Untangling ASIC’s message: What the regulator’s latest report really means

The corporate regulator’s latest report continues to assure trustees and advisers that there will be no need for every statement of advice (SOA) to be reviewed, but could oversight concerns see things change?

On Thursday morning, the Australian Securities and Investments Commission (ASIC) reignited an ongoing schism within the financial services space with the release of its latest report, which followed a review of the progress superannuation trustees have made in “addressing deficiencies in their monitoring of fee deductions for the provision of financial advice”.

In the report REP 781 Review of superannuation trustee practices: Protecting members from harmful advice charges, the corporate regulator called on superannuation trustees to “renew efforts to protect members from unscrupulous operators amid evidence of inadequate oversight of advice fee deductions”.

The timing of the review and report is certainly interesting, especially in light of the heightened scrutiny surrounding the initial Delivering Better Financial Outcomes bill and the subsequent Senate inquiry. The inquiry, in particular, has seen the bulk of the focus placed on the suggested revision of requirements for superannuation fund trustees processing financial advice fees.

Namely, the legislation sets out a number of requirements that need to be satisfied before a trustee can charge the cost of advice against a member’s interest in the fund.

Under the proposed new version of section 99FA of the Superannuation Industry (Supervision) Act (SIS Act), “the trustee or the trustees of a regulated superannuation fund must not charge against the members interest in the fund the cost of providing financial product advice, unless the financial product advice is personal advice and is wholly or partly about the member’s interest in the fund and the amount charged does not exceed the cost of providing financial product advice about the member’s interest in the fund”.

Speaking at a Financial Advice Association Australia (FAAA) roadshow event in Sydney last week, general manager policy, advocacy and standards Phil Anderson noted that advisers are often providing advice that “goes above and beyond the member’s interest in the fund”.

“That’s saying that the super trustee needs to know what advice you are providing and the extent to which that advice relates to your client’s interest in the fund to make sure that the fund is not paying for advice that is unrelated to their interest in the fund,” he explained.

“How exactly do they do that? That’s where we’ve come to the situation where some of the funds are asking for copies of SOAs and you guys have got to go through and redact personal information that you don’t think should end up with a trustee.”

What is ASIC saying?

The thrust of ASIC’s concerns in the report and its accompanying media release revolves around the erosion of member balances via advice fees, and the impacts of inappropriate super switching as a result of cold calling and high-pressure sales tactics.

“ASIC is concerned about the potential impact on superannuation members, particularly amid evidence of balance erosion from fee deductions for advice originated by cold calling business models using questionable sales tactics that pressure members into switching superannuation funds,” said ASIC commissioner Simone Constant.

"Superannuation trustees should have processes in place to detect and respond to suspicious activity.”

The problem is that the report doesn’t actually investigate whether there is any kind of causal link between cold calling and adverse outcomes.

The regulator is absolutely correct in calling out the danger of not providing any kind of oversight of advice fee deductions, as it opens the door for these unscrupulous operators to act undetected and cause long-term harm to members. However, as things currently stand, it has not supplied any data regarding the extent of the problem, merely stating that it exists.

ASIC does provide case studies that model out the impact of fee erosion from inappropriate switching. But these form a persuasive argument against the use of percentage-based fees above anything else, by showcasing how such fee structures can lead to adverse outcomes.

ifa sought additional detail on the link between the topics and while ASIC did not provide any specific data on the extent to which cold calling and advice fee oversight are connected, a spokesperson explained that the regulator is “engaged in cross-sector work on the issue of trustee oversight and cold calling operators” and that Report 781 is “just one part of this broader project”.

“As noted in our cold calling surveillance work, we have observed unusual volumes of superannuation savings flowing from a subset of advisers and licensees into high-risk property managed investment schemes – either via platform superannuation products offered by APRA-regulated funds or a self-managed superannuation fund (SMSF) – and associated payments made to cold calling businesses,” the spokesperson told ifa.

“People that switch their super accounts as a result of these cold calling operators are often paying thousands of dollars in upfront advice fees and higher ongoing fees as a result of inappropriate advice.

“ASIC’s view is that these inflows should have triggered further investigation by trustees, which may have occurred if trustees had better oversight practices in place.”

The numbers

The analysis within the report looks at 10 trustees and 1,526 checks of advice cases that the trustees conducted. Among the seven trustees that performed checks of advice fees, ASIC said that three found evidence of fees for no service.

Is this a return to the bad old days before the financial services royal commission (which ASIC specifically referred to in both the report and its media release)?

Not exactly.

Just 1 per cent of the cases checked had an outcome that found a financial service was not provided. In other words, there were, at most, 15 instances of fees for no service.

In contrast, 94 per cent of the cases had no adverse finding and the remaining 5 per cent fell into the nebulous “other adverse finding” category. Given these were the only three options and the results are self-reported by the super trustees, ASIC has no further information on what exactly that means.

Another of the top line numbers was the finding that 328 unique advice fee deduction arrangements exceeded $15,000, which prompted the regulator to note the importance of fee caps for both ongoing and non-ongoing advice.

“Non-ongoing fee caps range from $1,500 to $20,000, with only one fund having a percentage-based fee cap (4.4 per cent, applying for initial advice only). Ongoing fee caps range from $5,500 through to $20,000, or 2.2 per cent to 5 per cent on account balance terms,” the report said.

While $15,000 represents a fee higher than what most would consider reasonable, it’s unclear whether these fees pertain to one-off initial advice or ongoing services. Additionally, this amount constitutes just 0.07 per cent of the total 476,452 member accounts charged an advice fee or roughly 0.5 per cent of the $990.4 million in total advice fees.

What does this have to do with s99FA?

Despite highlighting a range of concerns, particularly regarding trustees and their allegedly inadequate steps to ensure fees are appropriate, including an over-reliance by trustees on attestations that the advice has met the sole purpose test, ASIC did not call for all SOAs to be checked.

“At the date of this report, proposed law reform to amend s99FA of the SIS Act is underway, including introducing an explicit requirement that the advice is wholly or partly about the member’s interest in the fund,” the report said.

“While we have been clear that neither the current law nor proposed reforms require trustees to check all advice documents, the assurance arrangements referred to in the 2019 and 2021 joint letters which are discussed in this report, such as reviewing a sample of advice documents, remain relevant.”

This echoes the statement made by ASIC commissioner Alan Kirkland that the corporate regulator does not see a need for superannuation trustees to verify every SOA.

“We’ve been trying to provide some early guidance in relation to the issue … around the obligation of superannuation trustees, to clarify that under those proposed reforms, as under the current law, it’s not our view that super trustees are required to check every statement of advice and we’ll continue to do our best to make that clear,” Kirkland said at the FAAA roadshow event last week.

In Thursday’s report, ASIC also made a number of references to the joint letter with the Australian Prudential Regulation Authority (APRA) sent to trustees on the matter in 2019 and 2021.

In the 2021 letter, under further guidance on oversight of advice fees charged to members’ superannuation accounts, the regulators noted that there is “no need to obtain a copy of every SOA produced”.

“However, the capacity to access SOAs and related documents provided by financial advisers, on request, should generally form part of trustees’ assurance processes,” it said.

Given the regulator’s apparent disappointment in super trustees’ efforts in meeting the requirements laid out in the letter, it is possible the regulator’s stance could change following the passage of the amendments to s99FA.

Consumer group takes aim

On Thursday afternoon, Super Consumers Australia said ASIC’s report showed that super funds and advisers need to urgently step up their efforts to protect Australians’ retirement savings.

Director of Super Consumers Xavier O’Halloran used the results to double down on the consumer group’s criticism of financial advisers and the sector’s concern over the amendments to s99FA.

“Unfortunately, some funds and advisers are forgetting the lessons of the Financial Services Royal Commission and the horror of ‘fees for no service’,” O’Halloran said.

“Right now, some within the industry are calling for the removal of obligations on super funds to protect people from inappropriate advice fees. We’re calling on Assistant Treasurer Stephen Jones to protect the savings of Australians from dodgy practices by retaining these protections,” said O’Halloran.

“It is good to see ASIC shining a light on poor practices. We expect ASIC to now follow up with strong enforcement action against trustees and advisers to deter future misconduct.”

In a joint submission to the Senate inquiry into the first DBFO bill, Super Consumers and Choice argued that concerns over the bill’s drafting are unwarranted and a result of fearmongering from advisers.

“The financial advice industry has attempted to argue that the reforms in the bill will increase red tape for advisers and require trustees to check every piece of advice individually,” the submission said.

“There is no basis for this argument, which appears motivated by a desire to remove appropriate oversight of advice deductions from super and reduce consumer protections.”