Bank cross-selling to employers: A threat to Australia's super safety net - BRIEFING NOTE

Bank cross-selling
  to employers: A
         threat to
 Australia’s super
       safety net

                     BRIEFING NOTE

     February 2015

ABOUT INDUSTRY SUPER AUSTRALIA
Industry Super Australia (ISA) is an umbrella organisation for the industry super movement. ISA
manages collective projects on behalf of a number of Industry SuperFunds with the objective of
maximising the retirement savings of five million industry super members.
Contact us:
Level 39, Casselden, 2 Lonsdale Street, Melbourne, VIC 3000
Telephone: 03 9657 4321
Email: contact@industrysuperaustralia.com
www.industrysuperaustralia.com
ISA Pty Ltd ABN 72 158 563 270 Corporate Authorised Representative No. 426006 of Industry Fund Services Ltd ABN 54 007 016 195 AFSL 232514

BANK CROSS-SELLING TO
EMPLOYERS: A THREAT TO
AUSTRALIA’S SUPER SAFETY NET

Contents
Introduction                                                                                     1
1.What successive inquiries said about the risk of banks providing super services to employers   1
2. What the law says about cross-selling activity involving superannuation products              2
3. Research into bank bundling service offers to small and medium-sized employers                3
Conclusion                                                                                       4

Introduction
It is recognised that most Australian workers do not choose their super fund, and instead rely on the
‘default’ fund their employer has selected.
This persistent consumer behaviour has led to a consensus by three recent financial inquiries (Cooper
Review, Productivity Commission and Financial System Inquiry) that Australia’s superannuation system
needs to retain decent standards of consumer protection.
These consumer protections have largely been provided by an independent process, including the
application of a ‘quality filter’, administered by the Fair Work Commission which ensures that only the
strongest performing funds are nominated in Awards as default funds.
The banks are lobbying government to scrap the super safety net and replace it with a regulatory
framework designed to suit their vertically integrated business models. The banks acknowledge that
offering inducements to employers is illegal, but are nevertheless seeking to bundle up business banking
services for employers with default superannuation services for employees.
All three recent inquiries identified the risks inherent in the banks’ proposal and supported the existence of
a super safety net that ensures default super funds are selected on merit and not just bundled up with
business banking services for employers.
The banks’ lobbying to remove consumer protections for people who do not choose their own super fund
follows the banks’ campaign in 2014 to remove consumer protections for people needing financial advice.

1. What successive inquiries said about the risk of banks
providing super services to employers
In 2012 the exhaustive review of superannuation by the Productivity Commission characterised the offering
of bundled services by the banks as a significant impediment to Australia’s compulsory super system
meeting the best interests of workers. It warned that:
            “Where an employer is free to choose any default fund for employees …. there are reasons why
            employers might not have the incentive to make a decision that is in the best interests of their
            employees, choos[ing] a fund that has additional benefits specific to them, such as access to
            financial products for their organisation”.1
The Commission recognised that small and medium sized employers especially would be unlikely to possess
the interest and expertise to choose a fund that best meets the interests of their employees and pointed to
the larger problem:
            “The Commission accepts (that there are laws which prohibit inducements being offered to
            employers on the condition that employees join a particular fund) but recognises that there is no
            requirement for inducements to be overtly offered for conflict of interest concerns to emerge. For
            example, even without prompting from financial institutions, employers might wish to consolidate

1
    Productivity Commission, Default Superannuation Funds in Modern Awards - Inquiry Report No. 60, 5 October 2012, p 60

1

all their business (including employee superannuation) with one particular institution. This might be
             administratively simpler for employers, but not necessarily be in the best interests of employees”.2
The views of the Productivity Commission were informed by the 2010 Cooper Review which spent
significant time contemplating the likelihood of agents of the banks offering bundled services to employers
- especially where it involved attracting employers to adopt a default fund on the basis that the employer
would get free financial advice subsidised by fees from worker’s super accounts. The Inquiry said:
             “The costs of providing superannuation advice services (and other services) provided to employers
             also should not be bundled into member charges or paid from member accounts in MySuper
             products under any circumstances. An employer should pay for advice services provided to it (which
             would be tax deductible as a business expense), rather than the fund members”.3
The most recent review, the Financial System Inquiry (FSI) covered much of the same ground as its
predecessors, and made much the same observation- that there is a risk posed to workers by banks
offering “auxiliary benefits specific to the employer”4. The FSI ultimately rejected the proposal by the banks
to dismantle the super safety net, in part relying on “concerns raised in several submissions, about
superannuation funds offering employers inducements to choose the fund”.5
The FSI reiterated and endorsed the PC’s finding that the MySuper regime did not provide adequate
protection for those who do not select their own super fund and that an additional quality filter was
required to safeguard the “best interests of members”.6

2. What the law says about cross-selling activity involving
superannuation products
Australia’s consumer protection laws (Competition and Consumer Act 2010 (Cth)) outlaw “third line
forcing”, where a company supplies goods or services- including discounts- on conditions that restrict the
buyer's freedom to choose with whom, in what or where they deal.
When it was established in the mid-1990s, Australia’s compulsory superannuation system recognised that
“third line forcing” by banks was a risk, setting out clear rules (Section 68A of Superannuation Industry
(Supervision) Act 1993 (Cth)) to specifically prohibit a related party, including a bank, from offering
inducements to a person or an employer in return for choosing one superannuation fund over another:
        “A trustee of a regulated superannuation fund, or an associate of a trustee of a regulated
        superannuation fund, must not
        a.     supply, or offer to supply, goods or services to a person; or
        b.     supply, or offer to supply, goods or services to a person at a particular price; or

2
Productivity Commission, p 187
3
Super System Review, Final Report, July 2010, p 19
4
Financial System Inquiry, Final Report, 2014, p 106
5
Financial System Inquiry, p 110
6
    Financial System Inquiry, p11-112

2

c.     give or allow, or offer to give or allow, a discount, allowance, rebate or credit in relation to the
               supply, or the proposed supply, of goods or services to a person;
        on the condition that one or more of the employees of the person will be, or will apply or agree to be,
        members of the fund.”

3. Research into bank bundling service offers to small and
medium-sized employers
In 2010 research commissioned by the Australian Taxation Office found that employers are largely
disengaged with superannuation obligations, and their survey results suggested that bank attempts to
bundle superannuation default products with other products or services may be effective in winning
default business.

The survey, conducted by Colmar Brunton, found that at the time 13% of employers surveyed admitted to
receiving a direct or indirect benefit from a superannuation provider, concluding that:7
        “Employers would be more inclined to consider changing their default superannuation fund if it was
        clear that membership of one fund would provide financial or resource benefit to the company”.8
In late 2014, ISA commissioned research company (UMR) to conduct an on-line survey of 550 small-to-
medium sized businesses to assess the extent of bank cross-selling their own super funds, and the
susceptibility of employers to offers and incentives.
In a nutshell the research found:
            just over one quarter of employers report having been recommended a default fund by their bank;
            two banks in particular appear to be the most active in approaching employers about their default
             super fund arrangements and then recommending their bank-owned super fund;
            some of the most common (and persuasive) offers made by the banks are those which provide a
             direct benefit to the business rather than employees (like discounts on banking and insurance
             products); and
            among those employers offered benefits, a third admit to having switched to funds promoted by
             their bank, and many more report that they are still considering switching.

We can take from this research that while cross-selling by the banks is not uniform or consistent, incentives
are being offered to employers to adopt an alternate super fund as their default fund, and are very
effective (a 30% success rate).

7
    Colmar Brunton Social Research prepared for the Australian Taxation Office. Investigating Superannuation: Quantitative
Investigation with Employers, 20 January 2010, p 55-57
8
    Colmar Brunton Social Research prepared for the Australian Taxation Office. Understanding Superannuation: Preliminary Report:
Qualitative Investigation with Employers, Consumers and Industry, 25 March 2010. Page 28.

3

Conclusion
Reflecting upon what might motivate employers considering which fund to use as a default when their
bank comes calling, business journalist Alan Kohler recently posited that ….“More likely, employers will
choose for us. But the same problem arises — on what basis do they choose? How about this: if you want to
keep your overdraft, you’ll choose the bank’s fund?”9
This research demonstrates that contrary to claims that they are seeking more competition in the default
fund system, banks are offering deals to employers which often do not prioritise the interests of
employees. The banks are seeking to design the default super regulatory framework to suit their vertically
integrated business models. This will diminish competition, not enhance it.
It is perfectly legitimate for banks to compete to be a default fund. But, consistent with the way the safety
net has been designed, ISA believes that competition should be based on the value a fund can deliver to a
member, not its capacity to bundle up business banking services and workplace superannuation.
This research marks out the case for retaining and strengthening the default safety net. A strengthened
safety net would provide some remedy to the difficulty of policing “third line forcing” and would protect
members from the inherent conflicts of interest that arise in the relationship between banks and their
employer clients. A straightforward change could be made to prohibit banks from providing default super
fund services where it provides other banking products or services to the employer.

9
Allan Kohler, Retail funds must explain why they give 25pc less than industry funds, The Australian, 22 Jan 2015

4