The escalating fee-for-no-service scandal will likely top $1 billion, according to the Australian Securities and Investments Commission, which is preparing to sue banks and other financial institutions for gouging customers.
ASIC deputy chairman Peter Kell told the banking royal commission on Friday that the regulator had considered taking criminal action where customers were changed fees for services they did not receive.
The practice is so widespread that the Big Four banks and AMP expect to have to repay $750 million.
But smaller banks have also started to confess and Mr Kell said the extent of the problem would probably exceed $1 billion.
Banking commission investigation on super wraps up
He committed ASIC to investigating how much extra profit the banks have managed to generate because they collected the fees.
ASIC is seeking what what it calls “disgorgement powers”, which would see profits obtained by law-breaking activities confiscated.
But the ASIC action on fee for no service masks the overriding message of counsel assisting during the rest of Friday’s hearing.
Michael Hodge painted the superannuation sector as one which is policed by soft regulators who either don’t bother taking companies to court or threaten to do so, but don’t make good on the threat.
Outcomes are “negotiated” and wrongdoers are given time to move their operations into line. As an intervention by Commissioner Kenneth Hayne established, court orders would put a stop to any unlawful behaviour immediately.
The commission heard how the the big banks, AMP and IOOF are all likely to have contravened superannuation laws yet the industry’s chief regulator, the Australian Prudential Regulation Authority, has not brought any court cases or enforceable undertakings for the past decade, the banking royal commission heard.
With APRA deputy chairman Helen Rowell in the witness box, Mr Hodge wanted to know why no action had been taken against the perpetrators of fee-for-no-service activities given they could represent breaches of the sole purpose test.
He said: “Do you know whether APRA has considered this question: if a trustee is automatically or regularly debiting money from members’ accounts and paying it to advisers who are not providing a service to the members, is that consistent with the sole purpose test?”
Mrs Rowell responded: “I think I would need to consider that more fully to give a specific answer. I mean, we – we don’t typically look specifically at individual commissions or other arrangements, but prima facie it would seem unsatisfactory from a member’s perspective to be paying fees for which they’re getting no service.”
She said APRA was waiting for ASIC to complete its work and had not yet formed a view on whether it should take action.
Mr Hodge wanted to know why ASIC appeared to use threats of court action to as a bit of bluff – something to make companies think they are serious.
“Do you think that financial institutions might take ASIC more seriously if when it drafts a concise statement, says it’s going to file it, it actually follows through and does it,” he asked.
Tim Mullaly, the senior executive leader in financial services enforcement, said ASIC conducted plenty of court cases. But in some instances, enforceable undertakings produced quicker outcomes.
Between 2003 and 2008, APRA has able to administratively disqualify super fund trustees on the basis they weren’t fit and proper.
During that period 133 such disqualifications occurred. Since 2008, when APRA had to apply to court, one disqualification has occurred, and it was in relation to Trio Capital.
APRA can take civil action against breaches of the sole purpose test but has never done so.
Mr Hodge singled out AMP, Colonial First State and IOOF to demonstrate a lack of action by APRA.
As the commission had previously heard, the board of AMP Super is at the mercy of other parts of the business when it comes to setting fees and investment return targets.
For several years AMP had been reducing the targets, Mr Hodge said.
He said the change was initiated not by the trustee, but by the investment manager and life insurance company – other parts of the AMP group.
Asked it that was an adequate arrangement, Mrs Rowell said it was the trustee’s responsibility to make decisions about targets.
“And if a trustee didn’t have contractual rights to be able to refuse to accept that target or to insist that an investment manager have a different target, does that mean that there is a problem for the trustee,” Mr Hodge wanted to know.
“We would see that as – as unsatisfactory, and – and not enabling the trustee to fulfil their obligations under the SIS Act,” Mrs Rowell said.
In evidence earlier in the week it was revealed that Colonial First State contravened the SIS Act at least 15,000 times between January 2014 and April of that year.
Super funds were required by law to transfer all default contributions to no-frills MySuper products.
The idea was to ensure people who did choose a fund would be tipped into a low-cost product so their balance was not eroded by fees.
After the first 15,000 contraventions, APRA agreed a remediation plan with Colonial.
When the errors continued to occur – with APRA’s knowledge – Colonial was essentially left to its own devices to remedy the breaches. APRA took no enforcement action.
In addition, APRA approved a letter and call centre script that even Colonial has now conceded was misleading. Customers were duped into remaining in higher cost products when they could have gone into a MySuper product.
Mr Hodge also said: “Retail trustees were taking active steps to try to obtain investment directions, rather than … transition over to MySuper products?”
Mrs Rowell replied: “We were aware that was occurring.” No industry-wide action was taken.
APRA’s dealings with the conflict-ridden IOOF group were also examined.
The regulator had uncovered a “multitude of concerns” about the governance and conflicts management of IOOF, the commission heard.
They included that “the IOOF board does not view compliance and conflicts management as areas that matter”, and that the ” board appears resistant to detailed documentation”.
APRA employee Stephen Glenfield said the regulator’s legal counsel took the view that there wasn’t enough admissible evidence to take a case to court on three specific breaches.
After news broke that ANZ was selling its wealth arm to IOOF, APRA told the IOOF board in June this year that splitting the dual structure was a minimum requirement. This has still not happened.
IOOF’s chief executive, Chris Kelaher, agreed in evidence last week that he did not “share the view of APRA that there are legitimate concerns about the dual structures but ultimately it’s easier to make changes rather than having to deal with the complaints”.
Mr Hodge asked whether APRA regarded IOOF as a “successful intervention?”
Yes, Mr Glenfield, said, from a “long-term point of view”.