In adjusting the roles of APRA and ASIC in relation to superannuation, it is very important not to draw lines in such a way that will leave gaps. If the consequence is, and it will be, that there is a degree of overlap between the remits of the two agencies, that outcome should be recognised and accommodated.
The adjustment to be made should accord with the general principle that APRA is to act as prudential regulator and ASIC as the conduct regulator. That is, as APRA described the respective roles of the agencies:
APRA, as the prudential regulator for superannuation, is responsible for establishing and enforcing Prudential Standards and practices designed to ensure that, under all reasonable circumstances, financial promises made by superannuation entities APRA supervises are met within a stable, efficient and competitive financial system …
As the conduct and disclosure regulator, ASIC’s role in superannuation primarily concerns the relationship between RSE Licensees and individual consumers.[1]
(I say more about this allocation of roles in the chapter on the regulators.)
Adjustment of this kind will result in the two agencies having common areas of interest. But each agency will have to look at those areas for different purposes and with a different perspective.
It is useful to return to the best interests covenant and conflicts of interest, which are likely to be of common interest for APRA and ASIC. These two themes frequently intersected in the case studies and often played out to the detriment of members, further emphasising the need for regulation and, where appropriate, enforcement.
3.4.1Current enforcement of the trustees’ covenants
Section 55(1) of the SIS Act provides that a person must not contravene the trustees’ or the directors’ covenants.[2] But, as the SIS Act now stands, breach of a covenant attracts no penal consequence, civil or criminal.[3]
A person who suffers loss or damage as a result of the breach may bring an action to recover the amount of that loss or damage but, if the action is against a director for breach of a director’s covenant, the action may be brought only with the leave of the court.[4]
As the law now stands, APRA may be able to say that the conduct that breaches one of the covenants is a breach of some prudential standard. It may be able to say that there has been a failure by the trustee to comply with the condition on its licence to act as an RSE – that its duties as a trustee are properly performed.[5] It may be able to direct the RSE licensee to comply with that condition.[6] But on their face, these enforcement measures are less direct than they should be, given the central importance of the obligations.
3.4.2Changing enforcement of covenants
The covenants are, as I have said, central to the proper administration of a superannuation fund. Their proper application is a matter of both prudential and regulatory importance.
I have no doubt that the SIS Act should be amended to make breach of the covenants set out in sections 52 and 52A of the SIS Act and the analagous obligations imposed by sections 29VN and 29VO of the SIS Act civil penalty provisions. And if that is done, section 202 of the SIS Act should be left to operate according to its terms, making it an offence to breach those covenants or those provisions if either of the additional elements prescribed by that section are established.[7]
As at November 2018, a Bill to make a number of changes to the SIS Act, including making breach of section 52A and section 29VO civil penalty provisions, had been introduced into the Parliament but had not yet been passed.[8]
Because performance of the covenants has both a prudential significance and a significance for members of the fund, both APRA and ASIC should be able to take action in respect of breaches of the covenants.
More often than not, I would expect that ASIC would be the agency that would take any enforcement action. This would be consistent with ASIC’s existing responsibility for enforcing similar obligations imposed on the responsible entities of managed investment schemes.[9] It would also be consistent with ASIC’s existing regulation of AFSLs. RSE licensees are also AFSL holders, and have obligations that ASIC is responsible for enforcing, such as the obligation under section 912A to provide services ‘efficiently, honestly and fairly’. Conduct that may give rise to a breach of the covenants may also breach the trustee’s obligations under its AFSL; in such circumstances it would make sense for ASIC to deal with the breaches holistically.
That being said, APRA’s prudential supervision of RSEs may be the most likely means by which issues about performance of the covenants emerge. It will not be often that individual members of a fund, or groups of members, come to be aware of facts and circumstances that may show a breach by the trustee. It is therefore essential that APRA retain the ability to take action in the case of a breach. Hence, the exercise of powers by the two agencies should be complementary, not conflicting.
The way in which dual regulation should occur is discussed more fully in the chapter dealing with the regulators.
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Recommendation 3.7 – Civil penalties for breach of covenants and like obligations Breach of the trustee’s covenants set out in section 52 or obligations set out in section 29VN, or the director’s covenants set out in section 52A or obligations set out in section 29VO of the SIS Act should be enforceable by action for civil penalty. Recommendation 3.8 – Adjustment of APRA and ASIC’s roles The roles of APRA and ASIC with respect to superannuation should be adjusted, as referred to in Recommendation 6.3. |
[1]APRA, Module 5 Policy Submission, 8 [15]–[16].
[2]Equally, ss 29VP(1) and 29VPA(1) provide that a person must not contravene the additional MySuper obligations imposed on trustees and directors respectively.
[3]The Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 1) Bill 2017 (Cth) would provide, among other things, for breach of a director’s covenant to be a civil penalty provision. Section 202 of the SIS Act now provides for when contravention of a civil penalty provision is an offence. To be an offence, the contravention must meet one of two additional elements: either the person contravenes the section dishonestly and intending to gain an advantage (for that or any other person), or the person contravenes the section intending to deceive or defraud someone.
[4] SIS Act ss 29VP(3), 29VPA(3), 55(4), 55(4A).
[5] SIS Act s 29E(1)(b).
[6] SIS Act s 29EB.
[7] The additional elements are either acting dishonestly and intending to gain an advantage or intending to deceive or defraud someone.
[8] Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 1) Bill 2017 (Cth), Sched 3.
[9] Corporations Act s 601FC.