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Navigating Regulatory Waters: Friend or Food? How To Stay Ahead in Financial Services

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Summary of major decisions

The 2020 Federal Budget was delivered by the Treasurer, Josh Frydenberg, on Tuesday 6 October. This year’s budget was delayed by six months due to COVID-19.

The majority of budget measures focused on rebuilding the economy and creating jobs, with a raft of measures announced to benefit individuals and businesses, as well as funding for COVID-19 vaccine research, and a projected deficit of over AUD213 billion.

A “cheat sheet” of key budget measures can be found here.

For fund managers and institutional investors, the main changes related to three measures around superannuation:

  • Changes to default superannuation – ‘Your Future, Your Super’ measures:

a. Superannuation will ‘follow’ members from job to job, replacing the model where members could elect their fund each time they start a new position

b. Members will have access to an online tool to track performance

c. Greater accountability on funds to act in members’ best interest and disclose how they are spending members’ money

  • The prudential regulator (APRA’s) annual benchmarking tests for superannuation products: Funds will be required to meet an annual performance test which the government says is aimed at protecting members from poor performance and lowering fees
  • Additional funding to address serious and organised crime in the tax and super systems. 

The Government has also addressed the Budgetary impact of several previously announced measures, including:

  • COVID-19 temporary early release to superannuation
  • COVID-19 temporary reduction of superannuation minimum drawdown rates
  • Deferred start date of the Retirement Income Covenant
  • Facilitation of closure of eligible rollover funds (ERFs)
  • Revised start dates for superannuation measures.

Also of interest for fund managers was an additional $14 billion allocated to infrastructure spending for projects across regional Australia, and enhanced funding for the Australian Renewable Energy Agency (ARENA) and Clean Energy Corporation to support the development of new technologies to lower emissions. However, there were few other environmental initiatives focused on emissions reduction and environmental sustainability.

Industry responses

The industry provided a lukewarm response to the measures. Below is a summary of statements from key industry lobby groups and associations.

ASFA, which represents both industry and retail funds, said the changes “lack body.” While the group welcomed measures to improve retirement outcomes, it said the “Devil is in the detail”, indicating more information was needed.

The body representing wealth managers, banks, and retail funds, the FSC, focused on the wins for individuals (Super consumers and taxpayers), particularly the ‘Your future, your super’ measures, which it praised. The FSC also welcomed moves to lower the Managed Investment Trust withholding rate for a range of countries, and modernise and expand its tax treaty network, which it said would help Australian fund managers compete on the world stage.

The Australian Banking Association welcomed the budget and said it would continue to partner with the government.

The associations representing industry funds (and, by extension, the labour movement), ISA and AIST both welcomed the reforms to super measures designed to weed out underperforming funds, but said more detail was needed. AIST also warned against stapling members to a fund for life.

CPA Australia welcomed the super measures that would help individuals port their accounts from job to job, but was disappointed by the lack of support for Australian superannuants to rebuild their super savings post-COVID-19.

The Australian Investment Council was supportive of measures that support business investment: R&D tax incentives for businesses, a focus on manufacturing industries, and the extension of tax incentives to encourage businesses to invest in, and employ, staff.

BlueChip’s view: a war time budget with ideological foes in the Government’s sights

The Liberal government has effectively aimed to make the delayed annual Federal Budget a “war time” budget. Analogies are being drawn with FDR's “new deal” so it may well be they hit that mark even with more left-leaning media. Notable critiques however included the lack of measures to support women and older people.

Surprise changes to super, possibly targeting pension fund activism

In a surprise move (even the board chairmen of the most politically 'neutral' super funds were unaware of this announcement) the government openly sought to restrict the power of the large pension funds in two key ways:

  1. First by proposing two key changes that would potentially restrict member acquisition and creation of multiple member accounts. First, the new fund ‘portability’ rule may restrict the ability of fund members to create new super accounts after their first fund membership, giving incumbency benefits to some funds, such as REST and HostPlus. The latter two serve retail and hospitality staff, and as a result are often the first fund for young people entering work for the first time. A second element of the legislation may restrict a non-performing fund from even accepting new members. “Performing” will be assessed via a public, government-created, comparison. So again, the devil will be in the detail for institutional clients. Those uncomfortable with APRA’s heatmap may well be even less pleased with the final form of this initiative.

  2. Restricting the ability of funds to take a position on 'non-financial' matters such as ESG. This appears to be a direct response to fund activism on governance and the environment, partly the most recent high profile matters involving AMP and Rio Tinto. Institutional investors notably contributed to former bank CEO and AMP Chairman David Murray and fellow board member John Fraser exiting their roles following a highly public sexual harassment claim against a former AMP asset management CEO, who was promoted by Murray.

For context, more conservative business power-brokers have long signalled, publicly and behind the scenes in Canberra, discomfort with the rising power of the industry pension funds. Concerns cited include influence over Australia's publicly listed companies, and claims that activist investing perverted boards and leadership teams' ability to create and pursue both strategy and unrestricted operations.

A more Manichean reading of the lead up to last night's announcement is simply that COVID19 is good cover to achieve a much-longed for reversion to “how things used to be”. Less power to the super funds would potentially achieve a return to a situation in which boards, investment banks and government have more control of capital, and some commercial outcomes, rather than that control sitting with industry funds which increasingly exercise their votes, investment choices and censure of boards and CEOs in line with ESG considerations in parallel – and sometimes ahead of short-term – financial ones.  

What does this mean for fund managers?

It depends which side of the political divide – and ESG ethos – you sit on. For managers with strong ESG credentials including an observable track record of achieving corporate and social change in pursuit of an ESG-led investment ethos, it's probably good news, with one caution.

The good news for ESG managers is that their largest client group - the industry funds (the majority of Australia's non-sovereign institutional investors) - will not drop ESG as a theme or increasingly dominant MO because it's central to their member-led purpose-focused ethos. However, they will have to find other ways to 'get the job done“.

History shows these funds expect their fund managers to act in line with their own views and values, should the manager not have already evidenced a propensity to do so. So ESG-led managers, particularly those with a strong stewardship or activist investor bent, may stand to benefit in a roundabout way from the proposed new restrictions on their clients, should those proposals become law (which is highly likely).

The caution is: most fund managers won't want to fall foul of the government of the day in any country, but particularly not one running a “war time effort” or agenda in which opposing views can be cast as anti-“Team Australia”. Support for clients, or action on ESG where it runs counter to government policy, may have to be pursued with care. Or abandoned, at least in public.

The cost-benefit may well be to be “out” on ESG, particularly where it's central to your differentiation and investment process. Our advice is:

  • assess the environment, and get advice on the emerging policy and budget landscape of this unusual “COVID-19 budget” 
  • make well considered choices about public statements, rather than blindly pursue an “ESG is good” narrative.

A smart move for many industry associations, and some individual managers, will simply be to engage elected officials in the major parties – starting with backbenchers - to hear more, seek to understand their agenda, and position your fund accordingly.

Australia is a small country. While decision-makers have long memories, it's also true that many are remarkably accessible. Constructive and well-planned engagement with elected officials, regulators and commentators, often yields valuable information to inform and shape strategy.

For financial services PR and marketing insights subscribe to BlueChip's fortnightly round-up 'Take a beat Tuesday'.

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