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What are wealth industry regulators thinking about?

At the SMSF Association Conference on 19 February 2015, representatives from Australian Securities and Investments Commission (ASIC), Australian Prudential Regulation Authority (APRA) and the Australian Taxation Office (ATO) spoke at a session called, ‘The evolution – Superannuation as the leader in the wealth industry’.

None of these presentations (which have been edited and paraphrased rather than quoted directly) have been posted on the respective websites.

Chris Jordan, Commissioner, ATO

We have a major transformation programme called ‘Reinventing the ATO’. It’s aimed at improving the overall experience of those who deal with us in tax or superannuation. It is designed for the majority who do the right thing, and not for the minority who do not. I want to cut red tape and make complying easier. Transforming the ATO is not just about communication and online products, it’s about how we change our approach, including to SMSFs.

Generally, within eight weeks we will risk assess SMSFs that have a contravention and we’ll notify them of any action. It used to be up to 12 months. Our three categories are:

  1. Low risk funds, where we have done a review and we will take no further action.
  2. Medium risk funds, where we will contact the trustees by phone about the contravention to resolve the issues. With some ongoing discussions, we can usually reach a ‘no further action’ point.
  3. High risk funds, where we progress to a comprehensive audit within three months of notification.

All trustees who have had contraventions noted will know where they stand quicker.

It’s extremely important how advisers, accountants, auditors and trustees work together to ensure all people understand their obligations and the need for adequacy of retirement savings. We work with ASIC to ensure the integrity of auditors in the sector. One example is we recently approached 280 auditors about their claimed level of activity who said they did not have a requirement to sit an exam. People don’t realise we can count the number of returns they have done. It’s not that hard.

We look at the 150 highest risk auditors each year out of the 6,650 auditors listed on 2013 returns. We will also contact about 300 auditors where we have concern about their independence. We work well with APRA and ASIC, and we’re on many forums and industry advisory groups.

We want to make sure people have modern technology, using the right software, and trustees and advisers know the difficulty of going from accumulation to pension phase, and we look at Limited Recourse Borrowing Arrangements. We are concerned about some of the heavy marketing and promotion of particular property developments using their funds as a vehicle. People might lose sight of the investment and be sold heavily on the tax benefits.

Less than 1,500 SMSFs have over $10 million, there are five SMSFs with over $100 million. They tend to be very old people in those funds who put a lot in over many decades, and I can tell you, they’re legitimate because we’ve looked at them. Often they’ve been lucky. They have not made contraventions. You don’t design a system for a handful of large SMSFs.

Peter Kell, Deputy Chairman, ASIC

ASIC’s primary role is not about regulating SMSFs as such but regulating the gatekeepers who provide products and services. Financial planners, accountants, SMSF auditors, mortgage brokers and product providers are pretty much all regulated by ASIC. Our aim is to ensure these professionals carry out their work in such a way that the SMSF sector continues to succeed. Obviously, if we see some of these gatekeepers fail, that’s when there will be a regulatory response.

We’ve had a particular focus on financial advisers in recent times. Last year we set up a wealth management team to look at the advice provided by the largest financial planning firms. We’ve also focussed on life insurance. In the SMSF space, we set up a task force in 2012 to examine some of the higher risk areas in this sector, and I’d like to mention two.

One is the risk of over-aggressive property spruiking, and I hardly need to explain why some of the activity at the moment lends itself to that sort of activity. This is not affecting the majority of SMSFs but we want to make sure it does not grow. We want to address the risky activity at the margin before it becomes widespread. Providing financial product advice which requires a licence includes making a recommendation or a statement to a person to set up an SMSF or to use an SMSF to purchase real property. It’s not the case if you’re operating outside an SMSF. The real estate industry has not necessarily understood that. We are seeking to take action against the unlicensed activity we see out there. Our aim is to make sure the spruikers do not build up a head of steam in a sector which is working well.

The second area of risk is our focus on false and misleading advertising. We have especially looked online at free set up or free benefits of one sort or another for establishing an SMSF. If only life was that simple. Normally what we have found when you look behind it is that there are significant costs. We don’t want people being encouraged to set up an SMSF when it’s purported to be free, in effect being misled. We are targeting new media and something like YouTube as in many cases, more people will see something like that than an ad in the newspaper.

On SMSF auditors, we are ensuring people who want to be in this space have the right qualifications. In December 2014, we cancelled the registration of 440 SMSF auditors who did not undertake or pass their competency exam.

Helen Rowell, Executive Board Member, APRA

I want to touch on three areas mentioned in the FSI: governance, retirement income options and how we access the performance of the industry.

On governance, implementation of the Stronger Super reforms has been a priority for APRA, aimed at enhancing the risk management practices of the industry. Our experience on how the super industry is going is only average. Whilst there’s been effort and goodwill, it’s hard to do good risk management if you have not got good governance and culture. It’s the role of the Board to ensure there’s a good culture in the entity, and the trustees on the Board must have a wide range of skills and capabilities. The industry must think about the process of appointment and selection of Board members. The evidence that we need independent directors is our experience in other APRA-regulated industries. Adding independent directors does lift the standard of governance. It adds a lot of value into the way the Board operates.

On retirement income options, there is a limited product set available, partly because of regulations but also due to individuals and their thinking. There’s a focus on the pot of money at retirement rather than what they need after that. Murray will shift the emphasis, including some of the policy initiatives. It concerns us how some APRA-regulated institutions are managing the risk of providing incomes through retirement, so we’re looking at product design and the level of guarantees, which a super fund without any capital cannot provide. There are investment issues to consider because the investment, liquidity and cash requirements around drawdown of income are difficult versus accumulation of a lump sum. Some of the systems, processes and advice models are also different. We are challenging the industry to think about these issues as we head towards pension provision.

On industry performance, the FSI focussed on why costs haven’t come down. My response is that we should not only look at costs, it’s no good delivering the cheapest system in the world if it’s not delivering the best retirement outcomes. We want trustees, when thinking about the scale of their business, to consider a broad range of factors and it’s not just about being the biggest or the cheapest. They need to look at their entire offering.

One last point on complexity. I was staggered recently when we looked at some of the reporting to find that there are over 40,000 investment options offered across the APRA-regulated space. There is no need for this across the super industry, we need to get rid of that complexity.


Graham Hand attended the Conference as a guest of the SMSF Association.


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