A professional and well-ordered superannuation industry which instils confidence in participants and which maximises the value of every regulatory dollar it spends, deserves better treatment than it has received in recent months.
In the final days of June 2013, when writing this article, the frustration and discontent of our financial services clients in relation to the regulatory shambles affecting superannuation disclosure after 1 July 2013 is in evidence. Our legislature and our regulators need to understand the real impact of their actions on the industry and members’ retirement savings. A professional and well-ordered superannuation industry which instils confidence in participants and which maximises the value of every regulatory dollar it spends deserves better treatment than it has received in recent months.
Let me provide some examples.
Disclosure of asset class types
The Further MySuper Act (Tranche 3)1 introduced a new section 29QC in the SIS Act, effective from 1 July 2013. The new section, in a nutshell, applies if a super trustee is required to give information to APRA under a reporting standard, and the information is required to be calculated in a particular way. In these circumstances the trustee of a super fund must ensure that if the same or equivalent information is given to another person, it is “calculated in the same way” as the information given to APRA.
APRA has finalised 32 reporting standards. Not all APRA reporting standards have been finalised, and notably reporting standard SRS 700.0 dealing with the Product Dashboard for MySuper Products is still outstanding. However, APRA has finalised reporting form SRF 533.0 which defines asset class types, being cash, fixed income, equity, property, infrastructure, commodities and “other”. Similarly SRF 703.0 is final, and defines fee type names and SRF 702.0 is also finalised and defines investment cost types.
In April ASIC issued information memorandum Info 167 in relation to the new provision, saying:
“… the requirement to align your disclosure material with how you report data to APRA may extend beyond matters such as performance information. If APRA requires you to report data about asset allocation (including defining ‘cash’ or any other asset class) you will need to consider whether changes should be made to your disclosure to align with these definitions.”
ASIC reiterated its position in an FAQ on its website, noting “we anticipate that this may have significant implications for RSE licensees and their disclosure…[and] may also affect advertising disclosures, as well as information given …to third parties such as ratings agencies.”
If ASIC’s position is correct, aligning disclosure material definitions with APRA reporting standard definitions will have wide repercussions and require the redesign of disclosure information to members and others, and may well require changes to the way such information is collected. For example, trustees would need to disclose in relation to “equity”, (and perhaps the subclasses “Australia domicile” and “International domicile”) rather than in relation to Australian and international shares, and insurance fees, rather than the more usual “insurance premiums”. Similarly, “fixed income”, “commodities”, and “property” would replace currently disclosed asset classes.
Super funds have been providing asset allocation charts and educating their membership by including information in relation to asset types in member disclosure documentation for many years. This interpretation will require changes to be made to such disclosure, arguably diminishing members’ financial understanding, so painstakingly grown over years. Further, the new disclosure material should be in place from 1 July 2013.
On 30 April 2013, the exposure draft of regulations2 intended to change the fee table format and fee example in a superannuation PDS were published. The new regulations were stated to have effect from 1 July 2013, and to apply in relation to a MySuper PDS.
Given the short timeline to 1 July, it was obviously necessary for trustees to address the new draft proposals if they intend to comply with them by 1 July 2013. Unfortunately compromises and assumptions need to be made to make any sense of the draft regulations. For example, the proposed fees and costs table and the proposed fee example table have been transposed - so do we assume they should be switched around? The fee table replacement is only for a multiple fee structure, not a single fee structure - again, do we assume this omission is an error? The fee table requires separation of the investment fee and the administration fee, but inconveniently defines neither. The new regulation also doesn’t exclude the concept of the indirect cost ratio, which combines the investment fee and administration fee. How do we reconcile this?
Not only have trustees and their advisers had to grapple with interpreting these requirements but also trustees who have prepared their PDS anticipate the new regulation will be in force by its purported start date. This will not in fact comply with the law in force on 1 July 2013, because the new regulations are not yet in force3.
Portfolio Disclosure obligations are imposed on trustees (and custodians and investment managers), with website disclosure of portfolio holdings required by trustees as at 31 December 2013.
The Further MySuper Act (Tranche 3)4 introduced these requirements. A number of issues were pointed out before the legislation was passed, but were not resolved. These include:
- No clear time frame or format for portfolio reporting to the super trustee, although presumably sufficient to allow the trustee to comply with its own obligations to report no later than 90 days after each reporting day
- Lack of clarity about potential retrospective application to investments
- How potential double counting of asset holdings should be addressed
- Jurisdictional reach. The disclosure obligations only apply where a financial product is “acquired… in this jurisdiction” however, it isn’t clear if the obligations will apply to foreign entities who issue financial products to Australian clients, or overseas custodians who hold assets on behalf of Australian clients;
- Commercial in confidence issues. There has been no recognition that the required disclosure will enable analysis of the construction of the portfolio and the valuation of certain assets, and may disadvantage a superannuation trustee in its dealings with other investors.
The superannuation industry in Australia is a heavily regulated behemoth. Changing a disclosure program can take many months, and involve multiple stakeholders. Likewise for implementing compliance procedures to underpin such changes. Accordingly, it is essential that laws that apply to super trustees should be clear and understandable. Legislation should be in force well before its application date, to enable trustees to properly understand their obligations, and to enable systems and processes to be implemented to ensure compliance. Laws should apply to future action (be prospective) rather than having any retrospective effect. The body of law should be relatively stable because constant changes diminish public trust in the regulatory system, and counteract any hard won advances in financial literacy achieved by trustees in respect of their membership. Laws must be taken seriously and enforced, consistent with the understanding that laws really matter.
The Law Council Submission on the Exposure Draft of the regulations contained a wonderfully understated criticism which is a good summary of my thesis:
“[The] Rule of law requires that Parliament make laws that are clear and written in such a way that those who are to be bound by them can readily determine the nature and extent of their obligations, and understand that consequences that will arise if they fail to comply. We are concerned that the draft regulations may not meet this standard.”
So are we.
1 Superannuation Amendment (Further MySuper and Transparency Measures) Act 2012
2 Superannuation Legislation Amendment (MySuper Measures) Regulation 2013
3 An amended version of the Exposure Draft of The Superannuation Legislation Amendment (MySuper Measures) Regulation 2013 was registered on 28 June 2013, that is the Friday evening before the commencement of the financial year. Preparation of a PDS in accordance with the revised requirements will now be optional from 1 July 2013 and mandatory from 31 December 2013. The Government will undertake further consultation in relation to the portfolio holdings requirements in August 2013.
4 See note 1