Yes folks, the PC’s Final Report on Super tells us that the regulation of self managed super funds (SMSFs) is “appropriate” and plumps for more attention to ‘advice’ in setting up SMSFs. Verily, my gob was truly smacked and smacked again. In any event, there’s not much more to say other than to hoist an old column from the archives – below.
(In other news the PC has backed off its in-principle objection to allowing Australians access to government super funds – though its reasoning remains somewhat obscure given that much of the text opposing the idea from the Draft Report remains undisturbed in its Final Report.)
Regulation review: superannuation edition – the column
In the last fortnight, the Government has ticked one of its boxes for next year’s election, launching policies to tackle over-regulation. And Treasury Secretary Martin Parkinson was reported as intimating that more regulation was needed to address risks posed by Australia’s DIY super.
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 Déjà 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 from each initiative.
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 and can’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 largely free rein in managing their investment portfolio is a time bomb. Ask 34-year-old paraplegic, Alison Cook, whose story was reported this weekend. Her DIY super fund lost two thirds of her accident compensation payout – nearly half a million dollars – through ridiculously risky investments that earned her advisor juicy commissions.
Yet DIY super isn’t too lightly regulated. It’s too heavily regulated. It’s only a time bomb 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 multi-billion dollar funds.
To establish a DIY fund one first 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 that trustees bemusedly sign. Then another professional firm audits the fund to comply with the Superannuation Industry (Supervision) Act 1993 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? One report signatory, Penny Wong, now finds herself the Minister for Finance and (ahem) . . . Deregulation.
But all the gold plating – which on my rough figuring lowers returns by around $200,000 over the forty-year life of an SMSF – isn’t the worst of it. Even as SMSFs consume billions in professional 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 clause 4.09 since you ask).
As expensive as they are, those requirements could have rescued Alison Cook from the predation of her professional advisors. But here’s the thing; those who need the protection lack the skills to select the right advisors, 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.