05 April 2023
6 min read
#Superannuation, Funds Management & Financial Services
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Superannuation trustees (Trustees) are under increasing pressure to meet high standards, but there is no consensus as to what those standards should be. Governments and regulators have attempted to legislate their way to a solution and have created something of a regulatory heatwave rolling through the superannuation industry.
While changes so far have been manageable, more complex and inconsistent changes are on the horizon, along with economic and political challenges like the fragile post-pandemic recovery, war in Ukraine, rising inflation, and volatile markets. As a result, the likelihood of some Trustees blistering from the regulatory heat seems inevitable.
Given such trying conditions, Trustees should keep one eye on a rapidly evolving complex legal system and the other on maximising returns. This article identifies five regulatory hotspots that Trustees should immediately address to reduce their operational risks and to overcome these challenges.
Introduced in 2021, the Annual Performance Assessment (Assessment) triggers new covenants under section 52 of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS) if Trustees fail to meet the minimum performance threshold for Part 6A (for now, MySuper) products. These covenants (i.e. sending prescribed letters to members to exit the fund, or, on consecutive fail, prohibiting Trustees from accepting members into the product) is likely to have already been a central focus for Trustees.
On face value, the Assessment, which measures performance over eight years and contains a minimum performance baseline to which Trustees must meet, is a welcome inclusion to the industry.
However, the inconsistencies and friction between the Assessment and other SIS provisions will also likely create stifling conditions for Trustees. Include recent statements made by APRA in respect of the Assessment and this new regulatory requirement begins to take on a white-hot molten quality that is likely to pose a serious risk for Trustees.
Find out how in the full paper here.
In 2021, the best interests covenant was amended to clarify that ‘best interests’ meant ‘best financial interests’. The change can be classified as a clarification of the covenant’s scope, ensuring no room for argument that the obligation focuses on members’ financial interests.
While this technical change was minor, the simultaneous and inextricably linked introduction of section 220A of SIS turned the impact of the covenant on its head by reversing the onus of proof and requiring Trustees in civil proceedings to start from a presumption of guilt.
Given that this reverse onus of proof now applies to alleged contraventions of the best financial interests covenant, Trustees must now undertake a sweltering amount of record keeping and risk assessment to guard against proceedings alleging a breach of the best financial interests covenant.
Find out how in the full paper here.
Division 3 of part 7.6 of the Corporations Act 2001 (Cth) (Corporations Act) requires Australian financial services (AFS) licensees, including Trustees, to report certain breaches to the Australian Securities and Investments Commission (ASIC). The obligation was updated in October 2021 after previous breach reporting requirements were considered too ambiguous, leading to inconsistent and delayed reporting within the required timeframes.
Notably for Trustees, the previous reporting regime was also in-line with RSE licensee requirements to notify APRA of certain breaches. This previous reporting included, to a degree, a subjective assessment from the Trustee to assess whether certain breaches were significant.
While the RSE licence reporting has remained unchanged, the updated section 912D reporting obligations have now significantly broadened in scope to cover both the previous assessments made, deemed significant breaches, and investigations determining whether a breach has occurred. Unfortunately this wider scope has also created ambiguity as to what is and is not a reportable situation.
Find out how in the full paper here.
For all AFS licence holders, new internal dispute resolution (IDR) requirements were implemented on 5 October 2021. The updated requirements include:
In a recent statement, ASIC expressed their concerns that over 50 per cent of Trustees it had reviewed did not comply with sending an IDR delay notification when required. Further, one in three Trustees advised ASIC that there were varying degrees of process failures or errors in their IDR systems. These included identifying or capturing complaints correctly, omitting mandatory content from IDR response letters or failing to send out IDR responses for some complaints. I put forward that some of the poor outcomes can be attributed to the legal document, ASIC Regulatory Guide 271 ‘Internal dispute resolution’, creating tension/confusion by containing both legal requirements imposed on Trustees and non-legal guidance that Trustees may choose to consider.
Find out how in the full paper here.
'Greenwashing' is a term used to describe the giving of false information on financial products that relate to environmental, sustainable and ethical standards. Regulators, like ASIC, have begun to act on such conduct, stating that the practice of greenwashing is a serious concern for a sector set to grow to 53 trillion dollars (USD) by 2025.
Despite this increasing concern about greenwashing, no uniform legal regime has been imposed on Trustees. Instead, the following disclosure requirements and misleading prohibitions attempt to cover the field:
The increased regulatory oversight of greenwashing comes after ASIC published Information Sheet (INFO 271) ‘How to avoid greenwashing when offering or promoting sustainability-related products’. While INFO 271 is a welcome guide on how Trustees may navigate the legal requirements to avoid greenwashing, the mishmash of obligations across a number of different legislative acts, instruments and guides has created ambiguity on the precise requirements required when issuing and advertising ESG-related financial products.
It may be that the requirements above are satisfactory in addressing the issue of Greenwashing in the financial services industry. However, given there has been no uniform expectations for Trustees to date, the current expectation is that for every issue, disclosure, advertisement or representation made surrounding ESG, Trustees must navigate this candescent and blurry set of obligations,above, each time. As a result of these various legal requirements, Trustees need to consider different angles of the law, rather than in a unified location, to ensure they have met all obligations when offering ESG superannuation products/investment options.
Much of what has been highlighted above focuses on current legislative obligations that have the potential to impact Trustees. With further heatwaves predicted in the future (proposed legislation, regulations and prudential standards), Trustees must take pre-emptive action to avoid these current hotspots and plan for what is to come. Only by preparing for such weather events will Trustees be able to minimise the impact of regulatory reform.
Read our full paper here for a more in-depth discussion on the five hotspots outlined above.
If you have any questions about this article or what action you can take, please get in touch with Holding Redlich’s Superannuation, Funds Management & Financial Services team.
Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.
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