The best of times, the worst of times

It was the Royal Commission we really didn’t need according to the government. But what muck has it unearthed! After much pressure the government finally set up the commission to examine the workings of our banks, insurance companies and superannuation funds.

The litany of sins is too great to list in this short article, but let’s just look at a few glaring examples of banking misconduct. Charging dead clients adviser service fees is a good one. I guess the bank figured no one was around to complain about the deductions. I’m sure that sits well with Australian community standards. And the same bank failed to move 15,000 customers to its no frills MySuper product which was cheaper and mandatory. It flouted the law for another three years, allowing its financial planners to make millions of dollars in trailing commissions.

Not to be outdone by ‘which bank’, another of our banks engaged in serious ‘upselling’. In short this means ‘rope them in with a simple, usually cheap product, then sell them something much more expensive’ usually involving a commission. Bank tellers were doing this under the guise of ‘general product advice’. So the unsuspecting bank customer would be lured into a conversation about super and the teller would recommend their product. The trusting customer would then roll-into the retail product to put all the eggs in one basket. However, one slight legal requirement was overlooked by the bank – when recommending a financial product the seller must know the customer’s financial circumstances. In other words the bank must ask, ‘What is your current fund and how is it performing? What are your current fees? Which insurance arrangements do you currently have’? So there was no regard for the bank customer who may have been in a better performing industry fund, as the tellers and financial planners making the recommendations were working to quotas. This is likely to change as a result of the Royal Commission and a few serious slaps on the wrists.

‘Fees for no service’ became a catch word for the commission. And of course trailing commissions are the best example of this. Traditionally financial planners were not paid on a fee for service model, but rather received ongoing trailing commissions each year for selling the policy. So each year they would get paid by the customer a certain amount of money even though they had not done anything for the customer that year. The introduction of MySuper products in 2014 went a long way in removing this model and more financial planners are now using a fee for service model.

In another superannuation development, a Senate Committee has approved the Protecting Your Super Package. It plans to make insurance opt-in for members under 25 and for accounts with less than $6000. This is a significant change as it will impact the pool of insured members as insurance will no longer be automatic under default arrangements. Also proposed is the removal of insurance from accounts which have received no contributions for 13 months. If legislated, these changes will increase the cost of insurance through super for members wishing to retain this member benefit.

The commission has now turned its gaze to industry superannuation funds and has indicated that it expected fewer problems with the higher returning industry funds as there is no inherent conflict of interest between financial planners and the not-for-profit funds. There is no upselling and no commissions are paid. Governance is strong and a member-centric ethos exists to ensure industry fund members have the best possible outcome for their retirement, which is exactly why they were established.

Bernard O’Connor
NGS Super
(Important information: The information in this article is general information only and does not take into account your objectives, financial situation or needs. Before making a financial decision, please assess the appropriateness of the information to your individual circumstances, read the Produce Disclosure Statement for any product you may be thinking of acquiring and consider seeking personal advice. Past performance is not a reliable indicator of future performance. Any opinions are those of the author and do not necessarily reflect the view of NGS Super.)