3.3 What the case study showed

3.3.1Key problem

The central point to be made from the evidence detailed above, and what I have said each aspect of the evidence showed, is that ASL and NM have implemented their outsourcing arrangements with other entities in the AMP Group in a manner that has presented, and, on the face of the evidence, continues to present, real and serious difficulties to each trustee in the proper performance of their obligations.

The problem is not outsourcing in general. Trustees are not, and should not be, prohibited from outsourcing or delegating their powers and duties.[1] The problem is the extent to which ASL and NM can discharge, and are discharging, their duties to their members in light of their particular outsourcing arrangements and the approach they adopt to those arrangements in light of their position within the AMP Group. They have made themselves submissive to the decisions of those to whom they have outsourced their tasks.

Two themes emerged from the evidence that are particularly important in considering ASL and NM’s compliance with these covenants.

The first theme is the deficient reporting to ASL and NM. The evidence illustrated four examples in which the reporting to the trustees under the BMM may be said to be deficient: performance of cash investments; performance of MySuper products; monitoring of investments and indirect costs; and issues concerning distribution of the trustees’ products.

The second theme in the evidence was the failure of the trustees to take steps to remedy the deficiencies in information provided to them, or to seek information that would give them a proper understanding of decisions being made by others in the Group. Nothing prevented them from actively testing the information provided to them by parts of the AMP Group, or from seeking further information to satisfy themselves that they had discharged their duties. But they did not do this.

The evidence suggests that the trustees did not do this because they relied on the relevant parts of the business, to which the trustees’ powers, duties and discretions had been outsourced, to ensure compliance with the trustees’ obligations. This was so even where relevant parts of the Group had interests in conflict with those of members of the trustees’ funds. To the extent that something went wrong, the trustees expected that it would be brought to their attention. Indeed, that was the premise central to the BMM and the exceptions reporting.

The trustees’ exception reporting framework through the BMM is not unlike arrangements in other companies where the board is notified about particular issues within the business on an exceptions basis. There is commercial sense in this type of arrangement. However, problems arise where, as it does in the case of the AMP trustees, the board receives reporting that is deficient. That problem is compounded where the board does not actively seek to test the information or ensure it is sufficient.

I have noted some of the failures to take action in the face of deficient reporting already. This reliance on other parts of the business to act in members’ best interests, or to act in a way that would discharge the trustees’ duties, was also illustrated through the ADA transition, and decisions as to pricing of the trustees’ products.

3.3.2Overarching conclusions about the trustees’ outsourcing arrangements

What conclusions should be drawn from the two themes in the evidence about the extent to which the trustees’ particular outsourcing arrangements are consistent with the trustees meeting their duties?

AMP submitted, in effect, that nothing can be drawn from these matters. It submitted that its outsourcing model was effective. It submitted that no findings of possible misconduct were open to me save where AMP had already admitted possible misconduct in a breach report to ASIC or APRA or both. It said that [t]he evidence received by the Royal Commission demonstrates the prudent and effective management of the funds by the Trustees.[2]

I do not believe that the problems can be so easily swept aside. There are three covenants imposed on the trustees under the SIS Act that require careful consideration in relation to the trustees’ outsourcing arrangements: section 52(2)(c) of the SIS Act, which requires the trustee to perform its duties and exercise its powers in the best interests of the beneficiaries; section 52(2)(d), which requires, in general terms, the trustee to prioritise the interests of the beneficiaries over its own and others’ interests; and section 52(2)(h), which requires the trustee not to enter into any contract, or do anything else, that would prevent the trustee from, or hinder the trustee in, properly performing or exercising the trustees functions and powers.

The way that the trustees carried out their outsourcing arrangements may have given rise to breaches of the covenants in section 52(2)(c), (d) and (h) in the following ways.

Section 52(2)(c)

AMP submitted that the duty in section 52(2)(c) of the SIS Act was not a duty to achieve particular outcomes for members and that, although the [AMP trustees] will always strive to achieve this, the provision certainly does not impose a strict duty to achieve the best outcome for members (emphasis in original).[3] Like others who appeared before the Commission in the fifth round of hearings, AMP submitted that the duty was directed at a proper process not at particular outcomes.[4] But again the aphorism may conceal more than it reveals.

It may be accepted that the duty in 52(2)(c) is breached by an inadequate process. It may also be accepted that an inadequate outcome does not demonstrate breach. Neither Counsel Assisting nor any person making submissions suggested otherwise. But it does not follow that the outcome of the process is to be disregarded.

A poor outcome for beneficiaries may point to a specific inadequacy in the process used by the trustee. In general, the poor outcomes achieved by the AMP trustees require an explanation as to why they occurred and went undetected for so long if the trustees’ processes were adequate. Indeed, one of the most basic tasks undertaken by a trustee acting in the best interests of its members and exercising the care, skill and diligence of a prudent superannuation trustee would be to engage in a process of self-evaluation to pinpoint the reasons for a poor outcome.

But, outcomes aside, having regard to the deficiencies in reporting, and lack of steps taken by the trustees to satisfy themselves that they were doing the best they could for their members, I am satisfied that the trustees implementation of their outsourcing arrangements may be conduct that was inconsistent with the covenant in section 52(2)(c). The poor outcomes for members points towards that conclusion.

Section 52(2)(d)

AMP did not accept that its outsourcing arrangements presented difficulties for it in complying with section 52(2)(d) of the SIS Act.[5]

AMP submitted that the AMP trustees are cognisant of the potential for conflicts that may arise within the outsourced model and are mindful of their duties and obligations with regard to conflicts, including Prudential Standard SPS 521: Conflicts of Interest.[6] AMP said that the AMP trustees have robust policies and frameworks in place for the identification and management of conflicts, and that the outsourcing arrangements expressly deal with conflicts and require the interests of members to be preferred.[7]

The outsourcing agreements do not require any potential conflicts to be reported to the trustees so that the trustees can monitor how the conflicts are resolved. For example, the Master Outsourcing Agreement between AMP Life and ASL requires AMP Life to prefer the interests of the beneficiaries where there is a conflict[8] but it does not require AMP Life to report that conflict to the trustee.

The circumstances of the ADA to MySuper transition plan illustrate this problem of being uninformed about conflicts. AMP submits that the trustee acted appropriately in approving the transition plan because the trustee was concerned about the management of risk. But the trustee was concerned about the management of risk because that was what AMP Life told the trustee was the reason underlying the transition plan. AMP submitted that [t]hat other members of the Group had regard to the particular interests of their stakeholders in relation to particular matters does not mean that the Trustees failed to properly exercise their functions.[9] But the trustee was not told about the use of the PwC heat maps to determine effects on advisers or made aware of the obvious possible conflict between the interests of other parts of the AMP Group and the interests of the superannuation beneficiaries in relation to the transition plan.

The decisions about pricing of the trustees’ products also illustrate the conflicts inherent in the trustees’ operations. AMP submitted that the trustees had the ultimate decision regarding pricing, and that the trustees were not forced to accept the pricing offered or approved elsewhere.[10] That may be true. But the reality is that the pricing of the trustees’ products was determined elsewhere in the Group, and the trustees did not seek to be informed of the information underpinning the pricing, or whether that pricing was the best that could be done for their members. And once the fees proved to be uncompetitive and produce poor outcomes for their members, they could only be reduced once there was also approval from other parts of the Group. Mr Allert’s evidence was plain that despite the high costs, the trustees had no intention of investing the assets of the funds somewhere else or engaging another investment management service provider.[11] Indeed, Mr Allert’s evidence was that the trustees were not in a position where they could say to AMP Life that the current arrangements were not acceptable to the AMP trustees’ members and move the investments out of AMP Life.[12] Mr Allert said that, in the current circumstances, there was no sensible possibility that would happen.[13]

These instances show that the trustees were not arming themselves with knowledge of conflicts that existed, or may exist, because of their outsourcing arrangements. And trustees cannot properly exercise their functions as contemplated by section 52(2)(d) without being aware of the conflicts that arise and, with that awareness, being prepared to take steps to test whether the interests of the beneficiaries are truly being preferred.

Section 52(2)(h)

The trustees acknowledged that their outsourcing arrangements have not relieved them of their duties to the members of the funds.[14] Indeed, AMP said that the primary intent of the BMM was to ensure that the AMP trustees could and would successfully discharge their obligations to their members.[15] And this proposition was central to the Fund Governance Charter, on which AMP relied in its submissions.[16]

AMP submitted that it was not open to me to find that the AMP trustees may have breached the covenant set out in section 52(2)(h) of the SIS Act by maintaining their outsourcing arrangements.[17] AMP submitted that its trustees’ outsourcing agreements do not prevent or hinder the Trustees from exercising their powers and functions Rather, the outsourcing agreements are the means by which the Trustees properly perform and exercise many of their functions they explicitly require the outsource providers to act in accordance with the Trustees’ obligations.[18]

I accept that AMP Life and NMMT are required under the outsourcing agreements to act so as not to cause the trustees to breach their obligations.[19] But the trustee is still the trustee. It is the trustee that must fulfil its obligations.

The submissions of AMP help to identify the fundamental problem with the trustees’ outsourcing arrangements: in practice, it was and is assumed by the AMP Group and the AMP trustees that the outsourced providers can and will fulfil the trustees’ duties for the trustees, so that the trustees can be, and are, passive.

The trustees’ passivity is manifest in three ways.

First, the passivity is reflected at the most basic level in the contractual agreements. ASL and NM do not pay AMP Life to provide it with services. Rather, ASL and NM are paid by AMP Life to be the trustee of the funds.

Second, it was evident in the evidence given by Mr Allert. His evidence, relied on by AMP in its submissions, was that he did not consider that the issues concerning negative net returns warranted terminating the relationship with AMP, because he had complete confidence that the issues would be fully dealt with by AMP.[20] Yet Mr Allert was seemingly indifferent about why the issues had arisen in the first place and why they had been allowed to continue for so long.

Because of this unquestioning trust, the trustee boards depended on exception reporting to bring to their attention any matters that may cause, or may have caused, them to breach any of their duties. The BMM expressly recognised this.[21] And although, as I noted above, at a general level there is nothing objectionable in an exceptions-based reporting structure, reliance on such a structure to the extent that the directors do not interrogate or enquire further into the information provided to them leads to the difficulties that the trustees have faced. And reliance without interrogation and enquiry is not consistent with the duties of the trustees.

AMP sought to meet the inadequacies in the detailed formal rules for reporting to the trustee boards by relying upon the general discretion of Trustee Services and outsourced providers to bring important matters to the attention of the trustee boards. But that directs attention to how the reporting worked in practice if left to the discretion of outsourced providers. The reporting was inadequate. The reporting by AMP Life of investment performance did not provide the AMP trustees with the performance of their products net of fees and taxes. The reporting through the BMM did not enable the AMP trustees to identify the fees being wrongly charged by AMP Capital as a result of the Expense Recovery and Fee Rebate Incidents at the time that the fees were being wrongly charged.

Third, the passivity is demonstrated in the trustees’ inability or unwillingness to influence outcomes for members without the agreement of the AMP Group.

Mr Allert’s evidence was that the AMP trustees were not in a position to move the investments out of AMP Life. And Ms Sansom said that she had considered the fees to be too high for some time but that it was a matter for the AMP Product Team. Nothing was done until APRA identified the problem, and even then no steps were taken until a month before the Royal Commission’s superannuation hearings were due to commence.

AMP submitted that Counsel Assisting had not articulated how the AMP trustees had exercised their powers in a way that was contrary to the interests of the members, relying on the BMM framework to support their argument. In AMP’s submission, the BMM was plainly a prudent exercise of the [AMP trustees’] responsibility to provide proper governance.[22]

But, as AMP has acknowledged, its trustees have breached their statutory obligations in several respects in the last few years because of the conduct of the related parties to whom they have outsourced their functions. The contractual obligations imposed on the related parties did not prevent these breaches. The contractual obligations did not cause the AMP trustees to be made promptly aware of the breaches. In one case (negative net returns to members invested in cash), the AMP trustee became aware of the problem after it had continued for three years and only because of an APRA investigation.

AMP has not sought to explain how it reconciles these breaches with its proposition that the outsourcing arrangements are adequate. Taken as a whole, AMP’s outsourcing arrangements allow and encourage the trustee to be passive and both the trustees and the other parts of the AMP Group assume and believe that this is appropriate and acceptable. The trustees, by implementing their outsourcing arrangements in the manner in which they have, and rely upon as the explanation for their passivity, may have contravened the covenant in section 52(2)(h) of the SIS Act.

The potential breaches of the covenants set out in section 52(2)(c), (d) and (h) not having been so far drawn to the attention of the regulator, I refer AMP’s conduct to APRA in accordance with paragraph (a) of the Commission’s Terms of Reference, for that agency to consider what action it can and should take.


This case study demonstrates two things.

First, the ease with which a trustee within a retail group may substitute the rigour and discipline required to fulfil its duties to members, with leaving others within the group to carry out its tasks, believing that copious process would ensure compliance.

Second, the readiness of APRA, the responsible regulator, to accept, or not identify, this substitution of form for substance.

APRA conducted a review of the BMM in 2017, and found that the BMM largely complied with prudential and legal requirements indeed, APRA characterised the BMM as ‘robust’,[23] a characterisation that AMP sought to rely on in its submissions.[24] APRA’s characterisation of the BMM suggests that its assessment may not have grappled with the way in which the trustees were conducting their outsourcing arrangements, and what that meant for the trustees’ members.

APRA was aware before the hearings for Round 5 of at least some of the issues that I have identified it had brought the poor performance of MySuper products to the trustees’ attention, and prompted them to identify issues such as the negative net returns to members invested in cash.

But, like the trustees, APRA did not seem to make the link that the trustees’ absolute reliance on the BMM and outsourced arrangements constituted failures of duty when those mechanisms, themselves, failed.

This suggests that APRA needs to do more in its evaluation of how trustees of vertically integrated institutions are complying with their fundamental duties to their beneficiaries. In particular, it highlights the need for APRA to consider whether the Standards and Guidelines for which it is responsible should be revised to improve the ability of both APRA and the trustee within a vertically-integrated group to adequately evaluate whether the trustee is promoting the best interests of members. For example, certain types of decisions by such trustees might be required to be reviewed by an external expert to certify that they are consistent with their obligations owed to members. APRA might also consider whether additional licence conditions should be imposed on some RSE licensees to report particular decisions to APRA for the purpose of evaluating conflicts. But any such developments in APRA’s approach must be more than merely an additional layer of regulatory process. What is required is improvement in the quality of APRA’s evaluation of conflicts management within retail groups, not merely more regulatory boxes to be ticked.

[1] See SIS Act s 52(5), which confirms that a trustee is not prevented from engaging or authorising persons to act on its behalf. See also APRA, Prudential Standard SPS 231 and APRA, Prudential Standard SPS 510, which requires the trustee board to have in place frameworks for outsourcing and delegation of duties and powers to others.

[2] AMP, Module 5 Case Study Submission, 1 [5].

[3] AMP, Module 5 Case Study Submission, 16 [74].

[4] AMP, Module 5 Case Study Submission, 16 [74].

[5] AMP, Module 5 Case Study Submission, 1516 [73], 1920 [90].

[6] AMP, Module 5 Case Study Submission, 6 [21].

[7] AMP, Module 5 Case Study Submission, 6 [21].

[8] Exhibit 5.267, Witness statement of Richard Allert (515), 25 July 2018, Exhibit RHA-2 [AMP.6000.0190.6472 at .6490–.6491, cl 2.6].

[9] AMP, Module 5 Case Study Submission, 6–7 [25].

[10] AMP, Module 5 Case Study Submission, 19 [86].

[11] Transcript, Richard Allert, 16 August 2018, 5099.

[12] Transcript, Richard Allert, 16 August 2018, 5099.

[13] Transcript, Richard Allert, 16 August 2018, 50989.

[14] AMP, Module 5 Case Study Submission, 12 [6].

[15] Exhibit 5.265, Witness statement of Richard Allert (506), 25 July 2018, Exhibit RHA-1 [AMP.6000.0124.0552 at .0553].

[16] AMP, Module 5 Case Study Submission, 1–2 [6].

[17] AMP, Module 5 Case Study Submission, 19–20 [85]–[89].

[18] AMP, Module 5 Case Study Submission, 18 [83].

[19] Exhibit 5.267, Witness statement of Richard Allert (515), 25 July 2018, Exhibit RHA-2 [AMP.6000.0190.6472 at .6488–.6489, cls 2.2 and 2.3]; Exhibit 5.265, Witness statement of Richard Allert (506), 25 July 2018, Exhibit RHA-1 [AMP.6000.0125.0272 at .0292, cl 7.1].

[20] AMP, Module 5 Case Study Submission, 12 [53]; Transcript, Richard Allert, 16 August 2018, 5099.

[21] Exhibit 5.265, Witness statement of Richard Allert (506), 25 July 2018, Exhibit RHA-1 [AMP.6000.0124.0552 at .0553].

[22] AMP, Module 5 Case Study Submission, 15 [73].

[23] Exhibit 5.291, 7 April 2017, Letter from APRA to Sansom, 3.

[24] AMP, Module 5 Case Study Submission, 2 [15].