Are member best interests compromised by vertical integration?

The ability of vertically integrated institutions to run superannuation funds has been brought into question by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services industry.

The Royal Commission has closely examined the relationship between financial services companies and their related superannuation funds in the context of both IOOF Limited and National Australia Bank/MLC Limited.

In the case of IOOF Limited, the Royal Commission questioned IOOF managing director, Christopher Kelaher on differences of opinion between the company and the Australian Prudential Regulation Authority (APRA) on the appropriate separation of the trustee and the responsible entity.

In the case of NAB/MLC the Royal Commission posed similar questions with respect to trustee of the MLC superannuation funds, NULIS, and its handling of members’ interests with respect to fee for no service.

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In the case of IOOF, the Royal Commission questioned the status of IOOF Investment Management Limited and its role as both a Registrable Superannuation Entity (RSE) and a Responsible Entity (RE).

At the heart of the examination of Kelaher was the manner in which IOOF had sought to rectify an over-distribution out of the Questor superannuation product and the use of fund reserves to compensate affected members rather than company funds.

Specifically asked by Commissioner, Kenneth Hayne the status of the fund general reserve, Kelaher said he believed it was not an asset of the fund members.

In the case of NAB/MLC, the former chair of the MLC Superannuation trustee, NULIS, Nicole Smith, acknowledged that the trustee board of the fund had sanctioned the grandfathering of adviser commissions as part of a successor fund transfer for fear of advisers taking their clients elsewhere.

“We thought there was the potential for an attrition risk if we removed grandfathered commissions,” she said.

“I think we thought that the risks called out were real and that in the context of the timing of the successor fund transfer it was appropriate to grandfather commission,” Smith said.