ASIC and APRA both scored scathing assessments in the Productivity Commission's superannuation report.
The regulators sharing responsibility for the oversight of Australia's finance system copped a grilling in the Commission's final report, which called on the Government to clarify each of ASIC and APRA roles and powers.
According to the Productivity Commission, the corporate and prudential regulators suffer from "confusing and opaque" conduct regulation arrangements for the superannuation system, noting "significant overlap" and a lack of delineation between APRA and ASIC.
The Commission's final report said that as a result, the regulators had reduced accountability, and pointed to the Royal Commission to highlight how the watchdogs were "missing in action" when it came to strategic conduct regulation.
The report's recommendations for the regulation of the superannuation system centred on clearly defining the roles of APRA and ASIC, with the Government encouraged to align their responsibilities closer to their "distinct regulatory DNA."
The report recommends APRA focus on matters of licensing and authorisation, ensuring high standards of system and fund performance.
ASIC's focus should be on the behaviour of the system's players, namely trustees and financial advisers, in addition to the appropriateness of products and disclosure.
The Commission also called on the regulators to become "member champions" by increasing their confidence and focus on members.
The Commission said too often debates in the industry went without member representation, with the voices of super funds usually dominating. The ultimate role of regulators is to protect member interests, it said.
The Commission set aside an additional recommendation for APRA: for the Government to immediately initiate an independent capability review of the prudential regulator in bid to examine how efficiently and efficiently it operates to achieve its strategic objectives.
Under a recommendation to conduct ongoing reviews of the system, the two regulators would also be required to jointly produce a report into the state of the super system, with an independent review to be conducted every five years to ascertain - among other things - whether APRA is effectively weeding out underperforming funds and options from the system.
Also recommended was an independent inquiry into the retirement income system, which would examine the role of compulsory super in the broader retirement incomes system and its net impact on private and public savings, as well as the impact of superannuation on public finances, and the economic and distributional impacts of the $450 Superannuation Guarantee contributions threshold.
The Commission wants the inquiry to be completed before any increase in the Superannuation Guarantee rate.
Finally the report recommends the Government to legislate all APRA-regulated funds be required to undertake annual outcomes tests for their MySuper and choice offerings, with clear benchmarking requirements for all MySuper and choice investment options.
The report said benchmarking should include a requirement for all investment options to be compared to a listed investment benchmark portfolio tailored to their asset allocation.
Funds should be required to undertake a 12 month period of remediation if an option falls beneath the benchmark portfolio by more than 0.5 percentage points a year, on average over a rolling eight-year period.
The Commission also recommended that until a fund complete the remediation, the prudential regulator should hold the power to stop funds launching new investment options or accepting new members onto existing options.