Former chair of NAB's superannuation trustee NULIS Nicole Smith. Image credit: AAP/James Ross

This is the second in a two part series on the end of retail super. Read the first part here.

Royal Commissioner Kenneth Hayne: Did you think yourself that taking money to which there was no entitlement raised a question of the criminal law?

Nicole Smith: I didn’t.

Nicole Smith used to be the chair of the NAB’s superannuation trustee, NULIS. She spent most of Thursday, August 8, 2018, being examined by counsel assisting the financial services royal commission, Michel Hodge QC, about the administration of the NAB’s superannuation funds, explaining issues like why NAB had charged superannuation account holders fees for advice they had never been given and why dead people had been charged for advice. And, particularly, why NULIS had never said boo about it. As Commissioner Hayne noted, NAB had been robbing its superannuation customers without thought it might be breaking the law.

Smith was being examined that day because the Turnbull government, furious at being forced into a banking royal commission at the end of November 2017, had expanded it to include superannuation funds as “a direct smack at Labor” as one Coalition source told the Financial Review. Peter Dutton was delighted about it, claiming the royal commission would “have a look at some aspects within the industry super funds which have union members and whatnot on the board. I think people lose a lot of their super through fees and through donations and all sorts of support for unions.” But others knew better. The ABC’s Ian Verrender warned “it may end up backfiring on the bank-run super funds if royal commissioner Kenneth Hayne adopts a broader view. “

The Productivity Commission had independently verified the performance gap between industry and retail super in its draft report in May 2018. We’ll never know what effect the PC had, but in the June quarter, industry super funds had for the first time ever overtaken retail super funds in size, surging a mammoth 16% in the quarter as account holders switched out of retail super.  Then-financial services minister Kelly O’Dwyer and her predecessor Josh Frydenberg — both former bank executives — had their non-parliamentary super in industry funds, so were obviously aware of the better performance of the sector. The banks themselves were signalling there were problems: at that time, three of the four major banks (it’s now all four) were in the process of hiving off their wealth management and super arms because the returns from vertically integrated financial services were too low for the colossal reputational damage that came from the constant scandals arising from them. 

But despite all that, the Liberals were seemingly convinced of their own claims about a sinister connection between unions and industry funds, one that would be exposed by Hayne.

How spectacular a misjudgment this was became clear from two weeks of hearings into the super sector from the 6th to the 17th of August, which barely touched of any hint of misconduct by industry funds but was devoted almost entirely to retail funds. The results were summed up to Hayne by Hodge late on a Friday afternoon.

… it may well be the case that you will conclude that some RSE (registrable superannuation entity) licensees are not, as they are obliged to do, prioritising the interests of their members over the interests of others, including themselves and the groups of which they are parties. And there are certain types of decisions that seem to particularly raise matters of concern. The decision to charge or allow others to charge members’ fees which are then paid to financial advisers in circumstances where the member doesn’t receive or could not have been receiving the services… decisions to charge or maintain grandfathered trailing commissions and other forms of conflicted remuneration… the decision to delay, or at the very least not expedite the transition of accrued default amounts to a MySuper product… the potential failure to become aware and intervene to prevent the charging of fees by a related party where those fees result in negative returns to members…

Hodge went on to detail a number of possible remedies to improve superannuation’s regulatory framework. Not merely had the big banks’ refusal to place customers’ interests over their own been publicly exposed, but the government is almost certainly going to be handed royal commission recommendations for a dramatic toughening of regulation of retail super funds, no matter who ends up owning them — recommendations it would be almost impossible to reject. And we’re yet to see what financial impact the August hearings will have on the huge switch of funds out of retail super that was already underway.

The Liberals’ blunder would be a gift that would keep on giving for industry super funds for years to come.