Platform governance requirements are not well-defined by legislation or by APRA, creating a blind spot in the regulatory regime, The Conexus Institute* has argued.
In a submission to Treasury’s consultations on trustee obligations launched in the aftermath of the $1 billion Shield and First Guardian collapse, the institute says the Superannuation Industry (Supervision) Act and APRA regulatory frameworks have been largely aimed at industry funds and retail master trusts rather than at platform super funds, even if this may not have been by design.
“The language, assumptions and structural concerns throughout the relevant legislation and regulatory documents seem to presume a super fund that constructs, owns, and governs its own investment options and delivers them to a pooled membership base,” the submission, written by executive director David Bell and research fellow Geoff Warren, says.
“This is not unexpected since the rise of platforms is a more recent phenomena, and the nature of legislation and policy is that it develops incrementally.”
The Financial Services Council has already commenced work to lift governance standards of trustees through its own best practice standard for members, released in April.
Platform trustees will be expected to conduct extensive due diligence on product issuers and their responsible entities, as well as on the governance and track record of the investment manager and the fees and costs of the investment option.
Trustees would also be expected to conduct active monitoring of investment options rather than adopt a “set and forget” standard, as well as keep an eye on rating downgrades, changes to disclosure, valuation practices, liquidity or governance.
But while The Conexus Institute submission highlights the need for a clearer regulatory regime that lifts standards, it also warns that imposing onerous regulations on super platforms may lead to the accelerated creation of SMSFs through investor-directed portfolio services that don’t face the same level of regulation and compliance.
“We are not advocating for platforms to have reduced standards,” the institute says.
“Rather, we are simply identifying that the obligations match better to an industry fund or corporate master trust and do not fit as naturally to a platform where advisers are acting as an intermediary that is overseeing investment strategy.”
The institute also argued for the introduction of mandatory holding limits for MISs and if it were to be introduced, a principles-based approach would be the best option.
ASIC commenced civil penalty proceedings against Diversa Trustees in the Federal Court alleging the trustee failed to enforce a 50 per cent holding limit on First Guardian, along with several other due diligence failures.
The regulator has also alleged Equity Trustees approved Shield and First Guardian in violation of its own internal investment governance framework, and failed to maintain holding limits.
The institute also highlighted that determining duties and responsibilities between advisers and trustees is difficult, noting a flaw in the consultation that focuses on the relationship between a member and super platform without properly focusing on the role of the adviser.
The institute says what needs to be factored in is when – or if – an adviser’s fiduciary responsibility supersedes a trustee’s, as well as the costs and benefits of overlapping best interests duties.
“We also acknowledge that many platforms have advised and unadvised members, representing direct and intermediated relationships,” the submission says.
“This warrants further consideration as to what degree the trustee is responsible for the portfolio the member has put in place under either arrangement. That is, it is important to consider how the duties and responsibilities of platforms may differ through a direct versus intermediated lens.”
The government launched three consultations simultaneously – the other two covering lead generators and the Compensation Scheme of Last Resort (CSLR), in addition to the one on trustee oversight – as part of its series of industry engagements to address regulatory gaps that led to the collapse of Shield and First Guardian.
The institute’s CSLR submission warns that although large-scale product failures such as Shield and First Guardian have dominated headlines, as well as other incidents such as United Global Capital and Dixon Advisory, there are numerous other system risks that will continue to create pressure on the CSLR.
These challenges include SMSF establishments, investment strategies related to property and misapplication of the wholesale/sophisticated investor tests.
The institute’s research highlighted limited recourse borrowing arrangements (LRBAs) in SMSFs, retirement advice, contribution strategy and tax advice failures, and intra-fund advice quality of super funds as other potential risks that could lead to significant client detriment.
“We share these points to help ensure that some of the focus is on the broader potential for advice failings, rather than losses relating to product failings,” the submission says.
*The Conexus Institute is a not-for-profit think-tank philanthropically funded by Conexus Financial, publisher of Professional Planner.
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