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Written by Dr Camille Schmidt, associate director of research at Rainmaker Information.
Dr Daniel Mulino's National Press Club address on August 19 ‘Protecting Consumers and the Promise of Superannuation in an Evolving Financial Ecosystem’ outlined the Government's strategy for addressing some of the most significant challenges facing Australia's financial services and superannuation system.
According to the Financial Services Minister, the package is built around three pillars:
Under the first pillar, the Government will curb lead generation activities and data harvesting, including a ban on unlicensed real-time communications relating to superannuation.
Anti-hawking protections will be strengthened by limiting the existing exemption for financial advisers to existing client relationships.
ASIC will receive additional funding to identify concerning flows into high-risk investment products at an earlier stage, while penalties under the SIS Act will be increased.
The second pillar focuses on improving access to advice through the next phase of the Delivering Better Financial Outcomes reforms, including targeted superannuation prompts, streamlined Statements of Advice, scaled advice reforms and a new class of adviser for APRA-regulated superannuation and insurance providers.
The package also includes legislating an obligation on trustees to set and ensure compliance with caps on advice fee deductions from member accounts.
The third pillar proposes a revised model for the CSLR that more closely aligns costs with the sectors responsible for consumer harm, while limiting compensation to actual investment losses.
SMSFs will be required to contribute to the scheme, while superannuation funds will remain within the funding pool, with Dr Mulino arguing that levy contributions need to be spread broadly across the system for the model to remain viable.
The ATO will also receive a new power to prevent rollovers into an SMSF where there is suspicion of fraud, misconduct or potential consumer harm. SMSFs will see additional protections through requirements for uniquely identified bank accounts, disclosure of adviser involvement in their establishment and ongoing advice fee deductions, and minimum trustee knowledge requirements before individuals can take on the role.
At a high level, the Government's direction appears sensible. The reforms have been influenced by the collapse of Shield and First Guardian, which exposed weaknesses in lead generation practices, superannuation rollovers, due diligence processes and oversight across parts of the investment ecosystem.
Few would oppose stronger action against unlicensed lead generation, data harvesting and marketing practices that steer consumers into products they do not understand.
Greater information sharing between ASIC, APRA and the ATO, alongside stronger intervention powers for regulators, should help identify emerging problems before they result in significant consumer losses.
Australia has spent the better part of a decade lifting professional standards for advice, introducing degree qualifications and strengthening adviser obligations.
While those reforms improved professionalism, they also contributed to a shrinking adviser population and left many Australians struggling to access affordable guidance.
Against that backdrop, the Government's decision to proceed with key Delivering Better Financial Outcomes reforms, including the introduction of a new class of adviser, is welcome.
Importantly, the Minister confirmed the new adviser class will initially be limited to APRA-regulated superannuation funds and insurers and will not extend to banks at this stage. The proposal will be reviewed after three years, which is a prudent approach.
The industry is attempting to solve one of the most difficult policy challenges in financial services: improving access to guidance without compromising consumer protections.
A staged rollout provides an opportunity to assess whether consumers are receiving better outcomes before considering any broader expansion.
Where the speech leaves more questions than answers is around the proposed capital and remediation framework for superannuation trustees.
Dr Mulino indicated that APRA would be empowered to impose additional capital requirements on trustees offering higher-risk investment options, with the objective of ensuring trustees have the financial capacity to compensate members where misconduct or breaches of obligations result in losses.
During the Q&A, the discussion appeared to focus on an additional set of requirements, beyond existing reserve requirements, for trustees offering platform services in particular, with references to related-party guarantees and the need to demonstrate an ability to return members' capital.
The objective is understandable. If trustees facilitate investment arrangements that expose members to misconduct or serious governance failures, there should be a clear and credible pathway to compensation.
Ultimately, the measure of success should be whether members are demonstrably better protected after accounting for any additional costs imposed on the system.
Every additional capital requirement ultimately has a funding source. Whether through larger reserves, additional insurance, related-party guarantees or higher compliance costs, there is a risk that at least part of the burden will be passed on to members.
If those costs ultimately flow through to higher administration fees, policymakers will need to demonstrate that members receive a meaningful increase in protection in return.
Policymakers will need to specify how the risk-based capital requirements will operate in practice, including what defines a higher-risk investment option, what constitutes an eligible loss, who determines whether a trustee breach has occurred, how ASIC's remediation powers interact with APRA's capital framework, and how quickly members can access remediation.
Without clarity on these issues, it is difficult to assess whether the proposal will materially improve consumer protection or simply increase the cost of operating superannuation funds captured by the regime.
A regime that materially increases operating costs while establishing a narrow and difficult-to-access compensation mechanism risks creating the worst of both worlds: higher fees for members without a corresponding increase in protection.
Conversely, a regime that is appropriately risk-based, clearly targeted at higher-risk activities and supported by straightforward remediation triggers could improve confidence in the system while avoiding unnecessary costs for members.
The government has outlined a coherent three-pillar framework for reform. The advice measures represent a sensible and cautious attempt to expand access to guidance, while the consumer protection initiatives seek to address some of the weaknesses exposed by recent failures.
The broad direction appears sound. The challenge now is ensuring the capital and remediation framework is carefully calibrated so that members receive genuine additional protection rather than simply bearing the cost of a more complex regulatory system.
For further details on the measures announced, see Treasury's fact sheet: Protecting Consumers and the Promise of Superannuation in an Evolving Financial Ecosystem.
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