WARNING:
This Digest was prepared for debate. It reflects the legislation as
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Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer and Copyright Details
Choice of Superannuation Funds (Consumer Protection)
Bill 1999
Date Introduced: 23 September 1999
House: House of Representatives
Portfolio: Treasury
Commencement: The operative provisions of
the Bill will commence on a day fixed by Proclamation or, if such a
day is not within 6 months of the Bill receiving Royal Assent, at
the end of that period.
To increase the
consumer protection available to people dealing with life insurance
companies, brokers and advisers.
Superannuation
The proposal to require employers to offer
employees receiving superannuation contributions a choice of the
fund to which the employer's contributions are made was included in
the Coalition's policy prior to the 1996 General Election. The
proposals, with some modifications, were included in Taxation Laws
Amendments Bill (No. 7) 1997, introduced in December 1997. The
measures contained in the Bill were due to commence from 1 July
1998. During debate on the Bill, which when passed became
Taxation Laws Amendment Act (No. 3) 1998, the measures
relating to the choice of superannuation fund were removed from the
Bill. Following the General Election in October 1998 the choice
measures were again introduced in the Superannuation Legislation
Amendment (Choice of Superannuation Funds) Bill 1998 and related
Legislation which deals with choice of funds for Commonwealth
employees. These Bills have remained before the Senate since
February 1999 and the proposed commencement date has subsequently
also been postponed.
The proposals were examined by the Senate Select
Committee on Superannuation (the Committee) which delivered its
report, Choice of Fund, in March 1998. While the general
principal of choice of fund was accepted by all parties represented
in the Committee, the ALP and Australian Democrat members expressed
concern about a number of matters, including the ability of members
to make an informed choice regarding the most appropriate fund.(1)
Informed choice can be divided into three categories, education,
disclosure and the ability to compare information provided by one
fund with that provided by another.
The potential for consumers to incur loses
through an inappropriately regulated greater choice regime is
usually illustrated by the experience in the United Kingdom in the
mid-1980s when many people were encouraged to transfer from
employer defined benefit schemes to new personal schemes. Evidence
given to the Committee places the number of cases of mis-selling at
over 570 000 and the value of compensation sought at $10
billion.(2) Evidence was also given that in Chile, where there is
compulsory scheme with private providers competing for member's
contributions, approximately 38% of management costs are associated
with changing funds.(3) In both examples commission driven selling
was seen as having a major role and a large number of changes were
not in the member's interests but prompted by gain for the seller
of the product.
The main consumer information provisions for
prospective members of public offer superannuation funds are
contained in Division 3 of the Superannuation Industry
(Supervision) Act 1993 (SIS) and its regulations. The
provisions require information to be provided that a person would
reasonably need to:
-
- understand the main features of the plan
-
- make an informed choice about the investment performance of the
plan, and
-
- make an informed judgement about the management and financial
condition of the plan.
The requirements include that a statement be
provided outlining:
-
- how fees, charges and other costs are calculated and levied,
and
-
- whether the fees, charges etc are fixed amounts or calculated
on a percentage basis.
These requirements address the provision of
information relating to the charges and other expenses of the fund,
they do not relate to any fee or commission that may be paid to a
provider of financial advice or other service who may suggest that
a person join a particular superannuation fund, either as a new
contributor or on changing fund. Such information would at least
give the prospective member knowledge of the incentive of the
information provider, even if, according to economic theory, this
should not affect the choice of which fund to invest in.(4)
Regulators
Superannuation funds are regulated by both the
Australian Prudential Regulation Authority (APRA) and the
Australian Securities and Investments Commission (ASIC). APRA has
responsibility for ensuring that funds comply with regulatory
standards relating to the financial viability of the fund and its
ability to meet member commitments. It monitors matters such as the
funds investment strategy and management to see if member's funds
are at risk. ASIC has responsibility for ensuring that the
Corporations Law is complied with and consumer protection. In the
later role, ASIC, does not deal with individual complaints but is
responsible for supervision of consumer protection through the
implementation and oversight of measures designed to ensure that
consumers have adequate information and are treated fairly. For
example, ASIC is responsible for the SIS regulations dealing with
the provision of information to new and existing members. and has
recently announced that it is reviewing the information statements
sent to members to ensure that regulatory requirements are complied
with and to see if members are able to understand the documents
they receive.(5)
Currently, entities selling financial services
and advice may have to be registered with a number of regulatory
bodies, each of which issues a licence to deal in a particular
product. The Financial System Inquiry (otherwise known as the
Wallis Report) recommended that a single licence be introduced for
financial sales, advice and dealing.(6) The recommendation was
adopted in the Corporate Law Economic Reform Program Paper No. 6
(CLERP 6) and the associated paper dealing with the implementation
of CLERP 6 (titled Implementing CLERP 6), with the
appropriate standard being the disclosure of information which
investors and their advisers could reasonably require to make an
informed judgment.
A major industry group, the Association of
Superannuation Funds of Australia (ASFA), has issued a Position
Paper on Disclosure which makes the following major points:
-
- Regulations should state the principals for disclosure, with
industry standards and guidelines outlining measures necessary for
a common presentation of information to allow comparison of the
information provided by funds, with proscriptive regulations used
only if industry standards and guidelines fail.
-
- ASFA's 'first priority is that such information should be
consistent in intent, and allow comparison of essential information
across all superannuation products regardless of provider.'
-
- Where the employer offers a range of funds for the employer to
chose from, the responsibility for providing information should
initially rest with the employer.
-
- In relation to the standard proposed in CLERP 6, and in
particular the stanard being aimed at investors and their advisers,
ASFA 'considers that disclosure needs under compulsory super are
not for a lower level of disclosure, but for a more effective,
comparable and member friendly disclosure. Disclosure should be
based on performance standards in terms of user comprehension and
accessibility which makes them appropriate for all users.'
-
- In relation to pre-joining disclosure, ASFA considers that the
information provided should include:
-
- the features and benefits available to members, including
optional benefits
-
- the nature of the investments, the associated risks and returns
and the crediting/reserving policy of the fund
-
- all fees and charges members will incur
-
- information about the providers of the product and the basis on
which it is offered, including, where relevant, a statement of any
commission payable, and
and that statements should include generic and
fund specific information and investment performance reporting
which should be on a standard basis.(7)
Education
Education is an essential pre-condition for
members, or prospective members, to be able to exercise an informed
choice. Even with clear and full disclosure of information, this
will be of little use if the members or prospective members who are
unfamiliar with the concepts involved. There are limits to what an
education campaign can achieve particularly as there seems to be a
great deal of apathy in relation to superannuation. Even a
brilliant education campaign may fail if the audience is not
interested in the subject. An indication of apathy and confusion
can be given by the number and value of lost members and accounts
which contain funds where the member cannot be traced. In a recent
audit of the lost members register, the Australian Taxation Office
(ATO) found that the value of superannuation with lost owners was
$3.4 billion and that the number of lost members was 2.6
million.(8)
The need for an education campaign, for both
employees and employers, is recognised and endorsed by the
industry, consumer groups and the government.(9) However, the
question of who will pay for such a campaign and the mix between
employer and employee education has not been settled. Suggested
sources of funding have included the government and surplus amounts
collected from the industry from various regulatory levies (ie.
from existing members of funds).(10) It can also be suggested that
a substantial contribution should be made from those who are most
likely to benefit from the introduction of choice. While the exact
beneficiaries cannot be identified, it is likely that retail funds
will benefit at the expense of existing funds, particularly
industry funds. (This is likely to be the case when the five
categories of funds used by APRA are considered.(11)) If this is
correct, a strong argument can be made that operators of large
retail funds, such as life companies and banks, should make a
substantial contribution to the cost of any education campaign.
However, at this stage beyond agreeing that
education is going to be an important component of a choice of fund
regime, the various parties have still to concur on the targeting
of the campaign, its contents and who should fund it.
Comparison
The ability to compare the information supplied
by various funds has been referred to by ASFA as the number one
priority (see above). To put their performance in the best light,
funds use the differing reporting periods and different methods of
calculating returns. Such performance statistics often do not take
account of the effects of fees and charges on the final benefit
available to members. Comparison will be further complicated if the
risk of the funds investments are also to be taken into account,
which will be necessary if prospective members are to be able to
chose between high return/high risk funds and lower return/lower
risk funds.
At present, this area remains generally at an
early stage. Groups such as ASFA have addressed the need to be able
to make a valid comparison but little progress has been made beyond
that stage. For example, the ASFA position paper, dated February
1999, refers to a Model Disclosure document being prepared and
being available on their website for comment. The author of this
Digest has been unable to find such a document. But while ASFA is
discussing the matter and giving it a high priority there appears
to be little other comment on the form that uniform disclosure
should take. It can be anticipated that there needs to be
considerable work done before comparable data will be released by
competing funds.
Other
While the choice of fund concept has been
developed, existing members are being offered a choice of
returns/risks within funds. It can be argued that this removes part
of the reason for the choice of fund, but this choice can also be
read as subject to the need for education and comparative
information referred to above if members are to make an informed
choice between options within a fund. Choice within a fund is a
relatively new concept and it will be interesting to see how it
develops and in particular whether it ends up resulting in cross
subsidies within funds if the higher risk option suffers a dramatic
loss, although the ability to cross subsidise may be restricted by
the relevant trust deed and general trustee obligations.
Life
Insurance
Life insurance is regulated under the Life
Insurance Act 1995 (the Principal Act), which defines a life
policy to include:
-
- a contract of insurance that provides for the payment of money
to a person on the death of a person or the happening of a
contingency dependent on the termination or continuance of a human
life
-
- a contract of insurance that provides for the payment of an
annuity for a term dependent on the continuance of human life
-
- a contract of insurance that provides for the payment of an
annuity for a term not dependent on the continuance of human life
but exceeding the term prescribed by the regulations (10
years)
-
- a continuous disability policy
-
- a contract that constitutes an investment account contract,
and
-
- a contract that constitutes an investment-linked contract
(section 9 of the Principal Act).
While life insurance products that pay an
annuity are superficially similar to superannuation benefits,
superannuation and life insurance products have different
regulatory regimes and taxation treatment. While many components of
life insurance income receive concessional tax treatment, to be
eligible for the 15% rate applicable for superannuation funds the
body offering the product must comply with the SIS Act and
regulations. The most obvious difference is that superannuation
must be provided by a trust based organisation, while life
insurance must operate through a company structure.
A substantially similar Bill was introduced as
the Life Insurance (Conduct and Disclosure) Bill 1998 but that Bill
lapsed when Parliament was prorogued for the 1998 General Election.
As the original name of the Bill suggested, this Bill is also aimed
at the activities of the life insurance industry and life brokers
and advisers.
Following the Principal Act coming into force on
1 July 1995, it had been intended that consumer protection
provisions would be passed as amendments in early 1996. Prior to
those provisions being passed into law (they have yet to be passed
and are contained in this Bill) consumer protection is governed by
the Code of Practice issued by the then Insurance and
Superannuation Commission as Circular to Life Insurance
Companies and Life Brokers, Consumer Issues No G.II.1, August
1995. The Code of Practice addressed matters such as advising and
selling practices; training and competency; and inquiries,
complaints and disputes. The Bill will give statutory effect to the
Code of Practice, which is now administered by ASIC.
The object of the Bill is to ensure that, as far
as possible, owners and prospective owners of life insurance
policies, and beneficiaries where relevant, receive sufficient
useful and accurate information to enable them to make an informed
choice relating to life insurance (clause 3).
Life insurance activity is given a wide meaning
and includes entering, varying, continuing or discontinuing a life
policy or varying the benefits available under a group policy
(clause 7).
For Constitutional reasons the Bill will not
extend to the operation of State government insurance that operates
only in the relevant State (clause 10).
ASIC will have administration of the proposed
Act (clause 13).
Part 2 of the Bill
(clauses 17 to 25) deals with duties of life
companies. Clause 18 provides a general duty on
life companies to provide prospective owners with the information
reasonably required to make an informed choice. If this requirement
is not followed, ASIC may, after following various procedures, give
a direction to a life company to either do a specific act or
refrain from doing a specified act. It will be an offence to fail
to follow such a direction (clause 20). Specific
rules relating to disclosure of information may be implemented by
regulation under clause 19. ASIC may issue a stop
order if it finds promotional material to be false or misleading or
to contain a material omission and it will be an offence to fail to
obey such an order (clause 22).
The use of false and misleading information may
also give rise to civil liability. If a person engages in life
insurance activity (see above) in reliance on false or misleading
information provided by the company or contained in promotional
material issued by the company, or information that that has a
material omission, and as a result the person suffers a loss, they
may recover any loss or damage suffered. In such a case both the
company and the directors at the time the material was issued will
be jointly and severably liable for any damages. It will be a
defence to such an action to show:
-
- the relevant information or omission was due to a reasonable
reliance on another person (which excludes agents, directors or
employees of the company)
-
- the omission was due to a mistake, or
-
- the relevant action was taken without the person's knowledge,
and
-
- the defendant took reasonable steps and exercised due diligence
to ensure that the information provided was true and not misleading
and that there was no material omission.
It will also be a defence to show that the
person engaging in the activity knew that the information was false
or misleading or that there was a material omission (clause
23).
ASIC may apply to a court for an order in
relation to promotional material that is false or misleading or
which has a material omission. The court may order that the company
disclose the information to either the public or a specified person
in the manner specified, or issue promotional material as specified
in the order (clause 24).
Part 3 of the Bill
(clauses 26 to 33) deals with the conduct of life
companies and their advisers. An adviser who offers or is asked to
give advice in relation to a life product to a client must, as soon
as possible, give the client a statement disclosing the matters set
out in the regulations. Failure to do so will be an offence with a
maximum penalty of 200 penalty units (a penalty unit currently
equates to $110). Such a disclosure need not be made if the details
have already been given to the client and have not altered
(clause 28).
Life insurance advice must:
-
- be in writing
-
- other than for a type of life policy as detailed in the
regulations, set out the name and address of the business, other
particulars as required by the regulations and the basis on which
the advice is given, and
-
- other than for a prescribed policy or for a fee or commission
paid by the client to the adviser, set out any benefit the adviser
may receive for providing the advice and any other pecuniary
interest that may affect the giving of the advice.
However, if the policy is a 'risk insurance
policy' (as defined in the regulations) it need not contain details
of fees or commission etc payable but must state that this
information is available (clause 29).
Advice must have a reasonable basis having
regard to the person's objectives, financial position and needs.
This will not apply for a type of life advice prescribed for the
purposes of the proposed section (clause 30).
It will be an offence if advice does not comply
with the requirements of clauses 29 and 30 and the client has not
indicated in writing that they do not intend to rely on the advice,
and a life company issues or varies a life policy (clause
31). As well, such action may give rise to civil liability
if the person suffers loss or damage as a result of following the
advice (clause 32).
The conduct of life brokers and their advisers
is dealt with in Part 4 of the Bill
(clauses 34 to 42). The provisions are similar to
those contained in Part 3 with the main difference being that where
the broker is found to have civil liability the court may order
that the broker and life company contribute towards an award made
on the basis of their receipts (clause 42).
A Code of Practice will be given statutory force
by Part 5 of the Bill (clauses 43 to
46). The Code may be established by regulation and may
cover, amongst other matters:
-
- preventing, as far as possible, the sale of inappropriate
policies
-
- ensuring that life companies, brokers and advisers maintain, at
a minimum, the standards prescribed in the Code
-
- ensuring that advisers are competent to give advice
-
- procedures for life companies to ensure that procedures for
supervising the competence and conduct of advisers is adequate
-
- adequate procedures for life companies to deal with inquiries
and complaints, and
-
- that where company dispute settling procedures have not settled
a dispute, there is a further dispute handling mechanism approved
by ASIC (clause 44).
Clause 45 provides that ASIC
may give directions to a life company where the Code has been
breached.
Compliance is dealt with in Part
6 (clauses 47 to 56). Life companies will
be required to establish a compliance committee (clause
47) which is to assist the directors of the company in
dealing with consumer related issues and to ensure that the company
has a proper system of management controls to comply with this
proposed Act (clause 49).
ASIC is given a number of investigative powers
and may require:
-
- the production of specified information (clause
53)
-
- the production of records (clause 54),
and
-
- access to premises (clause 56).
Part 7 of the Bill
(clauses 57 to 66) deals with miscellaneous
matters, including:
-
- failure to comply with the proposed Act will not invalidate a
policy (clause 59)
-
- State and Territory laws capable of operating with this
proposed Act are not excluded (clause 60)
-
- ASIC may seek an injunction to prevent a breach of the proposed
Act or regulations (clause 61), and
-
- ASIC may commence and carry on a civil action in another's name
if it thinks it would be in the public interest to do so
(clause 65).
-
- Senate Select Committee on Superannuation, Report No.28,
Choice of Fund, pp 90-103.
- ibid., p 71.
- ibid., p 72.
- In theory, the decision of which fund to invest in should be
based on the ultimate benefit that the prospective member will
receive, which is related to the performance of the fund and its
costs, including the cost of paying commissions. Such information
is either available under the SIS requirements or through further
investigation. However, this presumes that people will make the
choice based purely on economic grounds and not be swayed by a
sales campaign. If this were the case the UK experience referred to
above would not have occurred and funds would not be willing to pay
sales commissions. Sales campaigns can have a major impact on
choice, particularly for members of disadvantaged groups.
- ASIC, Media Release, 14 October 1999.
- Final Report of the Financial System Inquiry, p. 273.
- See www.superannuation.asn.au
- Australian Financial Review, 18 October 1999.
- ibid., pp 28-34.
- ibid., pp 32-34.
- The remaining categories are corporate funds where change is
less likely due to perceived corporate loyalty; public sector
funds, where the benefits available are usually generous; and self
managed funds which have been established as a vehicle rather than
investment in other forms of superannuation. Industry funds may
also be vulnerable as often neither the employer nor employee can
opt for another fund.
Chris Field
16 November 1999
Bills Digest Service
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ISSN 1328-8091
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