Super regulators ‘missing in action’

The super industry’s twin regulators failed to crack down on misconduct, the Productivity Commission says.

The Productivity Commission’s Karen Chester. Picture: Aaron Francis.

The prudential and corporate regulators have been “missing in action” when it comes to cracking down on misconduct in the superannuation industry, the Productivity Commission says in a report on the sector to be released today.

In a blistering indictment of the performance of the industry’s twin regulators, the Australian Prudential Regulation Authority and the Australian Securities & Investments Commission, the commission said their roles were unclear, they were too slow to act, needed to take more legal action and should focus more on member interests.

This would involve abandoning the prudential approach that has concentrated on making sure funds don’t collapse in favour of a focus on cracking down on poor returns and bad behaviour. The commission called on the government to conduct a capability review of APRA, which until last month had never taken legal action against a super trustee, and said the regulator should move quickly to kill chronically underperforming funds that can cripple retirement savings.

It welcomed moves to bring in civil and criminal penalties and beef up APRA’s enforcement powers, but said more was needed, and blasted the poor quality of data across the sector.

In other recommendations, it called on APRA and ASIC to release a report on the state of the super industry every two years and said the government should fund an organisation that can speak on behalf of super fund members.

The 722-page report, “Superannuation: Assessing Efficiency and Competitiveness”, is the end product of a two-year inquiry into the $2 trillion super sector, commissioned by then-treasurer Scott Morrison in February 2016 and overseen by Productivity Commission deputy chairwoman Karen Chester.

“Conduct regulation arrangements for the superannuation system are confusing and opaque, with significant overlap and no clear delineation between the roles of APRA and ASIC,” the commission said.

“This has reduced regulator accountability and, as highlighted by the hearings of the Financial Services Royal Commission, strategic conduct regulation (especially with deterrence intent) has been ‘missing in action’ or ‘too little too late’.

“The commission welcomes the move by APRA to take action in relation to underperforming funds, although it has taken more than a year to get to this point and there are still nine funds in ­‘continuing discussions with APRA’,” it said.

“These funds should be dealt with promptly (that is, they should take immediate measures to improve or they should be forced by APRA to exit the industry).”

It said an “elevated outcomes test” — designed to weed poorly performing funds out of the industry — was a “must have”.

This was because there was “a material tail of entrenched underperforming” funds in both the low-cost MySuper and mainstream choice sectors that “clearly demonstrates that the system has failed to deliver good outcomes for many members,” it said.

“Members would have a realistic expectation that government and regulators would ensure their fund is looking after them, but this expectation would have been sadly misguided — with no regulatory disposition nor effective mechanism in place for weeding out underperforming funds and products.”

It said its recommendations to beef-up the test that funds must meet would involve so-called mutt funds ceasing to exist.

“Such consolidation involving the exit of chronic underperformers is long overdue and should be welcomed,” it said.

The commission also blasted APRA for being fixated with super funds following correct processes — a failing exposed at hearings of the financial services royal commission last year — rather than looking at what was best for super savers, calling on regulators to become “member champions”.

“APRA would be a more effective superannuation regulator if provided with an explicit ‘member outcomes’ mandate rather than a traditional prudential mandate,” it said.

The commission also hammered APRA’s culture of resolving problems in private, rather than through public enforcement action.

“It is clear that strategic conduct regulation with deterrence intent — where public enforcement action in response to material member harm (and with a reasonable probability of success) is undertaken to deter similar behaviour by others — has generally appeared either largely ‘missing in action’ or been ‘too little too late’,” it said.

“The ‘behind closed doors’ nature of APRA’s supervisory activities means that there is little potential for demonstration effects.”

The commission did not spare ASIC, saying it “ has traditionally been reactive, rather than proactive, in its regulation of superannuation (and more generally)”.

However, it said some of this was due to “limitations in its regulatory toolkit” and welcomed increased penalties for Corpor­ations Act breaches and new powers for ASIC to intervene to kill off toxic financial products.

Both regulators should follow the lead of the Australian Competition & Consumer Commission and the Taxation Office by running test cases when the law is unclear, the commission said.

“ASIC and APRA also factor the need to clarify the law into their enforcement decisions, but appear overly reluctant to pursue such test cases despite their potential to lead to better outcomes for members,” it said.

It said changes to super laws currently before parliament that would allow APRA to stop changes of ownership of low-cost MySuper funds and introduce criminal and civil penalties against directors of superannuation trustee companies who do the wrong thing were welcome but would not fix all the sector’s woes.

“More generally, the accountability mechanisms for regulators that exist within the Australian (Westminster) system of government detailed and discussed in the ASIC Capability Review ... have been left largely dormant or at best under-utilised by government in the case of ASIC and APRA,” it said.

“As a result, ASIC and APRA have not been held fully to account by the government.”