ASIC has released Report 781, which warns trustees that they must:
- protect superannuation member account balances from being eroded by inappropriate deduction of advice fees;
- implement adequate checks for fees for no service and investigate "red flags" in financial advisers and licensees; and
- set fee caps for advice fee deductions which are appropriate to the needs of members.
This article provides a refresher on trustee obligations in respect of advice fee oversight and explores ASIC expectations for best practice.
Why now?
The Report follows letters jointly issued by ASIC and APRA in 2019, and again in 2021, which called on trustees to review their practices in relation to oversight of advice fee deductions from members' superannuation accounts. The joint letters warned that trustees should expect further follow up from APRA and ASIC in relation to their oversight practices.
Since then, it has been a core issue, with misconduct resulting in the systematic erosion of superannuation balances being announced as one of ASIC's key enforcement priority for 2024.
Trustee obligations
Subject to complex and seemingly conflicting legal obligations, a trustee's ability to deduct advice from members' superannuation balances must be in accordance with various obligations, which are difficult to navigate.
Centrally, the sole purpose test in section 62 of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) governs that a superannuation fund trustee must maintain the fund solely for a prescribed core purpose, including providing retirement benefits to members. The 2019 joint letter reiterated this obligation and clarified that any fees deducted from a member's superannuation account must relate to advice regarding the member's superannuation or insurance obtained through superannuation.
Further, any advice fee deductions must be in accordance with the trustee's general obligations under section 912A of the Corporations Act (to act efficiently, honestly and fairly), the covenants under section 52 of the SIS Act (to act in the best financial interests of members) and other relevant legislative instruments (namely ASIC Superannuation (Consent to Pass on Costs of Providing Advice) Instrument 2021/126 and ASIC Corporations (Consent to Deductions—Ongoing Fee Arrangements) Instrument 2021/124).
The Report, which followed a review of the practices of 10 trustees and reinforces practices recommended in the joint letters, found that "[c]oncerningly, we have identified that in a small but serious number of cases, the superannuation balances of members are being reduced to pay for advice that instead of being helpful is destructive to their retirement outcomes".
Four key recommendations in trustee management of advice fees
The Report highlighted four main concerns where there is significant trustee oversight of advice fee deductions and we expect that ASIC will remain vigilant against deficiencies in these areas:
- Proactive checks of sample advice documents to confirm provision of financial services and compliance with sole purpose test: ASIC confirmed that trustees do not need to consider the quality, value of appropriateness of advice during these checks. However, we expect that ASIC will closely review trustee policies and processes to ensure that they have suitable risk-based triggers for checks, appropriate level of checks and utilise random sampling methodology.
- Use of appropriate fee caps to protect low balance superannuation funds: ASIC found that nearly all trustees applied fee caps, but criticised the use of peer comparison to set fee cap structures and calls on trustees to review percentage-based fee caps which do not set fee ceilings or where exceptions to exceed fee caps are easily permissible.
- Robust practices for onboarding advisers and licensees: ASIC found that trustees had improved in this area, having put into place formal processes for checking the identity and qualifications of advisers. It recommended further improvements in onboarding processes, including questioning advisers and licensees about how they source new clients, the type of advice they provide or whether they specialise in a particular area or strategy.
- Active monitoring and investigation of poor conduct in advisers and licensees: ASIC highlighted instances of concerning conduct, such as where three trustees were not able to identify how many members had actively withdrawn their consent during the review period. In light of inappropriate cold calling conduct, ASIC warned that advisers with poor conduct may have a tendency to move rapidly between licensees and that trustees should regularly review the Financial Advisers Register. We expect that ASIC will consider a failure to report 'red flags' may be considered deficient trustee conduct.
Other issues included over-reliance by trustees on attestations that the advice received met the sole purpose test.
Upcoming reforms and what these mean
It is also worthwhile noting that the Government has separately begun implementing the recommendations put forth by the Quality of Advice Report, which conducted an in-depth review of the financial advice regulatory framework with the aim of improving accessibility and affordability of financial product advice. The package of reforms will be progressed in three streams over the course of 2024. Most relevantly, we note that the recently tabled Treasury Laws Amendment (Delivering Better Financial Outcomes and Other Measures) Bill 2024 initiates stream one of the reforms and proposes to implement recommendation 7 by amending section 99FA of the SIS Act to:
- introduce an explicit requirement that the advice is wholly or partly about the member's interest in the fund;
- eliminate the ability to charge against members' superannuation balances for general advice; and
- require written request or consent from the member.
This is distinct from the sole purpose test, which provides that a trustee may only apply superannuation assets to the cost of providing certain topics of financial advice. However, the Report provides that the checks that trustees should already be undertaking to comply with the sole purpose test will also assist in meeting the proposed change to section 99FA.
The Government has also announced that it will introduce a comprehensive framework for superannuation advice which will include, amongst other things:
- legislating consistent rules on what advice topics can be paid for via superannuation; and
- allowing superannuation funds to consider in the advice a broader range of a member's personal and household circumstances such as debt, spouse's income or age pension eligibility.
As the industry continues to grapple with the industry-wide acknowledgement of the importance of Australians accessing quality financial advice in relation to their superannuation, together with the rising costs of obtaining that advice, and the increased focus on the erosion of superannuation balances, we expect that ASIC will continue its keen focus on this area. Trustees should use information from the Report to assess their oversight policies, procedures and practices.