ASIC backs ‘best in show’ default super funds

The Productivity Commission’s proposal for a “best in show” list has gained backing from the corporate regulator, who says it could solve conflicts of interest and lack of competition.

The corporate regulator is also demanding additional powers to police misbehaving super funds and check their financial accounts.

As part of a sweeping review of the $2 trillion superannuation sector, the Productivity Commission is recommending that an expert panel select a “best in show” list of up to 10 best-performing default superannuation funds.

This is designed to replace the current system where employees default to a super fund selected by employers or by the Fair Work Commission in modern awards.

In a submission to the Productivity Commission published on Wednesday, ASIC said a carefully designed “best in show” list could help solve issues such as lack of competition and conflict of interest between employers and employees.

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This is in contrast to the Australian Prudential Regulation Authority, which said such a proposal could significantly hurt funds that lose default status.

ASIC qualified that in order for the list to work, the list should measure consumer outcomes “holistically” and not singularly focus on net investment returns.

ASIC can act as ‘conduct regulator’

There should also be a mechanism for ongoing assessment of funds on any list, in case some become no longer appropriate over time, ASIC said.

It also said we need to make sure trustees on the “best in show” list do not use the default arrangements to distribute more expensive products.

ASIC said it was concerned employers have no obligation to select a default fund that is in the best interests of their employees or put employees’ interests before their own.

“This naturally creates an environment in which conflicts can arise, and more generally where the employer may not place significant importance on the selection of a default fund,” it said.

Even if an employer wants to choose the best fund for employees, the employer may not have the knowledge and capability to do so, ASIC said.

ASIC has also demanded law reform to act as a “conduct regulator” and take public enforcement action against super funds for misconduct.

“ASIC’s approach as a conduct regulator more broadly involves a focus on public enforcement and transparent regulatory actions. That is, in part, due to the broader deterrent effect that such action can have. ASIC believes that public enforcement action is an important tool in trying to minimise the incidence of misconduct,” it said.

No one auditing super funds

ASIC said no regulator conducted surveillance of the financial reports of super funds or inspected the audits of those financial reports.

“We do not presently have the statutory powers (or funding) to oversee regulated superannuation entity financial reports and audits. ASIC would be willing to undertake this role, including conducting proactive surveillance of financial reports and audits,” it said.

This is in contrast to self managed super fund auditors, who are registered and regulated by ASIC.

No plan to monitor high exit fees

However, ASIC pushed back on the Productivity Commission’s draft recommendation for it to review whether exit and switching fees are unrelated to the underlying performance or the product or unreasonably stop members from switching to better products.

In the federal budget this year the government banned super funds from charging exit fees, making it cheaper for consumers to switch super funds.

“Given the limits on ASIC’s responsibility in fees, ASIC would not be able to take action if a trustee were contravening the existing restrictions on exit or switching fees, or the proposed ban on exit fees. ASIC could only take action if the fee disclosed is inaccurate, misleading or deceptive,” it said.

“In light of this ASIC is unlikely to prioritise work of this kind soon.”

ASIC flagged it is reviewing the way it regulates super funds, and super fund trustees can expect more consistent oversight by ASIC staff, more frequent onsite visits, more public actions and better use of data.

The submission comes only days after the regulator was given an extra $70 million in funding so it can better monitor big banks, take more cases to court, implement its new whistleblower protection laws and improve regulatory technology.

The submission also comes as super funds are facing scrutiny by the banking royal commission in a two-week hearing.

This week’s royal commission heard there was a “hopeless” conflict of interest between NAB’s superannuation trustee NULIS, which had the sole duty of acting in the best interests of the super fund members, and the administrator, which was concerned with making profits for the bank.

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