More regulation is needed to address consumer harm arising from SMSFs and the Financial Accountability Regime should apply even to platforms that outsource their super trustee in order to close governance gaps, according to Insignia Financial CEO Scott Hartley.
“SMSFs are the wild west, and the greatest cause of harm for Australian consumers of superannuation,” Hartley told a roundtable last week, hosted by Professional Planner sister publication Investment Magazine.
He added that there has to be rules placed on SMSFs, beyond bringing them into the Compensation Scheme of Last Resort which has been teased by the government in a consultation released on 8 April.
“They’re the source of most of the damage that hasn’t yet been compensated for,” Hartley said. “The vast majority of failures in the past have been SMSF related, until Shield and First Guardian, where a few platforms got slack and allowed them in.”
Growing SMSF establishment has emerged as a threat to some segments of the APRA-regulated super sector, with the AFR reporting in February that a record number – 14,500 – were set up in the September quarter as more and more members look to take more control of their savings.
Hartley was responding to a wider question around the release last Wednesday’s three consultation papers covering superannuation member protections and trustee obligations, the sustainability of the CSLR and stricter enforcement on lead generation services.
At the time of their release, Minister for Financial Services Daniel Mulino said that the collapses of Shield and First Guardian – which have so far impacted more than 11,000 consumers and over $1 billion in retirement savings – had “highlighted the need” for a comprehensive reform package.
Hartley said that, in the case of Shield and First Guardian, regulations were clear “but some operators didn’t apply sufficient oversight and appropriate due diligence” to ensure they were executed properly, and that those operators should “take accountability for that”.
“That was my position from the start and we welcome any tightening of governance for all trustees,” Hartley said.
“But it’s not just about platform governance; it’s about all superannuation governance. The rules for platforms are no different to super funds. SPS530 is the regulatory standard that says ‘this is how you’re supposed to govern investments whether you’re a platform or a super fund, it doesn’t matter’.”
Those rules aren’t broken, Hartley said, but they could potentially be improved – though trustees that don’t apply them correctly, resulting in losses, need to “step up and compensate clients”, as platform providers like Macquarie and Netwealth did.
“What would be helpful is if FAR applied to everybody operating in the platform sector the same way,” Hartley said.
The FAR was brought into impose stronger responsibility and accountability framework to improve the risk governance cultures of APRA-regulated entities, their directors and most senior executives.
“At the moment, some platforms outsource their super trustee to a third party and for some of these, the application of FAR doesn’t flow down from the outsourced trustee to the executives running and operating those platforms, which is a clear weakness,” Hartley said.
“If you’re operating under FAR it brings a different mindset to how you comply with regulations and manage risk.”
Hartley also questioned whether ASIC had enough resources to regulate advice and managed investment schemes (MISs), and said that the regulations governing the latter definitely “need to be strengthened”.
“If you’ve got $160,000 and a complying trustee and a complying PDS [product disclosure statement] you can set up an investment scheme, that seems crazy,” Hartley said.
“Some of the recommendations on MIS need to go to capital requirements and governance.
“On the advice side, I think there are some very compliant licensees in the industry that have been through the royal commission, been through the wringer, as I call it, and have very tight compliance and risk management. But there are a number of generally smaller licensees and self-managed licences who lack sufficient supervision.”
Consumer protection uplift
With the consultation papers released last week, Treasury is canvassing views on a host of consumer protection uplifts in super, including whether it should apply waiting periods for all inter-fund super switches and impose a legal obligation on trustees of retail platforms to compensate members for member losses arising from fraud or theft.
The proposed cooling-off period for super switching, previously flagged by Mulino, would require members to confirm their request with the transferring fund after a delay (Treasury uses five days as an example).
Treasury is weighing two options – applying the cooling-off period to all inter-fund switches, or only to switches in certain categories i.e. APRA-regulated fund to SMSF, platform or platform offering “higher risk financial products” – though the consultation paper notes that it might not improve protection in cases where the consumer was the victim of high-pressure sales tactics like those used by some lead generators to funnel consumers into the Shield and First Guardian funds.
Another proposal would require platform trustees to compensate their members for “eligible losses” – those arising from external fraud or theft that result in the collapse of an investment product but which would otherwise exclude losses attributable to ordinary investment performance or market volatility.
