Proposal
The Government invites comments on the circumstances under which Part 23 could be broadened, and how any compensation should be funded, including whether funding of broader compensation arrangements by industry levies would be supported.
The Issues Paper indicated that Part 23 could be broadened to include misleading or deceptive conduct as grounds for a claim for financial assistance.
Views from the consultation process
There was very little support for the broadening of Part 23 of the SIS Act to include financial assistance for acts that are misleading or deceptive. Many submissions indicated that Part 23 had not yet been tested, and that changing existing provisions before it could be determined whether they were operating effectively was not in the best interests of the industry.
Submissions were concerned that a broadening of Part 23 would increase the burden on effectively managed, low-risk funds to provide compensation for poorly managed, high-risk funds. Submissions also suggested that widening Part 23 would lead funds to reduce their own levels of protection, resulting in increased moral hazard, which was not considered appropriate. The Securities Institute of Australia stated that it 'does not support any broadening of such assistance at this stage, due to the inherent moral hazard involved and to the difficulty in defining what sorts of losses would be protected, given the absence of explicit promises'.
Further, most submissions were not supportive of a levy system to provide compensation, preferring that it be provided by some form of insurance or consolidated revenue. AMP indicated that '[a]n industry assistance fund could in the longer term act as a disincentive for prudent risk management with the cost of failure being borne by prudent trustees and their members.'
ASFA supported reworking Part 23 to ensure a more timely and efficient application of the current provisions, and expressed support for the capping of restitution and the implementation of a more formal definition within Part 23 of 'substantial diminution'.
A participant at the focus group sessions expressed concern about the current processing of applications under Part 23, and queried the benefits of deferring legislative change given these delays.
Consideration of the proposal
Part 23 of the SIS Act provides a framework for providing financial assistance to regulated superannuation funds (other than SMSFs) that suffer an 'eligible loss' (defined in the SIS Act) as a result of fraudulent conduct or theft, subject to certain conditions. For an accumulation fund, the loss must have caused substantial diminution of the fund leading to difficulties in the payment of benefits. For a defined benefit fund, the eligible loss is so much of a loss that a standard employer-sponsor is required to pay to the fund, but would be unable to do so without becoming insolvent. Further, the Minister must determine that the public interest requires that a grant of financial assistance be made.
There does not need to be a conviction for fraudulent conduct or theft; rather, it is for the Minister making the determination to be convinced in his or her mind that fraudulent conduct or theft did occur.
If the Minister determines to grant financial assistance, he or she must also determine whether the assistance is to be paid out of:
- the Consolidated Revenue Fund; or
- the Superannuation Protection Reserve funded through a levy on certain superannuation funds.
The Issues Paper invited comment on the circumstances under which Part 23 could be broadened, and how any compensation might be funded.
This proposal was aimed at addressing concerns that the provisions of Part 23 may not be sufficiently broad to meet community expectations about financial assistance to failed superannuation funds. However, the SWG acknowledges that, in light of existing Government policy that financial assistance be funded by industry levies, any expansion in the test could increase the burden on well-run superannuation funds.
As with other financial investments, the Government does not explicitly guarantee superannuation savings. However, given the special characteristics of superannuation - compulsion, preservation rules, limited choice and portability - as well as its role in retirement income policy, the SIS Act does provide protection for superannuation fund members that suffer loss as a result of fraudulent conduct or theft.
Such a safety net was supported by the FSI, although the FSI suggested certain limits on the provision of financial assistance:
'Where losses as a result of serious fraud are incurred by beneficiaries of superannuation funds (other than excluded funds), the Treasurer should have powers, on the advice of the [APRA] to levy superannuation providers at a rate not exceeding 0.05 per cent of assets where such restitution is considered to be in the national interest. Restitution should be limited to 80 per cent of the original entitlement of beneficiaries as determined by [APRA] ...'13
While the Government accepted this recommendation, no changes to Part 23 have been made to give effect to it.
The Senate Select Committee on Superannuation and Financial Services has highlighted the amount of time required to assess applications under Part 23, and recommended that the Government look at ways to expedite the process.14 Industry submissions also flagged concern that the decision-making process under Part 23 is too slow.
As noted above, prior to making a grant of financial assistance, the SIS Act requires that certain tests be met. The legislation provides the Minister with discretion to determine whether these tests have been met.
To assess whether there has been a loss suffered by a fund as a result of fraudulent conduct or theft, that has caused a substantial diminution of the fund leading to difficulties in the payment of benefits, requires a thorough assessment of the circumstances of the loss. Ascertaining these details is not simple, and recovery action or investigations can take some time. This reflects the general complexity of events surrounding fund failures.
A decision on a grant of financial assistance that is made prior to gaining and assessing all of the facts could be challenged on administrative or judicial grounds. The likelihood of challenge on these grounds may increase where a grant is funded by levies on other superannuation funds.
Further, while a number of applications are currently being considered under Part 23, no decisions have yet been made. Thus, the provisions of Part 23 have not been fully tested in practice.
Given that the effectiveness of the current provisions has not been fully tested, and the lack of industry support for any change, it seems inappropriate to recommend changes to Part 23 at this time. Further, any legislative changes arising from a review by the Government of the provisions after a Part 23 determination has been made could not have retrospective effect, and thus would not provide relief for current applications pending determination.
Recommendation 27
Given that the current provisions contained in Part 23 of the SIS Act have not yet been fully tested, the SWG recommends that the provisions not be changed at this time. However, the SWG recommends that the Government review the operation of Part 23 and consider possible amendments to it, in consultation with relevant stakeholders, once the first decision under Part 23 has been made.
13 Financial System Inquiry 1997, Recommendation 55.
14 Senate Select Committee on Superannuation and Financial Services 2001a, Recommendation 6.