FSC says advisers to protect consumers against ‘defective’ regulations

The government announced last week that it will extend the scrutiny from MySuper options to Choice super products and superannuation wrap investment options.

The new rules are expected to be updated for the August 2023 performance test.

In response, the Financial Services Council (FSC) urged consumers not to make any decisions regarding their super funds based on the government’s performance test without first consulting a financial adviser.

Referring to the new rules as “defective government regulations”, the FSC said they “risk failing to address methodological issues built into the test for the new class of trustee-directed products”.

While admitting FSC supports the government’s efforts towards holding underperforming super funds to account, chief executive Blake Briggs said it is concerned about “collateral damage”.

“The government has made improvements to the proposed regime through consultation, specifically splitting the test and the calculation of the benchmark into separate categories of superannuation product and switching to test platforms on a gross of tax basis,” Mr Briggs said.

“The government’s pursuit of rough justice for underperforming investment options, however, risks consumers becoming collateral damage. Issues with the chosen methodology will result in consumers receiving notifications from the government that their investment option has failed, when this is incorrect.

“Consumers are urged to speak to their financial adviser if they receive a notification later this year before making investment decisions that may not be in their best financial or tax interests.”

He added that the government has recognised the “potential for adverse consumer outcomes” with its amendment of the notification to “flag the risk of cost considerations”.

“The objective of these reforms is to raise investment returns for consumers and the Parliament should reconsider the risks of the proposed methodology to prevent the test failing superannuation consumers,” Mr Briggs said.

“The FSC urges the government to also address the existing shortcomings in the superannuation product modernisation regime by providing CGT rollover relief for superannuation trustees.

“A product modernisation regime for superannuation products will expedite the closure of underperforming investment options by removing tax consequences for consumers.”

Following its submission to the Treasury review of the superannuation performance test, Financial Advice Association of Australia (FAAA) CEO Sarah Abood said the APRA performance test is likely to have a substantial impact on advised Australians.

“While we are not opposed to the introduction of performance testing for Choice products, it is critical that the regime considers the impact on financial advisers and their relationship with their clients. It is also essential that it is fair and does not treat certain products in a way where the performance results are skewed,” Ms Abood said.

“There is a downside risk that needs to be considered, which is that it encourages some clients to make decisions to change products that might not ultimately be in their best interests. We are supportive of a message that encourages clients to consider the performance of their fund, but not one that scares them into making changes without accessing advice.”

Last week, in announcing the government’s intentions to overhaul the test, Financial Services Minister Stephen Jones assured that it had ensured the new test is more “fit-for-purpose” for Choice products.

The announced changes include an increase in the minimum testing period, a recalibration of key benchmarks, and the decision to benchmark platform and non-platform products against a median fee relevant to this category.