News & Commentary

Final Cooper report 30 Jul 10

By Robin Bowerman, Principal and Head of Retail

The Federal government’s third leg of its review/reform agenda for the financial services industry has been delivered.

The Cooper Review into efficiency, structure and operation of our super system is complete and the final report delivered to the desk of the Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen. Covering 10 categories with 177 specific recommendations the review’s final report lays out a roadmap for a much more cost conscious, member centric system that will hopefully serve Australian super fund members well for the next two decades.

The two “big rocks” on the recommendation list – MySuper and SuperStream – will have more direct impact on super default fund structures and back office administration than financial planning services.

However, the choice and member engagement framework (if adopted by the next federal government) has the potential to effectively segment the investor universe from a financial planner’s perspective given that one of the requirements for the MySuper default fund will be the provision of intrafund advice.

It also presents a consistent and supporting argument for Minister Bowen’s proposed reforms on adviser remuneration. The Cooper review – perhaps not surprisingly – takes aim at up-front, trailing or volume-based payments and is recommending that trustees of super funds be banned from paying them.

Specific recommendations that impact advice delivery are:

• Fundamental opposition to the notion of “bundling” of advice with super products
• Trustees of MySuper and Choice products “should not pay or fund any product-based upfront or trailing commission … or make or fund any payment that relates to volume”.
• Extends the ban on commissions to include life insurance
• Advice to members or employers cannot be bundled with choice products (including products offered to SMSFs)
• Specific legislative conduct and enquiry duties to be applied to people providing switching advice to a MySuper member
• Intra-fund advice  a key requirement to satisfy criteria for MySuper default fund status
• The SMSF sector got largely a tick of approval for the way it was operating
• A two-year transition period is recommended

The intra-fund advice requirement is potentially a delivery challenge for industry funds while they will also be impacted by the proposed segregation of MySuper accounts and the clear intent to restrict cross-subsidisation across fund members.

A key plank of the Cooper Review recommendations is the strengthening of trustee duties to more explicitly acknowledge that trustees have higher duties of care to that large group of fund members who are in the default MySuper option and typically are unengaged from their super.

On the investment strategy side there are a number of key recommendations. These are that:

• MySuper trustees will need to “formulate a single, diversified investment strategy at an overall cost optimising fund members’ financial best interests, as reflected in the net investment return over the longer term”
• Trustees to be required to focus on the investment return objective and level of risk – called “risk and return targeting”.
• The MySuper product would also need to offer a retirement income stream product
• That the SIS Act be amended to require trustees to have regard to after tax returns as a key outcome

Much of the cost savings estimated in the report will flow from the Super Stream recommendations which is comprehensive and really aims to bring super into the e-commerce world once and for all.

Considerable attention is also paid to transparency around outcomes – benchmarking of funds; disclosure of fees and risks – with a clear objective in mind to improve comparability across products and help drive cost out of the system either through scale benefits or competitive pressures.