By Mark Bland, Partner, Geoffrey McCarthy, Special Counsel and Ashley Kasner, Lawyer
This update is designed to help superannuation trustees track and manage regulatory change. We look ahead to forthcoming developments, look back at recent changes and then spotlight the impact of a key development on trustees. This edition’s spotlight is on the Treasury Laws Amendment (Your Future, Your Super) Bill 2021.
- Submissions are due to the Senate Economics Legislation Committee inquiry on the Treasury Laws Amendment (Your Future, Your Super) Bill 2021 on 18 March
- Deadline passed for first Member Outcomes assessment on 1 March
- Financial Sector Reform (Hayne Royal Commission Response No. 2) Bill 2020 covering advice fees in superannuation received assent 2 March 2021
- The Treasury Laws Amendment (Reuniting More Superannuation) Bill 2020 about closing ERFs passed Parliament on 25 February.
5 March – Submissions for second round of APRA’s consultation on its prudential standard governing insurance superannuation close. On 20 January 2021, APRA released a new draft SPS 250 and an updated version of SPG 250 for further consultation, clarifying some of the revised requirements.
11 March – Comments due on AUSTRAC’s consultation on AML/CTF rule amendments. related to the Anti-Money Laundering and Counter-Terrorism Financing and Other Legislation Amendment Act 2020.
15 March – 18 March Senate and House of Representatives sitting
18 March – Submissions are due to the Senate Economics Legislation Committee inquiry on the Treasury Laws Amendment (Your Future, Your Super) Bill 2021. The report is due by 22 April 2021.
22 March – 25 March House of Representatives sitting
26 March, 2021 – Closing date for submissions to review of AFCA. Treasury is undertaking a review into AFCA and is to provide its report to the Minister by 30 June 2021. The review into AFCA was announced, and terms of reference released, on 19 February 2021.
31 March – Under Government announcement the first Modern Slavery Statement due for entities with original reporting period of 1 July 2019 to 30 June 2020 under an extended deadline. Superannuation funds with a consolidated revenue of over $100 million are to report on actions taken to reduce the risk of serious exploitative practices in their structure, operations and supply chains.
31 March – Deadline for entities to upgrade to new version of D2A. The update adds integration of myGovID authentication, increased memory resulting in quicker processing of submissions, better business rule validations and error checks and updated branding. APRA is progressing towards their new Data Collection Solution to replace D2A as part of its data transformation program.
31 March – Submissions are due to the Joint Standing Committee on Trade and Investment Growth Inquiry into the prudential regulation of investment in Australia’s export industries. The inquiry is likely to focus on whether concerns by APRA and ASIC about climate related risks are inappropriately impeding investment in coal and other resources industries.
2 March – Financial Sector Reform (Hayne Royal Commission Response No. 2) Bill 2020 covering advice fees in superannuation received assent ASIC had issued a consultation paper CP 329 that addressed the exposure draft of the Bill which may now result in further guidance. The Bill as passed did have changes from the exposure drafts. The changes will also remove the capacity to charge advice fees to a member’s choice account unless certain conditions are satisfied. The Bill also has provisions concerning disclosure of lack of independence by financial advisors and ongoing fee arrangements.
2 March – APRA released superannuation statistics for December 2020. Total superannuation assets grew 2.2% over 2020 to $3.043 billion. APRA regulated assets increased 3% to $2.064 billion. Net contributions flows for the year were $7.7 billion, a $32.3 billion decrease on 2019, reflecting the early release scheme.
1 March – Submissions were due to the Senate Economics Legislation Committee inquiry on the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 on continuous disclosure and company AGMs introduced to House of Representatives on 17 February 2021. The Committee’s report is due 12 March 2021. The Bill provides that civil penalty proceedings commenced under the continuous disclosure and misleading and deceptive conduct provisions must prove that an entity acted with “knowledge, recklessness or negligence” in respect of an alleged contravention. Company and registered scheme meetings involving some attending physically and some electronically will be permitted until 15 September 2021. The EM indicates that this may become permanent.
1 March – APRA has said it will commence Stage 2 on RSE licensing issuing commences under which licences will be granted to any entity meeting the requirement.
1 March – Comments were due on ASIC CP 334 Proposed changes to simplify the ASIC Derivative Transaction Rules (Reporting): First consultation which proposes changes to promote international harmonisation and seek simplification.
28 February – First annual outcomes assessments were due. APRA published an FAQ noting that they expect the annual outcomes assessment to be undertaken by end of February 2021, despite any impending changes that may arise from the “Your Future, Your Super” 2020 Budget Measures.
28 February – Closing date for submissions to consultation on modernising business communications. Submissions were open until 28 February 2021. The consultation is focused on how to modernise business communications by improving the technology neutrality of Treasury portfolio laws to ensure they do not restrict the use of current and future technologies.
25 February – The Treasury Laws Amendment (Reuniting More Superannuation) Bill 2020 about closing eligible rollover funds passed Parliament. The Bill will require the closure of ERFs by 31 January 2022 and enable the ATO to consolidate amounts received from ERFs to active accounts. Through Government amendments, the Bill includes a general power for trustees to transfer to the ATO if it would be in the best interests of the member.
22 February – ASIC Supervisory Cost Recovery Levy Amendment (Claims Handling and Settling Services Providers) Regulations 2021 was registered providing for levies that will payable for AFS licensees authorised to provide a claims handling service. The Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 was enacted on 17 December 2020. The amendments made by that Bill will require claims handling services to be provided under the AFS licensing regime. Trustees will be exempt from needing a new licence authorisation but claims handling will be covered as part of the new providing a superannuation trustee service authorisation.
18 February – The Financial Sector Reform (Hayne Royal Commission Response) (2021 Measures No. 1) Regulations 2021 were registered. These regulations make changes consequential on amendments under the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 in relation to the requirement for AFS licensing of claims handling services and to provisions concerning disclosure by persons seeking insurance.
17 February – The RBA announced that it had started to acquire longer duration (2 year or more) swaps to avoid foreign exchange rollover risk on longer term AUD liabilities of the Australian government to the IMF. These should amount to 3-4 Billion and will not impact the value of the AUD.
12 February – Comments were due on data recording proposed requirements in relation to dispute resolution. Changes have been made to ASIC requirements for internal dispute resolution, including the definition of ‘complaint’ and particular timeframes for compliance. ASIC released final updated guidance and requirements on complaints handling in RG 271 on 30 July 2020. New requirements are to commence on 5 October 2021.
12 February – Submissions closed for the PJC Committee on Intelligence and Security inquiry into Security Legislation Amendment (Critical Infrastructure) Bill 2020 introduced to the House of Representatives on 10 December to 2020 increase regulation of critical infrastructure. Some superannuation funds will be classified as critical infrastructure, which will bring new security obligations.
12 February – APRA Deputy Chair made a speech Greater Expectations: increasing scrutiny of a maturing superannuation industry. For context, APRA published its 2020-2024 Corporate Plan on 31 August 2020, updated to account for the substantial impact of the COVID-19 pandemic.
9 February – Gateway Network Governance Body released cyber security report co-authored with PWC. The report discusses cyber security issues facing the superannuation industry.
8 February – APRA published Early Release Scheme data to 31 January 2021 saying that $36.4bn of payments had been made.
4 February – ASIC published an article on its website on its new role in superannuation. ASIC says it will have significantly increased regulatory functions in relation to superannuation including by creating a new financial service, ‘provide a superannuation trustee service’ which would bring all trustee operations under the AFS licensing regime.
3 February – The House of Representatives Standing Committee on Economics conducted a public hearing as part of its review of Australia’s four major banks and other financial institutions. One of the focuses is on the superannuation sector and a number of public hearings have been held.
On the horizon spotlight – Your Future, Your Super Bill 2021
The Treasury Laws Amendment (Your Future, Your Super) Bill 2021 (Bill) was introduced to the House of Representatives on 17 February.
It was referred to the Senate Economics Legislation Committee for report by 22 April 2021.
The Bill implements major parts of the Federal Government’s superannuation reforms in the 2020 Budget that is scheduled to start from 1 July 2021.
The four initiatives are:
- Stapling super to the member
- YourSuper comparison tool
- Annual performance test
- Increased transparency and accountability (incl ‘best financial interests’)
The Standing Committee for the Scrutiny of Bills has raised concerns about basic requirements being left to regulations in relation to stapling, annual performance test and the best financial interests and associated record keeping obligations, especially where there are civil penalty consequences.
For our previous discussion of the proposals, see Your Future, Your Super – RegTracker – 19 October 2020 and Your Future, Your Super Draft Legislation – RegTracker 30 November 2020.
There are some changes to the proposals from the exposure draft provisions. In this article we highlight some of the changes and interesting implications.
The Bill also includes a provision to remove an existing provision allowing for non-disclosure of certain non-material holdings under the portfolio holding provisions scheduled to apply for holdings on 31 December 2021. This supports the theme of additional transparency and might facilitate tracking any investments that are made contrary to prohibitions that may be made under the proposed regulation making powers under amendments in the Bill.
If a new employee from 1 July 2021, has a stapled fund, but chooses another fund, then the chosen fund must be used for SGC payments, even if there is a contrary workplace determination or enterprise agreement in place. However, if such an employee has no stapled fund, but a fund is specified by a pre-1 January 2021 workplace agreement or enterprise agreement then, even if the employee chooses otherwise, payment may be made in accordance with the workplace agreement or enterprise agreement.
There are provisions covering successor funds to enable them to inherit the status of being the stapled fund that the transferring fund had at the time of the last contribution for the employee.
We will have to await the regulations to establish “tie breaker” rules for determining which fund prevails as the stapled fund when there are multiple funds in play.
We expect some trustees to respond by ramping up engagement efforts with their inactive members so as to position their fund well under the forthcoming tie breaker rules.
As a consequence of the amendment, trustees may also wish to increase their engagement with their current “default” employers to hold conversations with their new employees about making a choice for the fund that is the default fund or the nominated fund under an industrial agreement. This could also be an opportunity to facilitate a consolidation service. However, this presents risks relating to employer inducements, employers giving financial product advice and fund BDMs providing personal advice by offering and executing consolidation services which would need to be carefully managed.
2. YourSuper Comparison Tool
The Government initiative to develop an interactive online comparison tool was not covered in the exposure draft but there is provision for it in the Bill. The idea is that the ATO will provide a table of MySuper products ranked by fees and investment returns, provide links to super fund websites to choose a MySuper product and show a member its current accounts to prompt a consolidation decision.
The provisions in the Bill authorise APRA to provide the ranking method and data to the ATO. Regulations may specify the method. The ATO is expected to make the ranked lists available on its website but it could make it available only on request.
The provisions will apply to MySuper products from 1 July 2021 and other products as specified by regulations. This is likely to cover non-platform choice products ‘trustee directed products’ from 1 July 2022.
3. Annual Performance Tests
MySuper products will be subject to an annual performance test by 1 July 2021. If a fund is “underperforming”, the trustee will need to inform its members of this within 28 days or longer if APRA or ASIC allow.
Trustees of funds with products that fail two consecutive “underperformance tests” will not be permitted to accept new members into the relevant product, but could accept members into another product of the fund.
We will need to await the regulations to know what the measure of underperformance will be. Interestingly, the provisions continue to refer to investment returns net of fees, without specifying if administration fees might be included in the deduction. However, it is not apparent if the Government will retreat from its position of only requiring deduction of investment fees.
The Bill does refer also to returns being net of taxes, unlike the exposure draft.
4. Increasing Accountability and Transparency
By 1 July 2021, super trustees will be subject to new obligations designed to reduce costs:
- Trustees will be required to comply with a new duty to act in the best financial interests of members.
- Trustees must demonstrate that there was a reasonable possibility to support their actions being consistent with members’ best financial interests.
- Trustees will provide members with key information regarding how they manage and spend their money in advance of Annual Members’ Meetings.
The Bill and explanatory memorandum (EM) are largely consistent with the exposure drafts. One significant change is that liability of directors is now to be addressed by the general provisions, rather than specific duties in relation to the best financial interests obligation.
Importantly, one implication is that the evidential onus of showing a reasonable possibility of compliance that was also to apply to directors, will now apply only to trustees.
As the EM notes:
“Reversing the evidential burden will mean that if the trustee is able to adduce evidence or point to evidence that suggests a reasonable possibility that there was a proper discharge of its duties, the evidential burden is discharged and the Regulator will then be required to prove on the balance of probabilities that the trustee did not perform their duties and exercise their powers in the best financial interests of the beneficiaries.”
Despite this, some of the language of the EM referring to existence of robust evidence implies a much tougher test than the actual reasonable possibility test. However, requirements for specific kinds of records may be imposed by regulations which in effect require more evidence that would be needed to meet the evidential onus.
The EM has also introduced some uncertainty with its example concerning failure to act in the best financial interests of members when paying subscriptions to an industry body. Merely because all the resources of an industry body are applied in a way that is conducive to the best interests of members, or even in an extreme case, completely wasted or even used counterproductively does not imply that when paying the subscription the trustee was not acting in the best interests of members. An industry body like a company or trust into which a superannuation fund invests, but does not control, is not acting on behalf of the trustee when incurring its own expenses. The test of whether expenditure is in the best interests of members is based on what is paid from the fund and the trustee’s knowledge, not what is paid by the industry body and its knowledge or purposes.
Another change is that the provision in the exposure draft for self managed superannuation funds to be subject to regulations that may prohibit particular expenditure or investments has fallen away. It may be that the Government considers there to be insufficient agency risks for SMSFs to warrant such intrusive laws. The evidential burden of proof is not reversed for trustees of SMSFs as there is no penalty for a contravention of the best financial interests duty. This will no doubt be galling to APRA regulated fund trustees who are, unlike SMSF trustees, already subject to a raft of governance requirements.
We still await information about what content will be required to be disclosed in advance of annual members’ meetings.
You may also be interested in reading some of our other commentary in our previous editions’ spotlights. Note that these articles reflect the position at the time of publication and so may no longer be current:
- ASIC CP on Affordable Advice – Regtracker 14 December 2020
- Your Future, Your Super Draft Legislation – RegTracker 30 November 2020
- Hayne Royal Commission Response Bill – RegTracker 16 Nov 2020
- Design and Distribution Obligations – RegTracker 2 November 2020
- Your Future, Your Super – RegTracker – 19 October 2020
- Intra-fund advice – RegTracker – 5 October 2020
- Fee and Costs Disclosure – RegTracker – 21 September 2020
- APRA Data Collection Consultation – RegTracker – 7 September 2020
- APRA and ASIC approach to COVID-19 – RegTracker – 21 August 2020
- ASIC’s Internal Dispute Resolution Requirements – RegTracker – 7 August 2020
- Business Performance Review and Outcomes Assessment – RegTracker – 27 July 2020
- AFCA’s approach to Superannuation – RegTracker – 13 July 2020
- ASIC Interim Corporate Plan 2020-2021 – RegTracker – 26 June 2020
- Hawking of superannuation products – RegTracker – 12 June 2020
- New financial service: Acting as superannuation trustee – RegTracker – 29 May 2020
- Strengthening breach reporting – RegTracker – 15 May 2020