Accountability in Regulatory Reform: Australia's Superannuation Industry Paradox

AuthorJulie Anne Tarr,Sue Taylor,Anthony Asher
Publication Date01 Jun 2017
Sue Taylor,* Anthony Asher** and Julie Anne Tarr***
The Australian Superannuation Industry is generally seen as very strong and successful
by global standards. However, three decades of legislative reform in the Australian
superannuation industry have created a paradox: ongoing reforms but continuing
dissatisfaction with areas of governance and outcomes. These include high levels of
administrative and investment fees, and systematic problems around a culture o f
conflicted investment advice.
In seeking to further elaborate and then resolve this paradox, this article draws upon
an extensive research project conducted by the authors within the Australian
superannuation industry, including three voluntary and anonymous surveys of
superannuation trustees/li censees. This research has revealed that fund members are
vulnerable to significant and expanding private-interest rents generated by the financial
services sector. This may be explained by regulatory capture mechanisms variously
described as statutory, agency, corrosive and intellectual capture.
The article examines ways to better achieve public interest outcomes, and at a time
when public sector integrity remains an area of particular attention, how more can be
done to blunt the force of private interest rent seeking.
Until 1983, occupational superannuation played only a peripheral role in securing
retirement savings for Australia’s workforce with less than 40% of employees
contributing to superannuation schemes. By June 2016,
$2.1 trillion in superannua tion
* Dr Sue Taylor, Queensland University of Technology, PhD (Melbourne), MBus (QUT)
** Associate Professor Anthony Asher, University of New South Wales, PhD (Witwatersrand),
BBusSc (Cape Town) FIAAust, FASSA.
*** Professor Julie Anne Tarr, Queensland University of Technology, PhD (Qld), LLM. (Monash)
JD (Cornell).
Australian Prudential Regulation Authority (APRA), Quarterly Superannuation Performance,
August 2016, 5
258 Federal Law Review Volume 45
assets covered 91% of Australians.
The increase can be largely ascribed to policie s
introduced by the Hawke/Keating Federal Labor Government (1983 91).
The Australian Superannuation Industry dominates it s capital markets with a pool
of funds which equates to 126% of Australia’s annual GDP
and 120% of Australia’s
share market capitalisation where superannuation funds, as the dominant investors,
hold half the value of all listed shares.
It continue s to expe rience one of the world’s
highest pension fund growth rates with a compound annual growth rate of almost seven
per cent between 2006 and 2016 (in US$ terms). This rate was well above the global
average of four per cent over the same period.
Given the preferred status of superannuation as a savings vehicle (together with
housing), and its placement as a primary pillar of Australia’s national retirement income
strategy, it is not surprising that it has, on public interest grounds, attracted high levels
of regulatory reform interventions over the last three decades. These interventions
however appear not to have addressed all major issues with governance a nd outcomes,
giving rise to a paradox of ongoing reforms, relatively uneven results and, in some
respects, high levels of dissatisfaction. We suggest in this article that the paradox results
from elements of regulatory capture with narrow industry interests favoured at the
expense of the public and then outline certain integrated, mitigating strategies designed
to redress this imbalance.
Based on Part II’s description of the industry and the regulatory changes over the
past three decades, Part III begins with the findings of an origi nal three-stage research
project which sought the views of Australia’s superannuation fund trustees across a
nine-year period as to their views of the cost and benef its of reforms introduced during
this period. It then considers how regulatory reforms have failed to address excess costs
and conflicted payments within the superannuation industry and how this mi ght be
explained by regulatory capture.
Part IV then considers a strategy designed to mitigate the risk of capture by
subjecting the regulatory process to greater external scrutiny in the form of an
appropriate cost benefit analysis (CBA). It describes Australia’s current Regul atory
Impact Statement (RIS) process, a nd the extent to which the regulatory reforms
introduced in the superannuation industry may have been undermined by weak -form
Macquarie Investment Management, Trends in Superannuation and Some Implications,
(December 2011), 4
investment-perspectives/ip-superannuation-1213.pdf>; Australian Bureau of Statistics,
Trends in Superannuation Coverage Series 4102.0 (March 2009)
Willis Towers Watson, Global Pensions Asset Study 2017 (January 30, 2017), 6
Department of the Treasury, Financial System Inquiry, Interim Report, July 2014,
Willis Towers Watson, above n 3, 3. The study covered 22 major pension markets, which
totalled USD 36,435 billion in pension assets and account for 62.0% of the GDP of these
2017 Accountability in Regulatory Reform: Australia’s Superannuation Industry Paradox 259
RISs deriving from the use of various statutory exemptions. Recommendations are
provided as to how the RIS process, when used in co njunction with related measures
designed to strengthen the position of the ‘public’ interests (eg diffuse, superannuation
fund members), could potentially constitute a mechanism to create order, transparency
and discipline in the regulatory reform processand, in so doing, better enable fund
members to detect and reject illegitimate rent seeking activities.
This section describes the industry and its regulatory history.
A The Superannuation Industry
We define the Superannuation Industry as the Superannuation funds registered under
the Supera nnuation Industry (Supervision) Act 1993 (Cth) (SIS Act). Funds are usually
employer-sponsored and may be public offer if membership is open.
contributions, together sometimes with additional salary sacrifice, are made largely by
employers but there is also provision for contributions by the self-employed. The
benefits paid are restricted by the sole purpose test to benefit s after retirement or the
death of a member.
Superannuation funds are trusts, controlled by trustees, who may act in the ir
individual capacity or be directors of a company. Part 6 of the SIS Act sets out fiduciary
duties largely in line with the general law, although section 58B specifically exempts the
fund from the conflict of interest provisions of the general law with respect to investing
and acquiring financial services.
Serving the industry are a range of producer organisations within the Financial
Service Sector (FSS): administrators, asset ma nagers, custodians, banks, insurance
companies, financial advisors, actuaries, lawyers and accountants.
The typical superannuation fund, then, is not a discrete commercial entity, such as is
commonly the case with a bank or insurance company in which core functions are
vertically and horizontally integrated. It is rather a collection of disparate entities, selected,
directed and monitored centrally by the trustee.
The industry is commonly divided
into ‘Retail’ funds which are run for commercial
purposes, and which account for 26% of assets and 45% of members; ‘Industry’ funds
where the trustees are jointly appointed by trade unions and employers within an
industry although largely controlled by the former (22% of assets and 38% of members);
‘Corporate’ and ‘Public Sector’ f unds, which are controlled by single employers or
groups (19% of assets and 13% of members) and Self-managed superannuation funds
These are defined in the SIS Act ss 1618.
SIS Act s 62.
Kevin Davis, Financial reform in Australia in Maximilian Hall (ed), The In ternational
Handbook on Financial Reform (Edward Elgar Publishing, Cheltenham UK, 2003), 130.
Scott Donald et al, Too connected to fail: the regulation of systemic risk within Australias
superannuation system (2016) 2 Journal of Financial Regulation 5678, 62.
APRA, Annual Superannuation Bulletin (June 2016)
%20PDF.pdf> 11.
260 Federal Law Review Volume 45
(SMSFs), which have fewer than five members all of whom are trustees (30% of assets
and 4% of members). All but the Retail funds are, ostensibly, ‘not for profit’.
The majority of the for-profit (retail) super annuation funds are operated by entities
owned by the four largest banks in Australia (i.e., the NAB, ANZ, Westpac and the
Commonwealth). In 20 16, the profits of the Australian banking sector equated to ‘ a
staggering 2.9 per cent of GDP, making Australian banks effectively the most profitable
in the world.’
Within these profit figures, ‘Australia’s major banks delivered combined
cash earnings of nearly $15 billion over the first half of their financial year.
The FSS is
Australia’s largest industry:
larger than mining, manufacturing and construction one of the largest employers in the
country, employing 416,500 people … Over the 2015–16 financial year, the financial
services sector directly contributed $145.8 billion of economic activity approximately
$6,000 for every man, women and child in Australia That equates to financial services
growing by 4.3 per centover one and a half times faster than the rate of GDP.
Within th is context, of primary interest to t his analysis are the lobby groups who
operate within the FSS which have direct links to the superannuation industry. Firstly,
the Australian Bankers’ Association (ABA) includes all of the major retail banks in
Australia, some investment banks and some foreign banks. ‘The ABA works on behalf
of members to ensure customers continue to benefit from a stable, competitive and
accessible banking industry’.
Second, the interests of the fund management
are re presented by the Financial Ser vices Council (FSC), whose mission
includes ‘continuously engaging in advocacy concerning the development of the social,
economic and regulatory framework in which our members operate, thereby helping
them to better serve their clients and customers.’
Their advocacy can sometimes be contrasted with the views of the Australian
Institute of Superannuation Trustees (AIST), the principal advocate and peak
representative body for the $700 billion profit-to-member superannuation sector’
Malcolm Farr, Australian banks top global list as Labor persists in demands for a royal
commission, (online), 5 August 2016
Michael Janda, Australian Banks are Too Big for the Nations Good, ABC News (online), 31
August 2016 08-31/janda-aus-banks-are-too-
Financial Services Council and UB Asset Management, State of the In dustry Report ( 2017)
Financial Services Council
Australian Bankers Association, About Us, Doing it Tough?
That is, Australias retail a nd wholesale funds management businesses, superannuation
funds, life insurers, financial advisory networks and li censed trustee companies, Financial
Services Council .
Financial Services Council, About the Financial Services Council (2017)
Australian Institute of Superannuation Trustees, Who are we? (2017)
2017 Accountability in Regulatory Reform: Australia’s Superannuation Industry Paradox 261
the Australian Superannuation Funds Association, the ‘peak policy, research and
advocacy body for Australia’s superannuation industry,’
with representatives from
the majority of the larger funds.
B Reforms to the Regulatory Landscape
The manda tory occupational superannuation benefits scheme was, when introduced,
positioned ‘as one of the greatest achievements of the Government’.
retirement savings levels derived from mandatory contributions would help advance
national savings goals; superannuation -based savings in turn would enable Australia’s
economy to grow without building unsustainable foreign debt;
and this ‘coherent and
equitable framework’ would permit a higher standard of living in retirement.
Legislation needed to achieve this objective included extension of occupational
superannuation benefits to all employees under the Superannuation Guarantee Charge Act
1992 (Cth) (SGC Act). Immediately following this extension of coverage, regulatory
reforms began with the enactment of the SIS Act and its Regula tions in 1993 and 1994,
which continue as pillars of the superannuation system.
The Howard Coalition government’s arrival in 1996 first brought with it a change in
the regulatory architecture driven by the concerns of the Wallis Rep ort
in respect of
banks and insurers. Since 1998, therefore, the industry has been subject to oversight by
three regulators:
All superannuation entities are regulated by the Austra lian Tax Office (ATO) to
ensure compliance with tax legislation.
All funds, except the SMSFs are regulated by APRA, which is responsible for
the administration of undefined ‘retirement income standards’ in ter ms of the
Australian Prudential Regulation Authority Act 1998 (Cth). Section 8(2) of this Act
requires APRA, inter alia to balance ‘financial safety and efficiency’, and is
particularly concerned with ensuring fiduciary responsibility by trustees and
that beneficiaries reasonable expectations are met.
The Australian Securities and Investments Commission (ASIC) regulates
‘market integrity and consumer protection’ of financial service providers and
the funds (again except SMSFs). This incorporates governance and financial
product disclosure as covered by the Corporations Act 2001 (Cth) ( Corps Act).
Australian Superannuation Funds Association .
John Dawkins, Statement to the House of Representatives during the Second Reading of the
Superannuation Guarantee (Administration) Bill 1992., House of Representatives Official
Hansard, No. 183, Thursday, 2 April 1992, THIRTY-SIXTH PARLIAMENT, F IRST
John Dawkins, Security in RetirementPlanning for tomorrow today, Statement by the
Honourable John Dawkins MP, Treasurer of the Commonwealth of Australia, 30 June 1992,
133; Michael E Drew and John D Stanford, A Review of Australias Compulsory
Superannuation Scheme After a Decade (Discussion Paper No 322, University of
Queensland School of Economics, 2003) 4.
Department of the Treasury, Financial System Inquiry, Final Report (March 1997) >.
262 Federal Law Review Volume 45
Each are responsible for different sections of the SIS Act.
All thre e operate with
some independence
and have the power to make subordinate legislation.
include APRA’s Prudential Standards and ASIC’s Class Orders. The SIS Act also permits
the Treasury to make regulations, another form of subordinate legislation. APRA enjoys
slightly more indepe ndence given t hat its governi ng members are appointed, in terms
of its Act, by Parliament rather than on the recommendation of the Treasurer. The
demarcation between the roles of ASIC and APRA is not always clear,
and both, in any
event, have to engage with the Treasury in any regulatory reform and are effectively
involved in member protection.
A further trilogy of licensing and fund choice reforms occurred early in the new
century. Initially, the Financial Sector Reform Act 2001 (Cth) (FSRA) introduced licensing
and other requirements by ASIC for service and product providers. These were designed
to harmonise financial services sector products and distribution to ‘facilitate innovation
and pr omote bu siness, while at the same time ensuring adequate levels of consumer
protection and market integrity.’
The Superannuation Safety Amendment Ac t 2004 (Cth) then introduced measures
aimed at enhancing ‘safety, competition and a best practice environment’ for non-SMSF
funds. Central to these Registrable Superannuation Entity (RSE) reforms was formal
licensing of both trustees and funds by APRA. Described ‘as the catalyst for far-reaching
change,’ APRA viewed these licensing requirements as necessary given that:
the compulsory nature of superannuation means that the failure of the market to deliver
optimal outcomes for superannuation impacts on almost all superannuation fund
members. In a system of mandatory retirement savings where members must be part of
the system, RSE licensees and superannuation regulators have an increasing obligation to
ensure that confidence in the system is maintained.
One consequence, as predicted by Clare, was that licensing may be a Faustian deal for
industryaccelerating industry developments towards fewer, larger and more efficient
funds but at considerable cost, including diversity and innovation.’
supported th is prediction with t he number of RSE funds with more than 4 members
calculated to have decreased by 94% from 3,661 in June 2001 to 236 in June 2016.
See SIS Act s 6.
They are all listed entities under the Public Governance, Performance and Accountability Act
2013 (Cth) s 12.
Powers are granted under the SIS Act (APRA and the ATO) and the Corps Act (ASIC) to make
Legislative instruments under the Legislation Act 2003 (Cth).
See, eg, Greg Medcraft, Australian Securities and Investment Commission, Speech to
Australian Prudential Regulation Authority leadership team (Speech delivered at the
Australian Prudential Regulation Authority leadership team meeting, 30 June 2011)
Explanatory Memorandum, Financial Services Reform Bill 2001 (Cth) 1.
APRA, Regulation Impact StatementSuperannuation Prudential Standards (2012)> 34.
R Clare, Super Licensing: The Industry Challenge (May 2005)
sing___The_Industry_Challenge.html> (emphasis added).
Calculated from the APRA Annual Report 2001, 11 and APRA Annual Report 2016, 30.
2017 Accountability in Regulatory Reform: Australia’s Superannuation Industry Paradox 263
Labor’s re-election in 2007 brought further superannuation regulatory reforms. The
Australian Super System Review (the Cooper Review) was commissioned:
to assess whether Australia’s compulsory retirement saving system was working
efficiently and in member interests. The broad-ranging Review looked at the underlying
philosophy of a compulsory system that is almost entirely outsourced to the private sector.
A key conclusion of the Review was that the system needs to be re-engineered to work
more for the benefit of its members reducing costs should be a top priority.
Arising from Review recommendations, ‘Stronger Super’ was introduced
‘MySuper’, a simple, low cost default superannuation product and ‘Superstream’ that
enforces uniform processing standards to make transactions cheaper and faster. APRA
was also provided with a mandate to establish and enforce prudential sta ndards a nd
practices through a mendments to the SIS Act. Stronger Super was also intend ed to
increase cost disclosure, and ASIC has made progress in this dire ction over the
intervening decade culminating in March 2017 by the issue of ‘RG 97 Disclosing fees and
costs in PDSs and periodic statements’.
Arrival in 2012 of the Future of Financial Advice reforms (F OFA reforms) brought
another reform wave. These reforms were developed by the Labor Government in
response to a series of high profile corporate collapses occasioning losses to fund
members of $6 billion including Great Southern, Westpoint, Opes Prime, Trio and Storm
Financial. The original Future of Financial Advice (FOFA) package of legislation was
contained in two Acts
that amended the Corps Act and introduced a prospective ban
on conflicted remuneration structures; a duty for financial advisers to act in the best
interests of their clients; an opt -in obligation that requires advice providers to renew
their clients agreement to ongoing fees every two years; and an annual fee disclosure
statement requirement. Enhanced powers were granted to the ASIC
and compliance
with the FOFA reforms was mandatory from 1 July 2013.
Attorney-Generals Department, Stronger Super, Governments Response to the Australian
Super System Review, 2010, 1.
Jeremy Cooper, Super for Members: A New Paradigm for Australias Retirement Income
System (2010) 3 Rotman International Journal of Pension Management, 8, 8.
Attorney-Generals Department, above n 30, 7.
Australian Securities and Investment Commission, Regulatory Guide 97 (March 2017)
These reforms were introduced through the Corporations Amendment (Future of Financial
Advice) Act 2012 (Cth) and the Corporations Amendment (Further Future of Financial
Advice Measures) Act 2012 (Cth), (the FOFA Acts) which amended the Corporations Act
2001 (Cth).
As elaborated by the ASIC, FOFAGuidance, and including Regulatory Guide 98 Licensing;
Administrative action against financial services providers (RG 98) which reflected the ASICs
expanded powers to cancel or suspend an AFS licence and ban representatives; ASIC,
FOFAASIC Guidance (20 October 2014)
ASIC, FOFA - Background and Implementation (20 October 2014)
264 Federal Law Review Volume 45
However, on 19 March 2014 the returning Austra lian Coalition Government
introduced the Corporations Amendment (Streamlining of Future Financial Advice) Bill 20 14
(the Bill) into Parliament that outlined a series of changes to the FoFA reforms
including: removal of the ‘catch-all’ eleme nt of the ‘safe harbour’ for the best interests
duty and further amendments to the best interests duty to facilitate scaled advice;
removal of the requirement f or fee disclosure statements t o be sent to pre-1 J uly 2013
clients; removal of the opt-in obligation for ongoing fee arrangements entered into after
the commencement of the Amendment Regulations, and exempting general advice from
conflicted remuneration in some circumstances.
The Streamlining FOFA Regulation was disallowed by the Senate on 19 November
2014, meaning that the FOFA provisions reverted back to their position prior to the
commencement of the Streamlining FOFA Regulation. A number of these regulations
were reinstated by the Corporations Amendment (Revising Future of Financial Advice)
Regulation 2014 (Cth), which commenced on 16 December 2014. The SOA Regulation was
repealed on 16 December 2014 by the Corporations (Statements of Advice) Repeal Regulation
2014. On 2 March 2016, t he Bill (renamed the Corporations Amendment (Financial Advice
Measures) Bill) was passed by the Parliament. The Bill made a number of amendments,
including extending the time period for giving opt-in notices and fee disclosure
statements from 30 days after the relevant date to 60 days after the relevant date.
events and the current requirements of the FOFA reforms following the successful 2 016
regulatory amendments are discussed in more detail in Part III of this article, along with
a summary of the position of the major interest groups.
Two further superannuation system reviews were initiated by the Coalition
Government. The 2013 ‘Better Regulation’
repeated proposals that boards should
include one third independent dire ctors, various transparency measures intended to
enhance member understanding of investment risks and asset holdings, and possible
changes to the determination of default funds in industrial a wards. The transparency
measures have been legislated through changes to the Corps Act
but are not yet in force
and the other measures are still subject to partisan debate. The 2014 Financial System
Inquiry Final Report
found that, although Australia ’s financial system had many
strong characteristics, ‘superannuation is not delivering retirement incomes efficiently
unfair consumer outcomes remain prevalent and policy settings do not focus on
the benefits of competition and innovation. As a result, the system is pr one to calls for
Most of these changes were implemented through the Corporations Amendment (Streamlining
Future of Financial Advice) Regulation 2014 (the Streamlining FOFA Regulation) which
commenced on 1 July 2014. Changes to the Statement of Advice (SOA) requirements were
also implemented through the Corporations Amendment (Statements of Advice) Regulation 2014
(SOA Regulation), which was to commence on 1 January 2015.
ASIC, FOFABackground and Implementation, above n 36.
Department of the Treasury, Better regulation and governance, enhanced transparency and
improved competition in superannuation, Discussion Paper 28 (November 2013)
Corps Act ss 1017BA; 1017BB.
Australian Government, Financial System Inquiry, Final Report: Executive Summary (2014),
2017 Accountability in Regulatory Reform: Australia’s Superannuation Industry Paradox 265
more regulation.’
Their approach was informed by t he view that ‘the superannuation
system is not operationally efficient due to a lack of strong price-based competition,’
and their recommendations, not yet implemented, were to give regulators enhanced
powers to increase competition and transparency. Somewhat surprisingly, given its
scope, there is no mention of the possibility of regulatory capture,
which we suggest,
in Part III, lies at the root of the paradox.
In 2016, the Australian Government Productivity Commission (PC) also announced
a study to develop criteria to assess the eff iciency and competitiveness of the
superannuation system, and an inquiry to develop alternative models for a formal
competitive pr ocess for allocating default fund members to products. Both tasks will
inform a further review of the efficiency and competitiveness of the superannuation
system in 2017.
In spite of all this, while the ongoing reform process has resulted in a range of benefits
including increasing retirement incomes, member choice, and the funding of Australia’s
more needs to be done to reduce fees and improve after-fee returns for fund
As the PC observed:
Regulation has grown at an unprecedented pace in Australia over r ecent decades
[while] this regulatory accretion has brought economic, social and environmental benefits.
it has also brought substantial costs. Some costs have been the unavoidable by product
of pursuing legitimate policy objectives. But a significant proportion has not. And in some
cases, the costs have exceeded the benefits. Moreover, regulations have not always been
effective in addressing the objectives for which they were designed
It seems that, at the heart of the issue, policy a nd regulatory incursions, as a result of
extensive lobbying, and various forms of regulatory capture, have better served the
private interests of the FS S than members. The trillion-dollar mandatory stream of
superannuation contributions is a financial windfall f or these producers. Not only does
this compulsory revenue pool provide guaranteed growth in superannuation revenue
inflows, it simultaneously minimizes the threa t of terminations, surrenders and
Ibid xiii.
Ibid xviii.
The issue was however raised forcefully in at least one submission to the Inquiry. See The
Australia Institute, Submission to The Financial Services Review (March 2014)
. The absence of comment in
the Inquiry also did not entirely escape notice at the time: see UNSW Centre for Law Markets
and Regulation, Innovating Regulatory Capture (9 December 2014)
Productivity Commission, How to Assess the Competitiveness and Efficiency of the Superannuation
System - Study Report (2016)
Australian Government, Financial System InquiryInterim Report (2014), ch 4.
Productivity Commission, How to Assess the Competitiveness and Efficiency of the
Superannuation System, above n 45, iv.
Productivity Commission, Identifying and Evaluating Regulation ReformsResearch
Report (2011) xi.
266 Federal Law Review Volume 45
forfeitures which caused critical issues of concern in the pre-mandated regime.
many instances, regulatory processes have not only been ineffective, but have served to
distract from more important questions often creating burdens and obstacles to b etter
governance and effectiveness.
This Part first provides evidence of some of these regulatory failures, and then shows
how theories of regulatory capture can offer an explanation.
A Evidence of Regulatory Failures
1 Industry Dissatisfaction of the Burden and its Ineffectiveness
There is a widespread view that regulation of RSE licensees is more onerous than
necessary and less than effective. In 2006, the first of three surveys were forwarded to a
sample of 500 fund trustees selected at random, primarily from the publicly available
list on the Australian Prudential Regulati on Authority’s (APRA) website (Survey One).
The 2006 date accorded with the final transition period for APRA’s newly introduced
Registrable Superannuation Entity and the Au stralian Securities Investment
Commission’s Australian Financial Services Licensing (AFSL) licensing regime s.
The total population available for Survey One was approximately 1160 trustees and
RSE licensees. With the substantial reduction in trustees post 20046 RSE Reforms,
Surveys Two and Three were able to take in the full cohort of RSE Licensees provided
on APRAs publicly-available lists (241 in June 2010; 190 in June 2 013).
The three surveys recorded an average response rate of 28%,
with respondents
representing public offer funds, extended public offer funds and non-public offer
entities. The basis of all voluntary, ethics-approved surveys was anonymity.
Accordingly, only limited information relating to the ‘profile’ of trustees/licensees was
permitted such as the type of fund (Surveys One and Two) and type of fund and years
of experience of the licensees (Survey Three).
Additional limitations of the survey process were two-fold: the capacity for an
individual respondent to complete a ll three surveys; and negativity bias risk arising
through responses being received only from individuals unhappy with regulatory levels
and/or its negative impact on costs and member benefits. The findings, however,
correspond with those of Butt et al
and AIST & BNP Paribas Securities Services,
suggesting that even if proportions are distorted, the views expressed were widespread.
See, eg, Jeremy Cooper, Super System Review Final ReportPart One: Overview and
Recommendations (CSSSR), (30 June 2010), [3.2.2]; See also Office of the Life Insurance
Commissioner, Annual Report (1980); Annette Sampson, Hop on Board the Gravy Train That
Never Stops, The Age (online), 8 May 2010 on-
APRA, Insight Issue One, 2012, 18; APRA, Insight Issue One, 2014.
Survey One: 114/500 (23%); Survey Two: 69/241 (29%); Survey Three: 48/151 (32%).
Adam Butt et al, The Superannuation System and its Regula tion: Views from Fund
Executives (Working Paper 030/2014, Centre for International Finance and Regulation, July
2014) 2.
AIST & BNP Paribas Securities Services, What will the superannuation industry be like in 2025?
(13 March 2015) Australian Institute of Superannuation Trustees
2017 Accountability in Regulatory Reform: Australia’s Superannuation Industry Paradox 267
Survey One (2006) canvas sed institutions’ experience over the AFSL regime’s two
years’ implementation period (to March 2004) and following two-year window to both
obtain a RSE license and to register their RSEs (to June 2006). ‘Best practice’ governance
expectation, durin g this time, carried with it expectations that efficiency gains would
result when subscale funds, unable to meet new licensing and registration requirements,
merged or outsourced their functions. Key survey issues related to (a) gathering of data
and (b) fund trustees’ comments around overa ll costs and benefits resulting from the
RSE-licensing reforms. Survey Two (2009/2010) was designed to furt her amplify the
cost/benefit data collection process, three years on from the Survey One.
Survey Three (2013/14 initial and reminder surveys sent) further focused on
gathering cost/benefit data around annual compliance and administrative costs. Its
focus remained couched on fund members’ benefit levels within the regulatory
framework. Additional feedback from trustees was also sought on cost/benefit views
and experiences around trust fund preparation for the implementation of the MySuper,
SuperStream and new APRA-regulated prude ntial standards, all of which were then in
Overall survey findings revealed three trustee/licensee experiences:
1. An overwhelming negative response throughout the review period to
cost/benefit experiences. T he associated administrative and compliance costs
related to fund governance (excluding commissions). Appr oaching $200 million
annually in 2 006, respondents identified continual cost rises each year
throughout the nine-year period to 2014. This was true across all fund types and
sizes as well as in ter ms of assets and membership.
For example, 62% of
licensees surveyed in 2013/14 expected to experience costs of $100,000 or more
in meeting the costs related to the implementation of the prudential standards.
Survey responses further re vealed (with a 10 0% agreement) that overa ll
compliance costs were anticipated to continue to rise annually.
2. The majority of respondents believed that the regulatory changes failed to
enhance member benefits. Of trustee s/licensees in the 2006 survey, 42%
indicated that the regulatory reforms (related to the RSE-based, licensing regime)
would deliver minimal benefits to fund me mbers. This percentage had changed
only marginally by the 2010 survey, when 38% of the trustees surveyed believed
that little or no benefits had been achieved for fund members as a r esult of the
introduction of licensing. Of the 2010 re spondents, 90% indicated compliance
costs would significantly offset any gains achieved from improved risk
management strategies. This was also true in 2013/14, when 57% of trustees
responsible for more than $60 billion in superannuation assets, believed APRA’s
prudential standards would produce little or no benefit to fund members.
3. Survey Three also sought licensees’ view of the g overnment’s consultation
processes f or the development of new regulations. Although 90% of the
responding licensees had more than eight years’ experience, they gave a score of
2.05 out of a possible 5 for the level of involvement that APRA had sought.
Sue Taylor, The $200 Million/Year Price Tag for Superannuation Fund Governance: A Case
Study of Fund Member Loss, (Paper Presented at the AFAANZ Conference, Gold Coast, July
268 Federal Law Review Volume 45
APRA’s own stakeholder surve ys confirm these res ults: 48% disagreed with the
statement that APRA’s prudential framework considers the cost to industry; a further
35% were neutral.
ASIC’s most recent stakeholder 2013 survey
did not ask a question
related to ‘cost to industry’. It did, however, report tha t 60% of their regulated entities
thought that ASIC was failing to reduce red tape associated with compliance.
Many interviewees, in Butt et al, expressed particular exasperation over the burden
of regulatory change, including the degree to which the rules have been in a state of flux.
Although the majority accepted the necessity of regulation, the main concern was over
too much happening all at once, coupled with high uncertainty over the rules .
factors were seen as inhibiting the capacity to address member needs and run a business.
Further support derives from the 2015 AIST & BNP Paribas Securities Services findings
wherein 40% of superannuation fund trustees, CEOs, CIOs & CFOs, and other senior
managers polled, believed that constant regulatory changes were the biggest future risk
factor they faced. This can be compared with the 2016 Global Risks Report produced by
the World Economic Forum,
where regulatory change, unsurprisingly, failed to even
get a mention in their list of 28 serious concerns.
2 Administration and Investment Costs
It is widely believed that costs within the industry are excessive as a result of economic
rents paid to service providers within the superannuation industry. A key implication
of moving to a mainly Defined Contribution (DC) system in Australia has been a shift in
the burden of risks (such as longevity, investment and expense risks) from the employer
to the individual.
APRA’s Annual Superannuation Bulletin shows that over 80% of
assets are in DC arrangements
, where the members’ benefits depend on th e net
investment return on their assets. The charges borne by members are of particular
concern given APRA’s ‘powerful message’
that, on average, the superannuation
can expect to earn average returns, and only that. Individual fund managers and
individual asset classes may outperform others, but these effects are transient. Costs, on
the other hand, are persistent. Between a strategy of pursuing gross returns and a strategy
APRA, Stakeholder Survey2015 Regulated in stitutions and knowledgeable observers (2015)
ASIC, Stakeholder Survey (11 September 2013)
Ibid 112.
Butt et al, above n 52, 8.
AIST & BNP Paribas Securities Services, above n 53, 1.
World Economic Forum, The Global Risks Report 2015, 11th Edition (2016)
Reserve Bank of Australia, Sub mission to the Financial System Inquiry (March 2014)
APRA, Annual Superannuation Bulletin, above n 10, 19.
APRA, Insight Issue One (2012)
issue-1.pdf> 54.
2017 Accountability in Regulatory Reform: Australia’s Superannuation Industry Paradox 269
of minimising the difference between gross and net returns, the latter appears more
The extent of the charges is not easy to gauge. The larger financial services industry
has a turnover of $146 billion annua lly
, or 9.5% of the GDP.
Superannuation Bulletin i ndicates the total expenses of all superannuation funds as
$15.4 billion during 2016,
but this does not include expenses paid by life insurers, unit
trusts and stock brokers directly on their behalf, nor the revenue generated by merchant
banks in servicing the capital markets that the funds dominate. The total is therefore
certainly higherperhaps by as much as a factor of three, implying that total charges
average somewhere between 1% and 2.5% per annum of assets.
Within this average, it is very clear that costs differ significantly between funds, and
the differences are largely felt by members with lower retirement benefits. It can be
calculated that the 1.9% per annum that Industry funds outperform Retail funds could
more or less double spending in retirement.
The difference is too persistent and the
numbers too large for this to be a statistical anomaly.
A variety of research ascribes the
difference to agency costs, whic h arise from the objectives of the largely bank -operated
commercial retail funds against the trade-union dominated non-profit industry funds.
Australian Bureau of Statistics, 5204.0 Australian System of National Accounts, Table 5. Gross
Value Added (GVA) by Industry
8059000EE9D4/$File/5204005_gva_by_industry.xls> Sheet Data1, cell AI67.
Ibid Sheet Data1, cell DY67.
APRA, Annual Superannuation Bulletin, above n 10, Table 4, 12. The figure is obtained by
adding the investment and administration and operational costs.
Anthony Asher, Conflicted Super Structures: Are Australian Investors Being Short-
changed? in John Evans, Michael Orszag and John Piggott (eds), Pension Fund Governance
(Edward Elgar Publishing, 2008) 6197, table 4.4, 86.
See APRA, Annual Superannuation Bulletin, above n 10, 17 (Table 9) for the difference, which
is the average over the past five years. The calculations are the authors, and assume 45 years
of contribution to a superannuation fund, and 22 years of drawdownwith real investment
returns of 3.1% and 5% respectively.
Table 9 (APRA, Annual Superannuation Bulletin, above n 10, 17) reports a difference between
the 25th and 75th quartiles as about 2% in 2016. If this is typical, and the distributions are
normal, there is a more tha n 99% probability that the underlying difference between the
funds exceeds 1.3% per annum.
See Anthony D F Coleman, Neil Esho and Michelle Wong, The impact of agency costs on the
investment performance of Australian pension funds (2006) 5 Journal of Pension Economics
and Finance 299; Adam Clements, Gemma Dale and Michael E Drew, Australias retail
superannuation fund industry: structure, conduct a nd performance (2006) 12 Accounting,
Accountability & Performance 1; Thi Thuy Chi Nguyen, Monica Tan and Marie-Anne Cam,
Fund Governance, Fees and Performance in Australian Corporate Superannuation Funds: A
Non-Parametric Analysis (2012) 11 Journal of Law and Financial Management 2; and Kevin Liu
and Bruce R Arnold, Australian Superannuation Outsourcing: Fees, Related Parties and
Concentrated Markets (12 July 2010)
pdf>. Ther e is, however, limited evidence elsewhere. See Krzysztof Jackowicz and Oskar
Kowalewski, Crisis, Internal Governance Mechanisms and Pension Fund Performance:
Evidence from Poland (2012) 13 Emerging Markets Review, 493; and Manuel Ammann and
270 Federal Law Review Volume 45
Asher explains most of the difference to commissions for advice and distribution costs
although these too can at least partly be ascribed to agency issues, as discus sed below.
Overall, international statistics suggest that Australia n fund members’ median
expense ratios have consistently and significantly out stripped its OECD equivalents.
Although some reduction has been recorded, at its current pace A ustralia would not be
expected to match the median expenses of OECD countries’ funded pension systems
within 50 years. Moreover, since the implementation of RSE licensing (20046) and My
Super (201 0–11), Australia’s superannuation cost curve for fund members, initially at
least, shifted upwards.
The April 2015 report from the Grattan Institute
confirms the conclusions of their
2014 report that in both default and choice funds, fees are higher than they need to be.
In addition, there is little evidence that funds that c harge higher fees provide better
member services. In summary, the 2015 Grattan Report suggests that ‘superannuation
could be run for much less than the $16 billion currently charged by large funds (self-
managed super costs another $5 billion).
When considering the reasons for these higher direct costs, Australian funds have
been found, in detailed international fund level comparisons
, to be more expensive in
two areas: those involving a larger number of manual transactions, and, more generally,
around investment management costs. Manual costs have been addressed by the recent
SuperStream regulatory changes. Investment costs are proving less tractable however,
with a detailed study based on the CEM international database
nominating in-house
management as the way in which investment costs could be reduced and returns
enhanced. A number of Australian industry funds have begun implementing this
Christian Ehmann, Is Governance Related to Investment Performance and Asset Allocation?
Empirical Evidence from Swiss Pension Funds (Working Papers on Finance No 2016/23,
Swiss Institute of Banking and Finance, University of St. Gallen, September 2016) .
Asher, Conflicted Super Structures, above n 68, 86.
Organisation for Economic Cooperation and Development (OECD), Pension Markets in Focus
(2015) in-Focus-
2015.pdf> 9.
Grattan Institute, Super StingHow to Stop Australians Paying Too Much for Superannuation,
(April 2014)
Ibid 7.
Grattan Institute, Super Savings (April 2015) -
content/uploads/2015/04/821-super-savings2.pdf > 2.
Ibid 3.
Deloitte, International superannuation & pension fund fees, 2009, Prepared for IFSA, 44 and
Alexander D. Beath, Value Added by Large Institutional Investors between 19922013 (January
David R Gallagher, Tim Gapes and Geoff Warren, In-House Investment Management:
Making and Implementing the Decision (Working Paper No 094/2016, Centre for
International Finance and Regulation, March 2016).
2017 Accountability in Regulatory Reform: Australia’s Superannuation Industry Paradox 271
These costs are at least reported, but others that are not reported to APRA nor
(apparently) to the trustees in some cases. These include:
Investment management costs incurred by underlying managed funds or
insurance policies that provide a net return to the superannuation funds;
Additional interest margins lost because administrators and custodians do not
obtain best value for m oney for deposits, foreign currency or derivative
Stockbroker commissions or margins that are added to or sub tracted from the
price of shares and bonds and often not reported as expenses;
Indirect costs of capital raising and restructuring, where again the costs are
incorporated in share or bond prices.
The long delay in identifying these costs provides evidence in itself of the power of
vested interests in hiding them from members and the public if not also from trustees. It
is to be hoped that ASIC’s RG 97 will achieve more than a little success in this area.
Lower cost ratios in other countries does not necessarily indicate that their pension
systems provide an adequate benchmark in being free of overcharging and over-
servicing. Adair Turner
, then head of the UK Financial Services Authority, says:
there are good reasons for believing that the financial industry, more than any other sector
of the economy, has an ability to generate unnecessary demand for its own servicesthat
more trading and more financial innovation can under some circumstances create harmful
volatility against which customers have to hedge, creating more demand for trading
liquidity and innovative products; that parts of the financial services industry have a
unique a bility to attract to themselves unnecessarily high returns and create instability
which harms the rest of society.
In the same speech, he went on to quote:
See Asher, Conflicted Super Structures, above n 68, 84 ff.
For the banks response to these allegations, see Banks in denial about cash scam (March 3 2017)
Michael West in-denial-about-cash-scam/>.
It does not seem possible to estimate the extent of these costs, but the order or magnitude is
given by the $908m turnover of the Australian Securities Stock Exchange. See Australian
Securities Exchange, ASX Limited Annual Report 2016 (2016)> 38. The
same source gives the annual turnover of shares alone at over $1 trillion (28). One might
speculate that stockbroker charges are at least that of the ASX revenue and that the
superannuation funds bear half.
Academics are puzzled as to why US merchant banks can charge 7% for raising capital and
hedge funds can charge 2% of assets plus 20% of outperformance. See Mark Abrahamson,
Tim Jenkinson and Howard Jones, Why Dont U.S. Issuers Demand European Fees for IPOs?
(2011) 66 The Journal of Finance, 2055; and Gaurav Amin and Harry M. Kat, Hedge Fund
Performance 1990–2000: Do the “Money Machines” Really Add Value? (2003) 38 Journal of
Financial and Quantitative Analysis 251.
Adair Turner, Speech by Chairman, FSA (Speech delivered at the City Banquet, The
Mansion House, London, September 22 2009, >.
272 Federal Law Review Volume 45
Chairman of the British Bankers’ Association, Stephen Green, who has said exactly the
same thing in very similar words, when he argued that ‘in recent years, banks have chased
short-term profits by introducing complex products of no real use to humanity’, and when
he recognised that ‘some parts of our industry have become overblown.
Econometric modelling by the OECD confirms that salaries a re higher for those
working in finance than in comparable industries, and that growth of the financial sector
not only has a negative impact on economic equality, but also on per capita economic
Given the extraordinary profitability of the FSS,
the arguments apply a
fortiori in Australia.
The reported costs and performance of the SMSF sector can be seen as supporting
this hypothesis. Their members are more capable than average of looking after their own
In his examination of the charges they incur, Raftery finds that they are on
average half of that reported by APRA regulated funds,
suggesting that more
informed people have fled the institutional funds, and reduced costs in spite of having
lost economies of scale. Raftery does not calculate net investment returns but they can
be estimated from APRA statistics.
These suggest that total performance has not been
significantly better than the institutional funds, which would be consistent with view
that ev en informed individuals cannot beat the larger funds in reducing hidden and
institutionalized costs in investment markets.
Finally, although the direct costs of regulation appear to play a relatively small part
in total fees charged, indirect costs are arguably more significant. Ongoing regulatory
changes involving licensing and governance, twinned with increasing complexity, have
provided little obvious benefit, while potentially distracting trustees from the more
important goal of providing value at lower costs. The 20 year lead up to the SuperStream
reforms and their obvious benefits provides evidence that even the regulators have been
3 Conflicted Payments
A more public and controversial criticism particularly aimed at the retail funds relates
to the direct and indirect costs of distribution and advice, which is closely linked to
whether advisors are conflicted between their duty to the clients and the commissions
that they are paid by financial service providers. Within the superannuation field, as
more broadly within common law busi ness practices, there is a f iduciary duty: an
Oliver Denk and Boris Cournede, Finance and Income Inequality in OECD Countries
(Working Pape r No 1224, OECD Economics Department, 25 August 2015)
; Oliver Denk, Financial sector pay and labour income
inequality. (Working Pa per No 1225, OECD Economics Department) OECD Publishing,
Paris, en>.
See Janda, above n 12.
Joanne K Earl, Paul Gerrans and Anthony Asher, When Cognitive Functioning Meets
Financial Literacy and Judgment in Older Age: Advising Those Self-Managing Retirement
Savings (2015) .
Adrian M Raftery, The size, cost, asset allocation and audit attributes of Australia n self-
managed superannuation funds. (PhD thesis, University of Technology, Sydney, 2014) 137.
APRA, above n 10, Excel version, >,
table 4a.
2017 Accountability in Regulatory Reform: Australia’s Superannuation Industry Paradox 273
‘“inflexible rule” which prohibits fiduciaries, such as corporate officers and advisers,
from putting themselves in positions where their interest and dut y conflict.’
protection would be available to members of superannuation funds in the absence of
any further legislation or regulation.
The industry is however riddled with conflicts, some ex pressly permitted by
regulation while others are overlooked in enforcement. Asher
lists various conflicted
payments that can arise, including:
adviser owes principal duty to member, but paid by fund, trustee or life company
sometimes also with soft dollars; adviser rebates commission, so reducing superannuation
account; adviser, trustee or group rebates or provides other benefits to employer; service
providers make secret, discretionary or soft dollar payments to consultants; trustee or
group makes, possibly, secret profit from holdings in adviser groups, service providers
and consultants, or exercises discretions to make a greater disclosed profit at the expen se
of the members; and financial advisers receive, possibly, secret profits from service
The original FoFA reforms introduced in 2012 were aimed at some of these payments,
as were the Labor Government’s response to a number of significant corporate collapses,
which led to considerable losses for retail investors. Their solution was to create a ban
on certain ‘conflicted remuneration’.
The ban was politically controversial as it would
largely have affected the commercial retail funds rather than Labor aligned industry
The original FOFA reforms were welcomed by both consumers and industry as a
significant step forward in the financial services sector. CPA Australia and the Institute of
Chartered Accountants Australia encapsulated the positive reception that the reforms
The passage of the FoFA reforms was the result of extensive, wide spread
consultation over many years. Its introduction marked a milestone opportunity for
the sector to take a greater responsibility and refocus its efforts on providing and
promoting quality financial advice in the best interests of the client, free from conflict
and in a transparent manner.
FOFA sought to strike a balance by 'introducing further consumer protections while
simultaneously requiring financial advisers to meet higher standards of care and skill.
Industry Super Australia (ISA) summarises a report by Rice Warner Actuaries
(RWA), in suggesting that the FoFA reforms would have ‘an unambiguously positive
J Glover, Conflicts of interest in a corporate context in G Acquaah-Gais ie (ed), Corporate
Crime Workshop (Monash University, Department of Business Law an Taxation, 2002), 3957,
46 quoting from Bray v Ford [1896] AC 44, 51.
Asher, above n 68, 75.
Explanatory Memorandum, Corporations Amendment (Further Future of Financial Advice
Measures) Bill 2011 (Cth), 3.
Senate Economics Legislation Committee, Parliament of Australia, Corporations Amendment
(Streamlining of Future of Financial Advice) Bill 2014 [Provisions] (2014) 7 [2.1][2.1] (citations
274 Federal Law Review Volume 45
impact on the affordability and provision of financial advice and a very positive impact
on the future level of superannuation and other savings’.
In contrast, when the returning Coalition Government proposed amendments to the
original FoFA laws to re move the outright ban, an updated report by RWA for ISA
revealed that it would have cost consumers more than $530 million annually in increased
fees and charges. Although defeated by the Senate, the original public interest -based
financial advice reforms introduced—termed the ‘biggest si ngle change our industry
will undergo in our generation’ by the Commonwealth Bank
came precariously
close to being eliminated.
The agendas of all key lobby groups within the superannuation industry are clearly
evident in their submissions to the Senate Economics Legislation Committee of the
Corporations Amendment (Streamlining of Future of Fi nancial Advice) Bill. That is, support
for the Coalition Government’s amendments to the original FOFA reforms was received
from the Financial Services Council who highlighted, in their submission that:
given the significant value advice delivers, the FSC strongly supports the objective of
promoting greater access to quality financial advice that is more accessible and more
affordable for more Australians … The FSC has previously submitted that given the
complexity and scale of the reforms and the relatively short timeframe to consult on
amendments made in the lead up to the 2013 elections that unintended consequences and
oversights would arise. Indeed, many unintended consequences and practical complexities
(that of operationalising policy) are now evident. It is for this reason that we welcome the
proposed amendments as they eliminate and address many of the regulatory ambiguity
The Australian Bankers’ Association’ submission also supported the Coalition
Government’s amendments commenting, on behalf of the banking industry, that it was:
seeking amendments to make sure the law operates as intended and does not adversely
impact on retail banking and to make sure bank customers can continue to conduct their
banking in ways they want and expect.
Industry Super Australia, ISA submission to the Exposure Draft of Corporations
Amendment (Streamlining of Future of Financial Advice) Bill 2014
sions/Industry_Super_Australia.pdf>, 11 referring to Rice Warner Actuaries, The financial
advice industry post FoFA (, prepared for Industry Super Australia, July 2013),
Rice Warner Actuaries, Consumer costs of FoFA amendments (May 2014)
Commsec Adviser Services,
Financial Services Council Submission No 27 to Senate Standing Committees on Economics,
Inquiry into the Corporations Amendment (Streamlining of F uture of Financial Advice) Bill
2014 [Provisions], 5 May 2014, 56.
Australian Bankers Association Submission, Senate Standing Committee on Economics, 2014
2017 Accountability in Regulatory Reform: Australia’s Superannuation Industry Paradox 275
By contras t, the submission of Industry Super Australia, representing 15 industry
funds, focused on what they believed to be the inaccurate rhetoric surrounding the
introduction of the amendments, which talked about the need to ensure that people can
access assistance and advice, particularly from bank tellers. In the view of Industry
Super Australia, however, the exemption was not really about improved access, rather:
There is already a complete exemption for basic banking products in the FoFA legislation.
Therefore, what we are talking about is allowing commissions and other for ms of
conflicted remuneration to be paid on complex products, including super annuation but
also others like managed investment schemes and leveraged products, which have been
the subject of many previous inquiries due to the consumer losses that have ensued.
Additional to the lobbying attempts to capture the regulatory policy processes,
serious enforceme nt issues have arisen which have contributed to problems faced by
investors. A recommendation of the 2009 Parliamentary Joint Committee report
had led to the reforms was that ASIC undertake an annual shadow-shopping exercise to
check on the quality of advice. To date, only two such surveys have been undertaken.
The first on retirement advice in 2012
found that 39% of advice was poor and only 3%
were ‘examples of g ood quality advice’. The second on life insurance advice in 2014
found that 3 7% of the advice examined ‘failed to comply with t he laws relating to
appropriate advice’. The indication is that ASIC is well behind in enforcing existing laws.
It’s most recent report on enforcement action
lists only two enforceable undertakings
with institutions in recent years, and actions against only six advisors. It is clear that
many members have been placed in inappropriate products and overcharged.
The inadequacy of its 201013 enforceable undertaking against the Commonwealth
Bank has been exposed by a Parliamentary Inquiry, which in 2015:
uncovered an aggressive sales culture amongst Commonwealth Bank financial planning
businesses which led to forgery, advisers hiding information from their clients and people
losing life savings advice should not be clouded by any type of financial incentive that
reward advisers based on how much of a particular product they sell.
Commonwealth, Public Hearings on the Corporations Amendment (Streamlining of Future of
Financial Advice) Bill 2014, Senate Economics Legislation Committee, 22 May 2014, Ms Robbie
Campo, Deputy Chief Executive, Industry Super Australia, 56.
Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into Financial
Products and Services in Australia, 2009.
ASIC, 12-55MR ASIC releases full report on retirement advice sh adow shopping research
(Media Release, 27 March 2 012)
ASIC, REP413 Review of retail life insurance advice (2014)
ASIC, REP 444 ASIC enforcement outcomes: January to June 2015 (2015)
Choice, CONbank says sorry but consumer protections must go (Media Release, 3 July
276 Federal Law Review Volume 45
Arguably, the entire FSRA and its regulations are poor legislation; excessively
complex and prescriptive, as often prohibiting useful innovation
as well as being
unenforceable. It may well provide more of an obstacle to the i mprovement of financial
advice than a deterrent to those who are breaking the common law (as the elements
requiring quality advice are more problematic to enforce.)
In summary, the overall findings of this analysis support contentions that the
Government’s effectiveness around it s superannuation pol icy agendas has been
progressively eclipsed by the lobbying power of vested interests. The public-interest
policy objectives of bipartisan legislative reforms have not materialised, therein creating
this reform paradox. Given the complex nature of the superannuation product and its
value to both the retail and no t-for-profit sectors of the superannuation industry,
ongoing patterns of vested interest-friendly regulatory reforms are certainly likely.
Conversely, the ability of the far more diffused and less informed fund members to
minimize this outcome appears limited in the absence of specifically designed strategies
to mitigate the distortions to the regulatory processes generated by lobbyist s.
B Public vs Private Interests: Regulatory Captures
Public and private interest models of regulatory theory shed insight into the origins of
the regulatory reform paradox. Public interest theory is built on the fundamental
assumptions that economic markets are subject to market failures and, as a result, can
operate inefficiently. Government reform to correct these market failures is therefore
necessary. Thus, the public interest paradigm is based on the assumption that the
government will act on behalf of the public t o improve welfare in situations where the
market has failed to do so.
The public interest model provides one relevant analytical
framework for assessing remedial measure to this problem.
In contrast to this public interest theory, the 1980’s ‘Stiglerian’
version of private
interest theory was developed by economists, building off Adam Smith and Mancur
Findings in this respect have highlighted outcomes wherein government
regulations appeared, in many cases, to have primarily served the interests of small,
powerful interest groups rather than the public in terest. Within this framework,
government regulation is seen as a market for wealth transfers, with politicians having
the power to coerce to affect wealth transfers, which product is then ‘sold’. To become
the ‘highest bidders’ in this lobbying process, private-interest theorists argue that voters
form special interest groups, which are able to exert a powerful influence on the political
process. The sale price takes the form of explicit payments to Governments (eg bribes,
One example is that superannuation funds have not been sure whether they were entitled to
provide obviously useful benefit illustrations to members. See Actuaries Institute Submission
to Treasury, Product Disclosure Statement For Superannuation Funds, 26 February 2009,
alia.pdf> 63.
Refer to the seminal publications: Barry M Mitnick, The Political Economy of Reg ulation (
Columbia University Press, 1980); Douglas Needham, The Economics and Politics of Regulation:
A Behavioural Approach, ( Little, Brown and Company, 1983); Richard A Posner, Theories of
Economic Regulation(1974) 4 The Bell Journal of Economics and Management Science 335.
George J Stigler, The Theory of Economic Reg ulation(1971) 2 Bell Journal of Economics and
Management Science 3.
Mancur Olson, The Logic of Collective Action (Harvard University Press, 1965).
2017 Accountability in Regulatory Reform: Australia’s Superannuation Industry Paradox 277
campaign contributions, etc) or subtler forms of payment (eg assurances of factional
voting support).
Producers within this original formulation of the private interest model will
generally seek to maximise their wealth by lobbying for regulation involving less
competitive market dynamics (e.g. price fixing, restriction of entr y, subsidies, and
suppression of substitutes). As producer groups are generally small relative to consumer
groups, and where profits are potentially large, producer groups are easier to organise
and strongly incentivised to seek self-benefitting regulation. Consumers, co nversely,
face a n insignificant ince ntive per per son to opp ose regu lation. The ‘pr otective’
regulatory shield sought by incumbent producers is to ensure that these benefits are
‘delivered’ by government in an opaque manner, such as in the form of highly technical
and complex supervi sory regulations, which allow little scope for fund
member/consumer recognition of the ‘hidden’ benefits/subsidies to producers and,
therefore, see no reason to mount any form of cou nter lobbying campaign.
private interest model thus sets out an alternative analytical framework for consider ing
remedial solutions to the reform paradox.
Regulatory capture theory provides another perspective that aligns with the
regulatory outcomes described. Harvard’s Tobin Proj ect
has generated a range of
studies around industry-based capture deriving from barriers to entry, and which can
be argued to characterise current superannuation regulation. Tobin research reconsiders
Stiglerian concepts of regulatory capture which predominantly focused on rent seeking
activities designed to generate m ore regulation: for example, creating barriers to entry to
new firms.
Corrosive capture is distinguishable in this context from the original concepts of
statutory and agency capture given that its primary focus is to:
dismantle regulation even in the absence of public support or a strong welfare rationale
for doing so. [With] corrosive capture occurring if organized firms render regulation
less robust than intended in legislation or than what the public interest would recommend.
By less robust we mean that the regulation is, in its formulation, application, or
enforcement, rendered less stringent or le ss costly for regulated firms (again, relative to a
world in which the public interest would be served by the regulation in question).
Corrosive capture mechanisms can be applied by private interest groups in either a
legislative or administrative context. They would occur without express sanction by
voters through ‘increased independence of the regulator vis-a-vis the legislature, and
possibly reduced fidelity to its statutory obligations.’
From the perspective of the
See, more broadly, Eric A Posner, Controlling Agencies with Cost-Benefit Analysis: A
Positive Political Theory Perspective (2 001) University of Chicago Law Review 1137; Sam
Peltzman, Towards a More General Theory of Regulation (1976) 19 Journal of Law and
Economics, 211240; Gary S Becker, A Theory of Competition among Pressure Groups for
Political Influence (1983) 98 Quarterly Journal of Economics 371.
Sue Taylor, Captured Legislators and Their Twenty Billion Dollar Annual Superannuation
Cost Legacy (2011) 58 (3) Australian Accounting Review 268.
Daniel Carpenter and David A Moss ,Preventing Regulatory Capture: Special interest influence
and how to limit it (The Tobin Project, Cambridge University Press, 2014).
Ibid 1617.
Ibid 17.
278 Federal Law Review Volume 45
Tobin Project scholars, most of the p ublic and academic discussion about capt ure in
recent decades is about regulatory corrosion given their de-re gulatory focus.
Theorists of regulatory capture have also identified that capture is more likely when
regulation is highly complex, and when information asymmetries between the regulated
industry and the regulators are greater. That is:
the complexity inherent in financial regulatory policies and the built-in advantage that the
financial firms targeted by specific regulation have in terms of knowledge and information
vis-à-vis other stakeholders are factors that increase the dependence on industry for
expertise. Moreover, many analysts have lamented the lack of engagement with financial
regulatory debates from stakeholders such as deposit holders, investors, and consumers of
financial services. Besides being disadvantaged vis-à-vis financial industry groups in terms
of fin ancial resources and technical expertise, these groups’ voices remain hindered by
their diffuse nature and the resulting ‘collective action problems’.
The authors believe that the complexity of the SIS Act and the FSRA particularly
plays a n important role in the regulatory paradox within Australia’s superannuation
industry as it generally benefits vested interests and acts as a screen for rent seekers. The
problem is wider than that identified in the superannuation industry with Justice Steven
Rares opining that:
the policy choice of using prescriptive drafting that most Commonwealth legislation has
reflected over the last two or three decades needs urgent reconsideration. It has really
significant impacts on the whole community in terms of comprehensibility, compliance
costs and, to use a political catch cry, access to justice.
A recent UK surveys of trustees
highlights that there are international analog ues.
The Parliamentary Counsel Cabinet Office
recently called for an in-depth analysis of
resulting complexity created in this context. In the view of the Parliamentary Counsel:
we should regard the current degr ee of difficulty with law as neither inevitable nor
acceptable. We should be concerned about it for several reasons. Excessive complexity
hinders economic activity, creating burdens for individuals, businesses and communities.
It obstructs good government. It undermines the rule of law.
A further element of regulatory capture can be described as intellectual capture,
wherein regulators, a ttempting to control too much in much detail, increasingly adopt
the perspective of the regulated industry producers who are the only source of the
relevant technicalities.
At the heart of this form of capture is the broader intellectual
climate which is characterised by the:
Stefano Pagliari, Making good financial regulation: Towards a policy response to regulatory capture
(Grosvenor House Publishing, 2012) 1011, citing Olson, above n 112.
Steven Rares J, Competition, Fairness and the Courts (2014) 28(3) Commercial Law
Quarterly: The Journal of the Commercial Law Association of Australia 17.
Kristian Brunt-Seymour, Trustees warn DC governance changes have not benefited members (19
January 2016) Professional Pensions
UK Office of the Parliamentary Counsel, When laws become too complex (16 April 2013) Cabinet
UK academic John Kay suggests that regulatory capture needs to be explained by more than
self-interest: That is … regulators come to see the industry through the ey es of market
2017 Accountability in Regulatory Reform: Australia’s Superannuation Industry Paradox 279
ascendancy within the academic community and many regulatory authorities of ideas
highlighting the efficiency of financial markets at understanding and allocating risks, their
self-stabilizing nature, and the benefits of financial innovations for the economy.
Of importance to note, while the traditional concept of regulatory capture in the
academic literature has focused on material incentives between regulators and different
the recent financial crisis has led a n umber of authors to broaden this concept and to
investigate how the possibility that reg ulatory policies will favour a narrow set of special
interests could be influenced by the regulators’ ideas, beliefs and mind-sets. Terms such as
intellectual capture, cognitive capture, and cultural capture have been used to signal
instances where … special interests are able to ‘shape policy outcomes through influences
other than material incentives and rational debate’. For instance, … in the period before
the crisis the Federal Reserve displayed ‘excess sensitivity … not just to asset prices but
also to the concerns and fears of Wall Street more generally’.
It would seem that this ideology forestalled the introduction of more directive
reforms such as Supe rStream that enforced collaboration, and MySuper, which has
explicitly restricted over-servicing and over-charging. At least the former is regarded as
having reduced costs significantly, while the latter explicitly recognises over -servicing
as a problem.
This Part first outlines a potential administrative re medy designed to blunt the rent
seeking activities of the financial services sector. It rests on the c oncept of Co st Benefit
Analysis (CBA), which is a key plank in Australia’s existing Regulatory Impact Analysis
(RIA) structure and which has now been the subject of bi-partisan support for some
decades. We then go on to show that the policy has been weakly enforced when applied
to superannuation reform particularly.
A Cost-Benefit Analysis
As highlighted by Rose and Walker,
CBA ranks among the most important decision-
making tools in the modern regulatory state. In the United States its congressional
mandate dates from 1902 when a ll federal agencies were compelled to present
participants rather than the end users they exist to serve, because market participants are the
only source of the detailed information and expertise this type of regulation requires. This
complexity has created a financial regulation industryan army of compliance officers,
regulators, consultants a nd adviserswith a vested interest in the regulation industrys
expansion. John Kay, Finance needs stewards, not toll collectors, Financial Times (London)
22 July 2012 ,
Pagliari, above n 118, 1516.
Ibid 16.
For a detailed discussion of RIS, see Sue Taylor, Anthony Asher and Julie-Anne Tarr,
Australias Flawed Regulatory Impact Statement Process (2016) 44 Australian Business Law
Review 361.
Paul Rose and Christopher J Walker, The Importance of Cost-Benefit Analysis in Financial
Regulation, Report for U.S. Chamber of Commerce (March 2013).
280 Federal Law Review Volume 45
cost/benefit analysis around proposed action.
Over the past 30 years in particular,
CBA has become a fundamental part of how US feder al agencies analyse and select
regulatory approaches.
At the global level, the OECD contends that a coherent, whole-of-government
approach is needed to create a regulatory environment favourable to the creation and
growth of businesses, productivity gains, competition, investment and international
This is enshrined in the OECD’s Guiding Principles for Regulatory Quality and
Performance (Guiding Principles), including the requirement of system ic assessment
and review of regulations to ensure that they efficiently and effectively meet their
intended objectives. The O ECD’s 2015 Government at a Glance Report
suggests that
a fully implemented, quantitative based regulation impact a nalysis (RIA) has the
capacity to minimise rent seeking by fostering transparency and engagement and, by
reinforcing the checks/balances system s to ensure policies and regulations, serve the
public interest. The Australian Government ha s endorsed these for its own regulatory
governance arrangements.
Rose and Walker group pro-CBA policy considerations
into two main classes:
cost-benefit analysis promotes more rational decision-making and more effi cient
regulatory actions. Second, when combined with notice-and-comment requirements, cost-
benefit analysis promotes good public governance as a transparent, democratic, and
accountable regulatory methodology.
Its application to Australia also has the s upport of the Business Council of Australia
(BCA), which presents a strong case for evidence-based policy making employing a CBA
framework, as endorsed by the Australian Productivity Commission and the Australian
Law Council. The BCA emphasises that:
In order for government decision-makers to ensure that governmen t policy is generating
the maximum benefit for society, decision s need to be based on robust evidence. Further,
that evidence needs to be communicated transparently and in a timely manner to business
and the community. Evidence is crucial to good government policy outcomes because it:
helps policymakers work out which policy options are likely to achieve the best results;
and h elps in getting policy implemented in circumstances where there is opposition to
River and Harbour Act of 13 June 1902, 1079 USC, § § 361362 (1902).
See Cass R Sunstein, The Cost-Ben efit State: The Future of Regulatory Protection (Working
Paper No 39, Coase-Sandor Institute for Law & Economics, 1996) 33.
OECD, Guiding Principles for Regulatory Governance and Performance (2005).
OECD, Government at a Glance 2015 (2015).
OECD, OECD Reviews of Regulatory Reform: AustraliaTowards a Seamless National
Economy, (2010) 15.
Rose and Walker, above n 126, 7.
Deloitte Access Economics, Familiarization of the cost benefit analysis framework (Report
prepared for the Business Council of Australia, 2012) 2.
2017 Accountability in Regulatory Reform: Australia’s Superannuation Industry Paradox 281
The science of quantification behind CBA admittedly needs further development,
with Posner and Weyl,
for instance, suggesting ways of quantifying the costs of crises,
and the market benefits of new products and services. Even in its current state, however
it is, a well-respected tool for keeping regulators focused on critical quantifiable
costs/benefits a nd risk minimisatio n. Its use also protects and enhances agency
rulemaking by providing a:
defensible regulatory process that not only is more efficient, but also is more likely to
reduce the need for extensive revisions following public comments and will protect the
agency against challenges to its regulations.
As set out in the updated Australian Government Guide to Regulation (AGGR),
the Government has enunciated a new, clear approach to regu lation which focuses on
reducing the regulatory burden by cutting existing red tape and limiting the flow of new
regulation. The AGGR serves to re-focus attention on Australia’s existing RIS process
with the requirement that every policy proposal de signed to introduce or abolish
regulation must be accompanied by a RIS. This RIS must be developed early in the policy
making process as a tool designed to encourage rigour, innovation and better policy
outcomes from the beginning. In turn, the Office of Best Practice Regulation (OBPR) has
been delegated the role of promoting the Federal Government’s objective of effective
and efficient legislation and regulations.
The RIS process is manda tory for all Cabinet submissions and applies to every
government a gency including government departments, statutory authorities, boards
(even if it has statutory independence), and public entities operating under the Public
Governance, Performance and Accountability Act 2013 (Cth). The 2014 AGGR also highlights
that even at the Cabinet level, a RIS is still required where the policy proposal is likely
to have a measurable impact on business, community organisations or individuals.
This includes new regulati ons, amendments to exist ing regulations and, in some cases,
‘sunsetted’ regulations being remade.
To be assessed a s adequate by the OBPR, a RIS must have a degree of detail and
depth of analysis that is commensurate with the magnitude of the problem and the size
of the potential impact of the proposal. Subject to this principle, the criteria which will
be used by the OBPR to assess whet her a RIS contains an adequate leve l of information
and analysis include the requirements that the RIS should identify a range of alternative
options including, as appropriate, non-regulatory, self-regulatory and co- regulatory
The only exceptions to these rules, which are set out in the 2014 AGGR,
designated ‘special cases’ which include:
Eric Posner and E Glenn Weyl, Speculation, Insurance and Financial Regulation: Benefit-
Cost Analysis for Financial Regulation (2013) 103 American Economic Review: Paper and
Proceedings 393.
Rose and Walker, above n 126, 9.
Commonwealth of Australia, Department of the Prime Minister and Cabinet (2014) 4.
Ibid 9.
Ibid 568.
282 Federal Law Review Volume 45
1 Prime Minister’s Exemptions
The Prime Minister can exempt a government entity from the need to complete a RIS
when: there are truly urgent and unforeseen events requiring a decision bef ore an
adequate regulatory impact assessment can be undertaken; and where there is a matter
of Budget or other sensitivity and the development of a RIS could compromise
confidentiality and cause unintended market effects, or lead to speculative behaviour
which would not be in the national interest. Where the Prime Minister grants an
exemption, the agency will not be deemed as non- compliant with the RIS
2 Election Commitments
A RIS covering matters which were the subject of an election commitment will not be
required to consider a range of policy options. Only the specific election commitment
need be the subject of regulatory impact assessment and in this situation, the focus
should be on the commitment and the manner in whic h the commitment sh ould be
3 Carve-outs
A carve-out is a standing agreement between the OBPR and a department, removing the
need for a preliminary assessment to be sent to the OBPR for minor or re current certain
types of regulatory reforms. Examples of acceptable carve outs include: routine
indexation that uses a well-established formula, such as the Consumer Price Index (CPI);
routine indexation of aged care subsidies in line with increases in the CPI; and regularly
updating of the listing and price of medicines available under the Pharmaceutical
Benefits Scheme.
An additional central pillar of ensuring transparency in regulatory practice by the
Federal Government and its agencies is the post-implementation review (PIR). As set
out in the OBPR’s Post-I mplementation Reviews Guidance Note,
all Australian
Government a gencies are required to undertake a PIR for all re gulatory change s that
have major impacts on the economy. PIRs must also be prepared when regulation has
been introduced, removed, or significantly changed without a regulation impact
statement (RIS). This may be because an adequate RIS was not prepared for the final
decision, or because the Prime Minister granted an exemption from th e RIS
B Weak Form Regulatory Impact Statement (RIS) and Post-Implemen tation
Review (PIR) Processes Undertaken
The ability of RISs to act as a potential gatekeeper/remedy to blunt the forces of
regulatory capture from a p olicy perspective is well tested domestically and
Where a Prime Minister s exemption is granted, agencies are still required to quantify the
cost of the regulation and identify offsets and provide those costings to the OBPR within
three months of the decision. Once costings are agreed they should be sent to the relevant
portfolio Minister and the Prime Minister. Th e OBPR will also publish the costing
information on the OBPRs website together with the fact that a Prime Ministers exemption
was granted.
OBPR, Post-Implementation Reviews Guidance Note (2014) 1
2017 Accountability in Regulatory Reform: Australia’s Superannuation Industry Paradox 283
internationally. This is not to suggest the RIS process is without limitations,
but RISs
help create greater transparency a round proposed regulatory frameworks without
requiring legislators to acquire the same level of specialised knowledge as their
RIS efficacy is, of course, necessarily dependent upon its imp lementation. We
give four examples in the Superannuation context where it does not seem to have been
applied appropriately.
1 The SIS Act
There appears to have been no form of RIS for the foundational SIS Act. The SIS Act and
Regulations, moreover, appear to have been passed without consideration of many of
the member protectio n mechanisms reco mmended in the extensive report by the
Australian Law Reform Commission (ALRC) and Companies and Securities Advisory
Committee (CSAC) completed in the previous year.
It is recommended, inter alia,
trustees should not be indemnified ou t of the fund, but section 58 however
explicitly permits this;
the dominant purpose should be the ‘provision of old age pensions’ as another
purpose might be unconstitutional (p 5 8), but section 62 permits any payments
so the dominant purpose has become the payment of lump sums;
trustees, investment managers and advisors should be fit and proper and the
latter should be subject to know your client rules. The se are partly covered, but
as discussed below, gaps remain;
prohibition of conflict of interest should be central, bu t section 58B specifically
exempts the trustees from important elements of this common-law requirement.
A number of other recommendations, which would also have offered significant
protection, were not implemented. These include:
o members should also have the right to dismiss the responsible entity in
certain circumstances;
o members should be given an annual report disclosing the payment of
all fees and charges, as well as significant asset holdings;
o an advisory service be established to provide education and
o the regulator should have the power to enforce contracts and to sue
investment managers.
Although a national program of review and refor m of existing legislation was
commenced in 1996 with a target co mpletion date of 31 December 2000, the SIS Act
review (conducted by the Productivity Commission)
did not eventuate until 2001.
This eight-year delay was then further complicated by non-issuance until 2003 of formal
See, eg, Ric Simes, Ian Harper and Hugh Green, Implementing Best Practice Regulation in a
Dynamic Market Place: Consultation and Accountability (2008) 27 Economic Papers 24.
Posner, above n 113, 1.
ALRC and CSAC, Collective Investment Schemes: Superannuation, Report No 59 (March 1992).
Productivity Commission, Review of the Superannuation Industry (Supervision) Act 1993
and Certain Other Similar Legislation, Inquiry Report No 18 (10 November 2001).
284 Federal Law Review Volume 45
Government responses to the Productivity Commission’s 2001 review comments. It
identified that the legislation was ‘voluminous, complex and in some respects, overly
and created unnecessary restriction of competition a nd compliance
costs. These problems have still not been addressed. Given the focus of the Commission
on productivity rather than member protection, it did not consider any shortcomings in
that area.
2 Registerable Superannuation Entity Licensing
The Explanatory Statement to the Superannuation Industry (Supervision) A mendment
Regulations (2004), No. 113 advised that a RIS was not required because the measures
had already been addressed in the RIS for the enabling legi slation or ‘are of a minor or
machinery of government nature.’
The RIS for the Superannuation Safety Amendment
Act 2004 (Cth), however only related to the mechanics of the reform and there was no
quantitative analysis for either the costs or benefits associated with the regulatory
Thus, the licensing regime was introduced without a specific, quantitative RIS. In
addition, given the wording of the exemption for the Regulatio ns, the carve-out
provisions allowed the licensing regime to be exempted from any PIR. This perfunctory
treatment stands in stark contrast t o the statistical impacts of RSE licensing which
contributed to a significant re duction in superannuation fu nds from 2001 to 2016 as
discussed in Part II.
3 Prudential Standards
APRA prepared a RIS for its suite of eleven prudential standards, stating that: ‘the
introduction of prudential standard s for superannuation is aimed at improving the
governance standards of a relative minority of RSE licensees.
Of concern in its RIS,
however, was an absence of any quantitative analysis for either the costs or benefits
associated with the implementation and operation of the standards.
This absence of a clear cost/benefit impact existed in spite of APRA acknowledging
that the implementation costs by RSE licensees of the prudential standards requirements
would ultimately be borne by members of RSEs in the form of higher fees and/or lower
investment returns. From APRA’s perspective:
overall, it is not clear how large this cost will be because the Stronger Super reforms are
creating an environment with more transparency and comparability of fees and costs, and
this competition may lower fees for this reason, the costs of implementing the prudential
standards are not quantified in this RIS.
In terms of benefits for RSE licensees fro m the introduction of prudential standards,
APRA claimed that:
prudential standards provide greater clarity of how the requirements of the SIS Act an d
SIS Regulations can be met a nd requirements in prudential standards can be set in a way
Productivity Commission, How to Assess the Competitiveness and Efficiency of the
Superannuation System, Draft Report (August 2016), 16.
Explanatory Statement, Superannuation Industry (Supervision) Amendment Regulations
(Cth) 2004 (No 3) 2004 No 113.
APRA, Above n 27, 17.
Ibid 9.
2017 Accountability in Regulatory Reform: Australia’s Superannuation Industry Paradox 285
that is flexible and principles-based which provides freedom for RSE licensees to interpret
the requirements in line with the size and complexity of their business operations.
4 Labor’s FoFA Laws and Subsequent Coalition Amendments
The FoFA reforms reveal yet another RIS shortfall. In this instance, although a RIS was
provided, its limitations were marked. As previously highlighted, the Coalition
amendments to the Labor Government’s original public-interest-based FoFA reforms
were designed to repeal the ‘best interests’ duty, remove the opt-in requirement and
relax the ban on commissions in a number of areas.
In the FoFA Amendments, the Treasury authored March 2014 submission to OPBR
(‘Details-stage Regulation Impact Statement’) reported that:
The key reforms are estimated to produce average ongoing compliance cost savings of
around $190 million per year,
as well as once-off implementation cost savings of around
$88 million Overall, the measures were assessed as having a major impact on the
broader economy and therefore given a B rating (on a scale of A to D) in relation to the
level of analysis required.
This Treasury prepared RIS, despite i ts significant pedigree a s an election
commitment to reduce regulatory burdens and costs in the FSS , failed to quantify any
benefits/costs for consumers.
Effectively incomplete, it was nevertheless assessed as
adequate by the OBPR.
The RWA 2013 Report,
however, identified consumer benefits as being more than
twice that of the cost to industry over the next 15 years. In total, benefits of the original
FoFA reforms were estimated to be $6.8 billion, far exceeding the cost of $2.4 billion over
the next 15 years. This saving accords with another estimate of $6.6 billion in annual
commissions paid by superannuation members and consumers of financial products per
year prior to FoFA.
Modelling of the FoFA reforms also highlighted benefits in
addition to the savings to super members and consumers of financial products. That is,
RWA predicted that by 2027 the FoFA reforms would: boost Australians’ savings under
advice by $144 billion; reduce the average cost of advice from $2,046 (before the reforms)
to $1,163, and double the provision of financial advice from 893,000 pieces to 1.88 million
By focusing only on the cost savings to the financial services industry at the cost of
ignoring consumer benefits, the RIS attached to the Coalition Government’s FoFA
Ibid 78.
Department of the Treasury, Future of Financial Advice AmendmentsDetails-stage Regulation
Impact Statement (19 March 2014) Department of the Prime Minister and Cabinet
This estimate of industry saving is consistent with the previously published annual savings
of $187.5 million per year estimated by RWA, above n 99.
This issue is further elaborated in Taylor, Asher and Tarr, above n 125.
RWA, above n 99.
Department of the Treasury, Future of Financial Advice AmendmentsOptions-stage Regulation
Impact Statement, 2013; See Appendix B in RWA above n 99; Rainmaker Information,
Commissions Revenue Report 2010 (Report prepared for Industry Super Australia, August
2011) ; Rice Warner Actuaries, Transformation of the Financial Advice Industry (Report,
March 2010).
286 Federal Law Review Volume 45
Amendments paralleled a similar US based RIS misuse incident highlighted by Fisch.
It is also inconsistent with the guidelines in the Best Practice Regulation Handbook that:
best practice regulation-making must be effective in addressing an ide ntified
problem and be efficient in maximising the benefits to the community, taking a ccount
of the costs’.
C SummaryIndependent Review Findings
A lack of enthusiastic take-up of the RIS process therefore is relatively well
An Independent Review of the Australian Government’s Regulatory
Impact Analysis Process (‘the Review’), was extremely critical of many aspects of the
Government’s policy development processes, including the public service, ministers,
and adherence to Cabinet processes.
For example, the Review found that there was ‘a
widespread lack of acceptance of, and co mmitment to the RIS process by Ministers and
Major criticisms highlighte d included 31 Prime Minister’s exemptions from the RIS
process under the Rudd/Gillard Governments which mea nt, amongst others, that the
introduction of the Fair Work Act, the establish ment of the National Broadband
Network and the banning of the ‘super trawler’ from Australian waters, had not been
subject to scrutiny’.
Moreover, the Review Panel highlighted that while it had lacked
capacity to examine the reasons why parti cular Prime Ministerial exemptions had been
sought or granted ‘the reason appears to have more to do with it being exped ient to
decisions that the Government wanted to make.
Prime Minister’s exemptions exercised across 200814 are ascertainable from
statistics provided within the Annual Reports of the OBPR. They confirm 38 Prime
Minister’s exemptions granted (based on exceptional circumstance s) to the RIS process.
During the same period, 48 non-compliant Regulator y Impact Statements and three
regulatory changes with a substantial or widespread impact on the economy were
Of great concern around the RIS processes implemented for the RSE Reforms, the
APRA-based Prudential Standards, the exemptions granted to some aspects of the
Stronger Super Reforms, and in relation to both the original FoFA laws and the latter
Jill E Fisch, The Long Road Back: Business Roundtable and the Future of SEC Rulemaking
(2013) 36 Seattle University Law Review, 695, 744.
Australian Government, Best Practice Regulation Handbook (2010), 1.
See, eg, Daniel Weight, Governments approach to policy development criticised in formal
review (Parliamentary Library, October 2012)
David Borthwick and Robert Milliner, Independent Review of the Australian Governments
Regulatory Impact Statement Process, Review for the Minister for Finance and Deregulation
Ibid 9.
Weight, above n 158, 4.
Ibid 1.
OBPR, Best Practice Regulation Reports 201314 (2014); OBPR, Best Practice Regulation
Reports 201213 (2013); OBPR, Best Practice Regulation Reports 20102011 (2011).
2017 Accountability in Regulatory Reform: Australia’s Superannuation Industry Paradox 287
introduced Amendments, is the lack of detailed quantitative, economic-based analysis
to force the disclosure of any extraction of rents from fund members that may occur
within the regulatory structure being proposed.
In turn, the weak-form implementation of RIS both in the superannuation i ndustry
and throughout the broader Austra lian government regulatory processes generally,
provides an example of the concept of ‘corrosive capture’ as previously outlined which
is designed to ‘dismantle regulation even in the absence of public support or a strong
welfare rationale for doing so.
The reality is that a significant proportion of the regula tory reforms in the
superannuation industry in Australia over the last two and half decades have not been
required to undergo serious, cost/benefit scrutiny. Th e weak-form RIS implementation
process applied has been unable, in its formulation, application, or enforcement, to
genuinely serve the public interest.
The Afterword to the Tobin Project’s Preventing Regulatory Capture observes:
For the most part, a country’s regulatory framework serves the public interest well. It helps
keep [people] safe from pollutants, personal injury, and other harms and supports the
orderly operation of a dynamic economy. Yet the threat of regulatory capture is ever
present. When powerful interests gain excessive influence over legislators and regulatory
agencies, the integrity of the regulatory process is compromised, and catastrophic
consequences can unfold.
This article brings into stark relief, in terms of the Australian superannuati on
industry specifically and the Financial Services Sector generally, the reality that lobbying
activities for or against Government policies are continually present. While it is unlikely
that this capture risk can be removed from the regulatory reform process in the
superannuation industry entirely, it seems possible to channel lobbying activity through
mechanisms that mitigate their impact. The RIS process, fully implemented, has the
potential to provide an ef fective remedy to the reform paradox, ensuring compatibility
of public and private objectives. By forcing legislators to fully consider a detailed,
transparent economics-based analysis of both costs and benefits of any proposed
regulatory reforms, the RIS process creates the capacity to identify and reject illegitimate
rent seeking.
At present in Au stralia, patchy or non-existent implementation is thwarting the
stated objectives/purposes of the RIS process. For example, as noted in the 2012
Regulatory Impact Analysis Benchmarking Report by the Productivity Co mmission:
Of greatest concern is the perception that in so me jurisdictions proposals (often
politically contentious) with highly significant impacts are more likely not to be subjected
to adequate RIA than other less significant proposals, either because: they are more likely
Carpenter and Moss, above n 115, 1617.
Ibid 467, quoting Democrat Senator Sheldon Whitehouse and Jim Leach, a former Republican
288 Federal Law Review Volume 45
to be granted an exemption from the process by the Prime Minister, Premier, Treasurer or
relevant delegated officer.
It is of concern that the Productivity Commis sion’s findings repeat those of the 2006
Banks Taskforce Report.
Some of these criticisms have been somewhat redressed in
the release of the OBPR’s updated 2014 AGGR, but carve out provisions creating broad
discretion around linguistic interpretation remain problematic.
In discussin g the reality of the large ga p that can exist between the principle and
practice of RIS, the PC in their 2012 Report argued that:
improving RIS quality is unlikely to be achieved by simply providing more detailed
guidance material or further strengthening analytical requirements. Based on the evidence
examined, such an approach would likely on ly further widen the gap between principle
and practice. In view of this, other approaches are needed.
Our research within the superannuation industry supports this contention. There has
been a con tinued failure by Governments to fulfil their own, stated, public interest
objectives, and to enforce a d etailed, quantitative analysis in relation to regulatory
reforms. The absence of such evidence-based analysis is also inconsistent with the
OECD’s Guiding Principles, to which Australia is a signatory.
To ensure that the RIS process can more effectively blunt the force of all forms of
capture and therefore provide a remedy to the reform paradox facing Australian fund
members, the following recommendations are suggested.
First, that both political pa rties, as a social imperative, pursue regulatory capture as
a systemic risk across all agencies and legislative processes. As suggested by Whitehouse
and Leach, consideration should be given to establishing an official public advocate,
with expertise in highly technical financial regulation, who is charged with representing
the public interest during the regulatory process.
Second, integrated with the creation of an officia l, expert, public advocate, to allow
for an informed debate among different stakeholders, steps need to be taken to address
the informational advantage of all industry insiders participating i n any RIS- related
consultations. For example, both the APRA and the ASIC need to be empowered to
generate and disseminate information to remedy the informational disadvantage vis-à-
vis the industry and any lobbyists. This release of data: will help energize the public to
overcome col lective action problems and ral ly be hind t he agency … so that they can
engage in the issues, possibly against the deep pockets of the incumbents’.
Third, that political parties and the OBPR require RISs to document consideration
and adopted solutions to any potential issues that may be perceived as arising around
rent seeking. In the case of the Australian su perannuation industry, given the size and
Productivity Commission, Regulatory Impact Analysis: Benchmarking, Research Report (2012)
Taskforce on Reducing Regulatory Burdens on Business, Rethinking Regulation, (January
2006) iii
taskforce/report/regulation-taskforce2.pdf >.
See Taylor, Asher, and Tarr, above n 125.
See Productivity Commission, above n 166, 195.
Carpenter and Moss, above n 115, 473.
Pagliari, above n 118, 24.
2017 Accountability in Regulatory Reform: Australia’s Superannuation Industry Paradox 289
power of the Financial Services Sector, consideration of this variable should be included
in RIS proces ses particularly around potential rent seeking activities that impose costs
on fund members.
Included within this point should be the prioritisation of the completion of
outstanding Post Implementation Reviews (PIR).
Ensuring reviews conducted
around superannuation revisit legislati on that may have previously been exempted
through grants of exemption ‘carve outs’ would be meritorious and, going forward,
should align with standards arising out of recommendation four below.
Fourth, there is a need for the ongoing development of more rigorous statistic al
parameters for both the related costs a nd benefits of any proposed regulations, as
suggested by Posner and Weyl.
Fifth, there is the desirability of significantly restricting the carve-out and exemption
provisions that are included within the Australian Government Regulation Impact
Assessment process, as flagged in the 2012 Borthwick and Milliner Review. Specifically,
‘Prime Min isterial exemptions from the need to undertake a RIS should be provided
only in genuinely exceptional circumstances.”’
Finally, it is suggested that the Federal government seek contribution more actively
and formally from Australia’s highly experienced fund licensees in the early stages of
the RIS process to ensure a ‘voice’ is given to them and, through their expertise, to those
of the millions of fund members whose life savings are the subject matter of their
fiduciary investment care. As the Productivity Commission’s 2012 Report so pointedly
RIS documents should not be delivered to the door of executive government to inform
decisions and then disappear. RIA processes are less about giving a single answer, and
more about framing problems, scoping solutions and uncovering unintended
consequences of proposed regulatory measures. A RIS should not fade from the scene once
a regulatory de cision enters parliament, but should remain an important r eference point
in political negotiations in the parliament before final decisions are taken. In short, RIA
processes should not only better inform executive government decisions; they should also
better inform the decisions of Australian parliaments.
As detailed on the OBPR site, PIR-Table-
Required-2014-15_22072015.pdf> as at 30th June 2015, there were a total of 90 post-
implementation reviews (PIR) required. Of the 90 PIRs, in 57 cases the regulation has been
implemented, whilst in 4 instances the regulation has not been implemented and 29 PIRs
were completed and published. Eight PIRs were non-compliant for not having been
completed in the required timeframe.
Posner and Weyl, above n 135.
Borthwick and Milliner, above n 159, 11.
Productivity Commission, above n 166, 236.

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