Point of view: A tough choice for advisers

One of the persistently used objections to choice of fund is ‘mis-selling’. Mis-selling is when a person is advised to move from their existing superannuation product to an inferior product.

Often the UK experience of ‘pension mis-selling’ is cited. One commentator has estimated a total of £11.5 billion compensation for pension mis-selling has been paid to date.

For companies responsible for mis-selling by advisers, their PI policies may provide no support if the deductible limit is very high and the aggregation clause precludes aggregation.

Another aspect of the UK pension mis-selling episode was that many individual pension issuers were required to cease selling product and retrain their entire sales force.

Will Australia, once choice of fund commences, have the same experience? And if so, who will bear the legal liability for compensating the victims of poor choices?

How do the UK (1988 to 1994) and Australia (post-July 2005) compare? In the UK, ‘pension choice’ was justified on similar grounds to fund choice and the advisers were both subject to ‘know your customer’ and ‘best advice’ requirements.

But there are significant differences. First, the UK mis-selling occurred in the context of employees moving from defined benefit products to accumulation products. Secondly, in the UK the employer was not required to provide super support if the employee opted out of the employer’s fund.

While in Australia the comparison will generally be between accumulation type products, this does not mean there will be no mis-selling in Australia.

An adviser will have to undertake a proper benefit-by-benefit and fee-by-fee comparison between the current product and the proposed product. The adviser will also have to consider the other features of the product such as the level of underlying investment manager fees, and an assessment of service standards and the quality and breadth of investment options.

Possibly, the greatest danger area for advisers will be the assessment of risk benefits — either not attending to the comparison or failing to consider all the relevant features of the comparison.

Further, moving from one product to another will involve medical re-underwriting and refreshing of the health and pastimes representations, plus an opportunity for the new insurer to apply premium loadings or exclusions.

If the adviser fails to exercise reasonable care in undertaking this comparison and this failure manifests itself in financial loss, who would be liable? Obviously, the dissatisfied employee will seek compensation from the adviser (read the adviser’s dealer). But the adviser may also owe a duty of care to the employee’s dependants who could also suffer loss.

Can the adviser seek to pass on its costs to its PI insurer? Possibly, but the impact of the deductible limit may rob the PI coverage of any benefit.

In the absence of the dealer being able to meet the claim, can the employee seek compensation from their employer? Or from the product issuer?

In the choice of fund context, the legislation attempts to exclude the employer from liability to compensate any person for loss or damage arising from “anything done by the employer in complying with this Part” (s32ZA). The scope of this protection will ultimately be tested in litigation.

However, the immunity is in respect of things done in compliance with the choice of fund legislation. The act of choosing a super fund as the default fund is a thing done in compliance with the legislation. But is choosing an inferior super fund as the default fund a thing done in compliance with the legislation? The protection of s32ZA may not be as complete as it seems.

In relation to the product issuer, it seems unlikely the product issuer will pick up liability simply by being the product issuer. Obviously if the product issuer is also the adviser then it will acquire liability by reason of being the adviser. The product issuer may acquire liability if the issued product is defective or falls short of its description in the product disclosure statement.

The end result of the choice of fund legislation is that for advisers, a comparison between accumulation products may not be a simple mechanical exercise, but will require an analysis of all relevant features of the two products.

For employers, the statutory protection of s32ZA may not be a simple incantation, that once said, can ward off all evils — including civil liability and plaintiff lawyers.

Employers may have to rely on the traditional remedies against liability of ‘disclaimers’ and ‘warnings’ to clearly negate any assumption of responsibility by the employer for the employee’s super arrangements, and to negate any reliance by the employee upon the employer choosing an appropriate super fund as the default fund or monitoring the fund’s continuing suitability as a super fund for the employee.

Michael Hallinan is special counsel with Peter Townsend Business Lawyers.