The reputation of Australia’s $600 billion retail super fund industry is in tatters after 10 days of royal commission hearings revealed a conflict-ridden honey pot overseen by regulators unwilling to intervene, trustees unable to, and financial services companies only too willing to exploit the paralysis.

The banks and other companies operating for-profit super funds have also been exposed for thousands of flagrant breaches of the law, including the Corporations Act, the ASIC Act and the SIS Act, with seeming impunity as they squeezed every last dollar out of the mandated tsunami of super inflows.

Counsel assisting the royal commission Michael Hodge, QC, raised the possibility of prohibiting lucrative commissions on super and higher penalties for breaches of the Superannuation Industry Supervision Act at the closure of 10 days of hearings on Friday but stopped well short of structural separation.

Preference against legislation

Mr Hodge said that while certain structures such as dual-registered entities were inherently conflicted and there were issues with other arrangements involving related-party insurers or investment managers, legislative change was not desirable.

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“The very strong preference should be away from any form of legislative intervention in particular corporate structures,” Mr Hodge said.

The inclusion of superannuation in the banking royal commission was part of a poison pill strategy by the federal government that has backfired spectacularly, with the union-linked industry funds emerging mostly unscathed and the bank-owned retail funds tarnished.

The twin peaks of financial regulation – ASIC and APRA – have shown themselves to be disturbingly reluctant to pursue court proceedings against the banks and instead reach negotiated outcomes behind closed doors over clear-cut breaches of the law.

‘You’ve got their attention?’

Mr Hodge appeared exasperated with ASIC’s senior executive leader of financial services enforcement, Tim Mullaly, over an issue with ANZ’s pushing of a super product that was identified in May 2014. When shown an email from ANZ group legal counsel that was sent more than three years later, Mr Mullaly said it was clear the regulator had the bank’s attention.

“You’ve got their attention? Is that honestly what you regard as a successful application of the regulatory process?” Mr Hodge asked.

“We wanted the conduct to stop … were were able to achieve that in a very timely way without having to go to court,” Mr Mullaly said.

How is that timely?

Mr Hodge took Mr Mullaly through the four-year time line and said: “Surely you don’t believe that is a timely resolution?”

The mess was further illustrated by APRA’s inability to take action against IOOF over three matters including a messy distribution bungle that saw it raid member reserves to resolve the matter. APRA believed IOOF breached the SIS Act and the Corporations Act during the matter, however IOOF did not agree.

Internal memos from APRA show the regulator was concerned that IOOF directors were ignoring their duties, did not understand how to manage conflicts of interest, did not take compliance seriously and raised additional questions about the fitness and proprietary of its leadership. IOOF has only recently agreed to make three of the four changes that APRA has been asking for after three years of engagement.

Inherent conflicts

The closing statement followed devastating hearings that exposed the guardians that are supposed to protect the best interests of members of retail super funds from ANZ, AMP, Commonwealth Bank, NAB and IOOF as conflicted and utterly unable to perform their duties.

At the heart of the matter are the seven million retail super fund members who are seemingly at the mercy of the commercial interests of the banks which include insurance, administration, investment management, platform operation and financial advice arms.

AMP, Commonwealth Bank and NAB account for roughly half the $600 billion managed by the sector. Each was exposed during the hearings for taking funds for services they did not provide. Commissioner Kenneth Hayne has indicated this may be a criminal matter.

Three of the big four banks have rushed to divest, spin off or otherwise dispose of the wealth management businesses and associated superannuation arms over the past 12 months.

ANZ has agreed to sell OnePath to IOOF, CBA will spin off Colonial First State later this year and NAB is aiming to demerge and/or float its remaining wealth assets.

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