Cash in superannuation accounts could be earning more in online savings accounts. Photo: Jessica Shapiro

The superannuation regulator and the competition watchdog are sidestepping concerns that Commonwealth, Westpac, National Australia Bank and ANZ could be short-changing investors on the cash in their respective superannuation accounts.

As revealed in a BusinessDay investigation last month, the super funds which dominate this country’s retail investment landscape – MLC (owned by NAB), BT (Westpac/St George), Colonial (CBA) and ANZ Wealth – are funnelling their customers’ cash exclusively into their parent banks for relatively low returns.

They are not, as their fiduciary duty requires, diversifying this cash but merely plonking it with their respective parent bank at the Reserve Bank cash rate or below.

The decision to place this superannuation cash in-house, rather than shop around for the best returns, is costing investors a potentially higher return. Their super savings also amount to a cheap source of funding for the banks.

They’re doing the same thing to self-managed super too, but more on that later.

But despite the apparent conflict, neither the Australian Competition and Consumer Commission (ACCC) nor the superannuation and banking regulator Australian Prudential Regulation Authority (APRA) wants to know.

When questioned by BusinessDay on the issue, neither was prepared to give a meaningful response.

Yet this super cash cartel has blossomed under their very noses over the past decade. The wrap platforms owned by the banks and AMP now control some 80 per cent of the financial planning market.

Roughly 8 per cent of the $50 odd billion in Australia’s master trusts sits in cash. But instead of the fund managers shopping around for the best yields, the super cash is siphoned straight out of their funds and up into the parent banks.

Consequently, the failure of competition policy is then enshrined in the investment returns

While cash management funds of the ANZ, CBA, Westpac and NAB are offering yields at the Reserve Bank cash rate of 2.5 per cent or less, other banks and credit unions (backed by the ADI deposit guarantee) are touting returns of up to 3.5 per cent.

The Australian subsidiary of the global Rabobank is offering 3.45 per cent, for instance, yet none of the Big Four have diversified into Rabo bank bills to enhance their customers’ returns – never mind the established investment practice of diversification for the sake of security.

Despite the glaringly anti-competitive aspects of these cash fund investments, an emailed response from the ACCC delivered only the usual platitudes about not commenting on “individual complaints or potential investigations”.

“The ACCC is concerned to ensure that businesses comply with their obligations under the Competition and Consumer Act and the Australian Consumer Law and encourages anyone with evidence of agreements between competitors to report that to the ACCC,” a statement emailed to BusinessDay said.

The apparent disinterest underscores the challenges facing the “Son of Wallis’ financial industry inquiry.

APRA, which is responsible for superannuation and the prudential supervision of the banks – and funded by the banks – “does not comment on matters that arise in the media”.

It’s a fair bet however that every fund management and banking type inside APRA would be well aware that it is best practice, indeed fiduciary duty and even common sense, for a cash fund manager to hold a spread of cash assets in various financial institutions. Not just their own.

We asked APRA what the difference was between a cash fund holding its own parent bank’s cash assets and a bank-owned share fund having its share portfolio invested exclusively and squarely in its own bank shares?

The prudential regulator can be forgiven for sidestepping this question on the grounds of embarrassment.

It is worth noting though that APRA’s own guidelines (Prudential Practice Guide SPG 530. Note 67 etc) don’t appear to champion the practice of a bank’s fund lumping its entire investment exclusively with itself in one asset class.

“APRA expects that an RSE [Registrable Superannuation Entity] licensee would be able to demonstrate appropriate analysis supporting its due diligence assessment of a prospective investment manager prior to selection of the investment manager. At a minimum, an RSE licensee would ordinarily consider: (a) the investment strategy and approach to investment portfolio composition; (b) how investments are managed, including the management of market and investment risk factors; (c) the approach, quality and extent of research, due diligence and investment processes, including the expertise of key investment staff”

It goes on. Suffice it to say that the words ‘portfolio composition’ tend to sing out.

The banks are running a cosy shop when it comes to rates on self-managed super too.

The self managed super fund (SMSF) market is generally more sophisticated and no doubt given to shopping around for better rates. But independent fund researcher Canstar shows the bulk of cash funds deliver returns well below the RBA cash rate – despite there being scope to stagger investment maturities for greater yield (on the basis that not all customers will demand their cash back on the same day in the event of crisis – deposits are government guaranteed after all).

Canstar research manager Mitchell Watson told BusinessDay the two main observations to be made from a comparison of interest rates in the market across both cash management and online savings accounts (available to SMSF) were 1. “A majority of cash management accounts are paying below the cash rate and 2. on average, SMSFs will receive a greater return of at least 100 basis points through an online savings account”.

“Based on these figures, SMSFs should not be holding large sums of money within a cash management account if they anticipate the money will be in there for an extended period,” Watson says. “While cash management accounts do provide greater transactional functionality, a similar outcome can be achieved with an online savings account used in conjunction with a CMA or transaction account.”

It should be said there is a disincentive for major fund managers to fork out decent cash returns, as the bulk of their own pay swings on a funds-under-management (FUM) deal. In other words equities pay better for fund managers, particularly when the market is rising, as it was last calendar year, and in 2012 too.

Notwithstanding regulator disinterest, those managers still have a problem in that they have a legal responsibility to act in the best interests of their customers.

Do these customers – millions of unwitting superannuation investors – really provide consent for these funds to slot this cash through to the parent banks on the cheap?

Do they really provide consent for their manager not to shop around for a better deal, and more importantly, for the sake of diversification?

It would surprising if the lawyers and litigation funders were not having a quiet sniff around this one.

A disclosure buried in the fine print of a PDS may not be enough to establish fiduciary duty.

Regulators might be sidestepping the issue, but it’s still touchy enough to have the peak industry body, the Australian Bankers Association, ducking for cover.

“This is an individual bank issue,” an ABA statement given to BusinessDay says.

Clarification: the working cash accounts on BT platforms is invested in Westpac and St.George. However, the cash option in a BT product, BT Super for Life, is invested in an underlying BT Investment Management wholesale cash fund which has a mandate of no more than 33 per cent to A1+ S&P rated issuers (current allocation is actually 22 per cent to WBC).