ASIC and APRA jointly called on superannuation trustees to maintain appropriate oversight of advice fees deducted from member accounts in June last year. ASIC’s Superannuation Senior Executive Leader, JANE ECCLESTON, reminds trustees to reflect on their obligations.
Superannuation contributes to the future financial security of Australians, and trustees have an obligation to ensure that they act in fund members’ best financial interests and that fees deducted from their members’ accounts are authorised and permitted by law.
The Financial Services Royal Commission (FSRC) highlighted instances of superannuation fund members being charged fees for financial advice even though they were not receiving advice services in return. In some cases, these fees were charged over an extended period, often without adequate consent, and led to the unnecessary and sometimes significant erosion of fund members’ superannuation account balances.
Trustee obligations concerning fee deduction practices and the payment of advice fees to third parties recently changed as a result of the Financial Sector Reform (Hayne Royal Commission Response No. 2) Act 2021. The FSRC reforms aim to address erosion of superannuation balances, and fees for no service conduct more generally, by prohibiting ongoing advice fee deductions from MySuper accounts and introducing new consent obligations for both ongoing and non-ongoing (one-off) fee arrangements.
In June 2021, ASIC and APRA wrote to the industry reminding trustees about their oversight obligations. In the joint letter, ASIC and APRA further explained our expectations of trustees and outlined what constitutes appropriate trustee oversight of advice fee deductions from members’ accounts. This additional guidance was based on our analysis of reviews undertaken by trustees and follow up work by ASIC and APRA after our first joint communication to trustees about this issue in April 2019. It also included references to revised legal obligations concerning fee consent. To comply with these obligations as well as broader trustee licensing requirements, ASIC and APRA expect trustees to incorporate the following practices into their assurance frameworks:
Trustees must take steps to prevent deductions of ongoing fees being made from MySuper accounts following the commencement of the Advice Fees and Independence Act. This applies to ongoing fee deductions under arrangements entered from 1 July 2021 and for ongoing fee deductions under other arrangements from 1 July 2022. Trustees are still permitted to charge intra-fund advice fees to MySuper accounts.
Ongoing advice fees are any fees paid under the terms of an ongoing fee arrangement between a fee recipient (such as a financial adviser) and a client within the meaning of s962A of the Corporations Act 2001. Generally, ongoing fee arrangements are those that last for more than 12 months (although there are some exceptions listed in s962A).
Trustees can deduct advice fees from a member’s account only if they have the member’s written consent (s99FA of the Superannuation Industry (Supervision) Act 1993). This applies to new fee arrangements commencing from 1 July 2021, and to all fee arrangements from 1 July 2022. Member consent is not required for fee deductions relating to intra-fund advice.
Separately, the FSRC reforms require financial advisers with ongoing fee arrangements to obtain the member’s consent before deducting or arranging the deduction of ongoing fees from any investments, not just superannuation. If there is an ongoing fee arrangement involving deductions from a member’s account, it is recommended that trustees sight the member’s consent given to the financial adviser in order to satisfy the requirements.
To better understand their obligations, trustees should consider the two instruments issued by ASIC detailing the consent requirements: ASIC Superannuation (Consent to Pass on Costs of Providing Advice) Instrument 2021/126 (Non-Ongoing Fees Instrument) and ASIC Corporations (Consent to Deductions—Ongoing Fee Arrangements) Instrument 2021/124 (Ongoing Fees Instrument). ASIC has also released two example consent forms: Example Written Consent Form – ongoing fees and Example written consent form (non-ongoing fees) as well as FAQs on Ongoing fee arrangements and Non-ongoing fee consents.
While member consents are important, we remind trustees that consents alone are insufficient to maintain adequate oversight of fee deductions by trustees.
Through our ongoing engagement with trustees, we identified that trustees need to do more about adopting formal processes to check the identity and credentials of financial advisers who provide services to their fund members. This should be similar to the due diligence assessments undertaken for outsourced service providers. Trustees can refer to ASIC’s Financial Advisers Register, which provides information on a financial adviser’s qualifications, work history and what products they can advise on. If a trustee becomes aware of concerns about a financial adviser, particularly systemic concerns, they should investigate further.
Trustees should proactively check a sample of advice documents on a random and risk basis to confirm that the financial advice has been provided and that any fee deductions comply with the ‘sole purpose’ test.
Signed fee consent forms generally indicate what services have been agreed to and can provide some evidence about the nature of advice services. However, they don’t confirm that services have been provided. Our view is that carrying out risk-based and randomised sample checks of a selection of advice documents, such as statements of advice (SOAs), records of advice (ROAs), fee disclosure statements (FDSs), or excerpts of these or other advice documents will help trustees to more definitively determine that services have been provided.
We do not expect trustees to undertake a detailed or extensive review of advice documents, but they should be able to request a selection of advice documents in order to conduct risk-based and randomised sample checks. This process should not be onerous on the financial adviser providing the advice documents. Trustees may wish to provide direction to financial advisers about what documents or evidence they need to sight to satisfy themselves that the advice services have been provided to the member and that the fee deductions comply with the sole purpose test.
To confirm, we don’t expect trustees to question whether the advice provided is suitable for each member, nor do we expect trustees to second guess individual pieces of advice for quality, value or appropriateness.
We understand that financial advisers are concerned about the potential for their clients’ privacy or confidentiality to be breached by the provision of advice documents to trustees. Trustees can help address some of these concerns by tailoring their approach to the issue they are seeking assurance on and providing clarity to financial advisers about what documents are needed in particular. Financial advisers can seek their client’s consent to provide documents to the trustee for its review. Where a client consents to their advice documents being provided to the trustee, privacy concerns about trustees sighting advice documents don’t apply.
The FSRC highlighted that the ‘sole purpose’ test means that superannuation assets can only be used to meet the cost of providing financial advice about ‘particular, actual or intended superannuation investments’. This means, while a fund member may receive advice on a broad range of topics including superannuation, only a proportion of the advice fee (relevant to superannuation advice) should be deducted from the member’s superannuation account. For example, fees for financial advice provided on the following topics can be paid for from a member’s account:
Broad retirement and wealth accumulation advice should not be paid for through a member’s superannuation account.
Our recent surveillance found that some trustees require warranties or attestations from financial advisers, and sometimes members, that the advice fees deducted relate solely to the provision of superannuation advice. While warranties or attestations are useful, trustees should continue to be alert to red flags indicating that further investigation is required. It is prudent for trustees to carry out some random checks of advice documents from time to time to satisfy themselves that the ‘sole purpose’ test has been met and that their controls are effective.
Trustees have a range of measures at their disposal to ensure fee deductions do not inappropriately erode member account balances. One of these is to impose caps on fees for advice services provided that can be deducted from member accounts. Our surveillance found that most trustees have fee caps in place, including capping upfront fees at the lower end of a dollar amount or at a percentage of the member’s account balance. Other funds cap upfront and ongoing fees at a percentage.
While capping fees can help protect members from inappropriate superannuation balance erosion, trustees should consider the size of any fee cap to ensure that it represents an appropriate safeguard against risk of balance erosion. Fee caps, particularly dollar-based caps, need to be appropriate to the size of the account balance. A member with a low account balance should have a lower dollar-based fee cap applied compared to members with higher account balances. Trustees should therefore contemplate separate fee caps to protect members with low superannuation balances.
During our surveillance work, we observed that some trustees seek to retain high fee caps to accommodate the advice needs of high net-worth members. A preferable alternative is to impose fee caps that protect the majority of members from balance erosion. Trustees should consider including exceptions rules, which allow them to exceed these caps in limited circumstances where a robust member benefit assessment has been undertaken.
Another measure trustees should consider is to confirm that each type of advice fee deduction serves a necessary purpose, particularly where multiple advice fees are charged.
Member complaints are a key risk indicator of systemic problems within a superannuation fund. It is important that trustees have processes in place to identify and resolve systemic issues to reduce member harm as well as the incidence of complaints being escalated to the Australian Financial Complaints Authority (AFCA). Effective complaint management processes can also reduce the risk of downstream remediation costs.
In our surveillance, we observed a range of practices regarding complaints made about third party financial advisers. Some trustees proactively investigate and act on member complaints, including those made about third party financial advisers, while others have taken the view that they are unable to investigate complaints of this nature. We do not expect trustees to take action to investigate every member complaint about financial advisers. However, trustees do need to act if members complain about advice services not being provided or if systemic issues are identified that suggest it is inappropriate for the trustee to continue to make payments to that financial adviser from member accounts. Where trustees become aware of multiple complaints about a financial adviser, we expect them to conduct an investigation, even if it is a third-party financial adviser.
Superannuation trustees may also be required to lodge a breach report where they become aware of a reportable situation regarding another licensee, such as a situation involving a third party financial adviser (see RG 78.70 for further guidance).
The oversight of advice fee deductions from members’ accounts is an important obligation of trustees. When processes for oversight are inadequate or poorly implemented, it could cause significant harm to members and result in breaches of the law.
Last year, ASIC and APRA asked trustees to proactively integrate advice fee oversight processes and controls into their assurance frameworks to better protect their members’ interests and ensure any fee deductions from the fund comply with the law. Trustees should monitor the efficacy of their current oversight practices and controls, and if necessary, modify them based on the practical experience and learnings from the past year.
ASIC and APRA will continue to work together to engage with trustees about the robustness of their oversight policies and practices and to determine how well trustees are managing their compliance with the new requirements under the law.