Repurposing the sole purpose test post-FOFA

The sole purpose test has governed the operations of Australian superannuation funds for nearly two decades but, as Mike Taylor reports, it may require some reinterpretation if it is to accommodate the role of superannuation funds in the Government’s new FOFA world.

Amid all the discussion around the implications of the Government’s Future of Financial Advice (FOFA) changes and the influence the legislation will hand industry superannuation funds, it is worth reflecting upon how superannuation funds have utilised the freedom granted to them to provide intra-fund advice.

When the former Rudd Labor Government gave the green light for class order relief to be granted to superannuation funds to deliver intra-fund advice to their members, there were many in the financial planning industry who believed it represented the thin end of the wedge.

At least a part of the reason for the planning industry’s concern was the vigour with which the issue had been pursued by the political lobbying arm of the industry superannuation funds – the Industry Super Network (ISN). Indeed, it is arguable the ISN pursued intra-fund advice with almost the same vigour with which it is now pursuing elements of the FOFA changes.

Now, more than three years later, it has become obvious that few superannuation funds actually chose to fully utilise intra-fund advice, preferring instead to pursue the more conventional route requiring the holding of an Australian Financial Services License (AFSL) or the outsourcing of advisory services to an AFSL holder.

At least a part of the reason for the low utilisation of intra-fund advice is probably owed to the realisation by superannuation fund trustee boards that the class order relief fell well short of providing them with the ability to develop a commercial advice model.

The reality of the rules surrounding the provision of intra-fund advice is that they were always going to provide a very narrow remit.

The narrowness of this remit was made clear in a recent Association of Superannuation Funds of Australia (ASFA) submission to the Treasury dealing with the FOFA proposals which outlined the boundaries of intra-fund advice as being:

• Intra-fund advice can include personal advice – subject to the limitations contained in these principles.
• Advice that may be provided by a calculator (such as benefit projections) can be included in intra-fund advice but areas outside intra-fund cannot. For example, calculators that compare two products cannot be funded out of the administration fee of a fund.
• The provision of intra-fund advice must meet the sole purpose test.
• Areas of advice that are potentially conflicted (such as advice to switch money from another fund), cannot be included in intra-fund advice.
• Intra-fund advice must be available to all members in the fund and the trustee must take reasonable steps to ensure all members are aware that the service is available.
• Members must be made aware of the limited scope of the intra-fund advice being provided.
• Trustees must have a documented policy on how it provides intra-fund advice and this must be published on the fund’s website.

The second point made in the ASFA submission, referencing what can be paid for out of the administration fee of a fund, is possibly the most important in terms of explaining why so few funds opted to strongly leverage intra-fund advice.

The third point referencing the sole purpose test is equally important because it sits at the heart of the debate about what ought to be regarded as the core activities of superannuation funds and whether national television advertising campaigns and sporting sponsorships actually fall within that criteria.

Indeed, the points outlined in the ASFA submission would seem to raise a number of issues for the Australian Prudential Regulation Authority (APRA) in terms of the manner in which superannuation funds have structured the delivery of their financial advice models and how those models are being funded.

What is clear from the manner in which intra-fund advice was handled and how the Government is approaching its FOFA changes is that while that part of the Superannuation Industry (Supervision) Act (SIS Act) which deals with the sole purpose test may not need to be rewritten, it may need to be suitably re-interpreted.

The commonly accepted interpretation of the sole purpose test is that it prohibits a trustee of a superannuation fund from maintaining a fund for purposes other than the provision of the benefits specified in section 62(1) of the SIS Act.

In that section, there are two permissible purposes, as follows:

• core purposes – mainly for the provision of benefits relating to retirement or death benefits for, or in relation to, a member; and
• ancillary purposes – mainly for the provision of benefits on the cessation of a member’s employment, or other death benefits and approved benefits not specified in the core purposes.

When the SIS Act was drafted in the early 1990s no one envisaged that superannuation funds would be providing financial advice, and it is unlikely that anyone conceived that industry superannuation funds would be funding multi-million dollar advertising campaigns and signing up to large sporting sponsorships.

While the ISN has signalled its willingness to work with the Government on some of the fine detail of the FOFA changes, it might be of value to the financial planning industry to offer its assistance in dealing with any new interpretations around the sole purpose test.

At the very least, both the Government and APRA must provide a detailed and legally sustainable explanation of how the SIS Act and the sole purpose test are to be interpreted in a new FOFA world.