asic.0039.0001 - royal commission

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Contents

Plan Service Fee (PSF) events update

Topic Slide reference

1. Background on the PSF breaches Slide 4

2. Intent of product changes Slide 5

3. Characterisation of the PSF Slide 6

4. Member impact Slide 7

s. PSF Remediation Program Slide 8, 9 & 10

6. Timeline for remediation Slide 11

7. Ongoing engagement with ASIC Slide 12

ASIC Assurance Review update

Topic Slide reference

1. Proposed amendments to Licence Conditions Slide 14

2. Independent Expert selection update & next steps Slide 15

2 Highly Confidential

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Plan Service Fee (PSF) events update

3 Highly confidential

1. Background on the PSF breaches

• The PSF is a fee for general advice and support services and was first introduced in 2012 to the MasterKey Business Super (MKBS) and MasterKey Personal Super (MKPS) products as part of a fee restructure under Project SWiFT.

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• The PSF was a fee that replaced the asset based commission which had previously been bundled into the management fee charged to members and the employer service fee. These fees had previously been charged through the Investment Policy issued by MLC Limited (MLC) in its capacity as the issuer of the policy.

• When the fee restructure was implemented, the PSF was applied to both members with a named adviser linked to their account (Linked Members) and members without a named adviser linked to their account (Non-Linked Members).

• The PSF was then applied to member accounts when two of our aged corporate superannuation products were traded up (Project Encompass and TERP) to the more modern MKBS/MKPS product.

• As previously reported to ASIC, the disclosures associated with the introduction of the PSF were not executed well.

• We have completed a thorough analysis of the circumstances surrounding the PSF events in each of three projects. Throughout this process we have sought to stay true to the NAB Group values which centre around the value of "Doing the Right Thing" . We have also respected the roles of the different entities involved and have had mechanisms in place to manage conflicts of interest (eg. separate legal advices were sought for each entity and separate management personnel represented each entity).

*On 1-Jul-16, members and assets were transferred from existing Registrable Superannuation Entity (RSE) of MLC Nominees Pty Limited (MLCN) into the new RSE of NULIS Nominees (Australia) Limited (NULIS), known as the MLC Super Fund, by successor fund transfer. At this time, MLC Limited (MLC) also ceased to be Administrator of various products that were previously under the trusteeship of MLCN with National Wealth Management Services Limited (NWMSL) taking its place.


2. Intent of Product Changes

• NAB Wealth's intentions with respect to the introduction of the PSF were positive for members and revenue-neutral for the shareholder.

• The product changes were aimed at providing greater fee transparency, improved member control over the fees they paid, all while not increasing the fees members paid. In the case of TERP, there were also significant enhancements to the investment menu and online access to member services. The approach was intended to be more member-centric in intent than many of our competitors that elected to continue with commission-based legacy products.

• MLC's service delivery model was evolving at the time of implementation of the PSFs, with access to traditional advice services provided by financial advisers being complemented by access to MLC's digital and phone based advice capability and services such as MLC member education seminars. This transition in service delivery model required significant investment in digital and phone capability and were enhancements in providing general advice services to members.

• PSFs were introduced as part of adopting FSC Standard 19 on the basis of providing members in employersponsored funds with improved transparency of adviser remuneration. Our introduction of PSFs preceded the Future of Financial Advice (FoFA) reforms which banned product commissions for new members (but allowed existing commission arrangements to be grandfathered) and advocated explicit fees for advice.

• The PSF was introduced to replace the asset based commission and Employer Service Fees (rather than close MKBS and MKPS and grandfather the existing adviser remuneration) so as to reduce the operational risks associated with administering legacy products.


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3. Characterisation of the PSF

• Extensive investigations were conducted to identify the nature and character of the PSF.

• After detailed analysis it was determined there were two alternative ways to characterise the PSF:

• Investment Policy Alternative - The PSF could be characterised as a fee charged to the Trustee by MLC, in its capacity as issuer of the Investment Policy; or

• Trust Expense Alternative - The PSF was an amount that the Trustee directed MLC, in its capacity as the administrator of TUSS, to collect from member accounts and pay to plan advisers on its behalf as an expense of the fund.

• Each characterisation had different potential approaches to remediation.

• After careful consideration of both alternatives with a particular focus on which of the alternatives properly reflected NAB Group Values it was decided that while both are reasonably arguable, the Trust Expense Alternative was the better characterisation of the PSF.

• Similarly, whilst different compensation alternatives are reasonable and in our view appropriate, both NULIS and NWMSL agree that the full compensation approach is the preferred and more generous approach to nonlinked members.

• This impacts the quantum of the event {in total) with compensation estimates now available for SWiFT and Encompass.


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4. Member impact

• Current estimates of impacted members are provided in the table below. The impact to ex-TERP members has been validated internally and an initial analysis was also conducted by KPMG. The SWiFT and Encompass numbers are still going through the internal validation analysis which is expected to be completed by 2 December 2016. KPMG will conduct a final analysis on ex-TERP members and conduct external assurance on the SWiFT and Encompass PSF event. It i s currently expected t hat their report will be finalised in February 2017.

• Ex-TERP members had their PSF turned off by 30 June 2016, the remaining PSFs for Non-Linked Members were turned off on 14 October 2016. The member impacts presented below are based on PSFs deducted to 25 July 2016 and are in the process of being updated to incorporate final fees deductions.

Initiative Number of member accounts impacted GI roupt* Total Impact* mpac

SWiFT

Encompass

TERP

Total

Existing Members at the time of implementation

95,524 member accounts

• 37,319 MKBS accounts in 2,586 employer plans -S7.3m

• 58,205 MKPS accounts -s13.4m New Members joining aft er implementation


• 10,547 MKBS accounts in 1,324 employer plans -s56.5k

• 2,871 MKPS accounts -s18.6k 2, 706 member accounts at trade-up

• 1,349 MKBS accounts in 227 employer plans -so.2m

• 1357 MKPS accounts -so.3m 108,867 member accounts at trade-up

• 39,441 MKBS accounts in 11,559 employer plans -s5.1m

• 69.426 MKPS accounts -s7.3m


-so.5m

*For the purposes of this table, compensation estimates are based off a 20% estimate for loss of earnings and are net of tax impacts.


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s. PSF Remediation Program

NULIS and NWMSL's commitments relating to the PSF matters substantially cover the matters contemplated by ASIC in the letter dated 21 June 2016.

The Trustee has approved an approach to remediation and communication that will be consistent across the events. Management is proposing that the timeframe is also aligned .. As such the dates for remediation of the TERP event will be revised. By conducting the remediation in tandem we will ensure a consistent approach to remediation is provided to all members impacted by the incorrect charging of the Plan Service Fees.

Specifically, we confirm that: • Progressing identification of affected members - we have identified (and are currently in the process of

verifying) current and former Non-Linked Members who have at any time had a PSF deducted from their MKBS/MKPS account;

• Member notice- we had previously drafted a notice for members who were traded up from TERP. We are in the process of reviewing the notice to ensure it covers the revised scope from the additional investigation into project SWiFT and the additional product trade up of Employer Super. Upon completion of the revised member notice, a copy will be provided to ASIC for review (see slide 10 for communication approach);

• Compensation methodology- Impacted Non-Linked Members will be compensated the full amount of the PSF deducted from their account plus interest (see slide g for compensation approach);

• Communication and payment - we believe we will, subject to further consultation with ASIC and completion of due internal processes, be able to communicate with, and pay compensation to, impacted members by 30 June 2017; and

• Documentation and independent assurance- we will document processes to implement all steps above. We are in the process of engaging with KPMG to review and assure our implementation. KPMG have already concluded some work in relation to the initial event raised for TERP, however this will now be expanded to cover the additional customer cohorts of SWiFT and Encompass, as well as new members who joined exTERP plans after the trade up and who may have been impacted. We would be happy to provide the scope of this engagement to ASIC for comments.



Approach to compensation

NULIS has approved a consistent approach to compensation to be applied for these events. The compensation approach that has been approved is in line with ASIC's feedback on the other Adviser Service Fee breaches.

I n Calculated amount For the period the of compensation Non-Linked member

had an active account up to the date of calculation of compensation or date of exit from the Fund if earlier.

For the period from date of calculation or date of exit from the Fund until the compensation payment date.

Minimum amount of compensation the Non-Linked member will receive


Comoensation for the Plan Service Fee events The Non-Linked member will be entitled to:

- a refund of the investment units incorrectly deducted from their account.

- the calculations of the required unit adjustments will include tracking of investment switches made by the member subsequent to each incorrect deduction of fees and determining the ultimate value of the adjustment as if the units had been in the member's account at the time of the switch.

- the unit price movements for each investment option will be applied from the effective date of the incorrect transactions rup until the date the compensation is calculated. Interest is applied to the value of the refunded investment units at the 90 day Bank Bill Swap Rate plus 3% margin.

The interest is applied for the period from the date of calculation to the date of expected payment (usually 10 business days) for members with an active account; and for the period from the date of exit from the Fund until the expected date of payment for members who have exited. The amounts calculated as above will be compared to the accumulated value of the dollar amount of fees incorrectly deducted from the member's account together with interest at the 90 day Bank Bill Swap Rate plus 3% margin up until the expected date of payment.

The compensation will be the higher of these two amounts.

Where the amount owed to an exited Non-Linked member is less than $20, the amount will not be paid to them. Instead, the collective value of these amounts will be credited to the investment option for the benefit of all current members within that investment option.

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Approach to member communications

• NULIS has approved the following approach to member communications

• Active Members: - Members who are entitled to receive $20 or more, will receive a letter regarding the error and payment

made.

- Where a member is entitled to less than $20, the amount will be identified on their transaction listings (on their annual statement) and no separate communication will be provided to the member at the time of the remediation .

• Where the member has exited their account, they will be sent a letter and payments will be made either: - by cheque; or

- according to previous rollover instructions within the last 6 months (if any). Where no such instructions exist, for preserved super monies, a form will be sent to members requesting for payment instructions. Members will be notified that if they don't provide direction, the Trustee will pay their compensation amount to the Australian Eligible Rollover Fund.

• Where a member has exited their account and is entitled to less than $20, they will not be sent a communication.


Key Assumption on Timeframes

ASIC review of documents and responding to their questions on these to their satisfaction can be completed in 6 weeks.

DGC Approval for SWiFT and EnCompass member communication can be obtained at the DGC meeting on 08/12/16.

End of Year shut down exists between the two weeks of 26/12/16 to 6/01/17.

Member communication will require no more than 6 weeks of staggering to avoid high impact on service teams and standards.

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7. Ongoing engagement with ASIC

• As noted, NULIS approved the compensation and communication approach on 26 October 2016.

• Subsequent to today's meeting we will provide; - an Open Letter confirming the known facts about the PSF events and the current status of remediation;

- an outline of the remediation plan (including the approach to compensation); - a copy of the KPMG assurance review once finalised; and

- copies of the member communications.

This information will be provided to ASIC as it becomes available (see previous timeline).

• In addition to the standard Quarterly Breach Updates provided to ASIC, we propose to provide a monthly breach remediation update for these Events (in a similar format to the current monthly updates provided to ASIC's Financial Advisers stakeholder team for the Adviser Service Fee Events and the monthly updates previously provided to Investment Managers & Superannuation in relation to the Navigator Income Allocation Event remediation program).


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ASIC Assurance Review update


1. Proposed amendments to Licence Conditions

• We thank ASIC for their proposed licence conditions and their incorporation of some of our suggested amendments from 29 September 2016.

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• We have identified some areas where further clarification to the conditions would assist the effectiveness of the Review.

• In making these suggestions, our intention remains to ensure that the Review addresses the root cause of ASIC's key concerns.

• Our amendments reflect 3 key principles, which we believe are aligned to ASIC's intentions for the Review:

• Ensure that the Review addresses AS I C's concerns relating to the 'fairness and efficiency' of the M LC Super Fund, now Australia's largest for profit retail super fund .

• Ensure that the Review reflects the current operating model of NULIS which outsources superannuation business services to NWMSL.

• Ensure clarity in the language of the licence conditions so that the Independent Expert is best able to conduct an effective assessment for each specific scope item.

• We would value the opportunity to hold a working session at ASIC's earliest convenience to explain our proposed amendments in detail and confirm the wording of each paragraph.

• We attach our proposed amendments for ASIC's consideration (Refer NULIS Ucence conditions 03112016 -proposed amendments DRAFT FOR DISCUSS/ON_ vo 5.doc).


2. Independent Expert Selection update & Next Steps

Independent Expert selection

• We are finalising the independence assessment with our shortlisted IE candidate (KPMG).

• We anticipate being able to supply the independence assessment information to ASIC early next week. We would appreciate ASIC's consideration and feedback ahead of finalising the selection of the IE, if suitable to ASIC.

• We are finalising our overall assessment of KPMG as the preferred candidate to recommend to ASIC and ultimately the NULIS Board for approval.

• We have prepared draft terms of engagement which will be subject to finalisation of the licence condition wording and approval by ASIC and ultimately the NULIS Board.

Timeline - Next steps to engagement

• w/e 11 November - confirm licence condition wording with ASIC (target date)

• w/e 18 November - prepare paper for NULIS Board delegates requesting approval of licence conditions and terms of engagement to appoint the IE

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• w/e 18 November - prepare licence conditions and terms of engagement to appoint the IE for approval by ASIC

• w/e 25 November - receive feedback from ASIC on the terms of engagement (target date)

• w/e 2 December - target approval from ASIC and NULIS Board (30 November) of the licence conditions and terms of engagement to appoint the IE

• 7 December - target date for engagement of the Independent Expert and commencement date of Interim Review Phase


asic.0039.0001 - royal commission

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