DADAR AHMADI-PIRSHAHID & AVALON CARNALL
JD I & JD I
Introduction
In February this year, the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry by the Honourable Kenneth Hayne AC QC, was tabled in Parliament. The report highlighted a toxic culture within Australian financial institutions and unearthed a plethora of examples of misconduct impacting consumers. Despite these findings, which should concern all who have a bank or superannuation account, the average university student will likely feel disconnected from the Royal Commission’s findings. The Commission’s case study on the superannuation fund ‘Hostplus’ might, however, highlight problems much closer to home for students working in pubs, hotels and restaurants. Hostplus is a hospitality industry super fund whose members tend to be “young and disengaged, with low superannuation balances”, having recently entered the workforce on a part-time or casual basis and regularly shifting jobs.[1] Evidence was produced to the Commission which suggested that Hostplus sought to take advantage of the disengagement of their young membership base.
Superannuation Funds and ‘Lost Member Accounts’
Existing legislation requires that superannuation funds transfer any money in a dormant ‘lost member account’ to the ATO; that is, an account that meets a number of conditions including having a balance of less than $6,000 and having had no contributions for the past 12 months.[2] The money from a ‘lost member account’ remains the property of the member and importantly is not charged any further fees. The introduction of the provision was an attempt by the government to protect young Australians from having their super balances whittled away by administrative fees and insurance premiums. However, such a practice of charging dormant accounts was highly lucrative for funds. Close to 50% of the accounts of Hostplus members had a balance of $6,000 or less.[3] Almost 300,000 Hostplus member accounts had not been contributed to for 12 months or more.[4] The transfer of a large number of member accounts to the ATO posed a real threat to Hostplus’ profits.
In an attempt to avoid this scenario, Hostplus wrote to members who appeared likely to become ‘lost members’ and encouraged them to exclude themselves permanently from the ‘lost member process’.[5] The wording of their letter to members was ambiguous and misleading:
“We are writing to advise that your account may soon be closed and your money transferred to the Australian Tax Office. Your account has been identified as at risk of becoming inactive and under current legislation we are required to transfer inactive accounts to the ATO.
…
Please note if your money is transferred to the ATO your super may not experience the same level of investment return as it would with Hostplus.”[6]
The letter did not explain why the accounts would be transferred to the ATO or that the ATO would be holding the money on behalf of members.[7] Members were even induced to opt out of the ATO lost member process by offering entry into a draw to win a ‘Hoyts VIP Black card’.[8]
“...how can misconduct be detected when members are often failing to monitor their own super accounts? And what legal framework can exist to protect people from this misconduct?”
Members that took Hostplus’ advice fell back into the cycle of high administrative fees and unnecessary insurance plans.[9] The perfect storm of member disengagement and Hostplus’ actions made such a reality possible. The reason for such disengagement may simply be that young people are not particularly concerned with their retirement plans. That sounds perfectly reasonable. But this level of widespread disengagement raises a few problems: how can misconduct be detected when members are often failing to monitor their own super accounts? And what legal framework can exist to protect people from this misconduct?
Stockbroker and financial markets commentator Marcus Padley, speaking on ABC News Breakfast,[10] suggested that the key issue is the widespread lack of financial literacy in the community. But this raises the following question: while people should take greater personal responsibility for their own financial and superannuation situations should it be incumbent on the consumer to protect themselves from financial service providers who often hide behind complex terms and conditions and use their power to mislead? Superannuation expert Professor Susan Thorp from the University of Sydney and ASIC Commissioner Danielle Press offer another perspective. Professor Thorp indicated that making good choices about superannuation is difficult even for those with a great deal of financial literacy.[11] This sentiment was echoed by Danielle Press, who had been CEO of Equipsuper for six years prior to her appointment at ASIC.[12] Commissioner Press expressed that even she was not immune from making bad decisions in relation to her own superannuation. While greater financial literacy in the community would certainly go some way in creating a more informed and proactive public response to misconduct, it is not a fix-all solution.
In effect, greater personal responsibility has to go hand in hand with more effective legislative controls. Professor Thorp suggests that, given superannuation is a mandatory system, the system should not work to the detriment of the passive member.[13] A similar notion was expressed in the 2010 Cooper Review into the governance, efficiency, structure and operation of Australia’s superannuation system. The review stated that “a compulsory system needs to be able to cater for … different degrees of engagement: the significant proportion of members who are not engaged with their super, or in a position to make the sorts of decisions required of them; and the informed, financially literate, or well-advised members.”[14] The Cooper review led to the creation of the MySuper product which is more suitable for passive members.[15] The final report for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry underlined the findings of the Cooper review.[16] However, given re-occurrence of the issue of passive members, it is worthwhile looking into the issue in greater detail.
Passive Superannuation Members
Passive members tend to accumulate multiple superannuation accounts. Every time a person starts a new job, they have the choice of providing the details of their existing superannuation account or having a new account opened with the employer’s choice of default fund. It is all too easy for disengaged members to simply elect for the default option each time. This is problematic because each account will have its own fees and default insurance policy that will incur an annual premium. Over 6 million Australians have more than one super account.[17] Commissioner Hayne recommended that a legal framework be put in place to restrict a person to one default account.[18] This recommendation, if implemented, would be effective in preventing the future accumulation of unnecessary accounts. However, this would raise the major issue of retrospectively applying such a move to the consolidation of existing superannuation accounts.
Another cause of superannuation fund erosion, particularly for passive members, is default life insurance policies. Professor Thorp reflected that it makes little financial sense for a young person with no dependants to have life insurance.[19] A half-yearly statement examined from a member of Hostplus showed that $565.59 of insurance premiums had been charged on an account with a closing balance of $1,216.54.[20] Commissioner Hayne did not make any recommendations with regard to the default application of life insurance policies. Recent legislative changes, however, have addressed the issue. Legislation that came into effect on 1 July 2019 requires automatic cancellation of insurance policies for accounts that have been inactive for 16 months.[21] Legislation will also come into effect on 1 October 2019 that will prohibit the default application of insurance policies to accounts of members under the age of 25, or members with an account balance under $6,000.[22]
Superannuation Funds and the Regulators
Finally, there is the issue of alleged misconduct by those responsible for the operation and oversight of superannuation funds. Superannuation fund trustees and directors have obligations under the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SIS Act’), to act in the best interests of members. Commissioner Hayne recommended the enactment of civil penalties enforceable by the twin regulatory bodies, ASIC and APRA, for breaches of the SIS Act.[23] ASIC Commissioner Danielle Press welcomed the recommendation for greater civil penalties and powers while emphasising that ASIC is taking steps to become more active in supervising the industry.[24]
The adoption of the recommendations made by the Hayne Commission would certainly provide ASIC with the tools to tackle misconduct. However, it is still imperative that instances of misconduct are recognised and reported in the first place. Commissioner Press expressed that ASIC is able to proactively identify problems in the superannuation industry.[25] Press indicated that the industry is quite small, with only around 180 funds to monitor.[26] ASIC monitors the performance of the funds and investigates underperforming funds.[27] This strategy seems to be based upon the logic that if members are receiving reasonable returns then there is less chance misconduct is taking place. However, it is important to note that Hostplus had one of the best performing default options at the time of its alleged misconduct.[28]
“...if passive members are not monitoring their accounts the complaint process will never even begin through the AFCA. ”
Commissioner Press identified several other strategies employed by ASIC. Press highlighted the deterrent effect of ASIC pronouncements to the industry.[29] Similar to enforcing ‘double demerits’ on the road, ASIC sometimes identifies particular focus areas in the industry to put funds on notice.[30] Further, the Australian Financial Complaints Authority (AFCA) is required to report systemic issues to ASIC.[31] The AFCA is another channel for complaints to reach the regulatory bodies. However, the same catch 22 arises: if passive members are not monitoring their accounts the complaint process will never even begin through the AFCA.
What is clear, however, is that the Financial Royal Commission has put the spotlight on misconduct in the superannuation industry. As Commissioner Hayne indicated during the public hearings, this form of sunlight itself has had a sterilising quality. The Royal Commission has already led to increased regulatory action against superannuation funds, such as that taken by the Australian Prudential Regulatory Authority against IOOF.[32] Only time can tell whether this attention will result in a lasting change in the culture of the financial services industry.
Advice for the Passive Member
Until the imperfections of Australia’s superannuation system are worked out – if they ever are - it is valuable for passive members to arm themselves with some basic knowledge. Though you may only be dealing with small amounts in your super account for now, these amounts add up; every dollar you do not invest in your superannuation now equates to about three dollars you will have to invest in your 50s.[33] Legislation requires all employers to pay super contributions of 9.5% of an employee’s regular wage.[34] This applies to full-time and part-time workers, and extends to some casual employees.[35] Contributions must be paid by an employer at least every three month and should be stated on payslips. The final advice for passive members is to check how many superannuation accounts they have, what life insurance policies are being applied and what premiums they are paying.
Twenty minutes on the MyGov website now might mean a lot more in your super account twenty years down the track.
[1] Commonwealth, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Final Report (2019), vol 2, 210-1.
[2] Ibid 214.
[3] Ibid 210.
[4] Ibid 210-1.
[5] Ibid 214.
[6] Ibid.
[7] Ibid.
[8] Ibid 215.
[9] Ibid.
[10] ABC News (Australia), The blunt advice you might not want to hear after the banking inquiry (5 February 2019) < https://www.youtube.com/watch?v=KN-CrnWYsUs>
[11] Interview with Professor Susan Thorp (Sydney, 27th May 2019).
[12] Interview with Danielle Press, Commissioner at ASIC, (Phone Interview, 25th June 2019).
[13] Thorp, above n 11.
[14] Commonwealth, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Final Report (2019), vol 1, 222.
[15] Ibid.
[16] Ibid.
[17] Emily Stewart, ‘If there’s one thing you should do by the end of this week, its check your super.’ ABC News (online), 26 Jun 2019 <https://www.abc.net.au/news/2019-06-26/big-changes-to-superannuation-are-coming/11243266>
[18] Commonwealth, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Final Report (2019), vol 1, 253.
[19] Thorp, above n 11.
[20] Commonwealth, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Final Report (2019), vol 2, 211.
[21] Stewart, above n 17.
[22] Joseph Ayoub, ‘Treasury Laws Amendment (Putting Members’ Interests First) Bill 2019’, Parliament of Australia Flagpost (online), 4 April 2019 <https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/FlagPost/2019/April/Superannuation_insurance_amendment>
[23] Commonwealth, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Final Report (2019), vol 1, 262-3.
[24] Press, above n 12.
[25] Ibid.
[26] Ibid.
[27] Ibid.
[28] Commonwealth, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Final Report (2019), vol 2, 210.
[29] Press, above 12.
[30] Ibid.
[31] Ibid.
[32] James Frost, ‘IOOF skimmed super members: APRA’, Financial Review (online) 1 May 2019 <https://www.afr.com/business/banking-and-finance/ioof-skimmed-super-members-apra-20190430-p51imq>
[33] Thorp, above n 11.
[34] <https://www.ato.gov.au/Calculators-and-tools/Super-guarantee-contributions/>
[35] If an employee is paid $450 or more before tax per month and is over 18 years, or if under 18 years but works over 30 hours a week. There is also a different rate for working holiday makers (WHM) – this includes 417 (Working Holiday) or 462 (Work and Holiday) visas.