Early release fraud – members will pay

8 May 2020

It will be the members of superannuation funds hit by early release fraud that ultimately end up paying to restore affected accounts to normal with senior superannuation executives citing using of the members’ reserve. 

Barely two years after IOOF ran into trouble in the Royal Commission because of its use of the members’ reserve, executives are saying that use of the reserve would be the most appropriate way of putting members balances right. 

“On the face of it, this fraud is not the fault of the fund. There were failings were evidently elsewhere. But that is what it is (the member reserve) is there for,” he told Money Management

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Superannuation fund officials have been angered by the attitude of the Government and the Australian Taxation Office (ATO) over the impact of the fraud involving about 150 accounts and amount to about $150,000 because the Government insisted on the rapid handling of early access requests (inside five days) and allowed a watering down of some key checks particularly on the part of the Australian Transactions Report and Analysis Centre (AUSTRAC). 

AUSTRAC announced in late March a new rule: “where the payment is approved by the ATO, will not have to conduct additional customer verification under the AML/CTF regime”. 

IOOF was the subject of controversy before the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry over its use of the members’ reserve to make good an administrative error which had impacted member account balances. 

The superannuation fund executive said that the amount of money involved in the fraud was not a large amount, but pointed out that news of the fraud had come just days after the Australian Prudential Regulation Authority (APRA) had produced data on the early release scheme suggesting superannuation fund trustees were taking an average 1.6 days to pay members. 

It is understood that the systems break-down which led to the fraud being investigated by the Australian Federal Police did not involve a superannuation fund but, rather, a data breach within an accounting firm. 

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All this fuss over $150K? That is a drop in the ocean compared to the billions in fees for no service being ripped from members accounts for "intra fund advice".

Australian Super has 2.2 Mill members.
Every one of those members pays an Admin Fee of $2.25 a week or $117p.a.
This equates to annual fees of $257,400,000.
In addition to these fees, they also pay .04% of their account balance as part of the Admin Fee.
If the average account balance was $50,000, this would equate to an additional $20p.a.
Over 2.2 million members, this equates to an additional $4,400,000.
So, the total Admin Fees for the average member may be $137.00 p.a. totalling $261,800,000.
These fees do not include the .60% Investment Fee charged on the Balanced Option.
On the Australian Super website under the heading of Advice Fees, it states:
" We can provide general or simple personal advice over the phone at NO COST".
Of the 2.2 million members, how many of these members actually access the so called " free" general or "simple" personal advice over the phone in a year ?
Whilst a component of the Admin Fee would be attributed to the general admin requirements per member, how much of the $117 per annum is allocated for the provision of the cost of providing the " free" advice.??
The percentage of the Admin Fee used to provide over the phone advice is really a retainer.
It allows all members to access the advice, but only a small percentage of the total members would do so.
Therefore, the cost of access is spread across the total number of members of the fund.
Those who utilise it may well receive information and guidance for a small cost, but those who don't are subsidising the real cost of providing that access and are effectively being charged a fee for something they haven't benefited from.
Is this therefore a fee for no service ?
Why is this being treated differently to an adviser charging all clients a " retainer fee " for access to advice, information and contact etc throughout the year ?

Yet again, the Govt place ridiculous time frames and parameters for the purpose of political perception rather than consulting correctly around an appropriate and secure time frame for the processing of the withdrawals.
If someone had been applying for an early release of super, I am sure if the process took only a few more days to ensure a higher level of security most people would be accepting of this.
Its no different to Josh Frydenburg to running around in circles like a Jack Russell Terrier following the Royal Commission stating that they would implement the recommendations long before he had any time to consider the manner in which they could be implemented and the consequences of doing so....it was just political nervousness and misjudgment.
.....but nothing takes the cake like Chris Bowen at the same time who actually stated that Labor would implement all Kenneth Hayne's recommendations BEFORE they had been released !!!
This was nothing more than Labor getting in first, even when they didn't know what they were agreeing to.
The list of unintended consequences of stupid political decisions and regulation is endless.
Decisions are made without appropriate assessment, planning and projection and then others are left to pay the price of incompetence.

An average fraudulent amount of $1000 per account ??
You would think if criminal/s were going to put their arse on the line, they would be going for the full benefit and have accessed $10,000 per account ( ie $1.5Mill).
Are these figures being reported accurate ?

We're waiting for the AFP but it looks like these bank account errors were just mistakes between the ATO and Fund Trustees - which will be fixed and the member compensated.
Not the work of Master Criminals clearly!

I had a client which was victim of a 150k fraud through a major industry fund. Of course the compensatory funds come from reserves. There's no profit to speak of. Either members reserve, general admin reserve or other reserves.
It's a great reason why a 'for-profit' fund run by an institution with a healthy balance sheet is a suitable fund provider. Other funds members moneys are not then used to compensate for these things, instead it comes straight from the providers bottom line. This creates an direct incentive to prevent fraud.

Unfortunately the industry has done it's best to run those providers out of town. So now everyone must chip in a slice to counter fraud - or exit these pooled funds altogether.

All members chip into an operational risk reserve of a fund and by doing so are all contributing to a collective 'insurance' against fraud and other operational risks. In that sense, it is quite a fair approach because they all share the benefit of that 'coverage'.

In a profit-driven fund, all members contribute to the profits of the institution which is charging fees to the fund -- and there are actual conflicts which can be very difficult to manage.

What's your point?

The point Ronan is making is that in the Industry Funds all members also share all the Intra Fund advice expenses even though only a small percentage actually benefit from it as this is fair for all !!!
So, that's Ronan's point...as bizzare as it is.

Customer, thanks pointing that out. I won't be holding my breath for a reply from Ronan.

Whether an early release if superannuation 'fraud' occurred remains to be seen. That the Australian Federal Police are involved is in Australia's interest because the Australian Securities and Investments Commission's history of handling 'fraud' shows ASIC is often friendly to fraudsters and fail to assist victims.

Seemingly the government of the day can blame account holders for any type of 'fraud' if mandated superannuation is stolen. The Trio Capital fraud victims were accused of following 'poor financial advice' despite following the letter of the law. Does Josh Frydenberg hold an Australian Financial Services License? Isn't it against the law to give financial advice without an AFSL?

While it may be technically against the law to give financial advice without an AFSL, in practice it is perfectly OK because ASIC has a non enforcement approach to that law. ASIC's primary focus is persecuting people who do provide advice under an AFSL. Everyone else can do whatever they like.

In tackling the insidious fraud on vulnerable members accessing preserved super to tide over the pandemic crisis, I would have though all super stakeholders can collaborate to minimise the detriment instead of turning it into an industry vs retail bickering. Fraudsters are agnostic about which sector they defraud. They would target both as well as corporate, SMSF and exempt public sector. Like COVID 19 no one is immune.
Super born in 1992 is 28 years old, but has still not matured out of adolescence!

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