Industry superannuation funds have dumped their longstanding opposition to their rivals’ vertically integrated business models, as the coffers of the not-for-profit sector continue to swell from retail-fund members switching in response to misconduct and conflicts of interest highlighted in the financial services royal commission.
Early last year, the $600 billion-plus industry fund sector launched the controversial “fox and the henhouse” advertising campaign, which targeted its bank-dominated rivals with the tagline: “Banks are not super”.
However, it is understood that a submission to the royal commission, due last Friday, resisted the temptation to go in for the kill by exploiting the retail funds’ horror round of royal commission hearings on super.
Instead of arguing, in principle, for structural separation to minimise conflicts of interest, the industry funds effectively pushed for preservation of the status quo, which had reportedly led to one in five retail fund members looking to switch to an industry fund.
“We’re not seeking a monopoly on super,” a source told The Australian.
“Our position has evolved: we want a competitive super industry with an enduring social licence to operate. We’re not seeking a monopoly.”
The royal commission, which examined the fox and the henhouse campaign as a possibly inappropriate use of member funds, barely laid a glove on the industry funds, in contrast to the recurring governance nightmare suffered by the retail funds.
Industry fund leaders have already said the banks were in a “tight and very dark spot” after the super round of hearings, with their customers “fleeing en masse”.
Figures released by the prudential regulator for the June quarter showed that the industry funds’ $632bn in asset holdings exceeded the retail funds’ $622bn for the first time.
The gap is expected to widen into next year.
With the industry funds benefiting from the current industry structure, it would be foolish to change the status quo.
For the same reason, they want to retain the existing default super system and are opposed to the Productivity Commission’s “untested” proposal for an expert panel to select the 10 best-performing, no-frills super products.
The conflicts of interest in the vertically integrated business model were highlighted in a report last January by the Australian Securities & Investments Commission on the financial advice practices of Commonwealth Bank, ANZ, Westpac, National Australia Bank and AMP.
The review found that financial advisers favoured their own products, ignored the best interests of their customers in 75 per cent of cases, and gave advice that left their customers worse off in 10 per cent of cases.
Lobby group Industry Super Australia said at the time that the report raised the question of whether banks should be offering super products at all.
“The banks’ attempt to cross-sell super at the workplace and direct to consumers via generic general advice should be rejected,” an ISA spokesman said.
“Hard questions must be asked of the banks’ role in the compulsory system.”
The difference between the industry funds’ position then and now, according to the source, was that the royal commission had asked the hard questions, and a policy response was likely.
ASIC deputy chairman Peter Kell told royal commissioner Kenneth Hayne in the financial advice hearings that conflicts could arise in vertically integrated businesses between a licensee’s interest in selling in-house products and the client’s interest in receiving advice that was in their best interests. They could also occur where a licensee marketed “white label” products, which were then sold as their own to generate income, or where licensees have other businesses that provide services to advice clients.
Problems arose, as well, when advisers had an interest in securing a commission, with ASIC finding a correlation between high upfront commissions and poor customer outcomes.
Mr Kell told last month’s super round of hearings that vertical integration created an inherent conflict of interest.
“There is inherently a conflict between manufacturing a product and supplying a product but then having an advice network or advisers who are supposed to be providing advice in the best interests of the clients, putting the clients — or prioritising the interests of the clients,” he said.
“Doing both within the same firm is allowed under the regime, but it does produce a conflict that needs to be appropriately managed.”
A Productivity Commission report in May that found industry funds had returned 6.8 per cent for members compared to 4.9 per cent for retail funds in 2005-16, boosted the exodus of funds the for-profit to the not-for-profit sector.
Meanwhile, analysts have started speculating about potential recommendations from the royal commission.
By Richard Gluyas (Richard Gluyas has more than 25 years of experience reporting on the nation's top corporates and business identities. He is a former Melbourne business editor and is now Business Correspondent for The Australian.)
The Australian Business Review
24 September 2018