In a response to the Financial System Inquiry interim report, the Australian Institute of Superannuation Trustees (AIST) argued that while outsourcing arrangements to entities with financial links to a super fund is in itself not a bad thing, the critical issue is whether these arrangements are in members' best interests or merely benefit the service provider at the expense of members.
In its response, AIST referred to a study conducted by APRA in 2009 that found while outsourcing minimised costs to the members of not-for-profit funds, “some of the trustees of retail super funds were prone to paying higher fees to related service providers”.
AIST said these higher costs were both “statistically and economically significant for members”.
While APRA has strengthened the legal obligations of trustees in regards to managing conflicts of interests and related-party transactions, AIST said the impact is still to be determined.
AIST argued in the submission that APRA should be “better resourced to monitor, report and supervise related-party outsourcing arrangements pursuant to their new standards to ensure trustee directors are meeting their legal obligations to procure services in members' best interests”.
The submission also criticised the practice of fee-gaming, which AIST said was “equally anti-competitive and also borne out of vertical integration”.
“While AIST has welcomed moves by ASIC to improve the monitoring of fee disclosure and fee-gaming, more needs to be done to ensure super fund trustees meet their obligation to procure services – including investment services - at the best value for money,” AIST said.
AIST also believes APRA’s probability and impact rating system should analyse the “degree of interconnectedness of the superannuation system and its components”.
It should also examine, according to AIST, “any systemic risks arising from behavioural issues within financial institutions such as the growing vertical integration of financial services”.
AIST said the degree of financial advisers in the banking sector, coupled with remuneration arrangements offered to financial advisers, is also a “matter of concern in so far as the impacts on the best interests of members”.
“Failure to carefully examine the implications of vertical integration in an advice setting raises serious issues where behaviours may lead to members and beneficiaries either losing or having lower retirement savings and therefore seeking government subsidy,” argued AIST.
AIST recommended prohibiting the provision of over-the-counter general advice and introducing terminology to make it clearer whether an advice provider is independent or tied to a financial institution.
