A shock to the super system

While Australia’s superannuation system is regarded as one of the best in the world, it may be in for a shock as the banking royal commission puts the $2.6 trillion industry under the microscope next week.

The battle between industry and retail funds seems to have been won by the former. But some big banks – those that own oft-maligned retail funds – which have been stung by the banking royal commission may now be quietly chuckling knowing that the spotlight is about to be shone on all super funds, including ‘squeaky clean’ industry funds.

Meanwhile, although big banks’ shift out of the wealth management sector has gained ground, Westpac has signalled that it’s still in it for the long haul. The bank has declared it will take a $70 million revenue hit to cut fees for customers on its BT Panorama Investments platform. While not one of the ‘Big Four’ but still a for-profit fund owner, AMP has also announced it will put aside $300 million to remediate poor advice given to customers.

Both these moves have been reactions to the royal commission, which has ripped into big banks and financial services for poor advice, corruption, excessive fees and other dodgy practices.

A report released earlier this month showed that Australians have forked out around $700 billion in fees to super funds.

While the Australian Superannuation Funds Association tried to come to super funds’ rescue, the sector’s fee structure remains less transparent.

The royal commission will likely shine a light on this and other areas of an industry that has so far escaped scrutiny because of its solid performance.

Although Financial Services Minister Kelly O’Dwyer was reluctant to hold a banking royal commission previously, her more recent comments about the investigation – both past and future – have become more pointed.

Speaking to the Financial Services Council last week, Ms O’Dwyer warned that the commission “could deliver some shocking stories about the super sector”, referring to the behaviour of the industry as well as the regulators.

She claims the royal commission is a chance for the industry to reflect on the behaviours that led to the probe. She also warned that the sector should now “draw a line in the sand” in regard to any questionable or underhanded practices, and to do what it takes to restore trust in the financial services and wealth management industry.

Ms O’Dwyer also relayed that the Government and the Australian Securities and Investments Commission will be “looking to firms to ensure they take all necessary action and play their part in restoring that trust”, including reviews of financial advice and fees charged.

If we’ve learnt anything from the royal commission so far, it’s that no stone has been left unturned in exposing poor practice and dodgy dealings in the financial services sector. It could be an ominous warning for the super industry which has so far not attracted the same attention.

One factor that worries many fund holders is who will bear the cost of compensation and remediation for funds found guilty of dodgy practices. Another is how the royal commission findings will affect stocks and investments.

Investors are now claiming that regulation is replacing disruption as a key theme to watch in the coming year. Airlie Funds Management Matt Williams said that the public’s desire to see change could affect the bottom lines of many companies in which these same people have investments.

Super funds may have to increase fees, or we may see softer returns as a result of regulatory risks.

Mr Williams referred to one of the Airlie Fund’s own holdings to illustrate his point: “They copped a regulatory decision on the rate of return they can get from their asset and it was way worse than what we were expecting. The stock suffered accordingly.”

Many fund members fear they’ll have to foot the bill to cover the cost of regulation. However, Australian Institute of Superannuation Trustees chief executive Eva Scheerlinck said that super funds were morally and legally obligated to ensure that members’ savings were not used to fund the resolution of complaints.

“It would be unacceptable, inequitable and unfair if members’ retirement savings were used to fund the resolution of disputes unrelated to superannuation, such as complaints against banks and financial advisers,” said Ms Scheerlinck.

The dominance of the big banks in the wake of the Global Financial Crisis has started to unravel thanks to the royal commission. Maybe the same will happen with the super industry. One thing’s for sure, the royal commission will be a shock to the system and one that will no doubt create some changes in the industry.

Are you happy with how the royal commission has operated? Will you benefit from the outcomes? Or are you worried that the cost of such action will end up coming out of your pocket?

Related articles:
Super funds exploiting members
Can you trust your super fund?
Banks grilled on poor advice

Written by Leon Della Bosca

Leon Della Bosca has worked in publishing and media in one form or another for around 25 years. He's a voracious reader, word spinner and art, writing, design, painting, drawing, travel and photography enthusiast. You'll often find him roaming through galleries or exploring the streets of his beloved Melbourne and surrounding suburbs, sketchpad or notebook in hand, smiling.
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