Introduction

The Commission’s fifth round of hearings explored issues relating to the superannuation industry.

The hearings focused on four topics:

  • the proper use of members’ money, including inappropriate deductions from members’ accounts (such as for services that were not provided), failures to diligently manage investments and spending, and retaining money instead of distributing it to members;
  • arrangements between superannuation trustees, related parties, and financial advisers, including where the trustee is part of a broader group;
  • governance matters, including board composition, the adequacy of the trustee board’s oversight, and merger proposals; and
  • the response of superannuation trustees to legislative reforms intended to promote superannuation members’ interests.

These topics sometimes overlapped within individual case studies.

One overarching theme recurred: the difficulties that trustees (principally retail trustees) faced in dealing with conflicts between duty and interest. A trustee must act in the best interests of members and prefer their interests over the interests of anyone else. It will breach its duties if it disadvantages its members or disregards their interests for its own, or others’, profit or convenience. Contrary to many of the submissions made by retail trustees, these duties are easily understood. But compliance with the duties in the face of some competing interests appeared to be difficult.

In a number of cases, what appeared to be a failure by a trustee to discharge its duties concerned MySuper members or members who ought to have been transferred to a MySuper product. In respect of those members, trustees have additional and more specific duties. MySuper members’ retirement savings are invested through a default product and, in that way, those members have delegated all aspects of their superannuation to the trustee.[1] For that reason, MySuper members may be seen as more vulnerable than those who have made an investment decision: they depend on the trustee’s judgment to place them in a position to receive the best return possible, so they can grow their retirement savings.

The legislation imposes certain rules and characteristics on MySuper products offered by trustees. MySuper products are designed to be low cost, simple and transparent and to provide an appropriate investment strategy for the member. They are designed to ensure that the financial interests of members who make no active choice about their superannuation are protected.[2] And they play a significant role in superannuation in Australia: as at June 2018, total assets held in MySuper products was $675.6 billion.[3]

In the cases examined in the hearings, potential breaches of trustee duties yielded no enforcement action by the regulators. It will be necessary to consider whether the Australian Prudential Regulation Authority’s (APRA’s) response was adequate.

The choices trustees make for their members can significantly affect members’ retirement savings. And, in turn, members’ retirement savings are affected by the way in which the regulator monitors and enforces trustees’ compliance with their duties, particularly in the case of MySuper products.

APRA’s mandate is to protect the Australian community by establishing and enforcing prudential standards and practices designed to ensure that, under all reasonable circumstances, financial promises made by institutions it supervises are met within a stable, efficient and competitive financial system.[4] For superannuation, the promise to a beneficiary of the trust is that the trustee will meet the reasonable expectations of the beneficiary in providing their retirement benefits to them on their retirement or attainment of 65 years. In this way, APRA is concerned with protecting the interests of beneficiaries, and ensuring that the trustee operates in such a way as to be able to meet those reasonable expectations.[5]

APRA is charged with the general administration of the provisions of the Superannuation Industry (Supervision) Act 1993 (Cth) (the SIS Act) that impose the best interests covenant[6] on trustees and directors of corporate trustees.[7] The Australian Securities and Investments Commission (ASIC) has general administration of those provisions to the extent that they relate to the keeping of reports and disclosure of information.[8]

A breach of the best interests covenant gives a cause of action to a person who suffered loss or damage as a result of the breach.[9] But a breach of the best interests covenant attracts no penal consequence. It is not an offence,[10] and, as the SIS Act currently stands, it does not give APRA a basis to bring a civil penalty proceeding against the trustee (or its directors). APRA’s ability to seek a remedy under the SIS Act where there has been a breach of the best interests covenant is limited: APRA may impose a licence condition on the trustee’s registerable superannuation entity (RSE) licence;[11] seek an injunction to restrain the trustee from engaging in the conduct or requiring it to perform an act;[12] or, after conducting an investigation or examination under part 25, cause proceedings to be begun in the name of the beneficiary to recover damages or property.[13]

The breach may be a failure by the trustee to comply with the condition on its licence that the duties of a trustee are properly performed.[14] APRA may be able to direct the RSE licensee to comply with that condition.[15] But on their face, these are indirect means of enforcing compliance with the covenants.

The Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017 (Cth), introduced into Parliament on 14 September 2017, proposes to amend the SIS Act to insert, among other things, a new provision rendering section 52A, which contains the best interests covenant imposed on directors of corporate trustees, a civil penalty provision.[16] The Bill was debated in the Senate in November and December 2017, but, at the time of writing, the government had announced it would table some amendments, and the bill had not progressed to the House of Representatives.[17]

The Bill does not propose to change the administration of part 6 of the SIS Act. Accordingly, if this Bill were to be enacted, APRA would be charged with administration of this provision and consequently with bringing any civil penalty proceedings for a breach of the best interests covenant under section 52A, to the extent that the breach did not involve any keeping of reports or disclosure to members.

A question arises as to whether APRA is best placed to enforce compliance with the best interests covenant in this way. As I observed in my Interim Report, APRA has not chosen to carry out enforcement activities in the courts. Indeed, such an approach to enforcement may present some conflict with its mandate of ensuring stability in the financial system. The power to bring proceedings may more properly sit with ASIC, which already has responsibility for regulating and enforcing provisions analogous to the best interests covenant under provisions such as those imposing duties on responsible entities of managed investment schemes.[18]

This chapter deals with the issues raised by the case studies in three parts:

  • First, issues that arose in respect of particular superannuation trustees, namely:
  • NULIS Nominees (Australia) Limited, part of the NAB group;
  • Colonial First State Investments Limited and Avanteos Investments Limited, part of the CBA group;
  • AMP Superannuation Limited and NM Superannuation Proprietary Limited, part of the AMP group;
  • IOOF Investment Management Limited and Questor Financial Services Limited, part of the IOOF group;
  • OnePath Custodians Pty Limited, part of the ANZ group;
  • Suncorp Portfolio Services Limited, part of the Suncorp group; and
  • Hostplus Pty Limited.
  • Second, issues that arose in relation to one or more other superannuation trustees:
  • board governance;
  • consideration of mergers;
  • management of members’ money;
  • payments from investment managers to superannuation trustees or their parent company;
  • fees for no service; and
  • keeping members in higher fee-paying products instead of a simple, low-cost product.
  • Third, the regulatory response.

[1] See, eg, Explanatory Memorandum, Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Bill 2012 (Cth).

[2] See, eg, Explanatory Memorandum, Superannuation Legislation Amendment (MySuper Code Provisions) Bill 2011 (Cth).

[3] See APRA, Quarterly Superannuation Performance, June 2018 (reissued 31 August 2018), 6.

[4] APRA, Statement of Intent, September 2018, 1.

[5] See, eg, the definition of prudential matter in SIS Act s 34C(4).

[6] The best interests covenant is set out in s 52 (for trustees) and s 52A (for directors of corporate trustees), in SIS Act Pt 6.

[7] See SIS Act s 6(1)(b).

[8] See SIS Act s 6(1)(d).

[9] SIS Act s 55(3).

[10] SIS Act s 55(2).

[11] See SIS Act s 29E(1). See also the definition of RSE licensee law in SIS Act s 10(1).

[12] See SIS Act s 315.

[13] See SIS Act s 298. This power is analogous to ASIC’s power to bring proceedings in the name of a person under the Australian Securities and Investments Commission Act 2001 (Cth) s 50.

[14] See SIS Act s 29E(1)(b).

[15] See SIS Act s 29EB.

[16] Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017 (Cth) s 55AA.

[17] See the status of the Bill here: www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=s1089

[18] See Corporations Act s 601FC.