Stand on the word

Could passage of the first tranche of QAR reforms hinge on an apostrophe?

Probably not – but after yesterday’s Senate committee hearing, you really do have to marvel at the disruptive capacity of one little punctuation mark. Specifically, it’s the one before the “s” in both paragraphs (1)(a) and (1)(b) of the proposed replacement for section 99FA of the SIS Act. 

If you’re unfamiliar, the text outlines the circumstances in which a super fund trustee can deduct advice fees from a member’s account. Or, rather, that’s what it’s supposed to do – confusingly, as written, it actually prohibits a trustee from charging a member for advice unless the advice satisfies certain criteria. 

That’s where our friend, the apostrophe, comes in. You see, two of the criteria – paragraphs (1)(a) and (1)(b), as mentioned above – are that the advice provided “is wholly or partly about the member’s interest in the fund” and that the amount charged to a member must not “exceed the cost of providing financial product advice about the member’s interest in the fund.”

Now, to be fair, there’s nothing grammatically wrong with the text here. To be even fairer, putting the apostrophe after the “s” would require further changes; you’d have to lose the definite article, for one, or risk suggesting that all members share a single unified interest in the fund, which I imagine would make for awkward conversation at drawdown. 

But I doubt you’re here for my thoughts on sentence construction (even though I would love it if you were). The actual issue with both paragraphs is that they imply, absent any supporting context, that trustees would need to review every advice fee charged to each member in order to comply with the proposed legislation. 

According to WT Financial Group managing director Keith Cullen, who appeared at yesterday’s hearing as a representative of the Joint Licensees Group (JLG), compliance with this requirement would “[incur costs] in the order of $400 per member request … [siphoning] away literally hundreds of millions of dollars of consumers’ retirement savings annually.” 

He added: “This doesn’t just fail to make advice more affordable – it is a sabotage of consumers’ financial security.” 

Nothing more than what cannot be done

Let’s back up a bit. The current version of 99FA(1) in the SIS Act also explains the circumstances in which trustees can charge a member for advice, but unlike its substitute in the Delivering Better Financial Outcomes (DBFO) Bill, it contains no references to the content of the advice nor the relative values of “amounts charged” and “costs of providing financial product advice.”

What it does share with its proposed successor is prohibitive framing: rather than being given permission to provide and charge for advice, trustees are restricted from doing so outside of a narrow list of exceptions. As Michelle Levy put it in her final QAR report, “section 99F says nothing more than what cannot be done.”

The Government’s stated task, then, was to clarify how and when super funds could charge members for advice – and, as Stephen Jones explained in December last year, to “provide certainty” that funds charging members for “retirement income advice” is consistent with the sole purpose test. 

You might be wondering how those two new paragraphs (and the apostrophes therein) contribute to this goal. To understand that, it’s worth going back to Levy’s report – the contents of which are fast-approaching the totemic levels of differing interpretation previously reserved for Kenneth Hayne’s Royal Commission debrief. 

(If you don’t believe me, consider the multiple instances yesterday where Senator Andrew Bragg asked witnesses to divine “the guts of Levy” as if searching for a haruspex among their ranks.) 

Levy argued, unambiguously, that section 99FA was “flawed and should be replaced” in her final report. She did so because of the “real and serious consequences of getting an advice fee arrangement wrong,” which included breaching the SIS Act and having a payment treated as a taxable benefit if the member hasn't satisfied a condition of release. 

Moreover, she said she wasn’t persuaded that superannuation should be “available to pay for broader financial advice” – i.e., advice that is not “wholly or partly about the member’s interest in the fund.” 

With this in mind, the Government’s proposed modifications to 99FA make a fair bit of sense. So why would specifying advice fee deduction requirements on a per-member basis cause such a massive cost blowout? What makes it, as Keith Cullen said, such a “sabotage”?

Letter of the law

FAAA CEO Sarah Abood explained the primary issue at the hearing: when advisers receive an audit request from a super fund, this usually involves providing documentation (such as SOAs) which include "sensitive, personal information" about clients. 

“Providing [these documents] unredacted to trustees could be a breach of the Privacy Act,” she said. “Completing this redaction task is time-consuming, as it is for super funds who must read these documents and form a view on whether that advice meets the sole purpose test.

"Thus we are concerned this new wording could significantly increase the costs of both providing financial advice and administering super funds.”

Surely, though, costs would only increase significantly if the (new) letter of the law compelled trustees to audit every single advice fee deduction. And according to Super Members Council CEO Misha Schubert – who, on an unrelated note, spoke to The Australian a day before the hearing about “dodgy financial advisers” using “clickbait” to get members to switch super funds – this is absolutely not the case.

In the context of the updated DBFO explanatory memorandum, Schubert told the committee, it was “very clear from our vantage point” that the robust assurance processes trustees would need to satisfy their legal obligations could include "random or risk-based sampling of advice" – but not, crucially, per-member audits of every advice fee deduction. 

If these amendments to the explanatory memorandum better-reflect the intent behind the legislation, however, one wonders why they’re not incorporated into the legislation itself. Per Andre Moore, assistant secretary for Treasury's advice and investment branch, this is because “the law is not prescriptive about how a trustee might go about complying with that law.”

Given the diversity of risk, practices and commercial arrangements across the superannuation sector, Moore said, it would be “quite a challenge for the law to prescribe to a higher degree of certainty for trustees exactly how they would comply with that law without actually impinging on those commercial arrangements.”

In the absence of more prescriptive law, trustees and advisers will have to settle for the supplementary information in the explanatory memorandum – as well as any regulatory guidance issued by ASIC and APRA. Plus ça change.

Retreating to our corners

Does this constitute a sufficiently-robust foundation for the future of advice regulation? Apparently not: FAAA general manager for policy, advocacy and standards Phil Anderson told the committee that the inconsistencies between the Bill and its explanatory memorandum will be material should they ever be tested in court – where, he added, “the Bill will prevail.”

This sentiment was echoed by Nathan Hodge from the Law Council of Australia, who noted that while the explanatory memorandum makes reference to compliance processes and policies for trustees, the law does not: “As a result, we would say that the courts would likely place limited weight on the explanatory memorandum in this situation.” 

At this stage, I should probably acknowledge a possible future where the DBFO fee-deduction requirements are never tested in this manner; where trustees (as well as ASIC and APRA) operate in the spirit of the law, rather than the letter of it. But to anyone who’s worked in financial advice for more than a day or two, the likelihood of this happening probably seems vanishingly slim. 

So: without substantial changes to the proposed legislation, it’s doubtful that advisers, trustees, Treasury and the regulators will be able to reach an accord on these reforms. Little wonder, then, that FSC CEO Blake Briggs seemed so exasperated with the tenor of the committee hearing – referring in particular to the ambient discussions about “dodgy advisers” and the “unhelpful” politicisation of an otherwise “sensible policy debate”. 

“It shouldn't be beyond the capacity of the industry and the Senate to work collaboratively on these things,” Briggs said. “And to be honest, we are a little surprised that everyone has gone back into the corners on this.” 

That’s the power of an apostrophe, right?

We don't don't know how, we don't know when

Not wanting to end on such a glib note, though, I have to ask: is there anything we can learn from yesterday’s four-hour policy fracas? 

To my mind, the situation described at the hearing – where a handful of letters and punctuation marks in an amendment to superannuation legislation could create a hundred-million-dollar sinkhole and upend individual advisers’ compliance obligations overnight – points to a wider issue with the way advice is regulated in this country.

Not exactly a novel insight, I know. But so long as advice, as a profession, remains embedded on a piecemeal basis within a legislative framework primarily tailored towards financial product distribution, these vulnerabilities are a feature, not a bug. 

A single amendment can’t change that – no matter where you put the apostrophe.