FAAA highlights flaws in expansion of performance testing

Last week, Financial Services Minister Stephen Jones confirmed the government will update benchmarks used to measure the performance of superannuation funds while extending 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.

The Financial Advice Association Australia (FAAA) has previously pointed to flaws in the test’s expansion to Choice products and the impact it could have on advised clients.

Namely, in its submission to government, the FAAA argued that financial advisers, while not usually involved in the recommendation of MySuper products, are very much involved in the recommendation of their Choice counterparts.

Speaking on the matter, Sarah Abood said at the time that while FAAA is 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”.

“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,” the chief executive officer of FAAA said.

“We would welcome the opportunity to discuss these issues in more detail with Treasury.”

Reiterating the body’s stance again, Ms Abood told ifa on Wednesday the FAAA remains concerned.

“We will await further detail on these changes, however, we remain concerned about the lack of acknowledgement of the financial adviser as part of this process and the importance of accessing advice when a member receives this notice,” the CEO said.

“We believe that some issues remain with the testing methodology that will result in some funds/option being incorrectly assessed as failing the test. This will generate unnecessary concern and anxiety for the members in these options.

“We remain concerned that these failure notices could undermine confidence in the client’s adviser and run the risk of triggering poor decisions,” Ms Abood added.

She “strongly" encouraged impacted clients to speak to their adviser when these notices are received later this year.

“We anticipate that advisers will need to devote a lot of time to addressing client concerns.”

The Financial Services Council (FSC) issued a similar response earlier this week and 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.”

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.