Treasury proposes lead generator, super switching reforms

Treasury is proposing a barrage of reforms that will curb dubious lead generator and superannuation switching activities and make platforms more accountable for the products they offer members.

The Enhancing member protections in the superannuation system consultation covers four key issues: making switching superannuation safer, strengthening trustee governance, limiting or better protecting advice-fee deductions from super and requiring platforms to compensate members for some investment failures on their platforms.

Treasury proposes applying a waiting period to all inter-fund superannuation switches. Members will be required to confirm the switch request for a mandatory period. If confirmation of a rollover request is not received by the transferring fund after the yet-to-be-designated period, the request will lapse after a further three business days.

Treasury also wants to limit fee deductions for switching-related financial advice and introduce codification obligations for receiving super funds to review advice fee deductions.

"The collapses of Shield and First Guardian have highlighted conduct where switching advice was provided at scale, facilitated by the availability of superannuation balances as a funding source for advice fees," Treasury said, adding that advice fee deductions also create risks for members by creating a pool of funds which bad actors may seek to target.

For platform trustees, Treasury is planning potential changes that include imposing mandatory holding limits for certain investment options and tougher due diligence when onboarding a financial product to the platform.

The initial due diligence would be focused on ensuring all products on a platform investment menu are of a high quality and are subject to active trustee scrutiny and approval, Treasury said, noting this will set out clearer minimum requirements through a legal obligation.

Treasury also wants platform trustees to compensate members for eligible losses incurred on their platform. It defines losses as "financial losses arising from external fraud or theft that result in the collapse of an investment product and would exclude losses attributable to ordinary investment performance or market volatility."

"Limiting the platform trustee's compensation obligation to 'eligible losses' would help clarify that the obligation is not intended to eliminate ordinary investment risk for members. Instead, it would draw a clearer boundary between losses attributable to the actions of bad actors, and losses that arise from normal market volatility or product underperformance," Treasury said.

Lead generation under the spotlight

Treasury proposes several areas of reforms under the Curbing lead generation activity consultation: making lead generators more accountable for their conduct, strengthening the rules on unsolicited selling, addressing conflicted payment structures and disrupting harmful or misleading advertising.

Part of the changes include imposing ongoing regulatory supervision over lead generation conduct and remuneration flows.

Treasury would also target specific actions of lead generators that are problematic, being the advertising to attract consumers and cold calling.

At present, Treasury believes there is some uncertainty about whether lead generation activities constitute "dealing or financial product advice" and this is dependent on the facts and circumstances of the individual case.

Lead generation activities that occur at the early stages of consumer engagement, such as ones related to superannuation, may not be captured by these protections where the activity does not clearly amount to dealing in a financial product or financial product advice or does not otherwise fit within the definition of financial services.

The government, therefore, wants feedback on prescribing certain lead generation activities as a type of financial service, where those activities influence consumer decision making in relation to financial products or services.

Ultimately, this will require lead generators to hold an AFSL and comply with the additional regulatory obligations under the licensing regime.

Anit-hawking prohibitions in the Corporations Act aim to protect consumers from uninvited real-time contact.

Treasury is now considering a broad-based ban on non-consumer initiated real-time contact and to "tighten the conditions that must be met for a consumer to consent to contact, and to add additional protections to ensure the consumer is aware of what they are consenting to".

It also wants to limit the scope of the financial advice exemption so that hawking cannot be "cleansed through subsequent financial advice."

This could be done via removing the personal advice exemption, restricting the exemption so that it only applies for advisers where they are offering products to existing clients or products other than superannuation products.

Furthermore, changes to capture lead generators under conflicted remuneration ban is up for consideration. These are typically third-party lead generators and their representatives that are not licensees providing financial advice or product issuers/seller whose actions could reasonably influence advice that is ultimately given to a retail client.

"This option seeks to explicitly capture lead generators in the conflicted remuneration framework, alongside the other obligations of licensees," Treasury explained.

"However, potential ambiguities around the scope of benefits captured by the conflicted remuneration provisions may still be exploited to circumvent these protections, when lead generators provide intangible non-monetary benefits to advisers."

The curbing lead generation and enhancing member protections in the superannuation system consultations are carried out in lockstep with the Compensation Scheme of Last Resort (CSLR) consultation.

Feedback from stakeholders for all three consultations is due on May 22.

The collapses of the Shield and First Guardian Master Funds have exposed industry-wide issues and misconduct that until recently have been left unchecked. These have ultimately exposed members to higher-risk products and inadequate diversification, resulting in significant losses that peaked at about $1 billion.

Many of the victims were contacted by lead generators to switch their superannuation fund to Shield and First Guardian.

Minister for financial services Daniel Mulino has subsequently released the three consultations to give consumers greater protection and realised "the need for a comprehensive reform package which responds to the ecosystem of alleged misconduct surrounding these failures."

"The Albanese Government will consider the outcomes of these consultations and progress a series of targeted, proportionate reforms which appropriately balance consumer protection, the risk of future collapses and the right of individuals to exercise choice in the superannuation system," he said.