6.3 What the case study showed

6.3.1Use of the tax surplus

Counsel Assisting submitted that SPSL, by its conduct in relation to the tax surplus, may have contravened the best interests obligations; the duty to exercise the degree of care, skill and diligence a prudent superannuation trustee would exercise; and the applicable prudential standards.

SPSL submitted that the obligation in the services deed to pay Suncorp Life the tax surplus gave rise to an expense incurred by SPSL for which it was entitled to be indemnified.[1] If followed, so the argument went, that the payments to Suncorp Life under the services deed were a proper exercise of SPSL’s right of indemnity.[2]

It will be recalled that the trustee may be indemnified for properly incurred expenses. To be properly incurred, the expenses must be reasonable. And it will be recalled that the management submissions to the board of SPSL said that the board should consider matters bearing upon whether the account to be paid for Additional Services’ was reasonable. It is not clear that SPSL could decide whether payment of the tax surplus amounts to Suncorp Life was (or is) a properly incurred and reasonable expense. While the four step process set out in the management submissions evidently was directed to those issues, I observe that:

  • So far as the evidence goes, the surplus has always been paid to the maximum extent.[3]
  • Only limited information is provided to the SPSL Board about the value of the services provided by Suncorp Life. Instead, the management submission focused on the cost to Suncorp Life of providing those services. That is not the same thing.
  • There was no evidence before the Commission of any independent valuation of the services having been requested or undertaken.[4]
  • It is anything but clear and I greatly doubt that the trustee could determine whether services were provided and paid for under the services deed or under some other contractual arrangement.[5]

Prudential Standard SPS 231: Outsourcing requires RSE licensees to be able to demonstrate that outsourcing to an associated entity is conducted on an arm’s length basis.[6] Although SPSL’s written submissions pointed out that the standard came into effect after the services deed was executed, SPSL did not go so far as to suggest that SPSL need not comply with the standard.[7] The arrangements between SPSL and Suncorp Life by which Suncorp Life is paid for Additional Services are unlikely to meet those requirements.

Whether or not that is so, I consider that the arrangement made between SPSL and Suncorp Life may not have been administered by SPSL in accordance with its obligation to exercise the degree of care, skill and diligence a prudent superannuation trustee would have exercised, in accordance with the covenant set out in section 52(2)(b) of the SIS Act. I refer the relevant conduct to APRA, pursuant to paragraph (a) of the Commission’s Terms of Reference, for APRA to consider what action it can and should take.

Separate questions about disclosure to members about the use of the tax surplus were canvassed in written submissions. SPSL submitted that it had a right of remuneration and a right of indemnity and that both are explained to members in relevant product disclosure statements (PDSs) albeit that the right of remuneration can be precisely quantified in the form of fees whereas the right of indemnity, by its nature, can not.[8]

In its written submissions, Suncorp submitted that there was no basis for finding that the PDS and Product Guide were misleading. It submitted that there was no basis for an assumption that the administration fees expressly payable by members to SPSL should be ‘comprehensive and exhaustive of all administration expenses of the Master Trust’.[9] It also submitted that there could be no reasonable expectation that the fact that excess contributions will be paid to Suncorp Life for administration services will be disclosed. Suncorp submitted that ‘the fact that excess contributions tax amounts may be used to pay expenses of the Master Trust is disclosed in plain terms in the Product Guide’.[10]

I agree with Suncorp’s submission that the PDS and Product Guide were not themselves misleading. The PDS and Product Guide revealed to readers that excess contributions tax collected from members would not be refunded to members. The PDS and Product Guide also revealed that the excess contributions tax might be used to cover administrative expenses that were incurred by the fund. What this meant in terms of the effective amounts paid by a member towards administration of the fund was not revealed by the PDS and Product Guide but, as Suncorp submits, SPSL had no stand-alone obligation to include within the PDS a statement of administration fees that is ‘comprehensive and exhaustive of all administration expenses of the Master Trust’.

However, this raises a broader question about the adequacy of the disclosures required to be made by trustees as to the amounts paid by members towards administration.

ASIC’s Regulatory Guide 97 provides that a trustee must not use any income tax deductions to reduce the administration fee it discloses.[11] That is, if a trustee charges an administration fee of $100 but receives a $15 income tax deduction, it must disclose the fee as $100, not $85. The benefit of the deduction should be disclosed under a separate heading within the PDS.

Suncorp, of course, did not use the tax surplus to reduce its disclosed fees. Suncorp simply kept it. Mr Pinto acknowledged that the result of retaining the tax surplus in 2016 was that members of the fund effectively paid a 1.05% administration fee.[12] However, as Mr Pinto also acknowledged, that fact would not be obvious to members.[13] If consumers are to be able to make informed comparisons between funds then they need to be able to understand the implications to them, in dollar or percentage terms, of a fund retaining excess contributions tax. Otherwise, it will be effectively impossible to compare a fund that adopts this practice, and therefore charges a lower face administration fee, with a fund that does not adopt this practice and charges a transparent administration fee that covers all administration expenses.

6.3.2Misconduct in respect of MySuper and ADA transfers

It will be recalled that RSE licensees were obliged to attribute default contributions to a MySuper product by 1 July 2017. SPSL submitted that its conduct was reasonable because it completed the transfer within that legislative time limit.[14] As I have noted elsewhere, the legislative deadline for compliance represented an outer limit. It did not mean that RSE licensees were entitled to wait until 30 June 2017 to comply. They were still required to comply with their other obligations, including their covenant to act in the best interests of members.

SPSL also submitted that it was reasonable to complete the transfer after the Super Simplification Program, because of the complexity that existed before that program was completed.[15] There are two difficulties with this submission. The first is that the Program was not implemented until 2015, long after the transition requirement was known. If it was part of the transition strategy, why did it not start until 2015? The second is that Mr Pinto said that the transfer, which occurred in June 2017, started immediately following the completion of the [Program].[16] But he also said that the Program was implemented from 2015 until November 2017.[17] If that is right, the Program was not completed until after the transfer had occurred. This apparent contradiction was not explored in evidence. But even accepting that all of the work of the relevant Program was complete at the time of transfer, I am not persuaded that it provides an adequate reason for Suncorp’s delay. At best, it was one factor among others.

One of those other factors was that until the transition happened, commission payments would be made to advisers in respect of ADAs. Advisers stood to benefit from a delayed transition. Members did not. Yet rather than writing to members to inform them of this fact (among others), SPSL wrote to advisers to recommend that the adviser encourage the member to make an investment decision. SPSL submitted that an investment decision did not necessarily mean a continued payment of commission, since a client could tell their adviser they desired to be invested in the MySuper product.[18] Strictly speaking, that is true. But taken as a whole, the communications suggest a focus on encouraging members to take action that would stop them from being transferred to a MySuper product.

I consider that Suncorp’s delay in transferring ADAs, and its actions encouraging advisers to contact members, each may have breached the covenant to act in the best interests of its members. It might also have been a breach of its covenant to prioritise the interests of members over others (like financial advisers). The conduct not having been drawn to the attention of the regulator, I refer the relevant conduct to APRA, pursuant to paragraph (a) of the Commission’s Terms of Reference, for APRA to consider what action it can and should take.

6.3.3Grandfathered commissions

As described above, the Distribution Agreement between SPSL, Suncorp Life and Suncorp Financial was apparently amended, at least in part, for the express purpose of maintaining grandfathered commissions. This topic was not explored in Mr Pinto’s oral evidence. Nor did Counsel Assisting submit that Suncorp’s conduct in this respect constituted misconduct or conduct falling below community standards or expectations.

In the circumstances, I do not make any findings about this conduct. I only observe that, on its face, it is difficult to understand how amending the agreement to allow for grandfathered commissions to be maintained was in members’ best interests. Commission payments reduce members’ benefits. But it is not clear what benefits, if any, were to flow to members as a result of the amendments. On the limited material available, it is not clear that members’ interests were even considered when the decision was made. If it were the case that the amendments would result in continued reduction of members’ benefits with no corresponding benefit, Suncorp should not have agreed to them. But, as I say, I make no finding.

[1]SPSL, Module 5 Case Study Submission, 15–16 [43].

[2]SPSL, Module 5 Case Study Submission, 15 [42].

[3]Exhibit 5.320, Witness statement of Maurizio Pinto, 27 July 2018, Exhibit MP-2 (Tab 19) [SUN.1501.0005.5563].

[4]One management submission said that the cost of individual projects is not benchmarked against what they could be delivered for externally. Exhibit 5.166, 18 April 2013, Board Submission, 5.

[5]One management submission said there was overlap between the Additional Services and services provided in return for administration fees: Exhibit 5.320, Witness statement of Maurizio Pinto, 27 July 2018, Exhibit MP-2 (Tab 19) [SUN.1501.0005.5563]. Mr Pinto agreed that SPSL could not be certain that the member was not paying twice for the cost of Suncorp Life’s calculation of the unit price, for example: Transcript, Maurizio Pinto, 14 August 2018, 4831.

[6]APRA, Prudential Standard SPS 231, 15 November 2012, [16].

[7]SPSL, Module 5 Case Study Submission, 17 [48].

[8]SPSL, Module 5 Case Study Submission, 15 [41].

[9]SPSL, Module 5 Case Study Submission, 15 [41].

[10]SPSL, Module 5 Case Study Submission, 17 [51].

[11]ASIC, Regulatory Guide 97, March 2017, reg 97.172.

[12]Transcript, Maurizio Pinto, 14 August 2018, 4823.

[13]Transcript, Maurizio Pinto, 14 August 2018, 4823.

[14]SPSL, Module 5 Case Study Submission, 18 [53].

[15]SPSL, Module 5 Case Study Submission, 18 [53].

[16]Exhibit 5.164, Witness statement of Maurizio Pinto, 5 August 2018, 30 [32].

[17]Exhibit 5.164, Witness statement of Maurizio Pinto, 5 August 2018, 19 [21].

[18]SPSL, Module 5 Case Study Submission, 19 [58]–[59].