Alert to all industry and retail superannuation funds – compliance with the proposed retirement income covenant (RIC) faces two major regulatory roadblocks: personal advice and anti-hawking. There is an urgent need for regulatory relief or reform in relation to this.
There are two major regulatory problems that are thrown up by the recently proposed RIC, to be legislated into section 52 of the SIS Act. As we know, the new RIC will require superannuation trustees to formulate, regularly review and give effect to a retirement income strategy that meets certain prescribed requirements.
In the broader context of financial services law, the two problematic elements are:
- the requirement to take steps to gather information about member needs, which will inform the formulation of the retirement income strategy; and
- the incidental aspect of the trustee engaging with members of the fund to discuss not only the potential needs of fund members in retirement, but also to discuss what relevant retirement income solutions the trustee can facilitate through the superannuation fund.
Roadblock #1: Personal advice risk
The first activity of getting information raises the issue of the trustee inadvertently running foul of the personal advice prohibition. As we know, this legislative prohibition has two distinct limbs: the first is whether the relevant person interfacing with the member actually took their relevant personal circumstances into account (i.e. the subjective limb).
But the second limb (i.e. the objective limb) is even more problematic for two reasons:
- first, because it can effectively deem an interaction to be personal advice where the client could have had a reasonable expectation that the interfacing person had considered the client’s personal circumstances; and
- second, because in the wake of the High Court decision in Westpac v ASIC, there is almost a presumption of personal advice where an entity such as a trustee has both personal information about the client and has a legal duty to act in the client’s best interests.
So it follows that in the course of using personal interactions to elicit information from superannuation fund members in respect of their retirement income needs, the trustee runs a real risk of activating the personal advice requirements (through both the subjective and objective limbs), including the best financial interests fact-finding obligations.
The Explanatory Memorandum to the proposed RIC addresses this point indirectly by noting that trustees need not elicit client-specific information, but could rely on publicly available information. However, there are numerous examples mentioned in the Explanatory Memorandum where the Explanatory Memorandum refers to very specific pieces of member information, for example:
- Paragraph 17.72: “trustees may consider information about whether beneficiaries are likely to have assets in other funds, other pensions or non-superannuation assets”;
- Paragraph 17.36: which states that trustees have discretion as to how they balance objectives “using their understanding of the needs and preferences of beneficiaries when formulating the strategy”; and
- Paragraph 17.31: other specific member information such as superannuation balances, expected eligibility for age pensions, partner status, home ownership, gender, expected retirement age, expected draw-down years, other demographic considerations.
It is not inconceivable or unrealistic that where a trustee formulates a relevant income strategy based on some or all of these factors, that it could be held to be providing personal advice.
Unlike the DDO regime, the RIC legislation contains no exception from the personal advise prohibition in respect of information gathering.
It is true that a trustee could seek to leverage the DDO exemption in this regard, but this would be quite a clumsy and potentially shaky strategy.
Roadblock #2: Anti-hawking risk
The anti-hawking regime seems to treat a pension interest as a separate financial product to an accumulation interest.
We reach this conclusion based on the following factors:
- section 761E(7) of the Corporations Act indicates that the regulations may make provision to determine the meaning of ‘issue’ in relation to a class of financial products;
- regulation 7.1.04E of the Corporations Regulations is made under section 761E(7), and applies if a member of a superannuation fund, who has a superannuation interest in the growth phase, elects to receive a pension in relation to that interest. Under sub-clause (2) of the regulation, a superannuation fund is taken to issue a new financial product when (a) it acknowledges receipt of the member’s election, or (b) it makes the first payment of the pension, whichever occurs first;
- use of the word ‘new’ in this context suggests that a pension is a separate financial product to the growth phase of a superannuation interest; and
- inserting this distinction into the language of the anti-hawking prohibition under s 992A(1) of the Corporations Act (that a person must not ‘offer a financial product for issue’), ultimately means that trustees who engage in unsolicited contact regarding pension products with existing members will be in breach of the anti-hawking regime.
This means that prima facie, a trustee or a party acting on behalf of, or by agreement with, the trustee could not interface with superannuation members to discuss the possible take-up of a retirement income solution by the member in a contact interaction which is captured by the anti-hawking regime (such as phone calls or branch conversations) without breaching the prohibition.
ASIC in Regulatory Guide 38 The hawking prohibition addresses this scenario by suggesting that it would be permissible for a trustee to provide information to a member about the pension product, provided that this would not consist of a prohibited offer, issue, sale or invitation. As you may be aware, we have taken the view that this is extremely ambiguous territory in practice – because even the provision of some information about a financial product, such as a pension product, could amount to an implied invitation and therefore, be captured by the anti-hawking prohibition.
The fact that an interaction by a trustee or a third-party product provider which is envisaged by, and in some respects required by, the proposed RIC could breach the personal advice and anti-hawking prohibitions seems curious, certainly unintended, and contrary to government policy.
It seems to us that a modification of the Corporations Act would be warranted in this scenario.
Such a modification could provide, for example, that the personal advice prohibition and the anti-hawking prohibition would not apply where the relevant interaction/communication with a member is made by the trustee or a party on behalf of the trustee in pursuit of compliance with the RIC. The key proposition would be to enable trustees to communicate with superannuation fund members freely in respect of retirement income options, particularly as members approach retirement phase.
It is of course possible that ASIC could decline to provide modification by pointing to the need for intervention by Treasury. The reality is that the proposed timeframe for compliance with the RIC by 1 July 2022, not to mention the need for substantial preparation for the new regime, is likely to be problematic in this regard. An alternate to an ASIC modification might be for APRA to provide some suitable relief but this said, it seems more appropriate for relief to emanate from ASIC given that relief is sought in respect of personal advice and anti-hawking.