FSC ups expectations on platform trustees' governance

A new standard from the Financial Services Council aims to strengthen governance practices across superannuation platforms, including limiting unadvised members to simpler investments, enhancing due diligence of options, and greater oversight of advisers using the platforms.

The Wrap Superannuation Platform Trustee Investment and Adviser Governance Principles: Standard and Better Practice Guidance has been developed in consultation with industry and is to commence July 1, with mandatory compliance from 1 January 2027.

The FSC said the new standard promotes "the best financial interests of members by strengthening the governance settings that support informed choice and sound investment outcomes, and supports trustees in delivering this choice in a manner that appropriately respects the professionally advised relationship, while maintaining sound governance guardrails to mitigate the risk of poor member outcomes and preserve the flexibility that is fundamental to platform products."

Under the standard, the FSC expects enhanced due diligence prior to the onboarding of any option onto an investment menu.

It said this would include due diligence on key disclosure documents, the option's fees, costs, liquidity characteristics, and stress testing. Trustees should also consider the option's distribution profile and growth dynamics, how the issuer or responsible entity manages conflicts of interest, and consider any external research or ratings of the product.

The FSC also wants to see the ongoing monitoring of options' appropriateness strengthened. This should include consideration of the ongoing suitability of the issuers and REs and of investment management, as well as material changes to disclosure documents, valuation practices and monitoring price feeds. It should also include oversight of liquidity characteristics and redemption terms, conflicts of interest, and changes to research house ratings.

The standard also calls for heightened due diligence of financial advisers and advice licensees before onboarding them to the platform. The standard says platforms should enquire as to licensees' business models and supervisory controls, including how it sources new clients, the types of advice it provides, how it is typically delivered and paid for, and whether any referral partnerships are in place.

It should also look into whether the licensee maintains adequate procedures and controls around adviser onboarding, training and competence, scope of advice, conflict and dispute management, and remediation. The FSC said platforms may wish to have a pathway whereby a licensee or adviser is approved by is subject to additional controls, like a watchlist. There should also be a framework in place for ongoing monitoring of advisers and licensees, it states.

When it comes to advice fee deductions, the standard requires trustees to monitor adviser fee flow patterns and adviser activity on member accounts and, among other things, where it has concerns deductions are not compliant, contact the member to find out whether advice was actually provided, while also collecting evidence from the adviser and their licensee. It must also switch off advice fees while these investigations are ongoing.

Finally, where a member is unadvised, trustees must put in place protective measures such as communicating with them where they exceed holding limits, prompting them to consider accessing advice, forcing them to declare they have reviewed the PDS when making a new investment, and monitoring whether they're on track to meet minimum pension withdrawal requirements.

To ensure they are capable of meeting the standard's requirements, the FSC said trustees must consider whether they have access to appropriate resourcing, skills, systems and quality controls, and whether it may require engaging third parties.

"Ensuring that trustees are appropriately equipped to discharge these responsibilities is essential to maintaining member trust and confidence in wrap superannuation platforms as a vehicle for retirement savings," the FSC said.

In releasing the standard, FSC chief executive Blake Briggs said the industry is responding to calls for a concerted effort in achieving governance uplift, with the industry body choosing to act now rather than await the outcome of proposed reforms.

"Platforms play a critical role in enabling Australians to access a wide range of investment opportunities with the support of financial advice," Briggs said.

"Within the range of policy options being considered, there are several worthwhile and significant reforms being proposed, including enhanced MIS governance and surveillance, curbing harmful lead generation, and requiring trustees to stand behind their investment governance processes, which together would strengthen the system and materially reduce the risk of inappropriate products being mis-sold under conflicted commercial arrangements."

In response to the FSC's move, minister for financial services Daniel Mulino said: "It's positive to see industry coming to the table and recognising the need for an uplift in governance and regulation in the platform sector."

"This is a substantial body of work that will complement sensible regulatory and legislative reforms which the government is currently consulting on."

The standard applies to all full FSC members who are wrap platform super trustees. This includes the seven largest wrap platforms by market share, which account for 90% of total platform funds under management.