Introducing a cooling off period in the process of switching super funds or moving money out of the sector could mitigate the potential loss to fraudulent behaviour, the outgoing ASIC Chair said.
In an address to the National Press Club this week, Joe Longo was asked whether a “slow down” was required to stop people from switching superannuation funds too quickly, and whether that would also be used by big funds to prevent members from entering the SMSF sector.
Longo replied that introducing “frictions” into the super-switching process is something the superannuation sector is open to dealing with.
“No one wants to preside over a problem like this if there are some potential solutions. So, I think there’s going to require some engagement with the sector as to what the practical solutions might be,” he said.
“Secondly, the frictions may not be for every transfer. So, if you’re transferring your money from one safe place to another, then that’s fine. I think the remedy we’re looking for, or the issue we’re trying to deal with, is people sending their money to odd places.
“Still within regulated super space, ironically, but sending their money to an entirely different space and very quickly. And remember, that often involves lead generators and financial advisers.”
Longo continued there is no “silver bullet” and the idea of a “cooling off” is to help people step back and perhaps seek a second opinion.
“It’s as practical as that because some of the misconduct happens very quickly. Anything that just slows people down, makes them think, sleep on it. We all know from life experience that if you slow things down, you give yourself a better chance of making a wiser decision,” he said.
Longo used his address to also issue a warning to the private credit market that it is on notice.
Last month, ASIC released a report that claimed private credit may present a “systemic risk” for SMSFs and sophisticated investors in an economic downturn.
The report identified concerning practices that require addressing, including opaque remuneration and fee structures, related party transactions and governance arrangements, valuation practices and inconsistent use of terms for effective disclosure.
In his press club address Longo said the Australian private credit sector at its current levels is untested under market-stress scenarios and with a large proportion of illiquid investments in high-risk real-estate developments, there is a “good reason to be critically thinking about this”.
“That risk is amplified when we remember that private equity and credit are now firmly established as asset classes in superannuation and will continue to grow along with the rest of the superannuation pie,” he said.
“While it’s true that, as a rule, super funds tend to have a stabilising effect on markets during times of stress, the sheer size of super means we need to start thinking about it differently.
“A severe and unexpected liquidity shock could cause super funds to raise liquidity in ways that increase financial market stress. And historically, superannuation hasn’t had the same scrutiny as other institutions that are systemically important such as the banks, although that is changing.”
He said it is time to act while the sector is still “small” and if managed correctly there will be “more diversification, more competition and more opportunity for all”.
“We need to see a significant uplift in practices and if the sector can’t get this right, law reform may be required – introducing new, mandatory obligations to lift standards and address poor consumer outcomes,” he said.
“There is also work to be done flowing from the recent Shield and First Guardian collapses. There is an opportunity to strengthen the system for all Australians.
“I am repeating ASIC’s view of the need to strengthen requirements for managed investment schemes, improve data reporting, and give ASIC the powers we need to oversee this sector effectively.”
