Financial institutions, including those involved in wealth management, face a potentially costly legal threat after a run of failings.

A law firm is preparing to sue Australian banks for charging excessive fees and paying below-market rates affecting retirement savings accounts, adding to the woes of the country’s financial sector in recent months.

Slater & Gordon says it is acting for clients who have been left out of pocket because firms had not acted in the best interests of investors in the A$2.6 trillion ($1.844 trillion) superannuation – aka pensions – sector. Australian citizens are required by law to steer part of their pay into “supers”.

The firm has called its lawsuit a “Get Back Your Super Fund Campaign”.

“Commonwealth Bank-owned superannuation fund, Colonial First State, and AMP super will likely be the first targets in a series of legal actions,” Slater & Gordon said in a statement.

Australia’s financial services industry, including wealth management, has been rocked by scandals around slack anti-money laundering controls, mis-selling and overcharging clients. The problems have dented the country’s image for financial prudence. Ironically, its “super” pension model has in the past been held up as a model for countries such as the UK to follow.

Late last year, the Australian government set up a Royal Commission to probe problems in the sector. It has criticised National Australia Bank, Commonwealth Bank, Australia and New Zealand Banking Group and wealth manager AMP for regulatory failings.

Spokespeople from Commonwealth Bank, AMP and NAB did not immediately respond to requests for comment. A spokesman from ANZ declined to comment (source: Reuters, 11 September).

In a separate, but related development, NAB said it is changing how mortgage broker commissions are calculated, in line with recommendations of the ASIC Broker Remuneration Review and Sedgwick Retail Banking Remuneration Review. (ASIC is the Australian Securities and Investments Commission, the country’s main financial watchdog.)

From November 2018, NAB will calculate the upfront commission a broker receives for a home loan based on the amount drawn instead of the total approved facility, and net of any offset facility, the bank said. This will mean, for example, that if a customer receives a A$500,000 home loan and puts A$100,000 of that loan into an offset account, the broker will receive commission on the drawn amount of A$400,000.

Slater & Gordon
The law firm said it will claim that “the big bank-backed super funds failed to obtain for members competitive cash interest rates on cash option funds, and charged exorbitant fees, affecting millions of members who held part or all of their superannuation in bank-owned funds”.

Slater and Gordon's head of class-action cases, Ben Hardwick, said that the fee gouging and paying out of uncompetitive interest rates for Australians who hold part of their super in cash option funds may have set back the quality of retirement for many Australians.

“This means that millions of Australians may be out of pocket and a handful of banks have lined their pockets,” he said in a statement.

“What funds like Colonial First State have been doing is dumping super with a parent bank such as CBA. The interest from the parent bank is so low that investors in the cash option are receiving rates as low as 1.25 per cent a year. This is even below the RBA [Royal Bank of Australia] cash rate," said Hardwick.

"This rate of return is ludicrously low. Standard bank interest should be around 2.0 to 2.5 per cent. “That's what most banks offer to ordinary customers with their normal term-deposits. And that's what industry super fund members and some retail fund members have been getting,” he continued.

“In the Royal Commission, it was revealed that some AMP super fund members were getting negative returns on the cash held for them by AMP.  "We don't believe there is any justification for a bank-owned fund member being worse off than industry fund members, especially when they have chosen to invest in a passive cash investment option, which requires the fund to do basically nothing,” he said.

"We think retail fund members should be compensated for the difference between their returns on cash, and the returns they should have received if the trustee had done their job properly. Industry funds have demonstrated the return that should be produced on cash investments when a proper effort is made by the trustee to secure the best available interest rate,” Hardwick concluded.