Thursday 4 February 2021

Changes to financial service licensing for superannuation trustees, and ASIC’s expanded role and powers

Government reforms that expand ASIC’s role in superannuation commenced on 1 January 2021. The reforms enable ASIC to play a more effective role in regulating conduct in the superannuation industry to promote better consumer outcomes and market integrity. Jane Eccleston, ASIC’s Superannuation Senior Executive Leader, explains what the reforms mean for trustees, ASIC’s approach to the changes, and how ASIC and APRA will continue to work together as co-regulators of superannuation.

Superannuation is for the future financial security of Australians, and trustee misconduct significantly impacts members’ retirement savings. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) recommended that ASIC play a greater role in regulating the superannuation industry.

In response, the Government introduced a number of legislative reforms in the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 and supporting regulations, most of which started on 1 January 2021.

The reforms expand ASIC’s role as the conduct regulator while retaining APRA’s role as prudential and member outcomes regulator for superannuation by:

• giving ASIC powers to enforce provisions of the Superannuation Industry (Supervision) Act 1993 (SIS Act) that concern consumer protection and market integrity; and

• broadening the scope of conduct covered by ASIC’s existing consumer protection powers under the Corporations Act 2001(Corporations Act) and Australian Securities and Investments Commission Act 2001 (ASIC Act).

They ultimately enhance ASIC’s ability to act against harmful conduct in superannuation, and promote improved outcomes for consumers. They do this by:

1. widening the scope of superannuation trustee conduct subject to obligations under the Corporations Act and ASIC Act. This is achieved by the creation of a new financial service ‘provide a superannuation trustee service’

2. ensuring that trustees of non-public offer funds are subject to the same legal obligations as trustees of public offer funds. This is done by removing (effective 1 July 2021) Australian financial service (AFS) licensing exemptions in the Corporations Regulations for non-public offer trustees

3. allocating ASIC an express consumer protection and market integrity mandate under the SIS Act

4. aligning breach reporting timeframes in the SIS Act with those in the Corporations Act.

What the reforms mean for trustees

The reforms have significant implications for trustees.

1. Providing a superannuation trustee service

An entity provides a superannuation trustee service if they operate a registrable superannuation entity (RSE) as trustee. This new category will capture all the activities in operating an RSE. By creating this financial service, the Government has broadened the scope of conduct covered by ASIC’s existing consumer protection powers.

The new financial service will fill gaps in ASIC’s existing jurisdiction and ensure that conduct obligations in the Corporations Act – including the need to act efficiently, honestly and fairly – apply to trustee activities relating to operating a superannuation fund. This means that ASIC will have a greater ability to scrutinise trustees, including how trustees oversee service providers, how they design and review their compliance systems, and how they handle insurance claims.

2. Licensing changes

From 1 July 2021, all trustees will be required to hold an AFS licence with authorisations to deal in superannuation and to provide a superannuation service. ASIC is committed to implementing the reforms in a way that minimises the burden on trustees impacted by the licensing changes.

Public offer superannuation trustees who are existing AFS licence holders with an authorisation to deal in superannuation are deemed, by law, to have the new authorisation – to provide a superannuation trustee service – from 1 January 2021. ASIC has written to all of these trustees to explain the changes to the regime. ASIC is also currently updating the public records for these AFS licences.

Non-public offer fund trustees will no longer be exempt from holding an AFS licence to deal in financial products, and will need to apply for an AFS licence to deal in superannuation and provide a superannuation trustee service. We encourage all trustees of non-public offer funds that need to apply to ASIC for an AFS licence (or to vary their existing AFS licence) to do so by 30 April 2021 at the latest. In assessing applications ASIC will take into account the trustees’ long-standing RSE licences.

Some existing licensing exemptions will continue to apply to trustees of pooled superannuation trusts where financial services are provided to wholesale clients only.

ASIC is further considering what updates to existing relief instruments and regulatory guidance may be needed as a result of the law reform, and will communicate these changes to trustees in due course.

3. ASIC’s powers under the SIS Act

The modified SIS Act gives ASIC greater powers to take enforcement action against unlawful and harmful conduct by superannuation trustees. This includes greater scope for taking action against trustees who may be in breach of the covenants in section 52 of the SIS Act.

ASIC will continue to focus on taking high deterrence-based enforcement action to change poor trustee behaviour that affects members.

Enforcement is an important component of ASIC’s regulatory approach, and ASIC takes enforcement action to ensure that trustees are held accountable for misconduct. We also have other regulatory levers, and in recent times, we are using more than one tool to stem, harm or disrupt misconduct. Where appropriate, we will consider enforcement action in conjunction with other options in our regulatory toolkit.

As co-regulators, ASIC and APRA are committed to working together to achieve better outcomes for members and to reduce duplication and unnecessary regulatory burden for super trustees. APRA and ASIC recognise that this involves effectively harnessing each agency’s different approach to regulation and supervision, while minimising duplication of regulatory effort.

What this means is that ASIC will not take over APRA’s enforcement actions in superannuation – APRA will retain its enforcement powers and tools to address serious prudential risks. Where misconduct breaches provisions that both agencies administer, we will work together to determine which regulator has the best tools to address the misconduct. We will also continue to engage with each other at the early stages of investigations and enforcement actions to ensure our approach is coordinated.

4. Breach reporting

Under the SIS Act, trustees must report significant breaches of their RSE licence conditions to APRA, no later than ten business days after becoming aware of a significant breach (that has occurred or is imminent). Effective from 1 October 2021, the reforms increase this timeframe to 30 calendar days, which is consistent with the amended timeframes in the Corporations Act that will come into effect from the same date. The APRA Dual Reporting Framework will continue to apply, so trustees will be able to continue to report breaches to both regulators by submitting one report to APRA.

Working with APRA

ASIC and APRA share an interest in protecting the financial wellbeing of the Australian community and achieving a fair, sound and resilient financial system. This commitment to working together was recognised in a new Memorandum of Understanding in 2019 (which covers strategic discussions on key risks, greater information sharing, and coordination on supervisory and enforcement matters) and continues into 2021.

ASIC will continue to focus on trustee behaviour that affects members. We will be issues-driven and our actions will be risk-based. We will focus on areas such as:

• member insurance claims being handled fairly, transparently and efficiently

• clear, accurate and relevant disclosure to assist members in making informed decisions

• transparent fee charging practices

• high quality financial advice provided to members when they need it

• improving internal dispute resolution practices and procedures.

There is, and always has been, overlap between ASIC’s and APRA’s roles, and the Government’s reforms increase these existing areas of common interest. However, our roles are complementary – not the same – and we will continue approach our regulatory activities in a coordinated and cooperative manner.

This article was first published on ASFA’s Superfunds. ASFA members can log in to the new Superfunds website to view the article.