Businesses nearly always assume that if you can do something faster, then that’s better for customers. Whether it’s the ability to order online shopping that arrives the same day, or banks’ claims they can approve some home loans in 10 minutes, we’re constantly told that quicker is best.
Most of us don’t need a 10-minute home loan, of course, but that’s beside the point. Companies are vying to be fastest to beat their rivals – and economists will generally tell you that competition is a great thing.
Now and then, however, you see examples where faster is not necessarily better, and indeed, where competition can have some perverse effects. The latest case in point concerns us all because it affects the $4.5 trillion superannuation sector that’s set up to safeguard our retirement savings.
Assistant Treasurer and Minister for Financial Services Daniel Mulino last week said the federal government may consider throwing some “sand in the wheels” in the regime that allows people to switch super fund, as part of a plan to beef up protection for consumers.
What might he be referring to? Why would you want to do anything that slows down people’s ability to move their own money?
And wouldn’t that go against the grain of generally making it easier for people to move their super around as they see fit, as has happened since 2005 when people were allowed to choose their own fund?
The context is important here. Mulino made the comments while explaining the government’s push to better protect super members from disasters such as the collapsed schemes Shield and First Guardian. These were two managed investment schemes into which about 12,000 Australians had invested, with more than $1 billion lost.
As well as taking a terrible toll on victims, these collapses are shining a light on the risks still lurking in our superannuation system, despite past attempts to clean it up, such as the 2018 royal commission into financial misconduct.
A key concern of regulators has been that in many cases, people ended up in these schemes through “lead generators”, which lured customers through various means, including social media advertisements offering a super health-check.
The chief executive of Super Consumers Australia, Xavier O’Halloran, says about 90 per cent of people invested in Shield and First Guardian arrived via such operatives. Mulino also called out “high-pressure lead generation pushing people to switch their retirement savings into higher risk environments and products such as low-quality managed investment schemes”.
Mulino’s comment about putting “sand in the wheels” should be seen in this context – ensuring people have more time, to prevent them from being rushed by high-pressure sales tactics.
What would such sand look like? The government hasn’t made any decisions, but it could introduce mandatory cooling-off for switching super funds, compared with the current rules, which require your fund to transfer the money in three days if you decide to leave. Giving people more time to cool off sounds sensible enough, though it’s hardly a game-changer.
But how does this sit with the common financial tips you often read about the need to shop around and consider switching your bank, insurance company, or indeed, your super fund?
Mulino, who has a PhD in economics, says there is a trade-off between preserving people’s right to make a choice about where to put their super and making sure that people aren’t rushed into such a complex and long-term decision. “I think it’s a very risky and concerning situation where somebody might, after a half hour or hour conversation, end up shifting all of their life savings,” he said.
Mulino drew a parallel with the fight against scams, where there have been improvements lately.
In this battle, banks have re-introduced “friction” or “speed bumps” into electronic payments, such as adding extra prompts before letting someone make a payment that looks risky. Banks have done this because near-instant money transfers, which started in 2018, had a clear downside: they made it much harder to get the money back when the customer had been tricked by a fraudster. It’s another case where faster wasn’t always better.
More broadly, there’s a philosophical point to be made about how well competition works in super. Economists often view more competition as a solution to all sorts of problems, but it’s not that simple. To be sure, a market with no competition can result in rip-offs and poor service.
But the textbook version of “perfect competition” assumes that consumers are rationally engaging with the different options in a market to do what’s best for them, and that’s often not the case with super. Indeed, many people are notoriously disengaged with their super, given it is money they are forced to save and can’t touch for decades. “I think superannuation and competition are always going to be uneasy bedfellows,” O’Halloran says.
For all these reasons – not least the fact that super is compulsory – it’s vital that governments have policies in place to protect consumers’ interests in the super sector, rather than leaving it to market forces.
The fact many of us don’t take a close interest in our super is why there are regimes such as MySuper – the low-cost super program that puts people in a no-frills account, if they don’t make an active choice. It’s also why the worst-performing funds get named and shamed through an annual performance test.
The question for Mulino is: what else should the government do to make the ever-growing super pool less vulnerable to risks such as “high-pressure lead generation”?
One option is to crack down on predatory “lead generation” – which frankly seems like a no-brainer.
O’Halloran is also pushing for “performance testing” to be expanded into the post-retirement phase of super, when people have more money in their accounts.
Giving consumers a choice about their super fund is important, but it’s not enough on its own.
The corporate cop has also launched various court cases against trustees and other players it considers had some responsibility in the Shield and First Guardian collapses.
And there is also a heated debate about compensation. Victims of poor financial advice can seek compensation of up to $150,000 in some circumstances, under a scheme established by the government after the banking royal commission. But the cost of this scheme has ballooned, and it’s expected to grow much larger as a result of the Shield and First Guardian collapses.
Last week, Mulino announced a plan to spread this cost over the entire financial services sector, including super funds, which will have to chip in $6 million for the 2025-26 year. Super funds especially are not happy about having to pay this growing cost, and designing a sustainable scheme is another challenge facing Mulino.
The reality is, super is an enormous pool of money and it will inevitably remain a target for people looking for a cut – including those using high-pressure tactics to put consumers into risky products.
Giving consumers a choice about their super fund is important, but it’s not enough on its own. At the very least, the government should look at how to extend and widen a crackdown on super spruikers, and put in place steps so that decisions which can affect people’s life savings aren’t rushed.
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Clancy Yeates is deputy business editor. He has covered banking and financial services, and was previously national business correspondent in the Canberra bureau.Connect via Twitter or email.
