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Parliamentary Joint Committee on Corporations and Financial Services
05/10/2012

LEVY, Ms Michelle, Member, Superannuation Committee, Law Council of Australia

[09:47]

CHAIR: I invite you to make a short opening statement, and the committee will ask you some questions.

Ms Levy : Thank you for the opportunity to appear. The first point I would like to make is that we do not really have a policy position. Our purpose is about creating clear and good law, so our comments in our submission are very much directed to that. I would just like to bring out some of the major points that we make in our submission—which I appreciate is quite long—about the three schedules only. The first is schedule 1 on fees and costs; the second is on the disclosure of information in schedule 3; the final one is on the accrued default amount in schedule 6.

With respect to schedule 1, there are just a couple of points. There is a provision in 29SA(c) which requires a trustee, when making an application for my super authorisation, to elect not to charge fees which will be used to pay conflicted remuneration. We are concerned by the mismatch here between the very generous grandfathering that is provided under FOFA and the Stronger Super regime. You may well end up with a situation where a trustee has an ongoing obligation to pay what would, but for the grandfathering provisions, be conflicted remuneration—they will have that contractual obligation, but they will have lost their source of funds to pay that amount.

The next issue was around the performance-based fees. The legislation introduces rules which apply to the charging and calculation of performance based fees where any assets relate to MySuper. Our submission talks to the extreme difficulty of applying those provisions. The legislation speaks about doing an after-tax calculation 'where possible'. That is a very high standard—many things are possible but not necessarily practical or in the interests of members. My clients and the other committee members' clients are very concerned about complying with the law and certainty. These provisions do not provide for any certainty, and you may well end up with trustees moving away from performance based fees.

The final point on the fee rules was on the provision dealing with financial product advice. These provisions are very difficult to understand and would be, I suspect, very hard to implement. The committee questions whether it could be drafted in a much more simple and direct manner to say that, if you are providing personal advice to an individual member, you can only charge the individual member for that advice, and then it could have some exceptions. That seems to be a very simple, straightforward way of doing it, rather than the very complex way it is drafted at the moment.

Moving to schedule 3, on the collection and disclosure of information, I have a couple of points. Regarding the product dashboard, concern is outlined in our submission about, again, the difficulty of providing and calculating some of that information and the mismatch between other published information, particularly in product disclosure statements, and the material that is on the product dashboard. Perhaps more concerning is provision 1017BB, which requires the publication of investment information. The provision is extremely unclear and potentially very onerous. Just as an example, it requires trustees to identify:

… each of the financial products or other property in which assets, or assets derived from assets, of the entity are invested …

It is intended to create some kind of flow-through into underlying investments, but the language is very unclear. It also raises the problem of double counting, which could arise if you had to delve through many layers of investments. A small but important point is that this information is required to be disclosed on a whole-of-fund basis, whereas members' interests are usually calculated by reference to their investment options. We query why you would not want this kind of information on a per-investment-option basis.

The other concerns with these provisions are about the strict liability provisions for trustees subject to a defence. The committee suggests that a better way of putting this would be to have an offence where the trustee has failed to use best endeavours—something along those lines—to comply with provisions. We believe that would be preferable to forcing a trustee into a position where they are in breach and then have to defend what may well be completely reasonable.

Finally, on schedule 6, moving accrued default amounts, the committee is concerned by the fact that, as you have just been discussing, this captures amounts where a member has exercised investment choice. They may well have thought, 'I want to invest in that balanced option; it happens to be the default option,' and you have heard at length about that. The explanatory memorandum speaks about why that is being done and talks about the member having 'decided to delegate responsibility' 'to the trustee'. I cannot see that you can draw that from the fact that a person has chosen, for example, a balanced option.

The final point is around the election process itself. We are concerned by this. The way this will work is that a trustee who puts in their MySuper application will be asked to elect to transfer accrued default amounts. It appears that this is an attempt to avoid 51(xxxi) of the Constitution. There appears to be a concern that requiring trustees to move assets from one investment portfolio to another with different fees will mean that a trustee will be giving up property rights. The question is then whether it is an unjust acquisition of those property rights.

Without forming a view, it appears that the government thought that they could bypass that question in requiring trustees to make an election and it has been queried whether that would be right. But more importantly I think the committee's view is that the government should take a view and require trustees to do something directly if it is permissible under the Constitution. The other thing just to note is that the law will affect existing rights. It will have a retrospective application. Again, there is no grandfathering here in the same way that you have in SISA.

I will spend one minute on process. We, the committee, spend a lot of time trying to prepare careful responses to legislation and often the time period—and I know it is not just for us; it is for everybody—is just too short. It is not possible to prepare a well-reasoned and thought-through submission in a week. For the trustee obligations bill the submission timetable was shorter than the period within which the committee was meant to release its report. I suppose people have a lack of confidence in the system given this timing.

I think the tranches of legislation are also extremely difficult to, again, provide comment on and just to read and understand. It is also a problem for the drafters. An important point is that the tranche 1 MySuper bill provides that in MySuper all rights, benefits and options for members have to be the same. There is a big issue here about insurance. A lot of people from APRA and Treasury have said you can have different insurance arrangements within MySuper, which appears to be contrary to the first bill.

In the explanatory memorandum to this tranche, the third bill, there is a discussion about the requirements in the first bill which just appear to be inconsistent. I think it is just a problem of everyone having to deal with multiple tranches of legislation which often amend one another.

Mr FLETCHER: Ms Levy, there are a number of things I would like to ask you about. To start with, you make a point about the drafting approach that has been used under which the trustee is electing to establish a MySuper fund and you argue that that appears to have been done to minimise the risk of the action being challenged as breaching section 51(xxxi) of the Constitution, the prohibition on the acquisition of property except on just terms. Can you expand on that a bit more.

Ms Levy : There is a concern—and it is a legitimate concern—of trustees that by having to move accrued default amounts into a MySuper account the existing fee entitlements that they have will be taken away from them.

Mr FLETCHER: That the removal of those fee entitlements is arguably an acquisition of property?

Ms Levy : That is a view. I do not express a view. But it appears to be a view that has been taken by government because they think that is the only way to account for the election process. So what the legislation requires is that, instead of saying you must transfer to MySuper, it says if you apply for a MySuper authorisation you must elect to do this where you are granted a My Super authorisation. Even if you are not, in fact, you must make this election. So I think the argument would be that there could be no unjust acquisition of property where you have elected or chosen to do something. Of course, it is a false choice.

Mr FLETCHER: Presumably, if a challenge were brought on the grounds that the legislation breached section 51 (xxxi) the argument would be put that, in substance, it is not an election because trustees essentially have no option but to make the election if they want to stay in the business of doing what they are doing.

Ms Levy : Correct

Mr FLETCHER: I think the point you are making is that the fact that the drafting has been done in this way indicates the government thinks there is a risk that a challenge could be brought. Is that a 'yes'?

Ms Levy : Sorry. Yes. I think that is right; I do not know. The other place that you draw support for that view is the fact that there is a reference to 51 (xxxi) for trustees who do not apply for a MySuper authorisation. So you get through the legislation and, if you are in that category, then you are required to transfer in accordance with the prudential standards subject to the application of 51 (xxxi).

Mr FLETCHER: The other point that you are making to us—to make sure that I am understanding it correctly—is that this drafting technique is by no means guaranteed of preventing a challenge being brought.

Ms Levy : I think that is right.

Mr FLETCHER: I would like to ask you about the process that has been adopted by the government in introducing the new regime governing MySuper and the simultaneous actions to introduce the Future of Financial Advice regime, the SuperStream measures and others. How would you characterise the general process over the last 18 months or so? Is it an exemplary piece of public administration, in your view?

Ms Levy : No. It has been very difficult for everybody in the industry and their advisers to stay on top of what is happening and to provide sensible comment.

Mr FLETCHER: Does the fact that the legislation is being split up into several tranches make it more difficult and cumbersome and complex to deal with?

Ms Levy : Yes, of course.

Mr FLETCHER: You mentioned, I think in your opening statement, that there are inconsistencies between different tranches of legislation and between the different areas. Could you amplify on that? Are there any examples you could give us?

Ms Levy : There are definitional problems. For example, terms that are used in the Corporations Act and not used in the SI(S) Act appear in the SIS amendments, because I guess drafters are looking at a whole bunch of different stuff. They are small things but they are the kinds of things that lawyers have to deal with when an issue arises: what does that mean; is the difference intended to mean something; is it an accident? It is all of those things. The one that I mentioned, the insurance issue, is a material problem for the industry. This has happened in FOFA as well, where you have legislation which appears to be purporting to being amended by explanatory memorandum. In this case, the problem is made more acute because the explanatory memorandum is commenting on a different act/bill. So it becomes very, very difficult to apply.

Mr FLETCHER: So as to understand that: the explanatory memorandum in respect to the bill we are considering today purports to vary the effect of another piece of legislation?

Ms Levy : It is like leaving a legal opinion, I hope not from me. It says 'it may have the effect of' when describing the insurance provisions and the MySuper bill. 'These insurance provisions'—and it is speaking about the provisions in this bill—

CHAIR: Could you give us the reference.

Ms Levy : Sorry—paragraph 2.18 in the explanatory memorandum.

CHAIR: Thank you.

Ms Levy : These insurance provisions mean that a licensee may apply reasonable conditions to the insured benefits that have the effect that certain members are not entitled to the same level of benefits or are entitled to different terms and conditions, notwithstanding the requirement in the MySuper core provisions bill that entitles members to access the same options, benefits and facilities. Frankly, the legislation does not do that. The bill does not vary or amend the MySuper core provisions bill.

Mr TONY SMITH: This is explaining something else. It—

Mr FLETCHER: Just to clarify, is this an inaccurate description of the bill before the committee now, or is it an inaccurate description of—

Ms Levy : It is an inaccurate description of the bill before us now. It appears that the purpose is to vary the effect of 29TC(1)(b) of the MySuper core provisions bill, because it says 'notwithstanding the requirement' in that section.

Mr FLETCHER: I see. What difficulties would that likely create for a court which was asked to interpret the MySuper core provisions act?

Mr TONY SMITH: They have to look at the act, the EM and the minister's second reading speech.

Mr FLETCHER: But they also now have to look at the EM for another bill altogether.

Ms Levy : Correct. It is a tortuous process. It is very difficult.

Mr TONY SMITH: But ultimately they would go with the act, wouldn't they?

CHAIR: Mr Fletcher has the call. Let's just keep it in order.

Mr TONY SMITH: Sorry, Chair, I was trying to be helpful.

Ms Levy : I had to look at this more recently because of the difficulties of the current legislation. It depends on whether there is any ambiguity on the face of the legislation or whether on its face it is clear and plain—and 'providing the same options, benefits and facilities' seems reasonably plain. Everyone thought they knew what they were dealing with. But the EM suggests something else.

Mr FLETCHER: I think what you are putting to us is that this is an example of the general proposition that the process that has been adopted by the government in introducing this set of reforms across the superannuation sector has been chaotic, confusing and internally contradictory. Is that a fair summary?

Ms Levy : It has not been ideal.

Mr GRIFFIN: To put a slightly alternative viewpoint, it is not unusual for reforms by government to involve more than one tranche of legislation if the reform is complex, is it? I will give you an example: the whole tax law improvement process, which took at least four or five tranches, I think. So it is not unusual. The other thing is that, when you are talking about the question of legal interpretation if court action were to result around any piece of legislation, it is actually quite normal for the bill, the explanatory memorandum, the Hansard, particularly the second reading speech, and other relevant pieces of legislation to be considered in any interpretation. Correct?

Ms Levy : I would agree with that.

Mr GRIFFIN: I just wanted to put that on the record.

Senator THISTLETHWAITE: Regarding the point you make about acquisition of property rights, given that the theme and policy intent of the legislation, which stems from the Cooper review, is to ensure that members of superannuation funds, particularly inactive members, are not paying commissions for services that they are not aware of or do not get any benefit from, how else, in your view, could the government achieve that policy objective while dealing with that issue associated with acquisition of property rights?

Ms Levy : I do not know. I guess the committee is just drawing to your attention that that is the effect of this. It really does become a policy issue, I think, and a constitutional law issue about whether or not the government can and should take away trustees' existing rights to property.

I do note that the government has provided extremely generous grandfathering arrangements for FOFA. So this is quite a different approach, and it will also, again, give rise to quite a lot of complexity. I could be receiving commission because I have put somebody in a managed fund or in a superannuation fund, and that commission will continue to flow from the managed fund or platform but not from the superannuation fund, if they have been moved to a MySuper product.

The other point, which I made at the beginning, is that it is not clear that the trustee's obligation to pay that commission will cease with the transfer to MySuper. There are personal contractual obligations that I would have thought remain on foot. The trustee may well have an ongoing obligation to pay something, but it will not be able to pay it from that member's account following the transfer to MySuper.

Senator THISTLETHWAITE: I suppose a difference between FOFA and MySuper is that these MySuper reforms come from what Jeremy Cooper recommended. He undertook an extensive period of consultation and worked with industry.

Ms Levy : Sure.

Senator THISTLETHWAITE: And because of the circumstances of superannuation, the overwhelming majority of people are not engaged. They were paying for products that they were not getting any benefit from or were not using. I suppose the government's approach is: 'Well, this is the way that we feel is the best way to deal with it.' The difference with FOFA is perhaps that people who have been on legacy products or things like that, which do have commissions, have made an active step to engage with a financial adviser.

Ms Levy : Not necessarily. They will be the same arrangements. I guess it is a retrospective application of law that you are dealing with here, by requiring people to move accrued default amounts into MySuper products. That said, it is a policy matter, but it also does engage the constitutional law point about whether there could be an unjust acquisition of property.

Senator THISTLETHWAITE: I have one final question. Your organisation has been consulted about these reforms, I take it?

Ms Levy : To some very limited extent we have been involved.

Senator THISTLETHWAITE: What does that mean? Have you had meetings with—

Ms Levy : No. We have met with APRA. They have a lawyers' liaison group, I think it is called. We have representatives who attend those meetings, but there have only been two.

Senator THISTLETHWAITE: When were those meetings?

Ms Levy : They were this year—August and maybe June. Otherwise, it has been submissions.

Mr FLETCHER: I have just a couple more questions. You indicate in paragraph 3.12 of your submission a risk that the MySuper fee rules are too proscriptive and that the consequence could be that a trustee is forced to impose a charge on choice members to cross-subsidise the MySuper members. Could you explain that concern?

Ms Levy : Again, it is a difficulty of the drafting. It is not clear from the drafting whether or not the fee rules are intended to provide for the entire universe of amounts that can be deducted or applied to assets attributed to MySuper members. If that is the case, then the concern is that in the drafting of the fee, the definitions themselves are too narrow to allow a trustee to be indemnified for the full range of expenses and costs that it would ordinarily incur.

Mr FLETCHER: You talk in paragraph 5.6 about the disclosure of the holdings of the fund. What you are saying—and I want to confirm that I am understanding correctly—is that disclosure of underlying holdings is a very good and desirable principle but the trustee may not be the right party to impose that obligation on. Is that a fair summary?

Ms Levy : No, I do not think that is our point. The point is that a trustee may not have all of the information. One way you could do this is to have layer 1 and require, say, the managed funds that they are investing in to disclose all of their holdings.

Mr FLETCHER: I will put it another way. The legislation as drafted imposes an obligation on a party which may not be in a position to fully comply with it because it requires action from others down the track.

Ms Levy : Correct, and it purports in the other provisions to control the actions of others as well in requiring them to provide information to trustees. I think there are shortcomings with those provisions. Again we talk about that. They may not be enforceable if you have a person who is overseas. They do not require information to be provided within the time frames that might be required for the trustee to comply with its disclosure obligations. Those are just some of the issues.

Mr FLETCHER: The legislative scheme is essentially going to result in a significant number of superannuation fund members being forced into a new product in circumstances where they had entered into arrangements which they had no reason to believe would not persist for as long as they took no other action. Are there other examples of the freedom to contract of citizens being constrained in this fashion?

Ms Levy : I do not know.

Mr TONY SMITH: Does that mean they are not immediately evident?

Ms Levy : I do not know.

CHAIR: Thank you, Ms Levy.