CHAPTER 11
CONSUMER PROTECTION
Introduction
11.1 Choice of fund will inevitably lead superannuation providers to
actively compete for the business of employees to improve market share.
Marketing costs will therefore rise. However, in the long run, the Government
believes that competition will drive costs down.
11.2 For the first time outside the sphere of optional private superannuation
arrangements, employees will encounter providers who will seek to persuade
them to direct their SG contributions towards particular products. The
Committee received evidence indicating that there is concern in some quarters
about whether the consumers of superannuation services and other financial
services will be adequately protected from unscrupulous marketing practices.
Evidence from officials of the ISC refuted such claims.
11.3 Adequate education and full disclosure of fees and charges represent
significant consumer protection measures and the Committee has partially
addressed this issue in chapters 5 and 6 of this report. The Committee
received evidence relating to a number of other potential consumer protection
issues. These include:
- commission driven selling;
- relationships between employers and providers; and
- dispute resolution.
11.4 A number of witnesses urged the Committee to be aware of what they
refer to as the "U.K. experience", in which a large number of
people in company pension funds were persuaded to change their funds for
personal pension plans, to their considerable financial detriment.
The U.K. experience
11.5 The Government of the United Kingdom introduced a form of choice
in the mid- 1980's. Under this arrangement, employees were given the option
of leaving their company pension plans to establish personal pension arrangements.
Many employees availed themselves of this option, lured by unrealistic
promises about expected benefits.
11.6 Decisions were made in an atmosphere which some analysts believed
encouraged members to actively make a choice.
11.7 The repercussions of this decision are still being felt. The Australian
Consumers' Association advised the Committee that more than 570 000 cases
of mis-selling had been identified, and the total compensation bill is
now $AUS10 billion.
11.8 The Committee received a number of expressions of concern in submissions
and evidence that there is potential for the U.K. experience to be repeated
in this country as a result of the introduction of the choice of fund
regime.
11.9 In particular, witnesses expressed concern that providers' agents
would induce people to switch funds with little advantage to the employee,
but considerable advantage to the provider in terms of the commission
they were likely to earn.
Commission driven selling
11.10 William M Mercer Pty Ltd supplied the Committee with information
about costs of switching superannuation funds in Chile. Chile operates
a compulsory private sector superannuation system in which funds compete
actively for members. Mercers advised that according to Institutional
Investor Magazine, 29 per cent of fund members in Chile switched funds
in the year ending June 1997. Much of this switching is triggered by salespeople
who are paid whenever a member switches funds. Approximately 38 per cent
of the entire cost of managing Chile's superannuation system is related
to costs associated with fund switching. [1] The Committee received evidence that commission-driven
sales of superannuation products in Australia may produce similar results
to those observed in Chile.
11.11 The Australian Manufacturing Workers' Union was one of several
who raised the issue of commission selling. The Union noted that "the
large profit driven financial institutions use commission agents to sell
their products". The Union considered that polished sales deliveries
would unduly influence the choice that employees might make:
With employees facing the complexities of comparing competing funds,
it is axiomatic that personalised service and a smooth sales pitch will
go a long way to influencing an employees' choice of fund; and all of
this will undoubtedly happen within a backdrop of saturation advertising
and promotion in the media by the larger financial institutions. [2]
11.12 The Union questioned whether the diversion of a member's money
into promotion and sales activities was in the member's interest and whether
the providers' marketing would provide the employee with the information
that will allow the employee to make a rational decision.
11.13 The Union suggested that a more orderly and regulated method for
the proffering of choice would allow for greater balance in the delivery
of sales information. [3]
11.14 Mr Stephen Gibbs, Executive Officer, Australian Institute of Superannuation
Trustees (AIST), also viewed commission based selling as undesirable in
a compulsory superannuation environment. Mr Gibbs said:
Commissions are okay for optional personal contributions but, in terms
of somebody's superannuation guarantee payments, if you want to be sure
of avoiding the U.K. problem, you simply outlaw the payment of commissions
in those circumstances. [4] ...you will inevitably have the sales people there; there is nothing
more certain in our mind. When somebody else makes money out of somebody
changing funds, people will be convinced to change funds when they should
not – inevitably in my view. [5]
11.15 AIST considered that the United Kingdom's experience is a `stark
reminder' that there needs to be adequate protection mechanisms in place
so that individuals are not sold products that are not in their best interests
to buy:
Caveat emptor is not a concept which should apply when we are dealing
with what might be an individual's own savings and ... will be likely
to be their major source of income in retirement. A bad decision early in life might, as people are living longer and
longer, result in 30 or more years of financial misery later on, and
the impact on the whole community by way of people being increasingly
reliant on government pensions and assistance in retirement, is obvious.
[6]
11.16 Representing the Institute of Actuaries, Mr John Trowbridge acknowledged
there is a potential problem associated with employees being induced to
make decisions that are against their best interests. `There are clearly
protections needed against sharp sales practices...'. Mr. Trowbridge is
of the view that key features statements by providers offer protection:
...one of the consumer protection issues here is to have key features
statements by providers. We want to prevent institutions, fund managers
of various kinds, pushing people into high expense rate and either high
risk or low risk earnings rate type funds when they are better off where
they are today. So the whole regime has got to push providers to be
responsible and make them accountable for trying to do the best for
their employees. There are clearly protections needed against sharp
sales practices and so forth… [7]
11.17 The Committee discussed the U.K. experience with ISC representatives
at its Canberra public hearing. Mr John Larkin told the Committee that
the UK problem arose from defined benefit scheme members being enticed
to leave their schemes and join personal pension plans that were sold
on the basis of quite high commissions. Further, employers provided less
support to the personal pension plans than they would have otherwise provided
had the employees stayed in the defined benefit fund. [8]
11.18 Mr Larkin told the Committee there are some important existing
or foreshadowed safeguards here that would protect against a situation,
similar to that in the UK, arising in Australia:
...it was foreshadowed in the budget announcement on choice of fund
that existing employees of defined benefit funds would be given a statement
explaining the consequences of a choice to leave a defined benefit scheme.
In our discussion paper released in December we foreshadowed some of
the items that would be included in that disclosure statement. That
would give those employees a basis for making an informed choice. [9]
11.19 Mr Larkin also advised the Committee that there is quite stringent
regulation of financial advice in Australia. He listed the following safeguards:
- Securities dealers and investment advisers are licenced;
- Dealers and advisers are subject to rigorous disclosure requirements
to disclose commissions and material conflicts under the Corporations
Law;
- The ISC administers a code of practice, in respect of life insurance
agents, that includes a requirement for agents to undertake a needs
assessment before recommending particular financial products; and
- Transparent disclosure rules at present administered by the ISC and
also the ASC. [10]
Relationships between employers and providers
11.20 The Committee received evidence arguing that there is potential
for employees to be locked into fund choices by their employer, where
the fund choice is based more on the interest of the employer rather than
the employees. In particular, the practice of bundled selling was raised
as a potential issue, as was the issue of undisclosed inducements and
rewards.
11.21For example, a provider such as a bank might offer favourable terms
and conditions on other products that it was selling to an employer, if
the employer persuaded employees to switch funds to those being offered
by the bank. This would not necessarily be in the best interests of the
employees. Protection against this practice may however be offered under
the provisions of the Trade Practices Act 1974.
11.22 In many cases, relationships between providers and employers are
innocent and may in fact be in the interests of the employees. However,
there is evidence of other situations where the best interests of employees
are not the major consideration.
11.23 Westscheme provided such an example to the Committee in its submission.
Westscheme submitted that there was evidence, within weeks of the Western
Australian Government's choice of fund legislation, of employers being
offered financial incentives to meet their choice obligations through
a service provider.
11.24 The ACA and several other witnesses considered that there should
be strong provisions against `deals' between employers and product providers.
The ACA told the Committee that such deals work against the interests
of employees, or unnecessarily restrict choice.
11.25 Accordingly, the ACA considered that the Committee should seek
a clear opinion of whether the Trade Practices Act provisions relating
to "third line forcing" are adequate for the protection of employees
in such situations. The ACA also recommended that there be disclosure
of relationships between employees and product providers where the relationship
extends beyond the provision of superannuation. [11]
11.26 The Association of Superannuation Funds of Australia (ASFA) also
addressed this issue. ASFA noted that where an employer has a financial
relationship with a provider of financial services including superannuation,
there is a possibility of a perception of bias arising if an employer
nominates a fund provided by that financial provider.
11.27 ASFA however did not think that such a relationship should be disallowed.
As Dr Michaela Anderson noted, `The other side to that is that you might
be depriving people of something that was really good'. [12]
11.28 ASFA and a number of other groups recommended that a full disclosure
of financial relationships between an employer and a financial provider
be made to relevant employees offered choice of fund. [13]
11.29 The Committee asked ISC, ATO and Treasury representatives whether
there was a need to regulate commission based selling more heavily, or
to ban it completely.
11.30 Mr Larkin advised that commissions are a "traditional and
quite normal method of remunerating people who distribute financial products".
He sees no major problem with commissions provided they are fully disclosed
in a manner that is transparent to the consumer. He reminded the Committee:
...in Australia we have quite strong disclosure of commissions. For
example, the disclosure rules administered under the SIS regime require
full disclosure of all direct and indirect commissions and adviser remuneration.
Under our life insurance regime, there is commission disclosure and,
indeed, benefit illustrations in respect of the impact of fees and charges
on regular premium products. So there are quite stringent regulations.
[14]
11.31 There are, however, limits to what regulation can achieve.
11.32 Committee members referred the officials to previous evidence about
inducements such as consumers being given mobile telephones in order to
induce them to switch funds. Mr Keith Chapman, Deputy Commissioner - Superannuation,
ISC, confirmed this would be difficult to prevent, and would require `extremely
draconian' legislation. [15]
Dispute Resolution
11.33 Several groups advised the Committee there is a clear need for
an alternative dispute resolution mechanism, particularly in view of a
recent Federal Court decision that removed the powers of the Superannuation
Complaints Tribunal. [16]
11.34The Australian Consumers Association addressed this issue. In its
submission, the ACA argued that the regulatory gap created by the Federal
Court decision needs to be addressed urgently.
11.35The Association expressed the view that if a legislative solution
to this problem is not possible, then an industry complaints scheme should
be established "very quickly prior to the introduction of choice
of fund". [17]
11.36The ACA advised that the foremost requirement of a complaints handling
mechanism is that it must be compulsory for superannuation funds to participate.
The ACA drew the Committee's attention to similar requirements for financial
advisers' licences:
...it will soon be a condition of holding a financial adviser's licence
that the holder becomes the member of an industry complaints handling
body. [18]
11.37 A submission by National Legal Aid (NLA) also referred to the dispute
resolution problem. NLA noted that one of the aims of the Superannuation
(Resolution of Complaints) Act 1993 is to provide relief for individuals
as a result of unfair tactics in respect of the sale of superannuation
policies, but `those provisions are now constitutionally invalid.' [19]
11.38 NLA also noted that the foreshadowed Life Insurance, Conduct and
Disclosure Bill 1997 still has not been introduced into Parliament. NLA
said the practical result of this is, that there is an absence of regulation
addressing problems within the superannuation industry.
11.39 NLA informed the Committee that the Government needs to act quickly
to remedy this situation because the practical effect is that superannuation
funds are now largely unaccountable. [20]
11.40 ASFA also addressed the issue of dispute resolution, advising the
Committee there is a need for an early stage and low cost mechanism for
resolving choice disputes involving employers.
11.41 ASFA warned that the operation of choice of superannuation fund
has the potential to generate disputes between employers and employees
on a range of matters both major and minor, concluding that `what is needed
is a dispute resolution mechanism which is able to resolve choice disputes
involving employers at an early stage and at a low cost'.
11.42 ASFA recommended the Government further investigate choice related
dispute resolution in the course of establishing the ASIC and the "gateway"
for dispute resolution.
Footnotes
[1] Submission, attachment p. 7.
[2] Submission, p. 4.
[3] Submission, p. 4.
[4] Evidence, p. 110.
[5] Evidence, p. 113.
[6] Submission, p. 7-8.
[7] Evidence, p. 233.
[8] Evidence, p. 432.
[9] Evidence, p. 432.
[10] Evidence, p. 432-3.
[11] Submission, p. 9.
[12] Evidence, p. 243.
[13] Submission, p. 16.
[14] Evidence, p. 437.
[15] Evidence, p. 437.
[16] Wilkinson, Tuohey and Wall v CARE Superannuation
Pty Ltd and others.
[17] Submission, p. 11.
[18] Submission, p. 11.
[19] Submission, p. 2.
[20] Submission, p. 2
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