Why the code is still a work in progress

It was only a few days before Christmas that the Minister for Revenue and Financial Services, Kelly O’Dwyer was quizzed about the voluntary nature of the Insurance inside Superannuation Code of Conduct and signalled the Government’s willingness to regulate an element of compulsion.

Thus, superannuation trustee boards will need to not only closely examine the implications and related costs of compliance with the Code of Conduct which emerged from the Insurance inside Superannuation Working Group (ISWG), they will need to consider what happens if they choose not to comply.

The ISWG was the creation of the Financial Services Council (FSC), the Association of Superannuation Funds of Australia (ASFA) and the Australian Institute of Superannuation Trustees (AIST) and each of these organisations have signalled their hope that their constituent member superannuation funds will sign up, while acknowledging that there is no particular sanction if they do not.

The three industry bodies are the so-called “owners” of the Code but acknowledge that their ability to ensure compliance is limited.

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However, the pre-Christmas comments of O’Dwyer should give superannuation fund boards pause for thought before deciding to opt out of signing up to the code.

“The Government is concerned that the superannuation industry has walked away from a commitment to a more robust, mandatory code of practice that had been the subject of earlier consultation,” the minister said. “The Government will consider an appropriate regulatory response in light of the industry’s position.”

The voluntary Code of Practice will come into effect from 1 July, this year but funds will have a transition period, so any regulatory move on the part of the Government will necessarily follow on from how many funds actually sign up before that date.

However even if the Government were to hold regulatory initiatives in readiness for a high level of non-compliance, it risks the whole exercise running into the political maelstrom which will be the next Federal election.

What the ASFA and the AIST know is that a number of their member funds have concerns about the onerous nature of some elements of the code of conduct and the manner in which those elements might give rise to significant member issues and potential liabilities down the track.

Those concerns are being felt notwithstanding key sections of the Code document which state: “The Code operates alongside and is subject to existing laws and regulations. Where there is any conflict or inconsistency between the Code and any law or regulation, that law or regulation prevails.

“We have a legal requirement to perform our duties and exercise our powers in the best interests of our beneficiaries. We will comply with our commitments in the Code to the extent that they are in the best interests of beneficiaries and consistent with our other legal duties. However, we cannot comply with anything in the Code that limits our ability to comply with our statutory and general law duties, and our trust deed. This may require us to alter our Code commitments, which we will publish in our annual Code compliance report.

“We will use our discretion when making decisions about the insurance benefits that we provide.”

Whilst few superannuation fund executives and trustees have gone fully public with their concerns about the costs and implications of signing up to the Code of Conduct, the major group insurers and asset consultants have signalled they are aware of some of the misgivings being expressed by client funds.

Deloitte superannuation partner, Russell Mason said he believed fund trustees were being prudent in assessing the implications of signing up to the code and the potential legal implications which might flow from it.

Mason believes there will be a number of funds which opt not to sign on to the code of conduct, while still others will only do so on a conditional basis.

“The bottom line is that funds have identified elements of the code arrangements which have the potential to make them vulnerable in terms of their ability to comply,” he said.

Mason said that not the least of the problem of the problem was the question of materiality.

“So, while I expect a number of funds to indicate their in-principle support for the code, I believe there is still work to be done to satisfy them that they can safely give their unqualified support,” he said.

The chief executive of major insurer TAL, Brett Clark also acknowledged that transitioning to the new Insurance inside Superannuation Code of Practice would represent a challenge for superannuation funds and would come with its share of costs.

“There will be system implications and associated costs for implementation of the ISWG Code that will vary fund by fund,” he said.

“It is important to understand the life insurance code frameworks that exist today and will exist in the future,” he said. “We have two codes that have different but complementary applications.  We have a Life Code of Practice that applies to life insurers in terms of conduct and services across all life insurance markets including Direct, Retail and Group.   And then we have the ISWG Life Insurance Code of Practice that will apply to superannuation trustees and how they deliver life insurance services to their members.”

Clark pointed out that trustees have until 31 March, 2018 to make their decision about compliance with the ISWG code and then a transition period to implement.

KPMG superannuation partner, Adam Gee said he believed many funds would indicate their in-principle support for the code while seeking to negotiate a way around those they saw as obstacles – not least the 13 months insurance cut-off and requirement and one per cent premium limits.

“Those arrangements are simply going to seem harder to accommodate for some funds than for others,” he said.