FAAA raises alarms regarding YFYS test expansion and advised clients

In June, Financial Services Minister Stephen Jones confirmed the government will update the 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.

Mr Jones said at the time that, following consultation on draft regulations and the Your Future, Your Super (YFYS) review, the government will update the regulations for the August 2023 performance test.

Philip Anderson, general manager for transformation and policy and advocacy at the Financial Advice Association Australia (FAAA), aired the group’s concerns in a recent video uploaded on YouTube.

He clarified that although the performance test initially began in 2021, the recent incorporation of trustee-directed products this year will significantly impact advised clients and result in increased workload for advisers.

“An end outcome of this new regime is that the members of Choice trustee-directed products who fail the performance test will start to receive failure notices within the next month or two. This testing will apply at the investment option level so clients could receive notices in respect to the failure of more than one investment option.

“Product providers continue to have concerns about the fairness of the testing methodology. We have concerns about the confusion the receipt of these notices might have for clients, particularly where there are a range of reasons such as tax or the cost of moving that might mean switching funds or investment options is not in their best interest,” Mr Anderson explained.

He observed that the failure notices contain prescribed text that emphasises the possibility of switching to a different provider, specifically mentioning MySuper products. Additionally, a cautionary note advises clients to consider their plans and personal circumstances. However, Mr Anderson also mentioned that these notices might inadvertently cause excessive concern among clients.

“[This] could potentially lead to clients making poor decisions,” Mr Anderson said.

“We expect that this will also generate significant additional work for financial advisers.”

As such, Mr Anderson suggested advisers should keep an eye out for when the Australian Prudential Regulation Authority (APRA) releases the latest results as an indicator for when clients may start to receive these notices.

“You should be prepared to proactively communicate with clients when this happens.”

Earlier, the FAAA pointed to flaws in the test’s expansion to Choice products and the impact it could have on advised clients.

FAAA argued at the time that financial advisers, while not usually involved in the recommendation of MySuper products, are very much involved in the recommendation of their Choice counterparts.

“Where clients receive a notification from their trustee that their fund, or one or more of their investment options, have failed the performance test, then many of them are likely to contact their adviser to either complain or seek advice on how to resolve this problem,” the group said in their submission to government.

“The impact of this is now probably only six months away. The financial adviser population are largely unaware of this issue at present and will have little idea how this assessment is undertaken.”

Reiterating this argument, Sarah Abood said at the time that while the 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 the FAAA said.

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