CHAPTER 2
ISSUES
A mixed response
2.1 The introduction of the RSA legislation has provoked a mixed response
among those organisations who contributed to the inquiry. Some potential
RSA providers clearly support the concept, although they have concerns
about some aspects of the legislation. For example, the Credit Union Services
Corporation (Australia) Ltd (CUSCAL) welcomed the initiative, advising
the Committee that:
We see RSAs as increasing consumer choice in superannuation by
offering a different risk return profile to that offered by superannuation
funds. They will provide a capital guaranteed product that is simple
to operate, convenient to access, highly portable and with low or no
fees. They will be a safe and secure savings mechanism for people who
are unsure or uncomfortable about other more complex savings arrangements.
[1]
2.2 It should be noted that CUSCAL has long sought a "on balance
sheet" superannuation product and made several submissions to this
Committee to that effect during 1994/95.
2.3 On the other hand, the Association of Permanent Building Societies
(APBS) cast doubt on whether its members would be willing to offer RSA
accounts. While supporting the concept of a simple, deposit based retirement
account, the APBS expressed concern at the Government's approach as requiring
RSAs to have too many characteristics of superannuation products. The
Association advised the Committee that the viability of small accounts
in ordinary savings accounts is already causing problems for deposit taking
institutions and expressed disappointment that "more complex and
special attention will be required for small RSA accounts".
2.4 The Australian Bankers' Association (ABA) assessed RSAs cautiously,
expressing the view that its members had a range of concerns about the
nature of the product. The Chief Executive of the ABA, Mr Mark Addis,
told the Committee that the ABA was "anxiously awaiting the regulations
that will accompany the legislation." He expressed the view that
it was difficult to assess what sort of product could be developed until
these regulations became available. [2]
2.5 The Association of Superannuation Funds of Australia (ASFA), questioned
the need for RSAs, arguing that the existing superannuation system already
met the needs of most individuals. However, in common with many other
contributors to the inquiry, ASFA accepted that RSAs would be established
in accordance with the Government's policy and concentrated its response
on the provisions of the legislation.
2.6 The Australian Council of Trade Unions (ACTU) and the Transport Workers'
Union (TWU) were unequivocal in their opposition to RSAs. The ACTU argued
that prior to the introduction of the trustee system, financial institutions
operated for the benefit of their shareholders rather than policy holders,
and the trustee system played a significant role in reforming that system.
The ACTU's concerns centred around the issue of "choice" in
the superannuation system and potential implications of allowing employers
to open RSAs for their employees without their consent.
2.7 The Council of Small Business Organisations of Australia, represented
by Mr Rob Bastian, supported the concept of RSAs. He advised the Committee
that he favoured bank operated superannuation vehicles over superannuation
funds, because of what he considered to be a relative inaccessibility
of superannuation monies to the small business capital market:
We do believe very strongly that the lenders are far more capable
of managing large amounts of money back to the marketplace than are
the much more conservatively managed superannuation funds. So, our preference
would be to accentuate the money in the banks as best we can. [3]
2.8 Mr Bastian also indicated that he supported a general simplification
of superannuation:
...superannuation is found by the smaller employers to be fairly
confusing...anything we can do to stabilise it and make it simpler would
obviously be welcomed by the sector.
2.9 The Government members of the Committee understand that Mr Bastian's
concerns about the availability of capital from superannuation funds are
shared by many in regional Australia. There has been criticism of current
superannuation arrangements from the decentralised and regional areas
of Australia in that Super Guarantee monies are sent to the principal
metropolitan cities for investment, denying regional areas of funds. An
RSA provided by the smaller funds may be of benefit to regional Australia.
Issues canvassed in this report
2.10 Submissions and evidence received by the Committee during the inquiry
identified a number of broad issues associated with RSAs. These included:
- Who can offer a RSA?;
- Choice;
- Nature of the Capital Guarantee;
- Incentives to employers;
- Regulatory regime; and
- Disclosure standards.
2.11 These issues are examined in the following paragraphs of this chapter
of the report.
2.12 The Committee also took evidence about a range of more technical
issues associated with the operation of RSAs. Chapter 3 deals with these
issues.
Who can offer RSAs?
2.13 Under the provisions of the Retirement Savings Accounts Bill 1996,
banks, building societies, credit unions, life insurance companies, friendly
societies (see para 1.6) and prescribed financial institutions can market
RSAs. Several witnesses and submitters argued that existing superannuation
trustees should also be able to offer RSAs, including the right to use
the term "RSA" as a product description.
2.14 The Investment Funds of Australia (IFA), for example, argued essentially,
there was no difference between an RSA and a cash based superannuation
fund. Accordingly, the IFA submitted that superannuation fund trustees
should "have access to the simpler and cheaper structure that is
being proposed for RSAs." The IFA contended that this was "an
important issue of competitive neutrality". [4]
2.15 Similarly, the Association of Superannuation Funds of Australia
(ASFA) submitted that all providers of RSAs and RSA equivalent products,
including those operating within trust structures should be able to use
the single identifying term 'RSA'. ASFA argued that to do otherwise would
confuse consumers and provide RSA institutions with an unfair competitive
advantage.
2.16 The Committee sought clarification of this issue from the Insurance
and Superannuation Commission (ISC). Dr Darryl Roberts, First Assistant
Commissioner, Policy, Legal and Actuarial Division, ISC, advised the Committee
that this issue "is likely to be in the regulations" and that
the term "RSA" could be used by "lookalikes" that
met the requirements:
The Government has indicated that there should be an opportunity
for traditional public offer funds that provide broadly equivalent products
to qualify for the lighter disclosure...
Our current understanding is that the term [RSA] could be used
by RSAs that are covered by the legislation and by lookalikes that met
the requirements. We would expect other products not to use that term.
[5]
Choice
2.17 Clause 51 of the RSA Bill permits an employer to open an RSA without
the consent of an employee. The representative of the ISC explained that
under this provision, the employer may fill out an RSA application form
with the employees' details and lodge that form with an RSA provider.
The RSA provider will then open the account and send the relevant disclosure
documentation to the employee. On receipt of this documentation, a "cooling
off" period applies and the employee has 14 days in which to decide
whether to retain funds in the RSA or transfer them to another fund. [6]
2.18 Several contributors to the inquiry expressed concern about this
provision. They argued that over the longer term, savings held in RSAs
would earn interest at a lower rate than is likely to be achieved in a
conventional superannuation fund. Accordingly, the question of employee
choice about whether the employer contributed to an RSA or a superannuation
fund is important, as an employee whose superannuation savings are in
a RSA might be financially disadvantaged in the longer term.
2.19 Organisations who opposed this provision in the legislation generally
acknowledged that other provisions within the legislation do allow employees
to transfer their funds out of the employers' RSA to a fund of their choice
if dissatisfied. Ms Elena Rubin, Senior Industrial Officer, Australian
Council of Trade unions, questioned the adequacy of this protection, arguing
that employees were often in a weak position in respect to the balance
of power in negotiations with employees:
...the industrial reality is that if an employer opens up an
RSA, each individual employee will have the onus of putting up their
hand and saying "I don't like the choice you made for me"
and in the workplace that will not happen, no matter how much the employee
wants to change that arrangement... [7]
2.20 The Australian Institute of Superannuation Trustees (AIST) raised
similar concerns. AIST contended that it was essential that employee choice
was built into the legislation. Dr Diana Olsberg told the Committee that:
It is very difficult, particularly for low income workers who
have very marginal power compared to the employer to actually defy the
choice the employer has made... [8]
2.21 The AIST argued that the issue of choice was compounded by other
factors, such as any commercial arrangement that may exist between an
employer and an RSA provider. This relationship might influence the nature
of the choice that the employer might make for the employee.
2.22 Dr Darryl Roberts of the ISC advised the Committee that the Section
51 provision directly mirrors section 153 of the SIS Act, under which
an employer can apply to make contributions to a public offer superannuation
fund without the consent of an employee. He stated that under both SIS
and the RSA Bills, employers can fill out a single application form for
multiple employees.
2.23 Dr Roberts pointed out that the RSA legislation does not make any
change in relation to the freedom of employers to choose a fund for Superannuation
Guarantee contributions. Neither does the legislation disrupt any existing
industrial framework. Dr Roberts confirmed that following amendments to
the Superannuation Guarantee Act, employers could make SG contributions
to RSAs as well as regulated superannuation funds. However, this does
not mean that employers have an automatic right to shift their SG payments
to RSAs:
...consistent with existing industrial relations agreements,
if employers are subject to an industrial agreement or award which does
not include a reference to RSAs then the employer will presumably not
be able to use RSAs to fulfil their SG obligations. [9]
2.24 The ISC argued that the legislation incorporates two important protections
for employees whose employers open RSAs on their behalf:
- a `free look period', under which employees can elect to transfer
the balance of the account to another RSA or fund within 14 days of
receiving the disclosure documentation from the RSA provider; and
- the employee can request that the RSA account balance be transferred
at any time to another fund.
2.25 The ISC acknowledged that RSA institutions can require up to 12
months notice for liquidity and administrative reasons, or because of
the terms of the contract. For this reason, it may take up to twelve months
for the balance to be moved to the employees' nominated fund. However,
the ISC maintained that:
These consumer protection measures provide portability and ensure
that employees remain in full control of the RSA once it is opened...
...the RSA regime retains the degree of choice available in the
existing superannuation system, and adds a new product to the market,
and provides for better portability. [10]
2.26 The Government members of the Committee acknowledge that questions
of choice do arise in respect of RSAs as employees' superannuation savings
may be diminished if their retirement savings are locked into a low-return
retirement savings vehicle. A compromise solution suggested to the Committee
was that employers be required to offer employees the choice of a RSA
account or a conventional superannuation product.
2.27 The Government members of the Committee note however the ISC evidence
that many RSA provisions including those relating to choice mirror the
provisions of the SIS Act, under which employers can also open superannuation
accounts for their employees under similar conditions as those that will
apply to RSAs.
2.28 Given that the Government is committed to the concept of increasing
choice in superannuation, The Government members of the Committee consider
that the Government should address the issue of employee choice in both
RSAs and trustee products in any overall review of choice in superannuation.
The Government members of the Committee are of the view however that these
issues should be addressed separately from the RSA legislation.
Nature of the Capital Guarantee
2.29 A number of potential RSA providers questioned the inclusion of
the capital guarantee provisions for RSAs, arguing that deposits in banks,
credit unions and building societies are already capital guaranteed. Mr
Raj Venga, Director, Policy and Compliance, APBS, summarised the view:
...the concept of negative returns simply does not apply to deposits.
There cannot be a negative return, because you are contracting to repay
the amount with or without interest that has been deposited. So it applies
to life insurance company models but certainly not to banks building
societies and credit unions. [11]
2.30 The Committee further explored the meaning of the capital guarantee
that is expected to be an essential feature of this product. Under questioning,
representatives of the ABA acknowledged that while the capital is guaranteed
against negative earnings, situations may arise where a deposit in an
RSA might be eroded by bank fees. Mr Addis told the Committee:
What we are saying is the capital is guaranteed against negative
earnings but admits the possibility that there may be some erosion of
the capital in the unlikely event I would expect, that fees and charges
are greater than positive earnings. [12]
2.31 The Government members of the Committee note that S38(2)(i) of the
RSA Bill gives reserve powers to the ISC, permitting standards to be prescribed
in relation to "fees that may be charged for the provision of RSAs".
While the ISC indicated that there is currently no intention to regulate
fees or monitor them in any systematic way, the Government members consider
that the ISC should survey the fees and charges applied to RSA accounts
to ensure the capital guaranteed nature of RSAs is not undermined by unreasonable
fees and if necessary, consider the use of its S38 reserve powers. Additionally,
the Government members consider such monitoring is essential to ensure
that the Governments' objectives for RSAs to be a simple, low cost product
are met.
Incentives to employers
2.32 A number of contributors to the inquiry considered that the Government
should prohibit RSA providers from offering incentives or inducements
to employers to use a particular RSA product. For example, a bank might
offer a business a reduced rate of interest on borrowings if the employer
opens RSA accounts for employees with that bank. Submittors argued that
there were a number of shortcomings associated with such a practice:
- Competition takes place between providers and third parties;
- Competition is not necessarily based on the merits of the product;
- The interests of the RSA holder may be secondary.
2.33 Representatives of the Australian Banking Association took a different
view. Mr Addis of the ABA told the Committee that as long as they are
not improper, incentives are part of normal business relationships:
I cannot see that it is a conflict of interest. I really wouldn't
want to speculate on the nature of the incentives, or the quantification
of those incentives, but the notion of incentives is part of any business
relationship, part of the negotiation of any relationship. It is part
and parcel of normal business. As long as it is not improper, as long
as people are comfortable with those arrangements, then so be it. [13]
2.34 The Australian Consumers' Association (ACA) drew the Committee's
attention to Section 47(IV) of the Trade Practices Act which prohibits
'Third Line Forcing' and other exclusive dealing in general terms. However,
the ACA and others considered that there is a clear need to clarify the
types of practices that should be prohibited as unreasonable and specify
appropriate penalties. [14]
Regulatory regime
2.35 A variety of financial and other organisations expressed reservations
about the regulatory regime that will apply to RSA providers.
2.36 The Australian Association of Permanent Building Societies (AAPBS)
expressed disappointment about the regulatory environment that is to apply
to RSA providers. AAPBS considered that the structure imposed under the
RSA legislation was excessively and unnecessarily complex, giving rise
to higher administrative costs and making the product a marginal economic
proposition. Mr James Larkey, the executive director of the APBS, summed
up the society's position:
At this stage we are anything but bullish about the future of
RSAs. We think an opportunity for a low-cost, simple bank deposit product
that would qualify for superannuation savings privileges is probably
being lost. [15]
2.37 ASFA also expressed concern that there will be no clear separation
of responsibilities, for example in complaints resolution, suggesting
that in the longer term, it would be simpler to move towards a singe complaints
regulator.
2.38 Dr Darryl Roberts of the ISC addressed concerns about the dual regulatory
regime at the Committee's first public hearing. Dr Roberts acknowledged
that the ISC is conscious of potential problems that might arise as a
result of adopting a dual regulator approach. He explained the ISC's proposed
approach in the following terms:
Therefore, to avoid the danger of encroaching on the domain of
an RSA provider's traditional prudential supervisor with adverse consequences,
we intend to closely coordinate and cooperate with that supervisor and
to generally take a non-intrusive approach to the regulation of compliance
with the retirement income standards. Essentially, this means a system
of self-assessment whereby the RSA providers themselves will need to
certify in writing that they clearly understand the RSA requirements,
that they have adequate systems in place to meet those requirements
and that they have, in fact, been fully complying with those requirements.
By adopting this self-assessment approach, we hope to minimise the regulatory
overlap and compliance burden which might otherwise result from not
having the prudential supervision and the functional regulation of a
superannuation provider housed in the same agency under the one roof.
[16]
2.39 Dr Roberts emphasised that should this system of self assessment
break down, the ISC would intervene promptly:
For example, we will immediately and intensively investigate
any suspected breaches of the preservation, disclosure or other superannuation
standards brought to our attention by way of market intelligence or
customer complaints. If remedial action by the RSA product provider
is required, we will ensure that it occurs. [17]
Disclosure
2.40 The RSA Bill does not specify disclosure standards. Rather, it enables
the Government to make regulations that will set standards in this area.
These regulations were not referred to the Committee and indeed had not
been made available during the Committee's examination of the legislation.
However, the Government members of the Committee consider that it is appropriate
to advise the Senate of the nature of concerns about disclosure requirements
that emerged during the inquiry.
2.41 A common theme was that consumers should be provided with adequate
information to make informed choices, including fees and expected returns.
However, excessively detailed material was considered counterproductive
as experience has demonstrated that excessively large amounts of material
is likely to be ignored. Additionally, excessive disclosure requirements
will impose excessive costs on RSA providers.
2.42 For example, the IFA representative, Mr Richard Gilbert advised
the Committee that the prospectus documents required for ordinary, cash
based funds can be as long as 50 pages. He said that the key features
statement should not exceed six pages. [18]
2.43 Other general points raised include that:
- Opinion is mixed about whether the proposed "health warning"
at a balance of $10 000 is adequate. Some support this level, others
argue that there should be also a "health warning" in the
initial disclosure documents;
- Several organisations offered opinions about what should be included
in disclosure documents. Common elements included information about
fees, commissions and charges; the nature of the capital guarantee;
historical and future returns; dispute resolution information; preservation
and access; information about the $10 000 "health warning".
- Commonly, potential RSA providers sought that disclosure rules be
kept "simple and minimal".
[Return to Table of Contents]
Footnotes
[1] CUSCAL Submission, p. 1.
[2] Evidence, 21 Feb 1997.
[3] Evidence, 21 Feb 1997.
[4] Submission, p. 2.
[5] Evidence, 25 Feb 1997.
[6] Evidence, 25 Feb 1997, Dr Roberts,
opening statement.
[7] Evidence, 21 Feb 1997.
[8] Evidence, 21 Feb 1997.
[9] Evidence, 25 Feb 1997, Dr Roberts,
opening statement.
[10] Evidence, 25 Feb 1997, Dr Roberts,
opening statement.
[11] Evidence, p. 22.
[12] Evidence, 21 Feb 1997.
[13] Evidence, 21 Feb 1997.
[14] Submission, Australian Consumers'
Association, p. 3.
[15] Evidence, p. 17.
[16] Evidence, p. 26.
[17] Evidence, p. 26.
[18] Evidence, p. 5.
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