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

HAWKINS, Mr Adam, Analyst, Financial System Division, Treasury

ROLLINGS, Mr Jonathan, Principal Adviser, Superannuation, Financial System Division, Treasury

SANDLANT, Mr Richard, Manager, Financial Advice Reform Unit, Treasury

[12:11]

CHAIR: I invite you to the hearing today and I thank you very much for being with us today. I draw the committee's attention to privilege resolution No. 116, which states that an officer of a Commonwealth department shall not be asked to give opinions on matters of policy. Do you wish to make a brief opening statement before we go to questions?

Mr Rollings : No, Chair. We are happy to go to questions.

CHAIR: Thank you very much. We will go to Mr Fletcher.

Mr FLETCHER: The first question I would like to ask is about the regulatory impact statement. Why is the regulatory impact statement not as comprehensive as we would normally expect?

Mr Rollings : The regulatory impact statement has met the guidelines for regulatory impact statements and was cleared by the Office of Best Practice Regulation.

Mr FLETCHER: There has been a lot of discussion this morning about the definition in proposed section 20B. In particular it has been argued that the second limb of the definition should not be there because, on the present draft, it captures people who have in fact exercised a conscious choice but the choice they have exercised happens to have been for the option which is also the default option for the fund they are in. What is Treasury's response to that issue?

Mr Rollings : Treasury, in working on the design of this legislation, has taken the Cooper review as the blueprint for the reforms. Going forward the Cooper review saw, and stated in the review report, that MySuper would replace existing default investment options in funds. In fact, Cooper said MySuper had been specifically designed around the concept of a default investment option to ease, for many funds, the transition to the new regime.

Mr FLETCHER: On that, did Cooper specifically recommend the transition of existing balances into MySuper?

Mr Rollings : Yes, he did.

Mr FLETCHER: In terms of the particular transition mechanism that Treasury has chosen, namely the opt-out mechanism, was that recommended by Cooper?

Mr Rollings : I think, and I could be reminded of the specifics, the detail here is that unless the member has given an express intention not to then it would be moved. But Mr Hawkins might be able to elaborate.

Mr Hawkins : Cooper talked about transitioning the existing default amounts to MySuper. He did not go into the detail of specifying the member communication process, whether it would be an opt-out process. However, his starting point was that MySuper would replace the existing default investment options that currently exist.

Mr FLETCHER: Did Treasury consider other options, for example, opt-in or, alternatively, imposing MySuper in respect of new balances but allowing existing balances to go through their natural course of life?

Mr Rollings : Yes. As part of the thinking behind the reforms and as part of the consultation with industry, I guess all options have been canvassed at one point or another.

Mr FLETCHER: Just on that—

Mr Rollings : Sorry; if I could just finish. A clear conclusion of the Cooper review is that, given the very large numbers of members who do not play an active role in relation to their superannuation and, I guess overlaying on that, the mandatory system of superannuation, there was an obligation here for government to have a sensible system of defaults that nudged, if you like, or directed those people who were not playing an active role in relation to their super to an outcome that would be in their best interests. In that context, the opt-out process was concluded.

CHAIR: Senator Thistlethwaite wants to ask a question on that point. We might operate in that way to get the best out of this.

Senator THISTLETHWAITE: Could there be a circumstance where a member who is transferred into a default setting, who did not opt-out, could be worse off in terms of fees and commissions because they have been inactive?

Mr Rollings : Again, I would agree with other witnesses who have said that the risk of this is very, very small. I would like to talk a little bit about insurance as part of that answer. In terms of fees and charges and given that MySuper will be commission free, you would expect that it is in the hands of the trustees to design a MySuper product that is going to be put into APRA league tables. There will be a much greater degree of transparency. They will be wanting to put forward a product that is competitive.

Senator THISTLETHWAITE: We heard evidence this morning that someone could go from a fund where there were no fees into a MySuper fund where, admittedly, there might be minimal fees but there will be fees.

Mr Rollings : I am not aware of too many funds where there are no fees.

Senator THISTLETHWAITE: Or an element of a fund that has no fees.

Mr Rollings : Okay. There was the cash hub example. We can talk a little bit about that one. The cash hub example is one where, at the moment, we are not convinced it is actually caught by the accrued default amount rules. We would have to look a little more closely at the specific design of those arrangements. Where it is a mandatory part of those products that under certain circumstances money will be held in a cash hub as part of that product, our view at the moment would be that it is open to interpretation that the money is not there as a result of a lack of an investment choice by the member but that it is actually a requirement of the product that the money be put there. So it probably needs to be looked at a little bit more closely as to whether those particular cash hub arrangements, which I would suggest are a pretty small portion of the landscape that we are looking at here, are in fact a particular case that might need some special attention. Again, we are not sure that they are caught by the current definition.

Senator THISTLETHWAITE: Can you just run us through how SBS 410 will work in terms of APRA being satisfied that there should be no disadvantage?

Mr Rollings : Yes. And in answering that, I can talk a little bit more generally about insurance issues, because there seems to be a view that in moving members to MySuper it will necessitate termination of their insurance. That is not the case. We have heard other witnesses say that as a matter of practice you can expect all funds to want to be offering a MySuper product because, with up to 80 per cent of members potentially being default members, unless the fund wants to count themselves out of that business going forward they will need to offer a MySuper product. So we would expect nearly all funds to offer a MySuper product.

In that context, where members have to transfer to the fund's MySuper product, there is a large degree of flexibility allowed to the fund on the insurance arrangements that they can provide to their MySuper members. The only requirements are that they must offer life and TPD insurance and that it be on an opt-out basis. So we would expect that, in the vast majority of—if not nearly all—circumstances, it will be possible for trustees to continue the existing insurance arrangements which members may have and which may have more favourable terms, conditions or benefits, so long as those arrangements are on an op-out basis. Our understanding is that in many cases these policies are already opt-out policies and that, if they are, it is a relatively simple matter to make them opt-out policies whilst retaining the level of cover that members have previously had. In the—what we think will be—small likelihood that a fund does not offer a MySuper product, the trustee is required to transfer balances to another fund offering a MySuper product. Of course, the first step will be the opt-out process. Someone who may have been sufficiently engaged to have obtained a specific level of insurance cover to meet their particular needs would have a level of engagement to be able to opt out and say, 'No, I want to stay where I am.'

On your initial question about how the APRA Prudential standard will work here: if balances do have to be moved to another fund, it is a matter of the trustee working in conjunction with APRA under the conditions of the prudential standard to find a fund that is suitable for their members' needs. I would reiterate other evidence, which suggests that this is an occurrence that happens reasonably regularly under successor fund transfer situations. Where a fund is seeking to merge with another fund—it is no longer going to exist—it needs to find another fund that can deliver equivalent rights to its members, and those issues are regularly resolved in the current environment.

Senator THISTLETHWAITE: I want to ask a question on another topic, because I have to go in a minute. The Law Council of Australia made the case this morning that they believe that there were potential constitutional issues with the acquisition of property rights relating to commissions. Do you have a view on that? Does Treasury have any advice on that?

Mr Rollings : Whenever Commonwealth legislation is developed, advice is sought—where necessary—to ensure that the legislation brought before the parliament is considered to be effective. This is no different: we have received advice along the way. The government believes that the legislation will operate as it is intended to.

Senator THISTLETHWAITE: What is the reason behind the difference between FOFA and this legislation in terms of grandfathering?

Mr Rollings : The essential arrangement here is quite different. Under FOFA, we were talking about two parties to a transaction—an adviser and a client—who had entered into an arrangement which may or may not have included commissions. There is nothing in this legislation which forces any contractual arrangement to be overturned. If there are contractual arrangements in question when a trustee has to move balances to a MySuper product, that is a matter between trustees and the other parties to those contracts. In fact, this was one of the reasons that industry sought a long transition period to resolve some of those contractual issues. The government provided a long transitional period in case there were any contractual issues that needed to be sorted, but, where a fund is offering MySuper, the legislation does not overturn any of those arrangements. In fact, the trustee elects to go down that path. In the other scenario, where a fund is not offering MySuper, there is a read-down provision that says that, in the event that there is an acquisition of property, the provisions do not apply.

Mr FLETCHER: What do you say to the evidence from the Law Council that using that drafting mechanism of having the trustee elect to establish a MySuper product appears to have been done specifically to manage the risk of a challenge on the grounds of a breach of section 5131?

Mr Rollings : I would repeat my earlier answer: that the legislation has been developed in a way to be effective, that—where necessary—advice has been sought and that the government believes it will be effective.

Mr FLETCHER: You said earlier that nothing in the legislation requires any existing contract to come to an end.

Mr Rollings : Where a fund is offering a MySuper product, which, as I said, we expect to be nearly all cases.

Mr FLETCHER: It has been put to us that one instance of a contract that will have to come to an end is a contract between an employer and a superannuation fund under which there is a general charge made for advice provided by a financial adviser to the class of employees of the employer who are members of the fund.

Mr Hawkins : In fact, that is not the case. There is no requirement for provision of that type of service to be ceased. What the bill does do is that it requires that only advice of a particular type—these are the intrafund advice provisions—can be collectively charged. If a trustee decides that they want to provide some general advice, whether through an external adviser or through their own internal advisers, they can do so and collectively charge, as long as it is that one-off, modular, transactional type of advice.

Mr FLETCHER: Can I just replay that. I just want to understand this, because Mr Rollings said there are no contracts on foot now that will have to come to an end, but I think what you have just said is that those advice arrangements can only continue if they meet certain requirements. That is right, isn't it?

Mr Hawkins : The nature of the advice delivered does not need to change. The way that members are charged does need to change, so if a trustee decides that that is a valuable service that they want to continue to provide to their members then that is ultimately a decision for the trustee. They can continue to have that contract on foot. However, the way that that is charged—

Mr FLETCHER: Let me understand that. They can continue to have the contract on foot, but the terms of the contract have to change. That is really what you are saying to me, isn't it?

Mr Hawkins : If the adviser is remunerated by the trustee, that is not the issue that is addressed by the bill. What is addressed by the bill is how members are charged. To the extent that they are not receiving that advice, or to the extent that it is general advice and the trustee wants to provide it or it is personal advice of the limited type defined in the bill, that can continue and it can continue to be collectively charged. However, if it is not of that type then the member will actually have to request it and decide to pay themselves for that particular type of advice. So, if that type of advice is currently being provided, you are right in that it cannot continue to be provided by that adviser without the member choosing to receive that type of advice.

Mr FLETCHER: So the statement previously made that there is no contract that will be required to come to an end under this bill in fact, on further analysis, is not right.

Mr Rollings : Can you just repeat the nature of the contract you are—

Mr FLETCHER: I am talking about the nature of a contract between a superannuation fund and a financial adviser under which the adviser charges a fee to the fund and then provides a set of advice to members of the fund. What witnesses have put to us is that that is a not uncommon arrangement in respect of corporate funds.

Mr Rollings : I can reiterate Mr Hawkins's answer, which is that you can continue to engage those advisers to provide that advice but you cannot charge members collectively beyond intrafund advice.

Mr Hawkins : So, for the type of advice that you are talking about, it is the same principle that applies under FOFA: that, on a going-forward basis, if you want to obtain that type of personal advice that is not within that definition, you in fact need to request it from the adviser before you have to pay for it. So the same principles that apply outside of superannuation for that type of more complex personal advice also apply within superannuation. The intrafund advice provisions simply allow some of that more limited advice to be provided on a collectively charged basis.

Mr FLETCHER: So it is the case that existing contracted arrangements of that kind will not be able to be maintained once the bill passes into law.

Mr Hawkins : As I said, they are the same principles that would apply within FOFA. So, if there is any existing arrangement outside of superannuation, the same change to the existing relationships that advisers have with their clients would obviously have to be structured to be consistent.

CHAIR: Could you explain clearly for us the rationale behind this change?

Mr Rollings : There are a couple of advice related measures in this bill. One is around personal advice provided to employers by advisers. There is a provision to ensure that that kind of advice cannot be charged to members of a superannuation fund, the rationale being that advice to employers, of a personal nature, should be paid for by employers and not by fund members. Regarding the broader issue around intrafund advice, the rationale here is that simple, non-ongoing advice relating to a member's interest in a fund is able to be provided by the fund, whether it be internally or externally by an adviser, and collectively charged across the membership. But any more complex advice—which is likely to be more costly—cannot be collectively charged and must be charged to the individual member.

Mr FLETCHER: I would like to ask about the consultation process. Did you consult on different options to manage the transition—for example, opt-in versus opt-out?

Mr Rollings : Last year we had a MySuper consultation group, as part of the broader consultation process, where there were discussions around the transition. Opt-in and opt-out were all given some discussion. Again, the government's landing here is to try to protect the largest number of people in the system with opt out; that was the preferred approach. Again, this was put out in the exposure draft of this legislation earlier in the year and there was a further opportunity for consultation at that point.

Mr FLETCHER: We have heard a lot this morning about the second limb of the definition in proposed section 20B. Does Treasury agree or disagree with what has been put to us by some witnesses, which is that the effect of that second limb is that members who in fact have made an active choice are going to be treated as disengaged members and defaulted into a MySuper product?

Mr Rollings : I would come back to the rationale for MySuper and its role in replacing default investment options rather than saying that this is an issue purely about engagement or disengagement. Where someone is in a default investment option, whether they have defaulted into it or whether they have selected to be in there, it is very difficult to know with any certainty what the motivation was for their selecting to be in there in particular.

Mr FLETCHER: On that point, it has been put to us that if somebody has, for example, 60 per cent of their balance in the default option and 40 per cent in the growth option, that is a pretty good indicator that they have taken a conscious choice as to the allocations. Do you accept that argument, or not?

Mr Rollings : In some cases that would be right, but I would not accept that as a conclusion to be drawn in all cases. It could be that the person has decided, 'For a proportion of my money I am happy for it to be in the option that the trustee is holding out as the default, which in some way reflects the trustee's view of the asset mix that will cater for the broad membership, and I just want some small amount in this other option that I select by myself.' Again, it is virtually impossible for anyone other than the member themselves to know what the motivation was for the selection of some proportion to go into the default option, which is why the reliable way of determining is to ask the member.

Mr FLETCHER: So the premise of the legislation is that anybody who is in a default option has not exercised a choice?

Mr Rollings : No, that is not what I said—and that is why I said that this issue should not be portrayed as one of engagement or disengagement; it should be a discussion around the role of a default investment option. Going forward, MySuper is replacing funds' default investment options. In that sense, it is making the trustee accountable for having an investment mix that the trustee views as best serving the interests of the broad membership. So, in trying to retrofit that going back, default options in the past were equally trustees' views of the best asset mix. Those amounts should, by default, go to MySuper—unless the member says, 'No, I specifically wanted the underlying asset allocation; I want you to leave me there.'

Mr FLETCHER: What do you say to the argument that as a consequence of this you will have members who may have been in a default fund that had a relatively high weighting to low-risk assets who find themselves now moved into a MySuper product, which has a higher weighting of risky assets?

Mr Rollings : Part of my answer would be that you could equally have members who were in a very risky option previously, potentially too risky an option, who will now be able to see what the trustees' new assessment of the best asset mix is, make an assessment of whether that is the option they want to be in and make their own choice of where they want to be. We heard from some witnesses this morning about the large number of default investment options that exist, particularly in some master trust situations, where employers have played a role in selecting those investment options on behalf of their employees. It was a clear conclusion of the Cooper review that that is not an appropriate role for employers. The appropriate accountability in the system for default investment options is with the trustee, unless a member themselves makes a relevant choice.

Mr FLETCHER: Is it the case that there will be members who have made an active choice who are now going to find themselves required to take another proactive step to maintain in operation the choice they have already made?

Mr Rollings : That is true.

Mr FLETCHER: Why is that a good thing?

Mr Rollings : Towards 80 per cent of members of superannuation funds are not that engaged in their superannuation, so it will protect the interests of those, recognising that those who are sufficiently engaged to make a choice in the first place should also be sufficiently engaged to confirm that choice if that is their wish.

Mr FLETCHER: So we are exposing the 20 per cent to a risk they did not previously face?

Mr Rollings : What we are assuming here is that, if those members' initial choices can be relied upon to reflect their specific wishes, we can also rely on them to make an additional choice that will reflect their—

Mr FLETCHER: Can I just clarify. The impression I am getting from you is that Treasury is wholly unpersuaded by the arguments that have been made today about the inappropriateness of the second limb of the definition in proposed section 20B.

Mr Rollings : Our position is that it is impossible for third parties to make assumptions on what was the underlying purpose of a member in selecting to be in a default option. If they selected to be in a separate investment option, that is much clearer and those amounts are not in scope for transfer, but, with a selection to be in a default investment option, only the member will know what the motivation was—whether it was to be in a default or whether it was the underlying asset mix. The only reliable way to ensure that the member ends up where they want to be is to ask them.

Mr FLETCHER: So the advice from Treasury to government is that the risk that that will cause the disruption of arrangements that have been actively made by at least some of those members is a risk that just has to be taken because of the greater good?

Mr Rollings : As I have discussed, we think the risks of people ending up in inferior or adverse arrangements, whether it be insurance or fees or other issues, are very small. Yes, given the very large numbers of people who are not actively engaged and could be paying higher fees than they should be or could be paying commissions and not receiving advice, the very small risk of an adverse consequence is vastly outweighed by the potential benefits.

Mr FLETCHER: So the evidence we have had from a number of witnesses this morning that those risks are material should be disregarded because it is purely advanced out of self-interest. Is that right?

Mr Rollings : That is not what I said. I do think that some of the concerns raised about the transition on insurance arrangements reflect a misunderstanding of how those arrangements actually work, in that in many, many cases people will be able to transfer their existing insurance arrangements across to the new MySuper product offered by the fund.

Mr FLETCHER: Is Treasury prepared to have more detailed discussions with the witnesses who have raised those concerns to be satisfied that they are not material concerns or to identify whether they are material concerns?

Mr Rollings : I have never rejected a request for discussions on any of these issues, so I would be happy to continue to have those discussions.

Mr FLETCHER: But it sounds like a request for further discussions on the second limb would be a futile request.

Mr Rollings : That is a policy matter. Treasury does not make those calls, but the legislation as introduced to the parliament reflects the government's policy position on these issues.

CHAIR: Mr Rollings, we have had a degree of commentary about the level of engagement with the government which ranges from, 'We have not been consulted adequately,' to, 'We are exhausted and overwhelmed by too much ongoing consultation.' Hopefully, today has provided another important opportunity for important consultation as we do move forward with the MySuper legislation. I want to thank you for your appearance before the committee this afternoon.

Committee adjourned at 12 : 40