By Paulina Duran and Byron Kaye
SYDNEY, Nov 5 (Reuters) - Australia's top financial regulators have called for tougher powers to police poor conduct in the country's A$2 trillion ($1.44 trillion) retirement funds market, the world's fourth largest, showed documents published by a powerful inquiry on Monday.
In submissions to a government-mandated inquiry that has criticised regulators for failures in policing the financial services sector, the Australian Prudential (LON:PRU) Regulation Authority (APRA) called for extra powers to enforce compliance with laws requiring companies to act in the best interests of savers.
The year-long inquiry, which is expected to recommend far-reaching reforms, has unearthed widespread misconduct including charging fees to the estates of dead people, fee gouging and breaching laws by failing to act in customers' best interests.
Yet, in their submissions to the Royal Commission, APRA and the Australian Securities and Investments Commission (ASIC) rejected criticism by the inquiry that they were too soft.
"APRA does not accept the premise that it has not generally acted promptly on misconduct or potential misconduct," the regulator said in its submission.
"However, there are steps that could be taken to improve the ability of both APRA and ASIC to take prompt and effective action in cases of misconduct," it said.
The regulator accepted it could make better use of its current ability to sue firms that breach the law, and called for more powers.
"There is also a need to strengthen APRA's powers in some areas (including to regulate and enforce the best interests of members covenant and sole purpose test)," it said.
VERTICAL INTEGRATION
ASIC called for more regulatory intervention to manage conflicts of interest in vertically integrated financial firms such as Australia's largest-listed wealth manager, AMP Ltd AMP.AX , and rival IOOF Holdings Ltd IFL.AX , including a potential outright-ban.
Vertically integrated financial firms have units that create financial products while at the same time owning businesses that buy those products on behalf of customers.
"ASIC believes that legislative intervention is warranted to address the inherent conflict issues" of firms which operate on behalf of both shareholders and policy holders, the regulator said.
"Consideration should be given to prohibiting" dual-responsibility entities, it said, referring specifically to firms that create the products in which its pension units invest.
Such a move would also impact some of the country's largest lenders, including Commonwealth Bank of Australia (CBA) CBA.AX , National Australia Bank Ltd (NAB) NAB.AX and Westpac Banking Corp WBC.AX , which also have vertically-integrated units that create conflicts of interest.
Foreseeing the higher regulatory scrutiny, CBA and NAB are in the process offloading their retirement units, while Westpac has said it remains committed to its investment in its pension business.
"Nonetheless it is ASIC's view, given the evidence ... regarding conflicted structures and the inability of (superannuation entities) to manage these in the best interests of members, that more stringent measures are required," the regulator said.
Australia's biggest retirement savings manager, AMP, said customers have benefited from vertical integration and competition should minimise any conflicts between parties.
A forced breakup "would also introduce new (albeit different) costs into the system that would have to be borne by someone and a new set of risks that would need to be managed/mitigated," AMP said in its submission. ($1 = 1.3908 Australian dollars)