Royal commission moves into solution mode

From
Jonathan Steffanoni

Jonathan Steffanoni

Proposed superannuation industry reforms from the Royal Commission are likely to cover four main themes including simplification of the law and of disclosure requirements, appropriate civil penalties for breeching best interests duty and an end to grandfathered commissions, says Jonathan Steffanoni, Principal Consultant, Legal & Risk at QMV.

“The future of financial product disclosure probably looks more like SkyScanner and less like an old fashioned phone book,” Mr Steffanoni says.

“Current product disclosure is based on the premise that individuals are at liberty to freely decide what they want, and what’s best for them, and are capable of actually doing that. In reality, this is often not the case.”

Mr Steffanoni says regulation, by way of product disclosure, assumes that individuals are:

  • adequately financially literate to understand what they are reading
  • motivated, engaged and have the time to read product disclosure documents
  • have all the information necessary to make an informed decision about what is best for them, and
  • continue to remain attentive to changes in product terms which are disclosed.

“Most people simply don’t have the attention or the patience to wade through product disclosure — let alone compare it to alternatives in the context of their personal circumstances.

“Recommendations directed at simplifying the disclosure laws would benefit from considering the increasing reliance people are likely to have on the data economy which will enable the fast comparison of financial products and allow individuals to consider their financial profile and the product that will best meet their needs.

“The Royal Commission may consider whether now is the time to recommend the extension of the Consumer Data Right to superannuation products, to require product disclosure in machine readable API format. This would enable consumers to utilise smart phone apps and other online services to compare and assess key product features in a familiar and user friendly manner.”

Additionally, Mr Steffanoni says a shift towards simplification of financial services and superannuation law may see greater use of principles-based standards – much like prudential standards – and associated soft law guidance.

“The demands for absolute clarity and certainty on the one hand seem to be giving way to a simpler, and more flexible, principles-based regulation.”

“While simplification can be an effective regulatory approach, it will also require that industry and the public accept greater levels of uncertainty and regulators are prepared to actively interpret and apply the principles.”

Civil penalties for superannuation trustees breaching best interests’ duty will be another likely recommendation. But he cautions: “While creating incentives for conduct and business practices which promote the best interests of superannuation fund beneficiaries is a sensible policy objective, caution may be required in ensuring that the form of any change operates as intended and doesn’t create too much uncertainty.

“The reality is that actions against superannuation trustees for breach of this duty have been few and far between, and the individual complaint resolution schemes – such as SCT, FOS, and now AFCA – have been effective in addressing most individual grievances.

“The imposition of civil penalties as a result of a breach of the best interests duty could fundamentally shift the responsibility for making such a determination from a court to the regulator, presumably APRA.

“This would likely create demands for detailed guidance on what exactly is meant by best interests in various contexts. It would also raise the prospect of judicial review of the administrative decision by a regulator to make a quasi-judicial assessment.

“Superannuation law is already considered to be complex. Adding an additional layer to the best interests obligation runs the risk of making trustee obligations even more opaque and confusing for both trustees and consumers. In a profit-for-member context, it might also mean that beneficiaries ultimately end up paying any monetary penalties.

“More interesting still, and possibly more important, is the question of whether a new best interests obligation would extend to Trustee Directors or senior managers personally, much as the Banking Executive Accountability Regime (BEAR) regime places responsibility on individuals rather than the corporate entity.”

Finally, he says the closest we might come to consensus agreement in recommendations, is in relation to ending grandfathered commissions from superannuation accounts.

“There was only a single objection to this recommendation in the interim report. This should happen as grandfathered commissions paid from superannuation accounts serve no useful purpose,” Mr Steffanoni says.

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