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FSI final report recommends changes to superannuation system

The final report of the Murray Financial System Inquiry (FSI) was released on 7 December 2014 via the FSI website. The Inquiry made 44 wide-ranging recommendations aimed at improving the financial system but has referred the tax issues for consideration in the Tax White Paper.

Stuart Jones, Thomson Reuters

The Inquiry identified 2 general themes where there is scope for improving the financial system:

  • distortionary effects of taxation on funding economy: while the government's role in funding markets should be neutral, the Inquiry identified a number of distortions that impede the efficient market allocation of financial resources, including taxation, information imbalances and unnecessary regulation. The Inquiry believes that reducing the distortionary effects of taxation should lead the system to allocate savings (including foreign savings) more efficiently and price risk more accurately. To this end, the Inquiry has referred the identified tax issues for consideration in the Tax White Paper.
  • competition: although the Inquiry found that competition is generally adequate, it noted that the high concentration and increasing vertical integration in some parts has the potential to limit the future benefits of competition.

Superannuation a pillar of financial system

The Inquiry found that the superannuation system has "considerable strengths" but it is not operationally efficient due to a lack of strong price-based competition. Other key findings in relation to the super system included:

  • fees and costs: the Inquiry expressed concern that the Australian system has been unable to realise the full benefits of scale to reduce fees and costs. While the Interim Report had suggested that fees and costs are relatively high by international standards, the Inquiry acknowledged that unique features of the Australian system contribute to elevated costs.

    The Inquiry also acknowledged that higher costs and fees may be in the interests of members in some cases. For example, alternative asset classes (such as infrastructure and unlisted investments) tend to be more expensive to manage, but also diversify risks and offer higher after-fee returns.

    The Inquiry found that higher costs and fees are primarily driven on the supply-side by market fragmentation; costly asset management and active investment strategies; taxation and provision of insurance; and Government policy changes. On the demand-side, costs are driven by weak member-driven competition due to lack of member interest; complexity; lack of comparability of fees and performance; and agency and structural problems;

  • MySuper: although it is too early to assess the effectiveness of the MySuper reforms, the Inquiry expressed reservations about whether MySuper will be effective in driving greater competition in the default superannuation market;
  • policy objectives: the lack of clarity around the ultimate objective of superannuation policy contributes to ad hoc short-term policy making, which imposes unnecessary costs and reduces confidence;
  • retirement incomes: the Inquiry believes that the purpose of the superannuation system is to provide an individual with an income in retirement. However, superannuation assets are not being efficiently converted into retirement incomes due to a lack of risk pooling and an over-reliance on individual account-based pensions.


The Final Report made the following recommendations in relation to superannuation and financial services:

  • objectives of superannuation system: should be enshrined in legislation to avoid ad hoc changes that cannot be sustained over the long-term. A first step towards obtaining political agreement on the objectives could be to establish a joint parliamentary inquiry.

    The Inquiry also identified several subsidiary objectives such as:

    • facilitating consumption smoothing over an individual's life;
    • helping people manage financial risks in retirement;
    • being invested in the best interests of members and fully funded from savings;
    • alleviating fiscal pressures on Government; and
    • being simple and efficient (with appropriate safeguards).

    However, stating the objectives in legislation is only intended to guide the policy-making process and is not intended to provide a platform for courts to reinterpret the law;

  • SMSF borrowings: remove the exception in section 67A of the SIS Act on a prospective basis to prohibit direct borrowings by superannuation funds for limited recourse borrowing arrangements (LRBAs). Superannuation funds with existing borrowings would be permitted to maintain those borrowings. However, funds disposing of a single acquirable asset purchased via an LRBA would be required to extinguish any associated debt at the same time;
  • MySuper competitive bidding process: introduce a formal competitive process to allocate new default fund members to MySuper products (unless a review by 2020 finds significant improvements in competition and efficiency). While the final report acknowledged that it is too early to draw firm conclusions about the long-term effects of the MySuper reforms on average fees and net returns, it found that 30 basis points could be saved through a MySuper formal competitive bidding process (for example, tender or auctions);
  • comprehensive income product for retirement (CIPR): superannuation trustees (excluding SMSFs) should be required to pre-select a CIPR to manage longevity risk for members. The minimum features for a CIPR would be determined by the Government but incorporate a regular and stable income stream, longevity risk management and flexibility. A combination of underlying products would likely be required to provide these features (for example, an account-based pension paired with a pooled product that provides longevity risk protection). Details of the pre-selected option would be communicated to the member during their working life. At retirement, the product would commence on the member's instruction, or the member may choose to take their benefits in another way. Impediments to retirement income product development (including tax policy settings) should also be removed;
  • retirement income projections: should be published on member statements (and set out in accordance with ASIC guidance) to improve member engagement. Access to consolidated superannuation information from the Tax Office should also be made available for use with ASIC's and superannuation funds' retirement income projection calculators;
  • choice of fund: all employees should have the ability to choose the fund into which their superannuation guarantee contributions are paid. Currently, the choice of fund provisions do not apply to employees with a superannuation fund nominated in an enterprise agreement, a workplace determination or a state-based award;
  • independent trustees: a majority of independent directors should be mandated for the board of corporate trustees of public offer superannuation funds, including an independent chair;
  • financial advisers: the Inquiry believes that the minimum competency standards for those advising on Tier 1 products should include:

    • a relevant tertiary degree;
    • competence in specialised areas, such as superannuation, where relevant;
    • ongoing professional development (including technical skills, relationship skills, compliance and ethical requirements) to complement the increased focus on standards of conduct and professionalism as recommended elsewhere in the report.

    Although the Inquiry did not recommend a national exam for advisers, it said this could be considered if issues in adviser competency persist;

  • register of financial advisers: the Inquiry supports the establishment of an enhanced register of advisers to facilitate consumer access to information about financial advisers' experience and qualifications and improve transparency and competition. It suggested that further consideration could be given to adding other fields, such as determinations by the FOS. The register should be designed to take account of possible future developments in automated advice and record the entity responsible for providing such services;
  • general advice: should be renamed with a more appropriate term so that it is not relied upon excessively by consumers due to the use of the word "advice". The current regulatory framework makes an important distinction between personal advice and general advice. While general advice must be accompanied by a disclaimer stating that it does not take a consumer's personal circumstances into account, the report says consumers may misinterpret or excessively rely on guidance, advertising, and promotional and sales material when it is described as "general advice". The use of the word "advice" may cause consumers to believe the information is tailored to their needs;
  • disclosure of ownership structures: require advisers and mortgage brokers to disclose ownership structures (that is, the vertical integration between some advisers and product providers). The Inquiry considered that the disclosure of ownership structures should be broader than the current rules for FSGs and could include branded documents and materials;
  • regulatory powers: provide ASIC with stronger regulatory tools and introduce a new Financial Regulator Assessment Board to advise Government annually on how financial regulators have implemented their mandates;
  • conflicts and director penalty regime: should be aligned with managed investment schemes and the conflict of interest requirements should be strengthened;
  • aligning interests of financial firms and consumers: better align the interests of financial firms with those of consumers by raising industry standards, enhancing the power to ban individuals from management and ensuring remuneration structures in life insurance and stockbroking do not affect the quality of financial advice;
  • product design: introduce a targeted and principles-based product design and distribution obligation to strengthen product issuer and distributor accountability;
  • product intervention power: introduce a proactive product intervention power that would enhance the regulatory toolkit available where there is risk of significant consumer detriment;
  • enhanced disclosure: facilitate innovative disclosure by removing regulatory impediments to innovative product disclosure and communication with consumers, and improve the way risk and fees are communicated to consumers;
  • impact investment: provide guidance to superannuation trustees on the appropriateness of impact investment (that is, providing both financial returns and the delivery of social service). The Government should also consider amending the law to facilitate private ancillary funds established and controlled by "sophisticated" or "professional" investors accessing wholesale offerings for social impact bonds;
  • retail corporate bonds: reduce disclosure requirements for large listed corporates issuing "simple" bonds and encourage industry to develop standard terms for "simple" bonds;
  • managed investment schemes: the Corporations and Markets Advisory Committee's recommendations on managed investment schemes (MIS) should be progressed with priority given to addressing consumer detriment (for example, illiquid schemes and freezing of funds) and regulatory impediments to cross-border transactions;
  • legacy products: facilitate the rationalisation of legacy products in the life insurance and managed investments sectors; and
  • Corporations ownership restrictions: remove market ownership restrictions from the Corporations Act 2001 once the current reforms to cross-border regulation of financial market infrastructure are complete.

Consultation and comments

The Treasurer said the Government intends to consult with industry and consumers before making any decisions on the recommendations. Written submissions are being sought from all stakeholders, including industry and members of the public. As a number of recommendations are the responsibility of the financial regulators — APRA, ASIC and the RBA — those submissions will be made available to these agencies unless the submitter indicates otherwise.

Comments are due by 31 March 2015 to: Senior Adviser, Financial System and Services Division, Treasury - Email: For enquiries, please call David Crawford on (02) 6263 2757.

Source: This article was first published in Thomson Reuters' Superannuation & Financial Services Bulletin. To subscribe to the Superannuation & Financial Services Bulletin, or for more information, please:

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