Regulation review: superannuation edition – the column

Here’s this Wednesday’s Age and SMH column.

Illustration: John Spooner.

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.

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Paul frijters
Paul frijters
9 years ago

Good points, Nick. Do you have a solution/improvement in mind for the regulation production process? I like the basic idea of the 5-year automatic repeal procedure forcing a rethink. At the minimum it doubles the marginal cost of more regulation, probably a good thing.

Steve 1
Steve 1
9 years ago

Good point Nick, it is a bit like me and driving. I am an excellent driver. I could drive through suburban streets at 100kph and not cause an accident. Its all those other drivers who are the problem. If it wasn’t for them, we wouldn’t need speed limits, seat belts, stop signs or any of those other rules and regulations that prevents me from driving at my optimum.
Could you pleae explain whether your piece is analysis or a whinge.

Steve 1
Steve 1
9 years ago
Reply to  Nicholas Gruen

I apologise for being a bit flippant and probably a bit rude, however, there are only three asset classes, land shares and money. I believe that super, despite most of us having shares and property in our superannuation portfolios whether they are industry or smsf, need to be classed as money. What this means is that super should be viewed as a savings vehicle rather than an investment vehicle and it is the desire by people to use super as an investment vehicle that complicates its purpose and therefore neccesitates more complex regulation. It is the messing of the purpose that creates the problems that government has to respond to which always means over regulation. If you want reduced and appropriate regulation, keep the purpose of super simplified.

murph the surf.
murph the surf.
9 years ago

Perhaps the problem is that you can’t easily invest in the regulators?
As a group they look like a growth industry with excellent earnings potential.
The 5 year rule producing a better overall environment for your funds would be wishful thinking I fear . The first strategy that would emerge would be to exploit this.Compliance would have to be for oh well let’s see, one year especially after the special pleading had finished and the rules were modified so they reflect those special realities of the financial world and away we go again……
Would setting a limit on the total return to advisors equal to say the cash rate plus 5% kill the industry entirely or attract those satisfied with that return?
IIRC tracking funds mostly outperform predictions from analysts most of the time so reducing choices to a more limited set of investment models could remove the scourge of the advisor.
Or have I gone mad after a very pleasant surf in warm water under blue skies?

john r walker
9 years ago
Reply to  Nicholas Gruen

Nicholas
Regulating millions(?) of innocent potential victims is a inefficient way of detecting and putting out of action the relatively rare shonky predator hidden in amongst the mob. Have you ideas on how it could be better done?

PS overall, how are the returns on DIY super Vs compulsory super funds going?

murph the surf.
murph the surf.
9 years ago
Reply to  Nicholas Gruen

Completely in sympathy with concerns about advisors.
If you remove one tax driven investment pathway is a government obliged to help the funds that then may become available for investment elsewhere?

Avi Waksberg
Avi Waksberg
9 years ago
Reply to  Nicholas Gruen

This comment is an excellent appendix to the column.

David Walker
9 years ago
Reply to  Avi Waksberg

Club Troppo comments: Consistently adding value since 1863.

Tel
Tel
9 years ago

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.

That’s not a bug, it is a feature. The whole idea is to separate the guy who puts in the labour, from the product of said labour and most importantly from any genuine investment decisions or direct responsibility regarding where the money goes.

You are supposed to get the hint, and just give up trying to do anything on your own, throw it all to someone very special who can do your thinking for you… like an Industry Super Fund for example. If you persist in thinking for yourself like this we will just have to make it more difficult, and that would make life harder for everyone. You don’t want that now do you? There’s a good chap.

David Walker
9 years ago
Reply to  Tel

If the SMSF concept is supposed to be a devilish Machievellian plot to make people just give their money to an industry fund, the devilish plot is failing dismally. Over the past 10 years SMSFs have grown like crazy.

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[…] programs.9. And so, for thirty years we’ve had lame top down regulation review policies that don’t work. The first decade of ‘minimum effective regulation’ announced by the Hawke Government […]

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[…] If FOI solves its problems the coward’s way, regulation reviews use the sword. Today, new regulation can’t be introduced without a “regulatory impact analysis” duly demonstrating that its benefits exceed its costs. Australia introduced it in 1986, and it seemed like such a good idea that it was replicated around the world — but invariably with the same (desultory) result. Here’s the British Chambers of Commerce back in 2007: […]