FAAA questions profession’s capacity to onboard constant super changes

The Financial Advice Association Australia has questioned the impact of continued tinkering with superannuation laws from the government, arguing Treasury needs a clear roadmap for change implementation.

In a submission to the Strengthening the superannuation performance test consultation, the FAAA said the profession has been required to deal with the Division 296 and payday super reforms, as well as capital gains tax changes proposed in the May federal budget.

Treasury is consulting on changes to the performance test to discourage the benchmark-hugging behaviour that has characterised super fund investments since the introduction of the test in 2021.

The FAAA said it doesn’t oppose expanding the performance test “in principle”, acknowledging that the test remained a central accountability mechanism that identifies persistent underperformance and places downward pressure on fees, but that limitations in the current benchmarking framework needed to be addressed before any expansion.

Furthermore, it suggested that more consumer testing and adviser consultation be done before any expansion occurs.

“In consultation with industry, consumer and professional associations, Treasury must produce an implementation roadmap that maps a delivery sequence across the financial services landscape,” the submission said.

Among the association’s long-standing criticisms of the test was how fees were calculated in the test and the submission questioned the appropriateness of the test being done on the basis of a $50,000 member balance when the average member balance is $170,000.

“Using a materially higher amount would make the test more relevant to the average consumer,” the association said.

The FAAA also highlighted the impact the performance test could have on adviser decision making.

“A failed performance test result may justify further investigation but should not automatically trigger switching decisions,” the submission said.

The association noted there can be broader consequences for switching funds or investment options that need to be carefully assessed.

“For example, a member in an underperforming super fund should not switch immediately if they will soon enter a 0 per cent tax environment in pension phase,” the submission said.

“Financial advisers are also supported by external research reports and licensee processes to approve products before they are available for advisers to recommend. Additionally, advisers remain responsible for the products that they recommend to clients, including reviewing whether the products remain suitable for clients over time.”

The collapse of the Shield and First Guardian master funds, which were managed investment schemes distributed through superannuation platforms, drew the government’s attention to the exclusion of externally managed products from the performance test.

The FAAA said the collapse highlighted the importance of strong consumer protections, but questioned whether the performance test consultation was the avenue to do so.

“While these events strengthen the case for reviewing the scope of the performance test, they also demonstrate that no single regulatory mechanism can substitute for strong governance, disclosure, regulatory oversight and access to professional financial advice,” the association said.

“Where fraud and misrepresentation of performance occurs, it is not possible for the superannuation performance test to identify this.”

APRA collected data on the Shield and First Guardian fund flows, but the prudential regulator didn’t have the processes in place to interpret the information.

The government will allocate $17.8 million to ASIC to help fund oversight programs, which will involve utilising APRA data.