House of Representatives

Revised Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer, the Hon Stuart Robert MP)

Chapter 3 Authority to offer a MySuper product

Outline of chapter

3.1 Schedule 2 to this Bill amends the SIS Act to give APRA an enhanced capacity to refuse an RSE licensee a new authority to offer a MySuper product or to cancel an existing authority.

3.2 This will improve the quality of MySuper products by allowing APRA to refuse, or cancel, an authority to offer a MySuper product if APRA has a reason to believe the RSE licensee may fail to comply with its obligations.

3.3 All legislative references in this chapter are to the SIS Act unless otherwise indicated.

Context of amendments

3.4 Currently, APRA must authorise an RSE licensee to offer a MySuper product if it is satisfied (among other requirements) that:

•

the RSE licensee 'is likely to' comply with the enhanced trustee obligations for MySuper products, 'is likely to' comply with the general fee rules and the fees rules in relation to MySuper products; and

•

the RSE licensee 'is not likely to' contravene sections 29W, 29WA or 29WB.

3.5 The amendments will enhance APRA's supervision of the offering of MySuper products by RSE licensees by giving APRA greater capacity to refuse a new authority to offer a MySuper product or to cancel such an authority. This provides more scope for APRA to ensure that RSE licensees who are authorised to offer a MySuper product are in a position to provide products of sufficient quality to promote the financial interests of members.

3.6 The change from an assessment on the balance of probabilities to a test based on APRA's reasonable belief aligns the MySuper authorisation and cancellation process with the assessment made by APRA when making decisions in relation to the granting and cancellation of RSE licenses.

3.7 These amendments work together with the amendments in respect of the obligation on a trustee of a regulated superannuation fund to make an annual determination on whether the financial interests of their beneficiaries who hold the MySuper product are being promoted by the trustee (see Chapter 2).

3.8 If APRA is not satisfied that the trustee complied with their obligations when undertaking the annual determination, APRA will have a reason to believe that the trustee may fail to comply with its enhanced trustee obligations and may therefore cancel the trustee's authorisation to offer a MySuper product.

Summary of new law

3.9 The amendments will enhance APRA's capacity to refuse authority to offer a MySuper product or to cancel an existing authority to offer a MySuper product, depending on whether it has reason to believe that:

•

the RSE licensee (or its directors) may fail to comply with its enhanced trustee obligations;

•

the RSE licensee may fail to comply with the general fees rules and the fees rules in relation to MySuper products; and

•

the RSE licensee may contravene section 29W, 29WA or 29WB.

Comparison of key features of new law and current law

Detailed explanation of new law

3.10 This Schedule amends the conditions to be satisfied in order for APRA to authorise an RSE licensee to offer a MySuper product.

3.11 Under the amendments, APRA can only authorise the RSE licensee to offer a MySuper product if it has no reason to believe that:

•

the RSE licensee (or its directors) or, where the RSE licensee is made up of individual trustees, any of those trustees may fail to comply with its enhanced trustee obligations;

•

the RSE licensee or, where the RSE licensee is made up of individual trustees, any of those trustees may fail to comply with the general fees rules and the fees rules in relation to MySuper products; and

•

the RSE licensee or, where the RSE licensee is made up of individual trustees, any of those trustees may contravene section 29W, 29WA or 29WB.

[Schedule 2, item 1, paragraphs 29T(1)(h), (i), (j) and (k)]

3.12 Section 29W makes it an offence for a person that makes a representation to offer a MySuper product when the RSE licensee for the fund is not authorised to offer MySuper products.

3.13 Sections 29WA and 29WB makes it an offence for a trustee (or trustees) to not treat a contribution by a member as paid into a MySuper product of the fund, if the member has not given the trustee (or trustees) a direction that the contribution is to be invested under a specified investment option for all or part of the contribution.

3.14 That is, APRA may refuse an authority to offer a MySuper product if APRA considers there are one or more reasons why an RSE licensee may fail to comply with its obligations, rather than having to assess, on a balance of probabilities, whether the RSE licensee is likely to comply with its obligations.

Example 3.1

Inka Superannuation Trustee Pty Limited (Inka) is the RSE licensee of Lighthouse Super Fund and has authority to offer a MySuper product to the members of that fund.

APRA is made aware that employees of the largest employer-sponsor Logistical Solutions Pty Ltd (Logistical) (which represents approximately 60 per cent of the Lighthouse's membership) receive discounted administration fees (50 per cent of the disclosed fee). This arrangement was not in place at the time of the original MySuper authorisation.

APRA has identified that Lighthouse Super Fund, due to several large annual fee increases, is now an outlier in terms of fees charged to members. APRA forms the view that the fees charged to employees of Logistical do not reflect the cost of administration and operation of the fund in relation to those employees. APRA also receives evidence that fees charged to members not employed by Logistical are being used to subsidise the fees charged to Logistical employees in order to retain the business of Logistical.

APRA requests that Inka demonstrate that the discounted administration fee reasonably relates to the cost to Inka of the administration of these members. Inka is unable to reasonably justify the discount and a breach is lodged with APRA, with a commitment to put in place an adjusted administration fee structure for members employed by Logistical within 90 days.

After 90 days, the fees have not been adjusted and Inka does not provide any further justification for the current arrangement. APRA directs Inka to comply with the requirements of section 29VB of the SIS Act and, when Inka fails to comply with that direction, APRA decides to revoke the MySuper authorisation.

Inka subsequently applies for a new 'large-employer' MySuper authorisation for employees of Logistical. Based on Inka's prior and demonstrated non-compliance, APRA has reason to believe that Inka will not promote the financial interests of all its MySuper members and may therefore refuse to authorise the proposed MySuper product.

3.15 The amendments to the situations in which APRA may cancel an RSE licensee's authority to offer a MySuper product will allow APRA to cancel existing authorisation if it has a reason to believe that:

•

the RSE licensee (or its directors) or, where the RSE licensee is made up of individual trustees, any of those trustees may fail to comply with its enhanced trustee obligations;

•

the RSE licensee or, where the RSE licensee is made up of individual trustees, any of those trustees may fail to comply with the general fees rules and the fees rules in relation to MySuper products; and

•

the RSE licensee or, where the RSE licensee is made up of individual trustees, any of those trustees may contravene section 29W, 29WA or 29WB.

[Schedule 2, item 2, paragraphs 29U(2)(c), (ca), (d) and (e)]

3.16 That is, APRA may cancel the authority to offer a MySuper product if APRA considers there are one or more reasons why an RSE licensee may fail to comply with its obligations, rather than having to assess, on a balance of probabilities, whether the RSE licensee is no longer likely to comply with its obligations.

3.17 These align with APRA's assessment in making decisions in relation to authorisation and cancellation of RSE licenses under sections 29D and 29G.

Example 3.2

Aztek Superannuation Trustee Pty Ltd (Aztek) is the RSE licensee of Nightfall Super Fund and has authority to offer a MySuper product to the members of that fund.

Since receiving its MySuper authorisation in 2013, Aztek has made changes to its investment strategy in an attempt to reduce its fees and promote itself as low cost to members. APRA reviews Aztek's investment arrangements and receives information that the average age of members of the fund is 30 and that Aztec is targeting young members via an on-line offering. In order to secure low fees, Aztek is offering an extremely conservative investment strategy constructed largely of fixed interest and cash.

As part of the review, APRA requests that Aztek review its MySuper investment strategy within 90 days to ensure that it is promoting the financial interests of its MySuper members and to ensure that the offering allows sufficient diversification.

During the 90 day period, Aztek continues to promote the fund as low cost and its membership continues to grow. Aztek refuses to review the investment strategy despite publically available information showing that Aztek is one of the poorest performing MySuper products. APRA directs Aztek to review the MySuper investment strategy; Aztec again refuses. Based on Aztek's failure to promote the financial interests of its members and to offer a sufficiently diversified MySuper product APRA may decide to revoke Aztek's authorisation to offer a MySuper product.

Application and transitional provisions

3.18 The amendments apply to all applications received by APRA on or after the day after this Bill receives the Royal Assent. [Schedule 2, item 3]

STATEMENT OF COMPATIBILITY OF HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Authority to offer a MySuper product

3.19 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

3.20 Schedule 2 to this Bill amends the SIS Act to give APRA an enhanced capacity to refuse an RSE licensee a new authority to offer a MySuper product or to cancel an existing authority.

Human rights implications

3.21 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

3.22 This Schedule is compatible with human rights as it does not raise any human rights issues.