Litigation risk looms for industry super funds

Any failure by industry super funds to out-perform retail superannuation funds over the long haul may act as a catalyst for future litigation. Mike Taylor reports.

When the Australian Securities and Investments Commission (ASIC) released in late August Consultation Paper 167 – its ‘Good Practice Guidance’ with respect to advertising financial products and financial advice services – it made no mention of the capacity for such advertising to give rise to civil legal action.

Instead, the ASIC document focused on financial services advertising in the context of the information it delivers to consumers 

According to the ASIC analysis, “Advertisements are an important source of information to consumers. Advertisements:

(a) promote consumer knowledge about the range and choice of financial products and services available; and 

(b) are an important way for promoters to raise awareness of their financial products and services in the market.

“Advertising therefore holds many benefits for both industry and consumers,” the ASIC guide said.

“Advertisements are designed to attract consumers and be easily understood. This has consequences for both promoters and consumers,” it continued.

“For promoters, there is a temptation to focus on the benefits or advantages and to give less prominence to unattractive features. For consumers, there is a temptation to make decisions on the basis of advertisements alone and not to seek further information, even though advertisements necessarily only contain limited information about the product or service.”

For an organisation extensively inhabited by lawyers, ASIC appears to have paid little heed to the consequences extending beyond its own regulatory activities when assessing best practice around financial services advertising.

Further, this is despite the number of occasions on which law firms have injected themselves into the aftermath of major financial services collapses, including many of those involving agricultural managed investment schemes.

Indeed it is a measure of the degree to which particular law firms have targeted the financial services industry that industry spokesmen and dealer group heads last month suggested the involvement of lawyers was motivated more by greed than by client interests.

To date, litigation in the financial services industry has been focused on advice and the manner in which it related to particular investment products such as Westpoint.

However, as indicated elsewhere in this edition of Money Management, Tasmanian Liberal Senator David Bushby has raised the possibility of financial services organisations, including major superannuation funds, being sued because of the content of their advertising, particularly the promise that by investing in a particular fund or product investors would be better off.

Indeed, Bushby even went so far as to ask the deputy chairman of the Australian Prudential Regulation Authority (APRA), Ross Jones, whether he believed superannuation funds would have enough money to meet the cost of such litigation.

Bushby left little doubt that he was referring to the multi-million dollar advertising campaign which has been run by the Industry Super Network over the past seven years, and his belief that there was the potential for litigation on the part of superannuation fund members if the claims made in those advertisements were ultimately not reflected in reality.

For his part, Jones had to acknowledge that in the event some superannuation funds were successfully sued over those advertising claims, they might not have the capacity to meet those obligations.

Asked whether APRA had made any estimates or assessments of the prudential risk for trustees who contribute member funds to advertising campaigns which might result in legal claims for false and misleading advertising, Jones said the simple answer was “no”.

He said this was because “a number of funds have no capital”.

“If there are issues with funds that would lead to members taking action against the trustees or the fund – and the fund has no capital – there is clearly an issue. 

Bushby said he believed the possibility of funds facing legal action as "probably a small risk at this point.

“But I have seen some of the ads that have been running again recently, which I do not think have even the disclosure that they used to have, and the basis on which the figures are calculated may well create an impression in some superannuation payers' minds that they are going to get that sort of return, and if it turns out that they do not – for reasons that are completely out of the control of the fund or otherwise – then they may well feel that they have an action and go and talk to Slater & Gordon or somebody about it,” Bushby said.

When Jones asked whether the senator was referring to some form of class action, Bushby said he was and asked whether APRA had actually considered the issue.

Jones confirmed that it was not something that had been contemplated by the regulator.

It would seem from its Best Practice Guidance that ASIC has also not considered the issue.

Of course, in the minds of lawyers the Industry Super Network ‘compare the pair’ advertising campaign will probably only represent ammunition for legal action in the event that the superannuation returns significantly disappoint some industry fund members, who are then prepared to pursue their complaints through the courts.

The time-scales and indicative return differentials outlined in the ISN advertising suggest that it may be at least another decade or more before they have to worry about a class action, but Bushby's questions have raised a number of issues for both APRA and the superannuation fund trustee boards it regulates.

At the very least, and irrespective of small print disclaimers, industry superannuation fund trustees will be hoping that the returns they manage to generate for members more than meet the broad promise contained in the ‘compare the pair’ advertising they first funded in 2005.