governance landscape of Australia's superannuation sector, with stakeholders eager to see how these recommendations, if enacted, will influence both fund management and member outcomes.
Source: Senate Economics References Committee inquiry into improving consumer experiences, choice, and outcomes in Australia’s retirement system, third interim report.
