Superannuation Trustee Advice Fee Oversight Under Scrutiny

On 9 May 2024, ASIC released Report 781, Review of superannuation trustee practices: Protecting members from harmful advice charges (Report). ASIC has expressed concern that superannuation trustees continue to have deficiencies in their oversight practices for the deduction of advice fees from members’ superannuation accounts but has confirmed that it does not expect trustees to review the advice provided to the member. The call to action from ASIC Report 781 is for trustees to review their advice fee governance arrangements and be prepared to defend them in court.

The Report follows previous calls by APRA and ASIC for trustees to improve those monitoring practices:

• On 10 April 2019, ASIC and APRA called on trustees to review their governance, risk management and oversight processes in respect of fees charged to member accounts and to complete the review by 30 June 2019.
• On 30 June 2021, ASIC and APRA again wrote to trustees outlining their expectations and their findings from the review of trustees’ practices that they conducted in 2019. The regulators identified that trustees were not conducting regular, proactive reviews of advice documents, and a lack of formal processes for checking financial adviser identification and qualifications.

The Report is a ‘shot across the bow’ for superannuation trustees and may represent a final chance for them to implement oversight practices that are consistent with ASIC’s expectations.  Noting that one of ASIC’s key enforcement priorities for 2024 was misconduct resulting in the systematic erosion of superannuation balances, the potential next step for ASIC in this area would be to commences legal proceedings against trustees.

Background to The Report

There has long been legal debate about the ability of trustees to deduct advice fees for advice from superannuation accounts of members due to the layers of complexity in the law. The uncertainty arises due to the combination of the following laws.

• the operation of the sole purpose test with respect to advice fees: The sole purpose test in section 62 of the Superannuation Industry (Supervision) Act 1993 (SIS Act) limits the provision of superannuation benefits by superannuation funds to a range of prescribed or approved retirement or retirement related circumstances. The test is silent on the treatment of advice fees. In 2001, APRA’s guidance in Superannuation Circular No. III.A.4 The Sole Purpose Test, was that advice fees related to the members interest in the fund would generally fall within the sole purpose test. However, that guidance has been retired and since then the regulators’ 2019 and 2021 letters have been issued, which, in contrast to the circular’s general guidance, set out the regulators’ detailed expectations of the steps that trustees need to take when deducting advice fees.
• Section 52(2)(c) SIS Act and members’ best financial interests: this duty requires the trustee to be satisfied that the advice fee deducted from the member’s account is in the member’s best financial interest. The best financial interests duty is broad and therefore captures the deduction of advice fees from the account. However, as a broad legal duty it was left to a trustee to determine the steps it must take in order to satisfy the duty in the context of advice fees.
• Section 99F SIS Act and ‘intrafund advice’: The term ‘intrafund advice’ is not defined in the law. Generally the term ‘intra-fund advice’ is used to refer to simple, non-ongoing personal advice accessed through a superannuation fund where the cost of the advice is charged collectively. Section 99F does not list the types of personal advice that are permissible as intra-fund advice, but it does specify the types of personal advice that cannot be collectively charged to the members of the fund as intra-fund advice. So the focus of section 99F is not about which advice fees can and cannot be charged to superannuation accounts, but about preventing collectively charged to the members of the fund for personal advice fees to a member.
• Section 99FA SIS Act and advice fee consent requirements: Section 99FA sets out, in short, that a trustee cannot pass on the fees for financial product advice unless the trustee has a copy of the member’s consent. Section 99FA does not impose any obligations on trustees to verify the content or quality of advice for which member consent is given. However, at the date of this alert, proposed law reform to amend section 99FA of the SIS Act is underway under the Treasury Laws Amendment (Delivering Better Financial Outcomes and Other Measures) Bill (Cth) 2024, including introducing an explicit requirement that the advice must be wholly or partly about the member’s interest in the fund. It’s difficult to see how a trustee can be confident that advice is wholly or partly about the member’s interest in the fund without reviewing the advice.

ASIC’s findings in Report 781

ASIC reviewed a sample of 10 trustees, during the 12-month period from 1 April 2022 through 31 March 2023, and found that trustees had room for improvement in implementing robust assurance processes without identifying which trustees had room for improvement.

Four key issues

ASIC identified 4 key issues and made recommendations as to how trustees could improve.

Other issues ASIC focused on:

• Complaints and systemic issues: when investigating complaints about an advisor, trustees should also investigate whether there are other abnormalities or patterns indicative of a systemic issue rather than an isolated experience of one member.
• Advice fee labels: advice fee labels were often not sufficiently simple and accurate, which risked confusing members and allowed for the charging of multiple fees, which increase risks of balance erosion.
• Deductions for general advice: ASIC noted that at the time of the publication of the Report, all 10 trustees that were the subject of the review did not deduct fees for general advice. Additionally, proposed reforms to s 99FA SIS Act would eliminate the ability of trustees to make deductions for general advice.

Key takeaways for trustees

From a practical perspective, ASIC’s recommendations are a prompt for trustees to consider undertaking the following additional work:

Strengthened due diligence when onboarding advice licensees, advice practices and advisers

• ASIC’s recommendation that trustees implement stronger processes to understand the businesses of the licensees and advisers, implies that trustees may need to conduct a form of compliance due diligence on the licensee before the trustee signs the licensee up.
• The recommendation certainly goes further than mere checking of advisers’ identity and qualifications details but considering the potential impact of a “rogue” financial adviser on the reputation of a superannuation fund is probably a prudent step to take.

Strengthened oversight

• ASIC’s recommendation that trustees have greater oversight of advisers by regularly checking the Financial Adviser Register, and to investigate patterns indicate of systemic issues. In effect, ASIC is expecting trustees to do more with the data that they have.  However, the ability of a particular trustee to take these steps will depend on the form in which the data is held and where it is held.
• ASIC is also expecting trustees to develop system flags which trigger further investigations by the trustee. The example given is the charging of adviser fees even though there is no adviser activity on a portal.  Trustees should also consider the reasonableness of adviser fee caps – caps which are set too high will not be effective controls to prevent a breach of the law.

Random sampling protocol

• Trustees should review current protocols to ensure there is random sampling of advice files. Trustees will need to consider the methodology for randomly selecting the sample advice documents to be reviewed (i.e. a risk-based flag, or more proactive), the number of documents that will be requested (i.e. one or more client files, and the whole client file or only the most recent SOA), and who will conduct the review of the documents.
• Trustees should also ensure that the review of advice files is limited to (1) ensuring that the services were provided and (2) whether the advice fees charged to the trustee were consistent with the sole purpose test. Notwithstanding ASIC’s comments in the Report, a trustee should also consider the extent to which these checks should consider other matters, having regard to reputational risk and the trustee’s risk tolerance.

Contractual arrangements with advice licensees

• Superannuation trustees typically have agreements in place with advice practices that set out the rights and obligations of the parties while the advice licensee provides financial advice about the trustee’s products and funds.
• Trustees should consider review existing agreements with advice licensees to determine whether complying with ASIC’s expectations in the Report will require amendment to these agreements. Early engagement with advice licensees about any changes may mitigate against a protracted amendment process.
• If the trustee has pro forma advice licensee agreements, trustees should also be considering whether the pro forma agreement requires an update to include any additional rights that the trustee wishes to reserve as a result of ASIC’s recommendations in the Report.

All of the above recommendations will be resource-intensive and send a message to the superannuation industry that an uplift in human, technological and financial resources may be needed to undertake the work that’s inherent in addressing these findings.  Trustee adviser governance frameworks, policies and procedures may also need significant modification to cater for the above work.  That said, making the investment of resources in uplifting oversight of financial advice could be seen as a strategic investment. This is because it may help reduce the risk of ASIC commencing legal proceedings in the first place and, at worst, assist with a defence or reduce the penalty that may be applied.