Super Consumers Australia raises concerns over Treasury reforms

Super Consumers Australia has called for the government to focus on reforms that will actually protect people, warning against ineffective measures and those that will harm victims.

It raised concerns over the proposal to remove the 'but for test' from the Compensation Scheme of the Last Resort (CSLR), calling it 'deeply unfair'.

Treasury proposed a series of reforms yesterday to curb dubious lead generator and superannuation switching activities and make platforms more accountable for the products they offer members.

It also opened consultation on the sustainability of the CSLR and the best way for the industry to fund it.

These reforms are in response to the Shield and First Guardian collapses, which saw more than 11,000 Australians invest over $1 billion into high-risk and inappropriate products.

Super Consumers Australia chief executive Xavier O'Halloran said reforms need to focus on preventing harm before it occurs.

"Dodgy lead generation sales practices allowed the harm to spread at an industrial scale. Disrupting this business model should be the highest priority. The most effective way to do that is to target their revenue by banning switching fees being paid from super," O'Halloran said.

"This needs to be coupled with stronger trustee obligations, and requirements for trustees to fund compensation to victims when they fail to protect their members from harm."

O'Halloran added consumers expect trustees to act as gatekeepers and creating incentives for them to do their job will support a safer system.

In the CSLR reforms, Treasury proposes revising the treatment of counterfactual loss for CSLR-eligible financial advice complaints.

The Australian Financial Complaints Authority (AFCA) generally determines loss in financial advice complaints using a counterfactual ('but for') approach, comparing the consumer's actual position following the breach with the position they would reasonably have been in had the misconduct not occurred.

"The use of a counterfactual methodology can materially affect the amount ultimately payable by the CSLR," Treasury said.

"Depending on the nature of the investment, the relevant time horizon and the way the counterfactual is constructed, compensation may exceed capital loss alone, including where losses are assessed across individual products rather than by reference to the consumer's overall portfolio position."

Treasury poses a key policy question of if the 'but for' approach needs to be changed and if so, how to balance fair compensation for consumers with the longer-term sustainability and affordability of the scheme.

"The proposal to remove the 'but for test' is deeply unfair and undermines a basic tenet that people should be compensated for losses that flow from misconduct," O'Halloran said.

"The right way to address sustainability is to stop harm from occurring in the first place and make it easier to ensure those responsible pay. Cutting off compensation to victims who have seen their retirement savings destroyed is a counterproductive policy outcome."

While welcoming the proposals, Super Consumers Australia cautioned that not all measures will deliver the same level of protection.

"We'll engage constructively through the consultation, but it's important to be clear some of these proposals will make a real difference, and some risk taking us backwards," O'Halloran said.

"This is a critical opportunity to reset the system. Getting this right means shutting down predatory practices for good and rebuilding trust in super for millions of Australians."

Financial Advice Association Australia (FAAA) chief executive Sarah Abood welcomed the consultation papers and said the FAAA will carefully review the proposals in coming weeks and will engage with members on their responses.

"In the current system, a declining number of financial advisers are paying the largest share of the CSLR levy despite having nothing to do with the misconduct that gave rise to the need for consumer compensation," Abood said.

"Bi-partisan support for proportionate, effective reforms that help victims, prevent misconduct, and hold those responsible accountable, is crucial for investor confidence and market efficiency."

The Super Members Council (SMC) also welcomed the government's move to reset the compensation scheme by better reflecting where the biggest losses and risks are in the system.

"We strongly oppose pushing the bill for the compensation scheme's blow outs onto ordinary Australians who have chosen the safeguards of the highly regulated super system, but the proposed changes will make the scheme more sustainable," SMC acting chief executive Georgia Brumby said.

SMC added the government must ensure self-managed super funds (SMSFs) can only claim from CSLR if they help support it and make it fairer and more sustainable. Currently, SMC said SMSFs account for about 80% of existing claims on the CSLR scheme relating to advice in that sector.

The Association of Superannuation Funds of Australia (ASFA) said the recommendations will go a long way in reducing CSLR claims in the first place.

"Unregulated lead generators, aggressive sales tactics, and conflicted financial advice have caused real consumer harm. Better licensing, more time for funds to check the safety of transactions, and stronger advertising frameworks will be much-needed guardrails," ASFA chief executive Mary Delahunty said.

"The vast majority of Australians have their super savings in a safe, tightly regulated system. But today's announcements address activity on the edges of this safety zone."

ASFA also welcomed the government's step to review CSLR's funding arrangements.

"ASFA welcomes this as a step towards a fairer outcome for the millions of super fund members who contribute to the scheme but cannot claim from it," it said.

Delahunty said the detail will matter, and ASFA looks forward to consulting with government on behalf of the superannuation sector over the coming months.

SMC said the government's proposal lacked detailed review on conflicted remuneration and refreshing official guidance to ensure there are no loopholes in this key protection.

"This is missing from the government's proposals and there is further work to be done," SMC said.

"The proposals are important steps towards protecting Australians from catastrophic financial collapses that destroy their retirement savings - but there is an opportunity to go further," Brumby said.

"If people are considering switching from a tightly regulated super fund into a potentially higher risk product, they deserve clear, like-for-like information that genuinely helps them understand the difference this will make to their retirement - so they're not left comparing apples with oranges."