Super braces for royal commission blowtorch

Financial Services Minister Kelly O’Dwyer warns the royal commission could deliver some shocking stories about super.

Minister for Revenue and Financial Services, Kelly O'Dwyer

Just when it seemed that life couldn’t get any tougher for AMP, the finance house that once dominated Australia’s life insurance and retirement savings industry, the company delivered another blow to its shareholders on Friday.

Its announcement that it would be putting aside almost $300 million to remediate poor ­financial advice going back a decade sent its shares down to a ­record low in early trading — and marked another groundshift in the superannuation industry.

Australia’s $2.6 trillion super industry is regarded as one of the best in the world based on the compulsory superannuation guarantee system.

But in recent years there have been major structural changes in the industry with once dominant players facing challenges, the sector grappling with a shift from commission-based sales to fee for service, and major banks now exiting wealth management.

Growth in the industry super fund sector continues to soar thanks to its links with the industrial awards, its lower fee structure, the relative lack of legacy costs and systems of retail, and its success in winning the public relations war against a retail super sector under fire for financial scandals.

The next market figures from the Australian Prudential Regulation Authority are expected to show the industry fund sector with assets of about $600bn, moving past the retail super sector that once dominated the landscape.

The government’s battle to break the nexus between industry super funds and industrial awards — which provide the funds with a steady flow of income that the retail funds don’t have — continues its tortuous path with the latest Productivity Commission recommendations on default super.

All this as the super industry braces itself for the forensic spotlight of the royal commission into misconduct in the financial services sector on Monday week.

This time last year, Financial Services Minister Kelly O’Dwyer was one of many in the government arguing against the need for a royal commission. Last week in an address to the Financial Services Council in Melbourne, it was a very different tone from the Minister, who warned that the commission could deliver some shocking stories about the super sector. In a pointed comment, she cast the spotlight on the behaviour of the industry as well as the regulators.

The royal commission, she said, represented an “unprecedented opportunity for the industry to reflect on the practices and actions that have resulted in the commission — and so too for the regulators.”

She urged the superannuation industry to use the royal commission to “draw a line in the sand” when it came to any questionable practices. The government, she said, would be “looking to firms to ensure they take all necessary action and play their part in restoring that trust”.

Under pressure to take a tougher view of the sector, the Australian Securities & Investments Commission is forcing the wealth management industry to look back over the past decade to review financial advice and fees charged.

After the experiences with the royal commission so far, no one in the sector knows what its review into super will throw up or what uncomfortable cases might be brought to light. Even players who feel they have nothing to hide are worried about whether there may be some past transgression that comes back to haunt them.

Structurally we are now seeing three of the big four banks — CBA, ANZ and NAB — moving out of wealth management in various forms. The financial system dominated by the big banks in the wake of the global financial crisis is now fragmenting.

Brian Hartzer’s Westpac confirmed this week it intends to continue to be a major player in the sector through its BT arm. Its announcement that it is prepared to take a $70m revenue hit to cut its fees for customers on its BT Panorama Investments platform was a further signal that it is serious about being a competitor in the sector. BT chief executive Brad Cooper is preparing his organisation for a world where an increasing number of financial advisers are independent of any major players.

The moral and potentially legal force of the royal commission is ­already accelerating the pace of change in the industry. But as O’Dwyer warned this week, there may well be more shocks to come.