Bills Digest No. 82  1999-2000 Choice of Superannuation Funds (Consumer Protection) Bill 1999


Numerical Index | Alphabetical Index

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer and Copyright Details

Passage History

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.

Purpose

To increase the consumer protection available to people dealing with life insurance companies, brokers and advisers.

Background

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.

Main Provisions

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).

Endnotes

  1. Senate Select Committee on Superannuation, Report No.28, Choice of Fund, pp 90-103.

  2. ibid., p 71.

  3. ibid., p 72.

  4. 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.

  5. ASIC, Media Release, 14 October 1999.

  6. Final Report of the Financial System Inquiry, p. 273.

  7. See www.superannuation.asn.au

  8. Australian Financial Review, 18 October 1999.

  9. ibid., pp 28-34.

  10. ibid., pp 32-34.

  11. 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.

Contact Officer and Copyright Details

Chris Field
16 November 1999
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

IRS staff are available to discuss the paper's contents with Senators and Members
and their staff but not with members of the public.

ISSN 1328-8091
© Commonwealth of Australia 1999

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1999.

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