Superannuation choice, ASIC and compliance: the 'choice regime' will have a significant impact on trustees, employers, employees and their financial advisers. As part of its professional education program, the SIA, now ISFB, has collaborated on a Super Choice campaign for advisers and compiled a simple checklist for advisers and clients on super switching

Journal of Banking and Financial Services, June-July, 2005

The Federal Government's choice of fund policy became effective on 1 July following the introduction of the Superannuation Legislation Amendment (Choice of Superannuation Funds) Act 2004 (the Choice of Fund Act).

The Securities Institute of Australia (SIA) equipped its financial advisers with the tools to obey the rules on superannuation choice prior to implementation in July. Financial advisers are working in the front line of the new Super Choice regime and CEO, Brian Salter, has noted that 'It's up to advisers to observe the rules laid down by the Federal Government and so protect consumers' retirement incomes'.

The SIA's policy and professional education teams collaborated on a super choice campaign for advisers that includes: a short guide for licensed representatives entitled Super Choice No 'Ifs' No 'Buts'; a seminar series with ASIC participation; and an online professional education program.

Policy and advocacy at the ISFB

The ISFB has a well-developed policy and advocacy function, which is committed to raising standards in the securities and financial services industry by providing practical, contemporary and innovative education, fostering ethical and effective markets, and advocating high levels of professional conduct.

To facilitate its advocacy role, the ISFB has a number of specialist policy committees representing the broad membership of the Institute and reflecting the current legal, regulatory and policy reform issues within the financial services industry. Our Super Choice campaign was steered by the Financial Advising Committee, which is responsible for considering broad and technical policy in relation to superannuation, retirement incomes and financial planning.

Role of ASIC in choice

The Australian Securities and Investments Commission (ASIC) supervises the licensing and disclosure obligations of industry participants. Its primary role in the new choice regime will be to monitor compliance.

ASIC Chairman, Jeffrey Lucy noted on 15 April 2005 that ASIC's aim is to ensure consumer and industry confidence by 'demanding appropriate standards of advisers and fund managers and helping consumers make informed decisions'. He emphasised that financial services providers will be monitored and 'we (ASIC) will take action if they fail to meet their significant obligations under the law. These obligations include the need to provide good professional advice supported by appropriate documentation'.

ASIC will conduct shadow shopping exercises on Super Choice in relation to the advice that consumers receive. As part of this process, ASIC will undertake audits on Statements of Advice and other disclosure documents.

Specific ASIC concerns

Consumers considering switching funds, and advisers on these matters, need detailed information on, and an understanding of, the issues surrounding:

* The default fund;

* The fact that choice of funds is not the same for each employee, as it may depend on the type of fund they belong to, personal circumstances, their award or employment agreement;

* How difficult it can be to compare different funds;

* Possible 'trade offs' required when switching from one fund to another; and

* How fees, charges and investment return can impact on the final payout.

ASIC has indicated that it will release a Guide to Super Switching Advice. In the meantime, the ISFB compiled the following simple checklist for advisers and clients.

The ISFB would not want to see a situation occur like that in the UK where billions of pounds of retirement savings were lost through 'mis-selling' practices after Choice was introduced in 1988. We look forward to continuing our dialogue with politicians and regulators as the choice regime is implemented.

This article is not an exhaustive or technical guide to the law. It is provided for information purposes only. It is intended to provide a general overview and be a starting reference point for Institute members. The information provided should not be treated as financial product advice. No reliance should be placed on its contents.

For further information on the ISFB's position on super choice or other policy matters contact Kristen Foster, Senior Policy Manager on (02) 8248 7660 (k.foster@securities.edu.au) or Russell Thomas, National Policy Adviser on (02) 8248 7508 (r.thomas@securities.edu.au).

Since this article was written ASIC has released it's publication "Choice of Superannuation Fund: Meeting your Obligations" and "Super Switching Advice: Questions and Answers--an ASIC guide".

From the ISFB Policy and Advocacy Team.

Key considerations   What an adviser should do

Insurance            What are the terms and conditions of the existing
                     insurance, e.g. death, disability, income
                     protection?
                     Can the new fund provide at least the same types
                     of cover?
                     Will the client need to provide medical
                     information or is cover automatic?
                     Is cover available in the new fund before leaving
                     the existing fund? Can insurance arrangements be
                     in place before contributions start?
                     Is there a gap in cover during transition to a new
                     fund and at what cost?
                     What are the potential changes to underwriting of
                     insurance in the existing fund and how will this
                     affect terms and conditions?
                     Is it time to review insurance cover, e.g. how
                     much is required, assets/liabilities, dependants,
                     future expenses?
                     Is trauma cover required?
                     Is there a continuation option?

Fees                 How does the cost of the existing fund compare
                     with the new fund?
                     What will a client gain/give up for the fee
                     charged?
                     Is there a cost incurred in switching?
                     Do exit fees apply? How much are they?
                     Does an employer currently pay for some fees?

Investment           How important are investment options to the
options              client?
                     Are the options available in the old fund? Has
                     the client used them?
                     Has the client been happy to remain in the fund
                     default option?
                     Is the client willing to pay for access to a large
                     number of investment options? If not, around six
                     options is considered enough.
                     Do the options suit the risk/return profile of the
                     client?

Investment           Is the client aware of how their existing fund
performance          has performed?
                     Have recommendations of fund performance been
                     based on a minimum of five-year average returns?
                     Has the client been warned that past returns do
                     not guarantee future performance?
                     Does the risk/return investment strategy of the
                     fund match the client's risk profile?
                     Does the fund report returns on an after-tax
                     basis?
                     Are the additional benefits and costs factored in
                     when comparing funds?

Benefits             In the existing fund, does the employer pay
                     investment and administration costs, insurance
                     premiums, or contribute more than the 9% on behalf
                     of the client?
                     Can the client remain in the existing or new fund
                     after moving jobs? If so, will benefits remain?
                     What post-retirement benefits does each fund have
                     available, e.g. TAPS, allocated pensions?
                     Will the client give up other benefits such as
                     access to home loans if they change funds?
                     Does the existing or new fund accept spouse
                     contributions?
                     How easy is it to make voluntary contributions?
                     What other services are offered, e.g. online
                     access, education/advisory services?

Self-managed         What are the costs, compliance, and role of
superannuation       trustee?
funds (SMSFs)        Does the client have the advised minimum
                     investment of $150,000?
                     Does the client understand the rules for SMSFs
                     and compliance implications?
                     Is the client educated and able to follow an
                     investment strategy?
                     Would the client be better off remaining in the
                     default fund or choosing another fund?

Portability          Is the client aware that there is potentially a
                     six-month wait after contributions stop before an
                     accumulated super benefit can be moved?
                     Is the client aware that trustees of super funds
                     can refuse a request if it is less than $5,000
                     unless the account is being closed?