Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)
Chapter 8 - Trustees of registrable superannuation entities should have no other duty (recommendation 3.1)
Outline of chapter
8.1 Schedule 8 to the Bill amends section 29E of the SIS Act to impose a new condition on registrable superannuation entity licences held by a body corporate trustee. The new licence condition prohibits these trustees from having a duty to act in the interests of another person, subject to exceptions that enable trustees to carry out their ordinary functions as a trustee of a registrable superannuation entity. This will reduce the risk of potentially unmanageable conflicts of duties arising and improve outcomes for beneficiaries of registrable superannuation entities.
8.2 The amendments implement the Government's response to recommendation 3.1 of the Financial Services Royal Commission.
Context of amendments
8.3 Section 52 of the SIS Act imposes covenants on trustees of registrable superannuation entities.  Relevantly, these covenants require each superannuation trustee to:
- perform their duties and exercise their powers in the best interests of the beneficiaries;
- give priority to the duties to and interests of beneficiaries over the duties to and interests of other persons where there is a conflict; and
- not enter into any contract or do anything else that would prevent the trustee from properly performing or exercising the trustee's functions and powers.
8.4 While these covenants (and relevant prudential standards) contemplate that conflicts may arise between the duties to and interests of the beneficiaries and the duties to and interests of other persons, they require superannuation trustees to develop a conflicts management framework that gives priority to the interests of the beneficiaries.
8.5 The Financial Services Royal Commission considered various conflicts management frameworks developed by superannuation trustees. While Commissioner Hayne recognised that in some circumstances, conflicts may be prudently managed, he found that irreconcilable conflicts of duties should be avoided entirely to give effect to the covenants.
8.6 In particular, Commissioner Hayne considered that superannuation trustees should avoid being the responsible entity of a registered scheme because of the potential conflict of duties that arises when the trustee 'wears two hats'.
8.7 The Financial Services Royal Commission heard evidence relating to superannuation trustees who also acted as responsible entities of registered schemes.
8.8 A potential conflict of duties arises in this context because such an entity is required to act in the best interests of the beneficiaries of the superannuation fund under section 52 of the SIS Act, and is also required to act in the best interests of the members of the registered scheme under section 601FC(1)(c) of the Corporations Act.
8.9 The conflict clearly materialises when a person who is not a beneficiary of the superannuation fund invests in the registered scheme, and the duties to the beneficiaries of the superannuation fund are in conflict with the duties to the other members of the registered scheme. As the trustee owes a best interests duty to two different groups of members, the trustee may be unable to discharge its duty to both.
8.10 Recommendation 3.1 of the Financial Services Royal Commission goes beyond prohibiting superannuation trustees from being the responsible entity of a registered scheme and states that a trustee of a registrable superannuation entity should be prohibited from assuming any obligations other than those arising from or in the course of its performance of the duties of a trustee of a superannuation fund.
8.11 Schedule 8 implements the Government's response to recommendation 3.1.
Summary of new law
8.12 Schedule 8 creates an additional condition on licences held by a body corporate superannuation trustee. The new condition prohibits these trustees from having a duty to act in the interests of another person, subject to exceptions that enable trustees to undertake their ordinary functions as a superannuation trustee.
Comparison of key features of new law and current law
|New law||Current law|
|A body corporate superannuation trustee cannot, as a condition on its license, have a duty to act in the interests of another person, except in the course of:
Detailed explanation of new law
8.13 Schedule 8 amends section 29E of the SIS Act to create an additional condition on registrable superannuation entity licences held by a body corporate trustee. The condition prohibits the trustee from having a duty to act in the interests of another person, except in the course of:
- performing its duties and exercising its powers as a superannuation trustee; or
- providing personal advice.
8.14 The new licence condition will improve outcomes for beneficiaries of registrable superannuation funds by requiring trustees to avoid conflicts of duties arising from competing duties owed by the trustee to the beneficiaries of the fund and to members of a registered scheme.
Who will need to comply with the new licence condition?
8.15 The new licence condition only applies to body corporate superannuation trustees. This includes a superannuation trustee that is a constitutional corporation. [Schedule 8, item 1, section 29E of the SIS Act]
8.16 The new licence condition does not apply to individual trustees, groups of individual trustees or individual directors of body corporate trustees. This approach reflects the various duties to act in the interests of another person that an individual may be subject to, for example as trustee of a family trust or as part of their professional employment.
8.17 The new licence condition only applies in respect of the licensee. It does not prohibit another entity in the same corporate group, including a subsidiary of the trustee, from having a duty to act in the interests of another person.
Having a duty to act in the interests of another person
8.18 A superannuation trustee may have a duty to act in the interests of another person because the duty:
- arises under legislation (for example, under the Corporations Act), under a contract or deed, or under a rule of common law or equity (such as a fiduciary duty); or
- is imposed by a court.
8.19 For the purposes of the new licence condition, it is not relevant how the duty arises. A duty to act in the interests of another person that is voluntarily assumed or is imposed on the superannuation trustee would therefore be captured. A superannuation trustee will also have a duty to act in the interests of another person if the trustee holds an office or role that gives rise to a duty to act in the interests of another person.
8.20 The new prohibition is limited to duties to act in the interests of another person and is subject to the broad exemptions discussed in the following section. Further, only legally enforceable duties to act in the interests of another are captured by the new licence condition.
8.21 While it is not possible to exhaustively list the situations or relationships that give rise to a duty to act in another person's interest, such a duty may arise in the context of a superannuation trustee:
- being the responsible entity of a registered managed investment scheme, as this would give rise to a statutory duty to act in the best interests of the members of the scheme under section 601FC(1)(c) of the Corporations Act;
- being a trustee of an unregistered managed investment scheme, as this would give rise to a fiduciary duty to act in the interests of the members of the scheme;
- acting as an agent of another person, as this would give rise to a fiduciary duty to act in the interests of the principal;
- being the trustee of a traditional trust, as specified in Chapter 5D of the Corporations Act, as this would give rise to a fiduciary duty to act in the interests of the beneficiaries of the trust estate; or
- providing personal advice to a person as a retail client, as this would give rise to a statutory duty to act in the best interests of the person under section 961B of the Corporations Act.
8.22 The new licence condition would not prohibit a superannuation trustee from having a duty that does not involve acting in the interests of another person. For example, this may allow a superannuation trustee to provide trustee administration services to other entities in exchange for fees, as this would likely involve a contractual duty to provide a service to the entity, rather than a duty to act in the interests of the entity.
Exemptions from the licence condition
8.23 The exemptions allow superannuation trustees to effectively carry out their duties and exercise their powers as a superannuation trustee in the best interests of its beneficiaries of the fund. [Schedule 8, item 1, section 29E of the SIS Act]
8.24 In addition to the exemptions listed in the new licence condition, APRA has broad powers of exemption and modification under Part 29 of the SIS Act. These powers may be exercised by APRA in exceptional circumstances in relation to this licence condition.
Performing the duties and exercising the powers of a superannuation trustee
8.25 This exemption ensures that a superannuation trustee can effectively perform its duties and exercise its powers as trustee of a registrable superannuation fund.
8.26 Duties imposed on the superannuation trustee under the 'RSE licensee law' are within the scope of this exemption. RSE licensee law is defined in section 10 of the SIS Act and includes, but is not limited to, the SIS Act, the SIS Regulations and prudential standards.
8.27 Other duties that are considered to be within the scope of the exemption include:
- duties imposed on the superannuation trustee under the common law by virtue of the trustee being a trustee of a superannuation fund;
- duties arising from the superannuation trustee operating investment vehicles, such as managed investment schemes, special purpose vehicles and pooled superannuation trusts, that are only open to members of the registrable superannuation entity;
- duties arising from the superannuation trustee holding an Australian financial services licence under the Corporations Act in relation to its superannuation activities that are financial services; and
- duties arising under Commonwealth, State or Territory legislation, or more generally under the common law, that relates to the business operation of the registrable superannuation fund. For example, duties under work health and safety legislation in relation to staff of the superannuation trustee.
8.28 Additionally, under this exemption, a superannuation trustee will be able to act as a trustee for more than one superannuation fund. The Financial Services Royal Commission expressly recognised that acting as a trustee of another superannuation fund is unlikely to give rise to an unmanageable conflict of duties that would adversely affect beneficiaries of those funds.
Provision of personal advice
8.29 Where a representative of superannuation trustee provides personal advice to a person as a retail client, the representative has a duty to act in that person's best interests under section 961B of the Corporations Act.
8.30 ASIC Report 639 Financial advice by superannuation funds found that of the superannuation funds surveyed, the majority of personal advice provided by a superannuation trustee is to its members in respect of their superannuation accounts. This advice often covers topics such as member investment choice and contributions. In these cases, the provision of advice would likely be captured by the exemption in new section 29E(5A)(a), as the advice is provided in connection with the trustee's role as a superannuation trustee.
8.31 However, certain types of personal advice may not be captured by that exemption, including:
- personal advice given to or involving a person who is not a beneficiary of the registrable superannuation fund, such as a spouse or relative of a member; or
- personal advice given to a beneficiary of the superannuation fund that does not meet the requirements of the sole purpose test in section 62 of the SIS Act and is therefore paid for directly by the member (rather than from their superannuation account). For example, where the advice is about a member's assets outside superannuation or age pension entitlement.
8.32 The provision of these types of personal advice is unlikely to adversely affect beneficiaries of the superannuation fund as a whole.
8.33 The personal advice exemption therefore ensures superannuation trustees and their representatives are not restricted from providing comprehensive personal advice. This recognises the important role superannuation funds play in meeting the financial advice needs of members wanting to build their retirement income.
8.34 This exemption is not limited to the provision of personal advice to a person as a retail client. It therefore allows a superannuation trustee to provide personal advice to wholesale clients, such as a trustee of another superannuation fund.
Failure to comply with the new condition
8.35 There are a range of existing mechanisms for APRA to enforce compliance with licensing conditions. For example, if a superannuation trustee fails to comply with a condition, APRA can issue directions requiring the trustee to comply. In exceptional circumstances, APRA may also cancel the licence.
8.36 Failure to comply with directions made by APRA under section 131D of the SIS Act is an offence with a maximum penalty of 100 penalty units. If a body corporate trustee is convicted of an offence, section 4B(3) of the Crimes Act 1914 allows a court to impose a fine of up to 500 penalty units.
8.37 Additionally, a breach of the new licence condition is likely to be a significant matter that must be reported to APRA under section 29JA of the SIS Act. Failure to comply with this requirement is an offence with a maximum penalty of 50 penalty units.
8.38 As the requirement is imposed by way of a licence condition on registrable superannuation entity licences, a failure to comply with the licence condition by having another duty to act in the interests of another person does not have any consequences for the validity or performance of the other duty.
Example 8.1 Company A is a superannuation trustee and becomes the responsible entity of a registered scheme. In its capacity as the responsible entity of the scheme, Company A subsequently does not invest money pooled in the scheme properly.Company A has breached the new licence condition in section 29E(5A) of the SIS Act. However, Company A cannot rely on that breach to argue that section 29E(5A) has the effect that its appointment as responsible entity of the registered scheme was invalid, or that it does not need to comply with duties in relation to the scheme (including the duty to invest money properly).
Interaction with the Corporations Act
8.39 Sections 912A(4) and (5) of the Corporations Act contemplate that a superannuation trustee may also be the responsible entity of a registered scheme.
8.40 These provisions have not been amended because it is possible for a corporate entity to be both the responsible entity of a managed investment scheme and the superannuation trustee where the arrangement is exempt from the new licence condition. In order for this arrangement to be exempt, the managed investment scheme would need to be open only to members of the registrable superannuation fund or other superannuation trustees that are investing superannuation fund assets (or both).
Application and transitional provisions
8.41 The amendments commence on the later of 1 July 2021 and the day after Royal Assent. [Clause 2]
8.42 The amendments made by Schedule 8 apply in relation to any duty that is had before, on or after 1 January 2022. Body corporate superannuation trustees will therefore need to consider whether their existing structures are compliant with the new licence condition and may need to restructure by 1 January 2022 to comply with the new licence condition.
8.43 The amendments have prospective application as it has a future effect on rights and obligations. Any breaches of the new licence condition will only occur prospectively, on and after 1 July 2021.
8.44 Superannuation trustees who are also responsible entities of a registered scheme may choose to retire as the responsible entity to comply with the new licence condition. Ordinarily, section 601FL of the Corporations Act requires a responsible entity to hold a members' meeting to allow the scheme's members to vote on a new responsible entity.
8.45 ASIC may consider on a case-by-case basis whether to use its existing powers of exemption and modification to provide relief from this requirement. ASIC's Regulatory Guide 136: Funds management: Discretionary powers sets out its general policy on exercising this relief. ASIC's Regulatory Guide 51: Applications for relief and the ASIC service charter are also relevant for trustees seeking to make applications for relief from the requirement in section 601FL of the Corporations Act.
8.46 Relevantly, ASIC may consider granting relief from the requirement to hold a members' meeting for a change of responsible entity if:
- the existing responsible entity and the proposed new responsible entity are related companies;
- the change is unlikely to have an adverse impact on the administrative, custodial or asset management of the registered scheme or give rise to any significant changes in the manner in which the scheme operates; and
- the costs of strict compliance with the meeting requirements under section 601FL(1) of the Corporations Act are disproportionately burdensome compared to the benefits of holding a meeting.
8.47 Additionally, APRA may use its exemption and modification powers in Part 29 of the SIS Act to postpone the operation of the licence condition so as to allow trustees a further period to comply with the new licence condition. When granting such an exemption, APRA may impose conditions, such as a condition that the exemption is for a specified period. This relief may be appropriate where an entity is required to undergo a complex restructuring process to comply with the licence condition. These powers will be exercised on a case-by-case basis, taking into account each trustee's circumstances.