ASIC's guiding lights tackle superannuation's dark side
The guidance notes on improving the quality and reliability of investment research update an old document. Whether they will produce a better result is debatable.
One of the main contributors to large investment losses in the past four years has been the collapse of managed funds that were rated highly by research providers and rating agencies. This was a worldwide problem.
A major cause was the conflict of interest of research houses that not only rate new investment products but also the fund managers that invested in these products. This resulted in both the sellers of financial products and the fund managers that invested in them paying large fees to research houses to have them rated.
A example of this was the favourable rating given to collateralised debt obligations designed by large investment banks. A similar favourable investment rating was also given to the managed funds that invested in them. In many cases the CDOs were made up of mortgages sold to people who could not afford them, which were packaged together by investment banks and sold to fund managers as an investment product, and which turned out to be worthless.
The guidance notes cover issues that contributed to the incorrect rating of investment products and include the management of conflicts of interest, the quality and thoroughness of the research process, details of the way products are selected for research and the transparency of the research process.
The letter on advertising sent to industry and commercial public offer funds highlighted issues ASIC identified as being possible problems. ASIC is concerned that because of the commercial pressures being placed on superannuation funds as a result of the introduction of the stronger super reforms and MySuper, some funds could resort to advertising that did not consider the needs of consumers.
These concerns include:
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Statements that do not give a balanced message about returns, benefits and risks associated with an interest in a super fund.
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Inadequate disclosure of warnings, disclaimers and qualifications and unrealistic expectations about the overall effect of fees.
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The costs that a member is likely to pay.
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Documents containing comparisons between products that mislead consumers.
The guidance notes on the competency standards for approved SMSF auditors were issued after input from various professional groups associated with SMSFs. Unfortunately the competency standards appear to be those that relate to the competency of all auditors and how all audits must be conducted - with a few additions relating to superannuation funds - and are not SMSF-specific.
It had been hoped that these auditing standards would be more tailored to the unique situation of SMSFs.
As a result of this one-size-fits-all approach, many SMSF specialist auditors believe they are forced to conduct tests that provide no benefit to the members of the fund but adds an extra layer of cost.
An example of this was the requirement for SMSF auditors to understand internal control procedures. These are put in place to try to detect fraud committed by those who manage and account for the finances of an organisation. Given that the trustees of an SMSF are managing their own money, internal procedures to detect fraud seem pointless.
Frequently Asked Questions about this Article…
ASIC has issued guidance notes focused on improving the quality and reliability of investment research and on the competency standards for approved self‑managed super fund (SMSF) auditors. ASIC also sent a letter to industry and commercial public offer funds reminding large super funds of their advertising disclosure obligations. These measures affect research houses, fund managers, SMSF auditors and large superannuation funds.
The article notes a major cause was conflicts of interest at research houses that rated both new products and the fund managers investing in them. Research providers were often paid fees by product sellers and fund managers, which contributed to overly favourable ratings. An example given is collateralised debt obligations (CDOs) that were highly rated but later proved worthless because they were built from risky mortgages.
Conflicts of interest can lead to biased or inaccurate ratings and recommendations. When research houses have commercial relationships with product issuers or fund managers, they may give unjustifiably favourable ratings. That can mislead investors and super funds into buying products that carry higher risks or lower value than advertised.
ASIC’s guidance highlights the need to manage conflicts of interest, improve the quality and thoroughness of the research process, be clear about how products are selected for research, and increase transparency about the research methodology. These steps aim to reduce incorrect or misleading ratings.
ASIC is concerned that commercial pressure from reforms like MySuper could push some funds into advertising that doesn’t consider consumer needs. Specific issues flagged include unbalanced statements about returns, benefits and risks; inadequate warnings, disclaimers or realistic expectations about the effect of fees; failure to disclose the costs a member is likely to pay; and product comparisons that could mislead consumers.
Clearer, more balanced advertising and better disclosure of risks, fees and likely costs can help members make informed decisions. When funds present realistic expectations about returns and fully disclose fees and comparisons, members are less likely to be misled by marketing and better able to choose a fund that matches their needs.
According to the article, the competency standards largely mirror those for all auditors and are not highly SMSF‑specific. There are a few additions relating to superannuation, but the standards mostly reflect general auditing competency and audit conduct requirements rather than the unique circumstances of SMSFs.
Many SMSF specialist auditors feel the one‑size‑fits‑all approach forces them to perform tests that add cost without benefiting fund members. For example, the requirement to understand internal control procedures is seen as of limited value for SMSFs because trustees manage their own funds, making some internal control tests seem pointless.
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