Hillary: “Just promise the cheating will end … ”
Bill: “You have my promise. You know that I am honest, 110 per cent.”
Hillary: “But how can I know that’s true?”
Bill: “Would I ever lie to you?”
Lyrics from Clinton: The Musical, co-written by brothers Paul and Michael Hodge, QC
Trust. Temptation. Betrayal. These are the key themes of the satirical 2015 off-Broadway hit Clinton: The Musical, which tells the story of Bill Clinton’s presidency through the novel dramatic device of splitting the central character into two roles – “good” Bill and “bad” Bill 0- played by separate actors.
They are also the recurring themes of the royal commission into misconduct in the financial sector, which this week racked up its 45th day of sensational public hearings as it turned its sights on Australia's $2.6 trillion superannuation industry.
How convenient, then, that the co-author of the musical should also play the role of chief interrogator in this week’s sensational hearings.
“It does seem surprising to people, yes,” Melbourne-based barrister Michael Hodge, QC, observed in a 2016 interview about his own dual personality as barrister by day and one half of a dynamic musical duo by night – the other half being his brother, talented composer Paul Hodge.
Hodge QC's flair for the dramatic, now applied as senior counsel assisting the royal commission, set the scene for this week's sensational hearings, which culminated on Thursday in the revelation of potential criminal charges being considered against NAB for its role in the “fees for no service” scandal which has infected the entire sector.
In lines which could easily have been stolen from Macbeth, the 37-year-old Hodge – dubbed by some the “baby-faced assassin” – opened this week's hearing with a powerful soliloquy, posing the central question: “What happens when we leave these trustees alone in the dark with our money?”
What happens – as subsequently unfolded during the week's hearings, which continue next week – is that retirement nest eggs are repeatedly raided and rorted by funds, who charge multiple fees and insurance premiums, while being “surrounded by temptation” to maximise profit for their parent companies – often the banks.
Could Hodge’s dramatic scene-setter be enough to finally burst through the collective apathy with which Australians have traditionally viewed their superannuation nest eggs?
Since it became compulsory for employers to set aside 9 per cent of a worker’s wages into super 26 years ago, Australian have silently amassed a significant fortune – worth more than our entire annual economic output.
Super today accounts for exactly half of all wealth held by Australian households in financial assets. But Australians remain dangerously uneducated about and unengaged with their super money.
In his opening remarks, Hodge identified three potential safeguards for super nest eggs: first, consumer vigilance; second, strong regulators stamping out bad behaviour and poor performance by funds; or third, the honest and diligent performance of superannuation trustees, acting on behalf of members, to protect their funds.
On the first, Hodge concludes: “Consumers are unable to do anything more than peer dimly through the darkness of their superannuation trustees.”
On the second: “There is no dedicated and active conduct regulator shining a spotlight on the trustees and searching out bad behaviour.”
And so it was the third – the role of trustees – the commission chose to hone in on this week.
Because superannuation is complex, and consumers have no real way of knowing if their interests are being put before all else, super funds are required to have “trustees”.
A trustee has the responsibility for ensuring that the best interests of fund members are given priority over the interests of other persons, under provisions of the Superannuation Industry Supervision (SIS) Act, administered by the banking regulator.
However, there have long been concerns that trustees are not always acting in the best interests of fund members. Most of these concerns have centered on the “retail” super funds – those run by the big banks and AMP – as opposed to the not-for-profit industry funds, often affiliated with unions.
The concern about retail super funds is that the trustee companies of these funds are usually wholly-owned subsidiaries of the banks and wealth managers.
That presents potential conflicts of interest between the trustees’ duties under the law to look after the interests of fund members and the desire of the parent institution to maximise profits.
This potential for conflict was explored at length this week, through a forensic questioning of National Australia Bank and its superannuation trustee, Nulis.
For several days, Hodge grilled the former chair of Nulis, Nicole Smith, on whether the trustee had acted in the best interests of members in response to how NAB was responding to the widespread “fees-for-no-service” scandal.
This scandal involved members of super funds run by banks paying fees from their accounts without having received any service – typically, financial advice – in return.
ASIC has said that compensation to fund members over the fees-for-no-service scandal is likely to reach $850 million across the industry.
During intense questioning, Hodge directed a series of questions to Smith to test the extent to which the trustees at Nulis were prepared to push back against the demands of those at NAB who wanted to avoid, minimise or delay compensation to fund members who had paid for services not received.
Smith rejected Hodge’s suggestion that Nulis did not act in its members' best interests for allowing, for example, the bank to discuss remediation of fees with the regulator without the trustee’s involvement.
But what seemed to really raise the ire of the commission this week was NAB’s failure to produce required documents in a timely fashion and its subsequent attempts to suppress some of those pages from public release.
According to Hodge, NAB dumped 3000 pages of requested documentation on the commission in the week before this week’s hearings.
Subsequent skirmishes ensued between NAB’s senior counsel, Neil Young QC, and commissioner Kenneth Hayne over NAB’s attempt to suppress sensitive parts of those documents which detail the bank’s exchanges with the corporate watchdog over ASIC's continuing investigation of more than 100 potential criminal breaches of the Corporations Act by NAB over the fees-for-no-service scandal.
At one point, Young submitted the documents were irrelevant to the evidence being presented by Nicole Smith. To which an agitated Hayne replied, physically pointing a finger at NAB’s senior counsel: “You will not give her answer, Mr Young. You will not. Do you understand me?”
Beyond this week's dramatic scenes, financial service industry experts agree that there are flaws in the trustee system, with one even questioning whether it has passed its use-by date altogether.
Mark Kachor, the managing director of life insurance and superannuation researcher DEXX&R, says there can be failures in protections for fund members, particularly when the trustee is a “captive” of the financial institution. Often, the senior officers of the trustee company also hold positions with the parent institution, Kachor said.
Professor Gail Pearson of the University of Sydney Business School agrees there are legitimate questions to be asked as to whether trustees are properly fulfilling their obligations on behalf of fund members, including whether conflicts of interest are managed adequately.
Pearson notes that enforcement of the law concerning superannuation trustees comes under the Australian Prudential Regulation Authority.
But she says the regulator’s main role has been to ensure that superannuation funds remain solvent, as stipulated under Section 6 of the SIS Act.
A breach of trustee obligations under Sections 52 and 52A of the SIS Act – the main provisions designed to protect member interest – is not an offence and neither do civil penalty or infringement provisions apply to those sections of the Act.
The regulator can apply to court to disqualify a trustee for contraventions of the Act, but that would only be used in extreme circumstances, Pearson said.
It is a situation that could rightly leave some fund members without complete confidence that their super fund’s trustee is looking out for their interests all of time, says Alex Dunnin, executive director of research and compliance at Rainmaker Group.
“If those trustees also work, or are paid by, sponsoring commercial organisations, they would need the hide of a rhinoceros to not, at least at times, act sympathetically to their sponsor [the parent financial institution],” Dunnin said.
As the royal commission considers what recommendations it may ultimately make about the role of trustees, one solution proposed by some experts is to separate superannuation trustee companies from their parent financial institutions, so that the trustee can fulfil its duties at arm's length from the financial institutions that own the funds.
Pearson says it could be time to rethink the way in which the trustee model operates: “We have seen problems arising from conflicts of interest between trustees and related parties, poor performances of some funds and fee gouging.”
In the May budget, the Turnbull government announced a suite of measures designed to increase the banking regulator's ability to scrutinise trustees, to provide more transparency and to stop the overcharging of insurance premiums for younger members or those with low balances.
The minister for financial services, Kelly O’Dwyer, who along with other Turnbull government ministers initially doggedly rejected the need for a royal commission, now says her decision to push for superannuation to be included in the agenda has been “vindicated” by the week’s evidence.
O’Dwyer says it’s a “lie” and a “smear” to suggest the government was motivated to include superannuation in the commission's inquiries to protect friends in the banking industry by dragging union-affiliated industry superannuation funds into the dock.
She says her preoccupation with super fund performance is neutral between industry and retail funds, and is motivated purely by complaints received as minister from people being “ripped off” through excessive fees and insurance premiums, from funds of both colours.
“I’m in an industry fund, my husband’s in a retail fund. I don’t have any ideological objection to industry funds,” says O’Dwyer.
Ian Silk, the chief executive of Australia’s largest industry fund, Australian Super, was questioned briefly this week about the fund’s purchase of the website New Daily, but the commission has signalled its concerns do not centre on industry funds.
The week’s lengthy examination of NAB, and next week’s scheduled grilling of Commonwealth Bank executives, suggest retail funds are firmly in the firing line.
Regulators from both ASIC and APRA will also be called to give evidence next week and defend their records of protecting super fund members, amid calls by former competition tsar Allan Fels for ASIC to be stripped of its responsibility for regulating banks, and have those powers transferred to the competition watchdog.
The Commission is due to deliver its initial report and recommendations to government in September, before bank CEOs are hauled into the dock for questioning in November.
There is plenty more drama to come.