Government releases intra-fund advice charging rules for superannuation trustees

The Government has released for consultation an exposure draft of the third tranche of Stronger Super legislation – the draft Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Bill 2012.

The draft legislation will introduce a new Part 11A to the Superannuation Industry (Supervision) Act 1993 (SIS Act) to set rules around the costs that can be charged across members by trustees for intra-fund advice.

The key piece of legislation in relation to intra-fund advice is section 99F, which reads:

99F Cost of financial product advice

(1)  This section applies if financial product advice is provided to a member of a regulated superannuation fund by:

  (a)  a trustee of the fund or

  (b)  another person acting as an employee of, or under an arrangement with, a trustee or trustees of the fund.

(2)  The trustee, or the trustees, of the fund must not directly or indirectly pass the cost of providing the advice onto any member of the fund, other than the member to whom the advice relates, to the extent that the cost relates to:

  (a) the provision of personal advice in relation to:

    (i)  a financial product other than the member’s beneficial interest in the fund or

    (ii)  whether the member should consolidate the member’s beneficial interests in two or more superannuation entities into a beneficial interest in a single superannuation entity or

    (iii)  the giving of a direction by or on behalf of the member to the trustee or trustees of the fund that an asset or assets of the fund attributed to a class of beneficial interest in the fund held by the member be invested in a specified financial product, or specified financial products; or

    (iv)  other prescribed matters or

  (b)  the ongoing provision of personal advice to the member (such as advice about the ongoing performance of a financial product).

There are a number of implications from the intra-fund advice provisions being drafted in such a broad manner:

• the prohibition applies to both direct advice and third party/external advice models:  the legislation will apply to all arrangements put in place by trustees for the provision of intra-fund advice to members, irrespective of whether the trustee provides the advice itself, or whether the trustee engages another entity (related or otherwise) to provide the advice¹
• spreading the costs of certain personal advice given to a member across the whole membership is prohibited, whether the cost is charged directly or indirectly: the trustee must not pass on the cost of the advice, whether directly (as an advice fee) or indirectly (as an expense recovery), to anyone other than the member who receives the advice, if the advice relates to:
  • a financial product other than the member’s interest in the fund²
  • consolidation of superannuation interests³.  (It is not clear whether this includes advice about consolidation of multiple member accounts within the trustee’s own fund) or
  • member-directed investment advice where the advice relates to particular financial products⁴.  (As an investment strategy is generally not itself a financial product, personal advice to a member about different investment strategies within the fund would be acceptable provided that no advice was given about specific financial products).
• trustees are prohibited from charging all members for ongoing personal advice given to a particular member⁵: the scope of this prohibition is quite broad, as the example given (‘advice about the ongoing performance of a financial product’) would even exclude the trustee spreading the costs of a member obtaining ongoing personal advice about their interest in the fund.  However, this appears to be the intention, given the Explanatory Memorandum to the draft legislation states: ‘the amendments only allow personal advice that is of a one-off or transactional nature to be spread across the membership of fund…Costs for an ongoing advice relationship must be charged directly to the member’.

Issues for consideration:

• Trustees that spread the cost of providing personal advice to members across the fund membership should consider their service offering to determine whether it includes personal advice about any of the three elements (financial products outside the fund, fund consolidation, member-directed investment strategies involving specific financial products) that cannot be charged to all members.  There are likely to be quite common personal advice services provided to members (such as comparisons between a member’s interest in the fund and other superannuation interests) that trustees will not be able to spread across all members.
• The prohibition will only relate to personal advice: trustees can continue to spread the cost of general advice across all members.
• The prohibition will only apply to costs passed on to members after 1 July 2013, so there is time to restructure arrangements so that, for instance, certain types of personal advice that are currently paid for by all members are funded on a ‘user pays’ basis by 1 July 2013.

¹  Section 99F(1)

²  Section 99F(2)(a)(i)

³  Section 99F(2)(a)(ii)

⁴  Section 99F(2)(a)(iii)

⁵   Section 99F(2)(b)