Industry Super Australia (ISA) has called for a “better-off test” to be introduced on the sale of superannuation products following the release of research showing bank customers are increasingly being switched to lower performing retail super funds by direct advice from financial institutions.
It also called for a total ban on all sales incentives on superannuation products.
In an analysis of research from the Roy Morgan Research group between 2011 and 2015, ISA found there has been a sharp increase in the number of super fund members switching to bank owned super funds after receiving direct advice from their bank.
The finding corresponds with a dramatic 90 per cent increase in the incidence of banks providing direct advice to people who choose to switch their super funds and a 41 per cent jump in the market share of bank owned funds for those who switch super funds.
Direct, or general, advice is provided by banks to customers without taking account of the specifics of their financial situation. It is more general in nature than personal advice, can come over the counter and is not covered by restrictions on commission selling of financial products introduced in the Future of Financial Advice legislation (FOFA) in 2013.
As a result there are limited obligations for sellers to ensure super products are suitable and in the best interests of customers. There is also an exemption that allows sellers of super under direct advice to earn volume commissions banned under FOFA.
The research found that people were being switched out of funds with high net satisfaction and performance (often industry funds) into bank owned funds with lower net satisfaction and performance.
Matt Linden, director of public affairs with ISA told The New Daily “what’s remarkable is that those funds which rate most highly in terms of member satisfaction and performance are losing members to fund with lower outcomes.”
The above table demonstrates that while industry funds top both net satisfaction levels and investment performance, they are losing members through switching. It also shows direct advice is a significant factor in switching at three of the four big banks, with NAB the exception.
“Australians rely on their super to improve the quality of their well-earned retirement. It is hard to reconcile the public policy imperatives of compulsory superannuation with such behaviour,” said David Whiteley, CEO of ISA.
A “better off” test is needed
“This activity supports the need to introduce a ‘better off’ test’. Such a test would require banks to demonstrate that when they switch a member into a super fund, they will not be worse-off compared to their existing super fund.”
“A prohibition on all sales incentives relating to superannuation would also be required, “Mr Whiteley said.
“Policy makers have a moral and economic imperative to protect the super savings of millions of Australians from the cross-selling by banks.”
The Australian Bankers Association rejected ISA’s claims, with executive director Diane Tate saying “it is ridiculous to claim that the increase in major banks’ superannuation market share points to ‘obvious market failure’.”
Technology is an issue
Ms Tate said technology was driving the move to direct advice with customers wanting a one-stop-shop for their basic banking and financial services.
“Banks are using technology to make sure their customers have the convenience of being able to access all their products and services in one place, like using their smartphone, and with the confidence their money is secure.”
Senator Katy Gallagher, Shadow Minister for Small Business and Financial Services, said “Labor understands that superannuation savings are critical to people’s lives in retirement.”
” We are concerned by reports that tens of thousands of customers are switching into poorly performing super products. Australians need to know that they can trust their financial advisers to provide advice that is in the customer’s best interest.”
Labor put in place the FOFA Future of Financial Advice reforms to ensure Australians get quality advice free of conflicts of interest and defended these reforms from Coalition attack over the last three years. We will continue to ensure that FOFA is fit for purpose and facilitating quality advice.”
Mr Linden said there were significant incentives for bank staff to “bundle bank accounts, credit cards, super and insurance together to earn volume commissions”.
The New Daily is owned by industry super funds.