Regulation changes won't fix super flaws
The contrast between minimising regulation "in general" while expanding it in particular illustrates Lord Acton's dictum about rowing as a preparation for public life - enabling one to face in one direction while travelling in the other.
The government is imposing stronger disciplines for regulators to perform regulatory impact analysis (RIA) before regulating. But we've been strengthening compliance on RIAs for two decades now and it doesn't work. Years ago the British Chambers of Commerce diagnosed the problem in its publication "Deregulation or Deja Vu?"
Both Conservative and Labour administrations approach deregulation with apparent enthusiasm, learn little or nothing from previous efforts and have little if anything to show for it.
Our model of regulation review was a noble try at its birth late last century as Western governments rationalised the detritus of decades of ad hoc political favouritism and regulatory capture. But it failed even then. Bureaucracy and politics rewards "can do" types, so regulatory impact analysis became a box ticking exercise, obeyed in the letter, but not in spirit.
Today with much of the purely deregulatory work done - with governments vacating the regulation of airline schedules and shopping hours - the quality and responsiveness of regulation matters more than its quantity. But regulating well involves finessing the micro-detail - as does running a business or building software - and economists' cost/benefit or regulatory impact analysis doesn't stoop to the micro-detail. Neither does business or political advocacy against over-regulation.
Take the Treasury secretary's concerns on DIY super. He's right: allowing unsophisticated investors free rein in managing their investment portfolio is a time bomb. Ask 34-year-old paraplegic Alison Cook, whose story was reported at the weekend. Her DIY fund lost two-thirds of her accident compensation - nearly half a million dollars - through ridiculously risky investments that earned her adviser juicy commissions. Yet DIY super isn't too lightly regulated. It's too heavily regulated. It's only the time bomb it is because it's exquisitely badly regulated.
Most self-managed super funds (SMSFs) comprise a diversified pool of "vanilla" assets - shares, bonds and cash - managed by families for their retirement. So, unsurprisingly, most are sensibly self-managed. But incredibly, the regulation governing DIY funds is a cut-down version of that governing multibillion-dollar funds.
One needs a trust deed - usually purchased from a city law firm (mine runs to 64 pages and sits, unread, on file). And while mum and/or dad go trustee and manage their own portfolio, their accountant manages "compliance", drafting resolutions for bemused trustees to sign. Then another professional firm audits the fund to comply with the Superannuation Act and regulations.
For simple "vanilla" funds all this could be handled at a fraction of the cost, as our taxes are, via self-assessment subject to risk targeted random auditing by the ATO. At the very least shouldn't we accept Recommendation 30 of a 2007 Joint Parliamentary Committee, that where funds consistently comply, they revert to five yearly rather than annual auditing?
But all the gold plating - which on my rough figuring lowers returns by around $200,000 over 40 years - isn't the worst of it. Even as SMSFs consume billions in services per year, horror stories are increasingly common. Meanwhile the auditors tick boxes - just like the regulators.
Each year my fund is audited to comply with Sections 52(2)e, 52(2)d, 62, 65, 66, 67, 69-71E, 73-75, 80-85, 103, 106, 109, 111, 112, 113(1A), 121 of the Act and Clauses 4.09, 5.08, 6.17, 7.04, 13.12, 13.13 and 13.14 of its Regulations. Auditors check that funds have an investment strategy considering risk, return, liquidity and diversity and that the investments are in line with the strategy (That's regulation 4.09, since you ask).
As expensive as they are, those requirements could have rescued Alison Cook from the predation of her professional advisers. But here's the thing; those who need the protection lack the skills to select the right advisers, lawyers, accountants and auditors.
So here's the bottom line: Our DIY super regulation is hugely and wastefully over-regulated for people like me who fancy they don't need all the professional "help". But with a carnival of high-risk investment products and predatory investment spruikers out there, all those ticked boxes are an elaborate and cruel hoax for the unwary.
Oh, and the government's new regulatory policy will do nothing to address any of this.
Frequently Asked Questions about this Article…
The article argues that self-managed superannuation funds (DIY super or SMSFs) are both wastefully over‑regulated and still poorly protected. Heavy, box‑ticking compliance and complex rules raise costs and reduce returns, yet they don’t prevent predatory advisers or risky investment behaviour that can wipe out savers’ balances.
DIY super refers to people managing their own retirement savings through a self‑managed super fund (SMSF). The article says most SMSFs hold 'vanilla' assets like shares, bonds and cash and are sensible, but unsophisticated trustees can be vulnerable to high‑risk products and commission‑driven advisers — illustrated by a case where a fund lost two‑thirds of compensation through risky investments.
According to the article, SMSFs require formal trust deeds (often lengthy), trustees typically rely on accountants for compliance paperwork and then pay for annual audits to meet many sections of the Superannuation Act and related regulations. Auditors check that funds have an investment strategy addressing risk, return, liquidity and diversity, making compliance expensive and time‑consuming.
The author describes the extensive compliance and professional service costs as 'gold‑plating' that unnecessarily inflates expenses. Their rough estimate is that these extra costs can lower retirement returns by around $200,000 over 40 years, reducing the benefit of self‑management for many trustees.
The article supports reducing auditing frequency for consistently compliant funds, citing Recommendation 30 of a 2007 Joint Parliamentary Committee: where funds consistently comply, audits could move from annual to every five years. It also suggests simple self‑assessment coupled with ATO risk‑targeted random auditing could handle 'vanilla' funds more efficiently.
Alison Cook, a 34‑year‑old paraplegic, reportedly lost two‑thirds of her accident compensation — nearly half a million dollars — to extremely risky investments that benefited her adviser with large commissions. The article uses her story to show that formal rules and audits didn’t protect an unsophisticated trustee who lacked the skills to choose trustworthy advisers.
RIA is the requirement for regulators to perform cost/benefit analysis before creating new rules. The article criticises RIA as often becoming a bureaucratic box‑ticking exercise: strengthened over decades, but failing to address the micro‑detail needed for effective regulation. Economists’ high‑level cost/benefit studies rarely solve the practical, granular problems that affect SMSF trustees.
No. The article states the government's new push to improve regulatory impact analysis and minimise 'over‑regulation' generally will not address the specific, practical problems with DIY super — namely costly, box‑driven compliance and poor protection of unsophisticated investors from high‑risk advisers and products.
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