House of Representatives

Revised Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer, the Hon Stuart Robert MP)

Glossary

The following abbreviations and acronyms are used throughout this Explanatory Memorandum.

General outline and financial impact

Annual outcomes assessment

Schedule 1 to this Bill amends the Superannuation Industry (Supervision) Act 1993 (SIS Act) to require each trustee of a superannuation fund to promote the financial interests of the beneficiaries of the fund who hold a MySuper or choice product, and strengthen the obligations on superannuation trustees to annually assess and compare the appropriateness of such, including how each product continues to promote the financial interests of members.

Date of effect: The day after the Bill receives the Royal Assent.

Proposal announced: This measure was announced in the Minister for Revenue and Financial Services' media release of 24 July 2017: Reforms to give consumers more power at the heart of a stronger superannuation system.

Financial impact: Nil.

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 2, paragraphs 2.41 to 2.44.

Compliance cost impact: Low.

Authority to offer a MySuper product

Schedule 2 to this Bill amends the SIS Act to give the Australian Prudential Regulation Authority (APRA) an enhanced capacity to refuse a registerable superannuation entity (RSE) licensee a new authority to offer a MySuper product or to cancel an existing authority.

Date of effect: The day after the Bill receives the Royal Assent.

Proposal announced: This measure was announced in the Minister for Revenue and Financial Services' media release of 24 July 2017: Reforms to give consumers more power at the heart of a stronger superannuation system.

Financial impact: Nil.

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 3, paragraphs 3.19 to 3.22.

Compliance cost impact: Low.

Penalties for contravening covenants

Schedule 3 to this Bill amends the SIS Act to allow civil and criminal penalties to be imposed on trustees of superannuation funds and directors of corporate trustees who fail to execute their responsibilities to act in the interests of member beneficiaries, or who use their position to further their own interests to the detriment of member beneficiaries.

Date of effect: The day after the Bill receives the Royal Assent.

Proposal announced: This measure was announced in the Minister for Revenue and Financial Services' media release of 24 July 2017: Reforms to give consumers more power at the heart of a stronger superannuation system. The amendments were also announced in Restoring trust in Australia's financial system on 4 February 2019 (Recommendation 3.7).

Financial impact: Nil.

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 4, paragraphs 4.24 to 4.44.

Compliance cost impact: Low.

Approval to own or control an RSE licensee

Schedule 4 to this Bill amends the SIS Act to strengthen APRA's supervision and enforcement powers when a change of ownership or control of an RSE licensee takes place.

Date of effect: Three months after the Bill receives the Royal Assent.

Proposal announced: This measure was announced on 20 October 2015 in the Government's response to the Financial System Inquiry (FSI). This measure was also included in the Minister for Revenue and Financial Services' media release of 24 July 2017: Reforms to give consumers more power at the heart of a stronger superannuation system.

Financial impact: Nil.

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 5, paragraphs 5.93 to 5.96.

Compliance cost impact: Low.

APRA directions power

Schedule 5 to this Bill amends the SIS Act to strengthen APRA's supervision and enforcement powers to include the power to issue a direction to an RSE licensee where APRA has prudential concerns.

Date of effect: The day after the Bill receives the Royal Assent.

Proposal announced: This measure was announced in the Minister for Revenue and Financial Services' media release of 24 July 2017: Reforms to give consumers more power at the heart of a stronger superannuation system.

Financial impact: Nil.

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 6, paragraphs 6.139 to 6.142.

Compliance cost impact: Low.

Portfolio holdings disclosure

Schedule 6 to this Bill amends the Corporations Act 2001 (Corporations Act) to refine the requirements for RSE licensees to make publically available their portfolio holdings.

Date of effect: This measure will apply to reporting days that occur on or after 31 December 2019

Proposal announced: This measure was announced as part of the Coalition's Policy for Superannuation in September 2013.

Financial impact: Nil.

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 7, paragraphs 7.51 to 7.54.

Compliance cost impact: Nil.

Annual members' meetings

Schedule 7 to this Bill amends the SIS Act to require RSE licensees to hold annual members' meetings (AMMs). The meetings are to discuss the key aspects of the fund and provide members with a forum to ask questions about all areas of the fund's performance and operations.

Schedule 7 also makes technical amendments to reduce unnecessary duplication; by ensuring that the regulations, which are to be made prescribing information to be included in annual members' meeting notices, can prescribe information by referring to information set out in a provision of the APRA reporting standards.

Date of effect: The day after the Bill receives the Royal Assent.

Proposal announced: This measure was announced in the Minister for Revenue and Financial Services' media release of 24 July 2017: Reforms to give consumers more power at the heart of a stronger superannuation system.

Financial impact: Nil.

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 8, paragraphs 8.52 to 8.55.

Compliance cost impact: Low to medium.

Summary of regulation impact statement - Annual members' meetings

Regulation impact on business

Impact: The amendments have a start-up cost of $8.5 million and ongoing costs of $13.7 million which result in an estimated annual compliance cost impact, averaged over 10 years, of $14.6 million.

Main points:

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Legislation to require trustees of certain APRA-regulated funds to hold AMMs and to allow regulations to be made prescribing information to be provided to members.

•

However, trustees would retain flexibility over how AMMs are conducted including holding virtual meetings. Also, while members would be able to ask questions, and trustees would be required to answer them, there would be no formal voting on resolutions.

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Three options were considered.

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Maintain the status quo (Option 1)

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Flexible annual members' meetings (AMMs) without voting (Option 2)

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Physical annual members' meeting with voting (Option 3)

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Treasury undertook public consultation (for 3 weeks) on draft legislation and explanatory material for Option 2.

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Option 2 is the best option because it provides a formal opportunity for engaged members to question superannuation fund trustees, executives and other relevant officers, holding them to account at reasonably low cost. It also provides funds with the freedom to choose the most appropriate approach to AMMs.

•

Legislative amendments are required to implement Option 2.

Reporting standards

Schedule 8 to this Bill amends the Financial Services (Collection of Data) Act 2001 (FSCODA) to provide APRA with the ability to obtain information on expenses incurred by RSE and RSE licensees in managing or operating the RSE.

Date of effect: The day after the Bill receives the Royal Assent.

Proposal announced: This measure was announced in the Minister for Revenue and Financial Services' media release of 24 July 2017: Reforms to give consumers more power at the heart of a stronger superannuation system.

Financial impact: Nil.

Human rights implications: This Bill does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 9, paragraphs 9.37 to 9.40.

Compliance cost impact: Nil.

Superannuation trustees not to incentivise employers

Schedule 9 to this Bill allow civil and criminal penalties to be imposed on the trustee of a superannuation fund who uses goods or services to influence employers to nominate the superannuation fund as the default fund or influence employers to encourage their employees to nominate the fund as their choice of fund (no treating of employers).

Date of effect: The measure applies to contraventions occurring from the day after Royal Assent.

Proposal announced: The amendments were announced in Restoring trust in Australia's financial system on 4 February 2019 (Recommendation 3.6).

Financial impact: Nil.

Human rights implications: This Bill does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 10, paragraphs 10.15 to 10.34.

Compliance cost impact: Low.

Chapter 1 Overview of improving accountability and member outcomes in superannuation

Outline of chapter

1.1 This Bill contains amendments to the SIS Act, the Corporations Act and the FSCODA that will modernise and increase confidence within the superannuation system.

1.2 This Chapter provides an overview of those amendments.

Context of amendments

1.3 Superannuation is a major part of Australia's retirement income system. Together with the Age Pension and savings outside of superannuation, it supports Australians in their retirement years.

1.4 It has been more than 25 years since compulsory superannuation was introduced. And yet the architecture of that system that has seen funds under management grow from around $136 billion to more than $2.3 trillion - an almost 1,300 per cent increase - has changed very little.

1.5 Superannuation is now the second-largest savings vehicle for Australian households (accounting for 17 per cent of household assets).

1.6 Over the next decade as the system reaches maturity, Australians will have received compulsory superannuation contributions for most or all of their working lives. As such, the income generated from these contributions will be an essential contributor to people's wellbeing in retirement.

1.7 Given the importance of the superannuation sector to working Australians, and its importance in the financial system and the economy more broadly, we need to ensure that there is confidence in the system and that it meets contemporary standards, and is consistently delivering the best outcomes for members.

1.8 Having a modern, vibrant superannuation system, which is solely focused on delivering outcomes for members, culminating in the efficient delivery of income in retirement, is critical.

1.9 A modern superannuation system empowers members; provides for transparency and accountability around funds' activities and performance; is consistent with community expectations for a compulsory system and international best practice for governance arrangements; enables regulators to hold trustees to high standards and take appropriate action where they fall short; and ensures members get their full entitlements.

1.10 It is appropriate for key aspects of the superannuation system to be modernised. Several aspects of the regulatory framework do not meet contemporary best practice or the standards applied elsewhere in the financial system. This means that the current framework is not holding funds to the highest standards of governance and accountability, to the detriment of members.

1.11 Superannuation funds must ensure members' interests are always paramount - after all, our system is premised upon a trust framework and trustees owe fiduciary obligations to their members.

1.12 The Bill will modernise and increase confidence within the superannuation system by:

•

lifting the bar for fund performance - facilitating improved decision-making;

•

strengthening supervision and enforcement - giving APRA improved capability to take preventive and corrective action in response to breaches of the law or where funds may not be acting in the best interests of their members; and

•

empowering members - strengthening fund accountability and boosting confidence in the superannuation system.

Summary of new law

Annual outcomes assessment

1.13 Schedule 1 to this Bill strengthen the obligations on superannuation trustees to annually assess and compare the appropriateness of their product offerings (both MySuper and choice), including how each product continues to promote the financial interests of members.

1.14 The amendments will expand the range of factors that trustees consider in assessing the quality and appropriateness of their MySuper product.

Authority to offer a MySuper product

1.15 Schedule 2 to this Bill provides APRA an enhanced capacity to refuse a registerable superannuation entity (RSE) a new authority to offer a MySuper product, or to cancel such authority.

1.16 This will improve the quality of MySuper products by allowing APRA to refuse, or cancel, an authority to offer a MySuper product if APRA has a reason to believe the RSE licensee may fail to comply with its obligations.

Penalties for contravening covenants

1.17 Schedule 3 to this Bill ensures that trustees and directors of RSE licensees are held accountable for their conduct in the same way trustees and directors of managed investments schemes are currently held accountable.

1.18 The amendments will ensure that an appropriate penalty regime is in place for trustees and directors who fail to execute their responsibilities to act in the best interests of member beneficiaries, or who use their position to further their own interests to the detriment of member beneficiaries.

1.19 The Government announced this on 20 October 2015 in its response to the FSI. The Government also announced this on 4 February 2019 in Restoring trust in Australia's financial system (Recommendation 3.7).

Approval to own or control an RSE Licensee

1.20 Schedule 4 to this Bill seeks to protect members by strengthening APRA's supervision and enforcement powers when a change of ownership or control of an RSE licensee takes place. The amendments will reduce the potential for fraud against members of RSEs by requiring prospective owners to obtain approval from APRA to own or hold a controlling stake in an RSE licensee.

1.21 The amendments will enable APRA to refuse authority for a change in ownership or control where it has concerns about the person seeking ownership or control, give a direction to a person to relinquish control of an RSE licensee and remove or suspend an RSE licensee where it is subject to the control of its owner.

APRA directions power

1.22 Schedule 5 to this Bill harmonises the directions powers across the banking, insurance and superannuation industries, by enabling APRA to intervene at an early stage to address prudential concerns in a manner that ensures actions undertaken are in the best interests of members.

Portfolio holdings disclosure

1.23 Schedule 6 to this Bill refines the current requirements for RSE licensees to make publically available their portfolio holdings. On commencement of the amendments, members will have access to information on how superannuation funds invest member contributions on a semi-annual basis.

1.24 Superannuation funds will be required to disclose the following on a semi-annual basis:

•

investments (down to the underlying asset) that they hold directly or through associated entities; and

•

their initial investments into non-associated entities.

1.25 In September 2013, the Government committed to improving superannuation transparency. The Government released a discussion paper Better regulation and governance, enhanced transparency and improved competition in superannuation on 28 November 2013.

Annual members' meetings

1.26 Schedule 7 to this Bill will ensure greater accountability and transparency of superannuation funds by requiring RSE licensees to hold AMMs. The meetings will give members an opportunity to discuss the key aspects of the fund and provide them with a forum to ask questions about all areas of the fund's performance and operations.

1.27 The amendments will require RSE licensees to hold an AMM within nine months after the end of each income year.

Reporting standards

1.28 Schedule 8 to this Bill amends the FSCODA to provide APRA with the ability to obtain information on expenses incurred by RSE and RSE licensees in managing or operating the RSE.

1.29 This additional information will enable APRA to understand the full picture of how RSEs are using member contributions and will enable APRA to consider whether expenses of individual RSEs are in line with covenants under the SIS Act.

Superannuation trustees not to incentivise employers

1.30 Schedule 9 to this Bill will ensure greater accountability of trustees of superannuation funds that uses goods or services to influence employers to nominate the superannuation fund as the default fund or influence employers to encourage their employees to nominate the fund as their choice of fund (no treating of employers).

Chapter 2 Annual MySuper outcomes assessment

Outline of chapter

2.1 Schedule 1 to this Bill amends the SIS Act to strengthen the obligations on superannuation trustees to annually assess and compare the appropriateness of their product offerings (both MySuper and choice), including how each product continues to promote the financial interests of members.

2.2 The purpose of these amendments is to ensure that trustees are promoting the financial interests of their members, which is expected to lead to an increase in the overall quality of products.

2.3 All legislative references in this chapter are to the SIS Act unless otherwise indicated.

Context of amendments

2.4 Under the SIS Act, only an authorised MySuper product is eligible to operate as a default product for employees who do not choose a fund to receive their mandatory superannuation contributions. Because of their default nature, MySuper products are subject to higher performance requirements, enforced by APRA. As a consequence, enhanced trustee obligations apply to trustees of in respect of their MySuper members.

2.5 These obligations were introduced in recognition of the fact that MySuper beneficiaries are generally 'default members' who do not make active decisions about their superannuation.

2.6 All superannuation funds that offer a default, MySuper product, regardless of the type of fund will be subject to the same high standard of oversight, transparency and accountability introduced through the expanded outcomes test.

2.7 The SIS Act requires superannuation trustees to promote the financial interests of their MySuper members as part of the enhanced trustee obligations in relation to a MySuper product. In particular, trustees must have regard to returns to those beneficiaries (after the deduction of fees and costs).

2.8 Currently, trustees are required to undertake an annual assessment of whether beneficiaries holding a MySuper product in their RSE are disadvantaged when compared to the experience of beneficiaries holding MySuper products in other RSEs because the trustee's MySuper product or RSE lacks sufficient scale (the scale test).

2.9 Whilst the scale test was designed to ensure that members were not disadvantaged by being in a small fund with high costs per member, there are limitations to the value of the current test. For example, trustees with a large number of members and assets in the MySuper product can easily pass the scale test, even if they are underperforming relative to other MySuper products.

2.10 The Government recognises that member outcomes are influenced by more than just the scale of the superannuation fund. When making their annual assessment, trustees should have regard to not only scale but also to the outcomes that are being delivered to members in that MySuper product. These include consideration of the returns, costs, fees, investment strategy and the insurance offering of the MySuper product to determine whether they are promoting the financial interests of members.

2.11 Accordingly, the amendments will replace the scale test with a new outcomes test covenants, which require trustees to determine whether the financial interests of their beneficiaries are being promoted by the trustee having regard to a comparison with other similar products and specified benchmarks and factors.

2.12 The new obligation that the trustees 'promote the financial interests' of beneficiaries reinforces and builds upon the existing trustee obligation to act in the best interests of beneficiaries by recognising that trustees must take actions to annually assess whether their MySuper or choice products are optimising outcomes for, and in the best interests of, members.

Summary of new law

2.13 The amendments strengthen the obligations on superannuation trustees to annually assess and compare the appropriateness of their product offerings (both MySuper and choice), including how each product continues to promote the financial interests of members.

2.14 The amendments also make consequential amendments to Schedule 4 (Approval to own or control an RSE licensee) as a result of Schedule 1. The amendments require each trustee of a regulated superannuation fund to make an annual determination, in writing, as to whether the financial interests of the members in the MySuper product are being promoted by the trustee, having regard to a range of factors.

2.15 The determination follows a two-step process.

2.16 The first step is for the trustee to compare products against required benchmarks (including other products); and

2.17 The second step is for the trustee assess whether the product promotes the financial interests of member, including against a specified range of factors.

2.18 The determination, together with a summary of the assessment and comparison on which the determination is based, are to be made publically available on the superannuation fund's website within 28 days of the determination being made.

Comparison of key features of new law and current law

Detailed explanation of new law

2.19 The amendments change the governing rules of each trustee of a regulated superannuation fund (other than a self-managed superannuation fund or a small APRA fund) to contain covenants that require trustees to:

•

promote the financial interests of their beneficiaries across all products (other than beneficiaries holding defined benefit interests); and

•

carry out annual outcomes assessments of all their MySuper and choice product offerings, including how each product continues to promote the financial interests of members.

[Schedule 1, item 6, subsections 52(9) to (13)]

2.20 The new outcomes test covenants require trustees to determine whether the financial interests of their beneficiaries are being promoted by the trustee having regard to a comparison with other similar products and specified benchmarks and factors. The new obligation that the trustees 'promote the financial interests' of beneficiaries reinforces and builds upon the existing trustee obligation to act in the best interests of beneficiaries by recognising that trustees must take actions to annually assess whether their MySuper or choice products are optimising outcomes for, and in the best interests of, members.

2.21 The new covenants apply to each trustee of a regulated superannuation fund. However, they do not apply in respect of a PST, approved deposit fund, a self-managed superannuation fund or a small APRA fund.

2.22 The new outcomes test requires trustees to assess their MySuper or choice product in respect to a range of product features including their insurance and investment strategies, and compare how their product is performing against other products and benchmarks, using certain performance metrics.

2.23 In this regard, the outcomes test provides trustees with a framework for assessing their product offering to determine whether it is achieving its intended outcomes and how it may be improved. The framework for the outcomes test endeavours to support the trustee's primary obligation to promote the financial interests of their members, in particular the net returns to those members.

2.24 A more comprehensive assessment of MySuper and choice products will make trustees more accountable for their products and enhance APRA's ability to take specific action to ensure the trustee rectifies the performance of their product where the financial interests of members are not being effectively promoted.

2.25 Choice products are all products that are not MySuper products or defined benefit products.

2.26 Under the current law, these obligations apply to trustees only in respect of their beneficiaries holding MySuper products.

2.27 As the obligations are extended to also apply in respect of choice products, the provisions on trustee obligations in relation to MySuper are being relocated from Part 2C of the SIS Act (provisions relating to MySuper) to Part 6 of the SIS Act (provisions relating governing rules of superannuation entities).

2.28 Schedule 1 nonetheless preserves the operation of existing obligations on each trustee to include in the investment strategy for a MySuper product:

•

the details of the trustee's annual outcomes assessment determination: and

•

to update each year the ten year return target for assets attributable to the MySuper product and the appropriate level of risk to the investment of those assets.

2.29 Schedule 1 recognises that although the features of MySuper products and choice products differ, the obligation to undertake an annual outcomes assessments in respect of beneficiaries holding either MySuper products or choice products should be done in as similar a way as is possible, recognising that trustee obligations to members should apply irrespective of product type.

2.30 For both MySuper products and choice products, the determination retains its two-step process approach:

•

compare products against required benchmarks (including other products) (step one); and

•

assess whether the product promotes the financial interests of member, including against a specified range of factors (step two).

2.31 The determination, together with a summary of the comparison and assessment on which the determination is based, are to be made publically available on the superannuation fund's website within 28 days of the determination being made.

The regulations may also specify additional benchmarks against which each trustee must determine, in writing, whether each trustee is promoting the financial interests of beneficiaries. [Schedule 1, item 6, paragraph 52(9)(aa)]

2.32 Choice products do not have the same defined features as MySuper products and so it is open for a choice product to be substantially different from one or more other choice products. For example, MySuper products have a single investment strategy that applies to all members (except MySuper lifecycle investment products) which differs from choice products which offer a whole range of investment choices.

2.33 As the differentiation amongst choice products and between choice products and MySuper products can be significant, it would be very difficult to apply a single methodology for comparing both MySuper and choice products when carrying out the annual outcomes assessment.

2.34 In comparting a MySuper product with other MySuper products, or a choice product with comparable choice products, the trustees of a fund must compare:

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the fees and costs that affect the return to beneficiaries holding the relevant products;

•

the returns for the products;

•

the level of investment risk for the products;

•

any other matter specified in the prudential standards; and

•

any other matter specified in the regulations.

[Schedule 1, item 6, subparagraphs 52(9)(a)(i) and (ii) and subsections 52(10) and (10A)]

2.35 Allowing the regulations or APRA prudential standards to supplement the benchmarks for making further comparisons ensures that the most appropriate comparison methodologies applied to particular types of products. For example, APRA's reporting standards currently set out the preferred methodology for calculating the MySuper product dashboard metrics. APRA may choose to mandate these methodologies in its prudential standards.

2.36 The factors in step two for choice products are broadly the same as those currently applying to MySuper products, although some of the factors have been simplified with the details to unfolded in APRA's prudential standards. While all of the factors are relevant to MySuper products, some may not be relevant for a particular choice product. Trustees will need to review the relevance each year, but where it is not relevant the factor need not be assessed.

Consequential amendments

2.37 The revisions to enhanced director obligations, enhanced trustee obligations and superannuation entity director in subsection 10(1) of the SIS Act are to reflect the relocation of the provisions. [Schedule 1, items 1, 2 and 3, subsection 10(1)]

2.38 The revisions to sections 51A and 52A of the SIS Act and subsections 55(5) to (7) reflect that obligations under sections 29VN and 29VO being relocated to section 52. [Schedule 1, items 4, 5, 7 to 10 ]

2.39 The amendments also add the terms 'benchmark' and 'comparable choice products' to the dictionary for the SIS Act. [Schedule 1, items 1A and 1AA, definitions of 'benchmark' and 'comparable choice products' in subsection 10(1)]

Application and transitional provisions

2.40 The amendments will apply to annual determinations required to be made by a trustee of a regulated superannuation fund from the day after the Bill receives the Royal Assent, in regards to whether the financial interests of the beneficiaries of the fund holding a MySuper product are promoted by the trustee.

STATEMENT OF COMPATIBILITY OF HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Annual MySuper outcomes assessment

2.41 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

2.42 Schedule 1 to this Bill amends the SIS Act to strengthen the obligation on superannuation trustees to consider the appropriateness of their MySuper product offering annually including how that product continues to deliver appropriate outcomes to MySuper members.

Human rights implications

2.43 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

2.44 This Schedule is compatible with human rights as it does not raise any human rights issues.

Chapter 3 Authority to offer a MySuper product

Outline of chapter

3.1 Schedule 2 to this Bill amends the SIS Act to give APRA an enhanced capacity to refuse an RSE licensee a new authority to offer a MySuper product or to cancel an existing authority.

3.2 This will improve the quality of MySuper products by allowing APRA to refuse, or cancel, an authority to offer a MySuper product if APRA has a reason to believe the RSE licensee may fail to comply with its obligations.

3.3 All legislative references in this chapter are to the SIS Act unless otherwise indicated.

Context of amendments

3.4 Currently, APRA must authorise an RSE licensee to offer a MySuper product if it is satisfied (among other requirements) that:

•

the RSE licensee 'is likely to' comply with the enhanced trustee obligations for MySuper products, 'is likely to' comply with the general fee rules and the fees rules in relation to MySuper products; and

•

the RSE licensee 'is not likely to' contravene sections 29W, 29WA or 29WB.

3.5 The amendments will enhance APRA's supervision of the offering of MySuper products by RSE licensees by giving APRA greater capacity to refuse a new authority to offer a MySuper product or to cancel such an authority. This provides more scope for APRA to ensure that RSE licensees who are authorised to offer a MySuper product are in a position to provide products of sufficient quality to promote the financial interests of members.

3.6 The change from an assessment on the balance of probabilities to a test based on APRA's reasonable belief aligns the MySuper authorisation and cancellation process with the assessment made by APRA when making decisions in relation to the granting and cancellation of RSE licenses.

3.7 These amendments work together with the amendments in respect of the obligation on a trustee of a regulated superannuation fund to make an annual determination on whether the financial interests of their beneficiaries who hold the MySuper product are being promoted by the trustee (see Chapter 2).

3.8 If APRA is not satisfied that the trustee complied with their obligations when undertaking the annual determination, APRA will have a reason to believe that the trustee may fail to comply with its enhanced trustee obligations and may therefore cancel the trustee's authorisation to offer a MySuper product.

Summary of new law

3.9 The amendments will enhance APRA's capacity to refuse authority to offer a MySuper product or to cancel an existing authority to offer a MySuper product, depending on whether it has reason to believe that:

•

the RSE licensee (or its directors) may fail to comply with its enhanced trustee obligations;

•

the RSE licensee may fail to comply with the general fees rules and the fees rules in relation to MySuper products; and

•

the RSE licensee may contravene section 29W, 29WA or 29WB.

Comparison of key features of new law and current law

Detailed explanation of new law

3.10 This Schedule amends the conditions to be satisfied in order for APRA to authorise an RSE licensee to offer a MySuper product.

3.11 Under the amendments, APRA can only authorise the RSE licensee to offer a MySuper product if it has no reason to believe that:

•

the RSE licensee (or its directors) or, where the RSE licensee is made up of individual trustees, any of those trustees may fail to comply with its enhanced trustee obligations;

•

the RSE licensee or, where the RSE licensee is made up of individual trustees, any of those trustees may fail to comply with the general fees rules and the fees rules in relation to MySuper products; and

•

the RSE licensee or, where the RSE licensee is made up of individual trustees, any of those trustees may contravene section 29W, 29WA or 29WB.

[Schedule 2, item 1, paragraphs 29T(1)(h), (i), (j) and (k)]

3.12 Section 29W makes it an offence for a person that makes a representation to offer a MySuper product when the RSE licensee for the fund is not authorised to offer MySuper products.

3.13 Sections 29WA and 29WB makes it an offence for a trustee (or trustees) to not treat a contribution by a member as paid into a MySuper product of the fund, if the member has not given the trustee (or trustees) a direction that the contribution is to be invested under a specified investment option for all or part of the contribution.

3.14 That is, APRA may refuse an authority to offer a MySuper product if APRA considers there are one or more reasons why an RSE licensee may fail to comply with its obligations, rather than having to assess, on a balance of probabilities, whether the RSE licensee is likely to comply with its obligations.

Example 3.1

Inka Superannuation Trustee Pty Limited (Inka) is the RSE licensee of Lighthouse Super Fund and has authority to offer a MySuper product to the members of that fund.

APRA is made aware that employees of the largest employer-sponsor Logistical Solutions Pty Ltd (Logistical) (which represents approximately 60 per cent of the Lighthouse's membership) receive discounted administration fees (50 per cent of the disclosed fee). This arrangement was not in place at the time of the original MySuper authorisation.

APRA has identified that Lighthouse Super Fund, due to several large annual fee increases, is now an outlier in terms of fees charged to members. APRA forms the view that the fees charged to employees of Logistical do not reflect the cost of administration and operation of the fund in relation to those employees. APRA also receives evidence that fees charged to members not employed by Logistical are being used to subsidise the fees charged to Logistical employees in order to retain the business of Logistical.

APRA requests that Inka demonstrate that the discounted administration fee reasonably relates to the cost to Inka of the administration of these members. Inka is unable to reasonably justify the discount and a breach is lodged with APRA, with a commitment to put in place an adjusted administration fee structure for members employed by Logistical within 90 days.

After 90 days, the fees have not been adjusted and Inka does not provide any further justification for the current arrangement. APRA directs Inka to comply with the requirements of section 29VB of the SIS Act and, when Inka fails to comply with that direction, APRA decides to revoke the MySuper authorisation.

Inka subsequently applies for a new 'large-employer' MySuper authorisation for employees of Logistical. Based on Inka's prior and demonstrated non-compliance, APRA has reason to believe that Inka will not promote the financial interests of all its MySuper members and may therefore refuse to authorise the proposed MySuper product.

3.15 The amendments to the situations in which APRA may cancel an RSE licensee's authority to offer a MySuper product will allow APRA to cancel existing authorisation if it has a reason to believe that:

•

the RSE licensee (or its directors) or, where the RSE licensee is made up of individual trustees, any of those trustees may fail to comply with its enhanced trustee obligations;

•

the RSE licensee or, where the RSE licensee is made up of individual trustees, any of those trustees may fail to comply with the general fees rules and the fees rules in relation to MySuper products; and

•

the RSE licensee or, where the RSE licensee is made up of individual trustees, any of those trustees may contravene section 29W, 29WA or 29WB.

[Schedule 2, item 2, paragraphs 29U(2)(c), (ca), (d) and (e)]

3.16 That is, APRA may cancel the authority to offer a MySuper product if APRA considers there are one or more reasons why an RSE licensee may fail to comply with its obligations, rather than having to assess, on a balance of probabilities, whether the RSE licensee is no longer likely to comply with its obligations.

3.17 These align with APRA's assessment in making decisions in relation to authorisation and cancellation of RSE licenses under sections 29D and 29G.

Example 3.2

Aztek Superannuation Trustee Pty Ltd (Aztek) is the RSE licensee of Nightfall Super Fund and has authority to offer a MySuper product to the members of that fund.

Since receiving its MySuper authorisation in 2013, Aztek has made changes to its investment strategy in an attempt to reduce its fees and promote itself as low cost to members. APRA reviews Aztek's investment arrangements and receives information that the average age of members of the fund is 30 and that Aztec is targeting young members via an on-line offering. In order to secure low fees, Aztek is offering an extremely conservative investment strategy constructed largely of fixed interest and cash.

As part of the review, APRA requests that Aztek review its MySuper investment strategy within 90 days to ensure that it is promoting the financial interests of its MySuper members and to ensure that the offering allows sufficient diversification.

During the 90 day period, Aztek continues to promote the fund as low cost and its membership continues to grow. Aztek refuses to review the investment strategy despite publically available information showing that Aztek is one of the poorest performing MySuper products. APRA directs Aztek to review the MySuper investment strategy; Aztec again refuses. Based on Aztek's failure to promote the financial interests of its members and to offer a sufficiently diversified MySuper product APRA may decide to revoke Aztek's authorisation to offer a MySuper product.

Application and transitional provisions

3.18 The amendments apply to all applications received by APRA on or after the day after this Bill receives the Royal Assent. [Schedule 2, item 3]

STATEMENT OF COMPATIBILITY OF HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Authority to offer a MySuper product

3.19 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

3.20 Schedule 2 to this Bill amends the SIS Act to give APRA an enhanced capacity to refuse an RSE licensee a new authority to offer a MySuper product or to cancel an existing authority.

Human rights implications

3.21 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

3.22 This Schedule is compatible with human rights as it does not raise any human rights issues.

Chapter 4 Penalties for contravening covenants

Outline of chapter

4.1 Schedule 3 to this Bill amends the SIS Act to allow civil and criminal penalties to be imposed on trustees of superannuation funds and directors of corporate trustees who fail to execute their responsibilities to act in the interests of member beneficiaries, or who use their position to further their own interests to the detriment of member beneficiaries.

4.2 All legislative references in this Chapter are to the SIS Act unless otherwise stated.

Context of amendments

4.3 Recommendation 13 of the Final Report of the FSI dated 7 December 2014 was to align the penalty regime for directors of trustees set out in the SIS Act with the penalty regime applying to directors of responsible entities of managed investment schemes. The Recommendation was adopted in the Government's response to the Inquiry.

4.4 Recommendation 3.7 of the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry dated 4 February 2019 recommended that the breach of the trustee's covenants set out in section 52 or the breach of the directors covenants set out in section 52A should be enforceable by action for civil penalties. Recommendation 3.7 was adopted in the Government's response to the Royal Commission.

4.5 The Corporations Act sets out the duties that an officer of a responsible entity has in relation to a registered scheme. A contravention of these duties may result in the application of a civil penalty with possible civil and criminal consequences. In broad terms these duties are:

•

to act honestly and exercise a reasonable degree of care and diligence;

•

to act in the best interests of the scheme's members;

•

to prioritise the interests of the scheme's members over the interests of the responsible entity;

•

not to make use of information acquired though being an officer to gain an improper advantage, or to cause detriment to the members of the scheme; and

•

to take reasonable steps to comply with the Corporations Act, the conditions imposed by the responsible entity's financial services licence, as well as the scheme's constitution and compliance plan.

General obligation on directors and trustees

4.6 The SIS Act contains similar provisions related to the governing rules of superannuation entities, with sections 52 and 52A setting out covenants that apply to each trustee of a superannuation entity or director of a corporate trustee of a superannuation entity. These obligations are incorporated into the governing rules of a superannuation entity by subsections and 52(2) and 52A(2) to the extent they are not already included in those governing rules.

4.7 In broad terms these obligations require each director to act in the best interests of member beneficiaries, and to prioritise those member beneficiaries' interests over those of any other person in the event of a conflict.

4.8 Under existing law, a contravention of the governing rules of a superannuation entity is not an offence, and does not affect the validity of a transaction. This means a contravention does not result in a civil or criminal penalty. However, a contravention can give rise to a claim for loss or damages by the affected member.

Summary of new law

4.9 These amendments ensure that a trustee or director of an RSE licensee can be subject to civil penalties if they breach the general trustee or director covenants.

4.10 The amendments achieve this by specifying that a contravention of those duties or covenants is a contravention of a civil penalty provision for the purposes of Part 21. This means directors may be liable for fines up to 2,400 penalty units (currently $504,000), and for serious breaches, imprisonment up to five years.

Comparison of key features of new law and current law

Detailed explanation of new law

4.11 The amendments in Schedule 3 allow civil and criminal penalties to be imposed on trustees of superannuation funds and directors of corporate trustees of superannuation funds who fail to execute their responsibilities to act in the interests of member beneficiaries, or who use their position to further their own interests to the detriment of member beneficiaries.

4.12 To achieve this outcome, the amendments introduce a specific obligation not to contravene the general covenants that apply to the trustee of a superannuation entity or the director of a corporate trustee. The amendment also specifies that the obligation not to contravene these covenants is a civil penalty provision. . [Schedule 3, item 1, section 54B]

4.13 The relevant obligations are those contained in section 52 which require each trustee to act in the best interests of its beneficiaries, and to prioritise those beneficiaries' interests over those of any other person in the event of a conflict. Similar obligations are required for each director of the corporate trustee of a superannuation fund to act in the best interests of its members which are set out in section 52A.

4.14 For example, there may be an action taken that results in the failure to comply with a section 52 covenant by a corporate trustee of a superannuation fund. Equally, that action will also likely result in the directors of corporate trustee breaching a section 52A covenant for an individual director. This situation would give rise to two separate actions being available to the regulator under the civil penalty provisions under the new paragraphs 193(aa) and 193(ab).

4.15 Listing these additional obligations as civil penalty provisions means that a failure to comply with them can result in civil or criminal penalties under Part 21. In this respect, it is not the initial breach of the covenant or obligation that gives rise to penalties - it is the breach of the separate obligations introduced by these amendments not to contravene the related covenants and obligations. [Schedule 3, item 6, paragraph 193(aa) and (ab)]

4.16 When a contravention of a civil penalty provision occurs APRA can apply to the Court for a civil penalty order.

4.17 If the Court finds that a trustee or director has contravened one of these civil penalty provisions, the Court must declare that they have contravened the provision. For serious contraventions, amendments made by the Senate to this Schedule that were tabled by the Opposition allow for a Court to fine the trustee or director up to 2,400 penalty units. [Schedule 3, items 6A, subsection 196(3)]

4.18 This increases the penalties from 2,000 penalty units to 2,400 penalty units and ensures that trustees and directors that contravene their obligations are held to account.

4.19 In addition, serious breaches of the director's duties (such as those involving intentional or fraudulent contraventions) may constitute a criminal offence punishable by up to 5 years imprisonment.

4.20 The consequences for failing to comply with the new obligation not to contravene the general directors duties apply in addition to any consequences that may already apply for contravening the actual duties under section 55 (which is about giving rise to a claim for loss or damages). [Schedule 3, items 2 to 5, section 55]

4.21 Consistent with other obligations under the SIS Act, a contravention of these additional obligations does not result in the invalidity of a transaction.

4.22 The amendment clarifies that trustees and directors must not contravene other covenants outside of sections 52 and 52A, such as those prescribed by legislation under section 54A. However, the breach of these other covenants does not result in the possible application of the civil penalty provisions. [Schedule 3, item 1, section 54C]

Application and transitional provisions

4.23 The amendment applies in relation to contraventions occurring on or after commencement of this Schedule. [Schedule 3, item 7]

STATEMENT OF COMPATIBILITY OF HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Trustee and director penalties

4.24 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

4.25 Schedule 3 to this Bill amends the SIS Act to allow the imposition of civil and criminal penalties on trustees or directors of RSE licensees who fail to execute their responsibilities to act in the best interests of member beneficiaries, or who use their position to further their own interests to the detriment of member beneficiaries.

4.26 This is achieved by specifying that a contravention of a trustee or director's duties is a contravention of a civil penalty provision for the purposes of Part 21 of the SIS Act.

Human rights implications

4.27 This Schedule is compatible with applicable human rights.

4.28 In forming this view, consideration has been given as to whether the imposition of a civil penalty for a violation of a directors duties in proceedings under Part 21 of the SIS Act would involve the 'determination of a criminal charge' within the meaning of article 14 of the International Covenant on Civil and Political Rights (ICCPR) and, if so, whether the application of the rules of evidence and of the procedure applicable in civil proceedings would be inconsistent with that article.

4.29 Article 14 of the ICCPR contains the right to a fair trial and fair hearing, and minimum guarantees in the determination of a criminal charge.

4.30 The civil penalty should not be considered 'criminal' for the purposes of human rights law because there is a clear demarcation between what constitutes a civil and a criminal penalty under Part 21 of the SIS Act; no term of imprisonment is available as an alternative to the monetary penalty; and the courts can tailor the amount of the monetary penalty to the circumstances of the case.

4.31 The civil penalty regime in the SIS Act consists of two distinct elements.

4.32 Firstly, the Regulator may seek a civil penalty order from the Federal Court of Australia (FCA) declaring that the person has contravened a provision and imposing a monetary penalty of up to 2,000 penalty units.^[1] The court may also or alternatively order a person to pay compensation where they are satisfied that a superannuation fund has suffered loss or damage as a result of the contravention.^[2] An application for a civil penalty order is a civil proceeding,^[3] and the parties are required to comply with the civil rules of evidence and procedure.

4.33 In civil proceedings, the law provides for specific relief from liability for contravention of a civil penalty provision where a person acted honestly and having regard to all of the circumstances of the case it appears to the court that the person ought to be excused for the contravention.^[4]

4.34 Secondly, contravention of a civil penalty provision may constitute an offence, which is punishable on conviction by imprisonment, only where a person contravenes dishonestly, intending to gain, whether directly or indirectly, an advantage for a person, or intending to deceive or defraud someone. The prosecution of an offence is a separate criminal proceeding conducted by the Commonwealth Director of Public Prosecutions. The FCA does not have jurisdiction with respect to a proceeding for an offence. A person guilty of an offence may be imprisoned for not longer than five years.

4.35 There is therefore a clear demarcation between what constitutes a civil and a criminal penalty under Part 21 of the SIS Act.

4.36 As to purpose, Australian case law indicates that a civil penalty for a contravention should be sufficiently high to demonstrate the importance of not contravening the relevant part of the SIS Act, but not so high as to be oppressive.^[5] The law specifically states that the court is not to make a civil penalty order unless it is satisfied that the contravention is a serious one.^[6] Consideration of the deterrent or compensatory purpose of the penalty applies differently in the Australian context as a civil penalty order is enforceable as a judgment of the FCA,^[7] and no term of imprisonment may apply as an alternative.

4.37 Further, in the Australian context the amount of loss or damage caused (and any compensation that might already have been paid) has also been recognised as a relevant factor to consider when determining the amount of a civil penalty.^[8]

4.38 Part 21 of the SIS Act specifies a maximum penalty amount of 2,000 penalty units which encompasses all types of superannuation funds in the industry. Whilst the maximum penalty amount applies to all contraventions in relation to all types of superannuation funds, a court will determine the appropriate amount of any monetary penalty.

4.39 The case law to date indicates that the higher end monetary penalty orders, for example over $50,000, have only been applied in very serious circumstances and where multiple contraventions of the SIS Act have occurred. The FCA has found that multiple contraventions may be properly seen as one contravening course of conduct^[9], and therefore the maximum potential penalty is not multiplied in the case of several contraventions.

4.40 Although the maximum penalty of 2,400 penalty units (currently $510,000) may seem significant, the maximum penalty is considered appropriate in this circumstance.

4.41 Most members of superannuation funds are required by law to participate in the superannuation system and a trustee relationship between the fund and the members exist. Trustees and directors of corporate trustees are therefore in a unique position to ensure the trustee acts in the best interest of the members.

4.42 The maximum penalty of $510,000 is considered appropriate to provide sufficient deterrence to directors to not breach their obligations to ensure the trustee and corporate trustee acts in the best interest of the members of a superannuation fund.

4.43 Following the analysis above, the civil penalty provisions do not involve the 'determination of a criminal charge' within the meaning of article 14 of the ICCPR, and consequently that Schedule 3 to this Bill does not engage any human rights.

Conclusion

4.44 This Schedule is compatible with applicable human rights.

Chapter 5 Approval to own or control an RSE licensee

Outline of chapter

5.1 Schedule 4 to this Bill amends the SIS Act to strengthen APRA's supervision and enforcement powers when a change of ownership or control of an RSE licensee takes place.

5.2 The amendments will reduce the potential for fraud against members of RSEs by requiring persons to obtain approval from APRA to own or hold a controlling stake in an RSE licensee.

5.3 The amendments provide APRA with the power to:

•

refuse authority for a change in ownership or control where it has concerns about the person seeking ownership or control;

•

give a direction to a person to relinquish control of an RSE licensee, whether control is held via the amount of shares held, or exists in practice; and

•

remove or suspend an RSE licensee where it is subject to the control of its owner.

5.4 All legislative references in this chapter are to the SIS Act unless otherwise indicated.

Context of amendments

5.5 In 2009, approximately $176 million of members' superannuation benefits were lost following the collapse of Trio Capital. In response the Australian Parliament launched a Parliamentary Joint Committee (Committee) Inquiry into the collapse of Trio Capital. In the Committee's report (released in May 2012), it recommended that APRA conduct an internal assessment of the adequacy and timeliness of its checks to monitor the ownership and control of an RSE licensee.

5.6 APRA, following its internal assessment, concluded that more powers to monitor the ownership and control of an RSE licensee were needed to ensure that RSE licensees are best placed to carry out their duties free of any influence that may not be in the best interests of the members of their fund.

5.7 Trustees of superannuation funds are required to obtain a licence before they can operate as a trustee of a registered superannuation fund.

5.8 Currently, when a person applies for an RSE licence, APRA is able to consider whether that person is suitable and would comply with RSE licensee law through the application process.

5.9 That is, in order to obtain an RSE licence, the trustee or director must comply with certain conditions, including meeting minimum standards of fitness and propriety and maintaining risk management strategies and plans governing each fund under their control.

5.10 APRA has the power to impose additional conditions upon those licences, vary or revoke the conditions or cancel the licences. RSE licences may be granted to constitutional corporations, other bodies corporate and groups of individual trustees.

5.11 While APRA assesses the suitability of persons to hold an RSE licence when an application is made, it is currently unable to consider the suitability of trustees or directors who may subsequently obtain ownership or control (including practical control) of the RSE licensee. This hinders APRA's ability to monitor whether RSE licensees continue to carry out their duties free of any influence that may not be in the best interests of beneficiaries.

5.12 This means, after an RSE licence has been granted, APRA has no ability to prevent the sale of an RSE licensee to a party which may affect the licensee's ability to comply with its obligations.

5.13 The change would make the change of ownership requirements for the superannuation industry broadly consistent with those for other industries regulated by APRA.

Summary of new law

APRA Approval

5.14 A person will be required to apply to APRA for approval to hold a controlling stake in an RSE licensee prior to them obtaining ownership of an RSE licensee. The approval process (see Diagram 5.1, below) is similar to the process required to be undertaken when a person seeks a new RSE licence.

5.15 Consistent with the Financial Sector Shareholding Act 1998 (FSSA) a controlling stake is a stake of more than 15 per cent of the RSE licensee.

5.16 A person's stake in an RSE licensee is a person's shareholding (including the shareholdings of their associates) and votes associated with that shareholding.

5.17 A decision by APRA to refuse an application for a change in ownership or control (including practical control) is merits reviewable in the Administrative Appeals Tribunal (AAT).

5.18 The holding of a controlling stake in an RSE licensee without approval is a strict liability offence, which incurs a penalty of 400 penalty units per day.

Direction to relinquish control

5.19 In the event that there has been, is, or is likely to be, interference with the ability of the RSE licensee to satisfy its obligations in respect of the fund, due to a change in ownership or control, APRA has the power to issue a direction to a person who is in control of the RSE licensee to relinquish that control.

5.20 The direction to relinquish control can occur when the person has a controlling stake, or where the person has practical control. Practical control occurs where the directors of the RSE licensee are accustomed or under an obligation, whether formal or informal, to act in accordance with the person's directions, instructions or wishes, or the person is in a position to exercise control over the RSE licensee.

5.21 Practical control can only occur where the person does not hold a stake of more than 15 per cent of the RSE licensee. As such, APRA may give a direction to relinquish control to a person that was not required to obtain approval to hold their stake in the RSE licensee.

5.22 APRA's decision to issue a direction is merits reviewable in the AAT.

5.23 A reckless or intentional failure to comply with the direction is an offence subject to 400 penalty units per day.

Suspension or removal of trustee of superannuation entity

5.24 APRA's current power to suspend or remove an RSE licensee is expanded to allow it to exercise that power if it has reason to believe that a person that owns or controls an RSE licensee is exercising, has been exercising, or is likely to exercise, that control in a way that means the RSE licensee is unable to satisfy one or more of the trustee's obligations contained in the covenants inserted by the SIS Act, or the additional obligations for RSE licensees that relate to MySuper products.

Comparison of key features of new law and current law

Detailed explanation of new law

5.25 The amendments strengthen APRA's supervision and enforcement powers when a change of ownership or control of an RSE licensee takes place.

Obligation to apply for APRA approval

5.26 The amendments insert Division 8 into Part 2A to require approval to hold a controlling stake in an RSE licensee. The provisions will apply to RSE licensees that are body corporates. [Schedule 4, item 8, section 29H]

5.27 If a person is seeking to hold a stake of more than 15 per cent in the RSE licensee, the person must apply to APRA for approval to hold a controlling stake in an RSE licensee. [Schedule 4, items 1 and 8, definition of 'controlling stake' in subsection 10(1) and subsection 29HA]

5.28 This is consistent with the concept of controlling stake in the FSSA.

5.29 A stake in an RSE licensee is a person's shareholding (including the shareholdings of their associates) and votes associated with that shareholding.

5.30 The application must be in approved form and contain the information required by the form. [Schedule 4, item 8, subsection 29HA(2)]

5.31 APRA will issue an approved form for this purpose.

5.32 If after the application is made, but before APRA decides the application, the information on the form ceases to be correct, the person must give APRA the correct information, in writing, as soon as practicable after the information ceases to be correct. Otherwise, the application is taken to not be in compliance with its requirements. [Schedule 4, item 8, subsections 29HA(3) and (4)]

5.33 APRA may request specific information relating to the application by giving a notice to the applicant. [Schedule 4 , item 8, section 29HB]

Time to decide the application

5.34 APRA must make a decision on the application within 90 days of receiving the application or, where APRA requested further information from the applicant, within 90 days of receiving all the information requested. [Schedule 4, item 8, subsection 29HC(1)]

5.35 However, APRA may extend the period by a further 30 days, as long as APRA informs the applicant in writing within 90 days of receiving the application, in this case APRA must decide the application within the extended period [Schedule 4, item 8, subsections 29HC(2) and (3)]

Approval of an application

5.36 APRA must approve the application if and only if:

•

the application is in the form required and with the correct information;

•

the applicant has provided all the information requested or the request has been disposed; and

•

APRA has no reason to believe that the RSE licensee may be unable to satisfy one or more the trustee's obligations contained in a covenant set out in sections 52 to 53, or prescribed under section 54A, or referred to in section 29VN or 29VO, because of:

-

the applicant's controlling stake in the RSE licensee; or

-

the way in which that controlling stake is likely to be used.

[Schedule 4, item 8, section 29HD]

Example 5.1

Ms Hetty is seeking to make an offer to SA Adventure Pty Ltd to acquire 100 per cent of the shares in Harpoon Pty Ltd (Harpoon) (an RSE licensee). Prior to making the offer Ms Hetty seeks approval from APRA. APRA previously had concerns with Ms Hetty's ownership and management of an APRA regulated entity, including prudential compliance and meeting tax obligations. These concerns were raised with Ms Hetty at the time and not resolved. Ms Hetty subsequently sold the APRA regulated entity.

During the application process for Harpoon, Ms Hetty does not provide further information that assures APRA that the previous concerns about her ownership will not eventuate. The additional information sought was focused on the governance and the fitness and propriety of nominated persons of the entity that would operate Harpoon.

APRA's original concerns remained and APRA subsequently rejected that application for approval.

Example 5.2

SA Adventure Pty Ltd (SA Adventure) seeks APRA's approval for its planned purchase of 100 per cent of Harpoon RSE licensee Pty Ltd (Harpoon) from HLMW RSE licensee for $3 million. Harpoon holds an RSE licence and has approximately $1.5 billion under trusteeship across a number of funds.

In considering approval, APRA forms the view that SA Adventure raises significant prudential concerns, particularly around its level of financial resources to ensure the operational viability of Harpoon post-acquisition. SA Adventure was listed on the Australian Securities Exchange (ASX) with a capitalisation less than the acquisition price of Harpoon. SA Adventure had only recently become active as a financial services company after previously operating businesses in a separate industry. APRA also recognises potential issues in the fitness and proprietary of SA Adventure's managing director based on previous legal action.

APRA's significant concerns about the level of financial resources that SA Adventure would have to operate Harpoon in the best interests of beneficiaries were not able to be resolved by SA Adventure during the application process. APRA subsequently notifies SA Adventure that they do not approve its purchase of Harpoon.

5.37 Sections 52 to 52C provide the covenants to be included in the governing rules of an RSE or self-managed superannuation fund, if such covenants are not included in the governing rules of the entity. Some of these covenants relate to the directors of the RSE or self-managed superannuation fund.

5.38 The covenants include obliging trustees to act honestly, in the best interests of their beneficiaries and keep the money and assets of the entity separate from any other money and assets.

5.39 Similarly, section 53 implies a covenant into the governing rules of an approved deposit fund to require a trustee to repay an amount to a beneficiary, if a beneficiary requests the repayment and compliance with the request would not be inconsistent with the operating standards for the approved deposit fund.

5.40 Section 54A allows regulations to prescribe other covenants.

5.41 Section 29VN contains additional obligations imposed on trustees of a regulated superannuation fund in relation to MySuper product. These include obligations to promote the financial interests of beneficiaries in the fund and having up to date investment strategies for each product.

5.42 Section 29VO contains additional obligations imposed on directors of corporate trustees to exercise reasonable care and diligence for the purposes of ensuring the corporate trustee carrying out its obligations under section 29VN.

5.43 If APRA approves the applicant to hold a controlling stake in an RSE licensee, APRA must notify the applicant in writing. [Schedule 4, item 8, section 29HE]

Refusal of an application

5.44 If APRA refuses the application, APRA must take all reasonable steps to ensure that the applicant is given a notice informing it of the decision and setting the reasons for the refusal. [Schedule 4, item 8, section 29HF]

5.45 The decision to refuse to give approval is reviewable by the AAT. [Schedule 4, item 2, paragraph (dla) of definition of 'reviewable decision' in subsection 10(1)]

5.46 Where APRA does not decide on the application within 90 days (or 120 days for extensions) of receiving the application, the application is taken to be refused. [Schedule 4, item 8, subsection 29HC(4)]

Offence to hold a controlling stake without approval

5.47 Where a person holds a controlling stake in an RSE licensee without approval, the person is committing a strict liability offence with a penalty of 400 penalty units for each day in which the controlling stake is held without approval. [Schedule 4, item 9, section 29JCB]

5.48 The offence is a strict liability offence consistent with Commonwealth guidelines for drafting offences.

5.49 The requirement for a person to seek approval from APRA prior to holding a controlling stake in an RSE licensee is to allow APRA to continually ensure that RSE licensees are best placed to carry out their duties free of any influence that may not be in the best interests of the members of their fund.

5.50 A contravention of the requirement is a strict liability offence because it is necessary to ensure the integrity of the regulatory regime.

5.51 The offence is subject to an infringement notice. [Schedule 4, item 12, paragraph 223A(1)(aa)]

5.52 This is to address the situation where the person holding a controlling stake in an RSE licensee has not been aware of the requirement to obtain approval but is otherwise considered to be satisfying their fiduciary obligations.

Direction to relinquish control

5.53 APRA may direct a person to relinquish control of an RSE licensee if APRA has reason to believe that:

•

the person has a controlling stake in. or has practical control of, the RSE licensee; and

•

APRA has reason to believe that the RSE licensee has been, is or is likely to be unable to satisfy one or more the trustee's obligations contained in a covenant set out in section 52 to 53, or prescribed under section 54A, or referred to in section 29VN or 29VO, because of:

-

the person's controlling stake in or practical control of the RSE licensee; or

-

the way in which that control is likely to be exercised.

[Schedule 4, item 10, subsection 131EB(1)]

5.54 These requirements are similar to the conditions for APRA to approve an application for controlling stake in the RSE licensee. The likelihood of interference with the RSE licensee's ability to fulfil its obligations, due to the person controlling the RSE licensee, is the key consideration in APRA's assessment of either approval of an application or the issue of a direction to relinquish control.

5.55 The main difference between the conditions for an approval of an application and the giving of a direction is that a direction can be given to a person's practical control over an RSE licensee who does not have a controlling stake in the RSE licensee.

5.56 A person has practical control over an RSE licensee if the person does not hold a controlling stake in the RSE licensee and:

•

the directors of the RSE licensee are accustomed or under an obligation (formal or informal) to act in accordance with the directions, instructions or wishes of the person; or

•

the person, alone or together with their associates, is in a position to exercise control over the RSE licensee.

[Schedule 4, items 1 and 10, definition of 'practical control' in subsection 10(1) and section 131EC]

5.57 Practical control occurs irrespective of whether the person's directions, instructions or wishes or their position to exercise the control originate from the person alone, or together with their associates. [Schedule 4, items 1 and 10, definition of 'practical control' in subsection 10(1) and section 131EC]

5.58 APRA may also give a person a direction to relinquish control of an RSE licensee if it has reason to believe that the person has a controlling stake in the RSE licensee and:

•

the person does not have approval from APRA to hold a controlling stake; or

•

the person has approval from APRA to hold a controlling stake, but the information given in the application was false or misleading in a material particular.

[Schedule 4, item 10, subsections 131EB(2) and (3)]

5.59 To avoid doubt, a direction to relinquish control can be given to a person who holds a controlling stake in an RSE licensee even if APRA has given approval to the person to hold a controlling stake. [Schedule 4, item 10, subsection 131EB(4)]

Giving and revoking a direction

5.60 The direction must be in writing, and APRA must give the person subject to the direction a copy of the direction and a statement of APRA's reasons. [Schedule 4, item 10, subsections 131EB(5) and (6)]

5.61 APRA may revoke a direction to relinquish control of an RSE licensee in writing and a copy of the revocation must be given to the person subject to the direction. [Schedule 4, item 10, subsections 131EB(7) and (8)]

Consequences of a direction to relinquish control

5.62 Upon receiving a direction to relinquish control, the person must take necessary steps to ensure that:

•

the directors of the RSE licensee are not accustomed or under an obligation (formal or informal) to act in accordance with the directions, instructions or wishes of the person (either alone or together with associates);

•

the person (either alone or together with associates) is not in a position to exercise control over the RSE licensee; and

•

the person does not hold a controlling stake in the RSE licensee.

[Schedule 4, item 10, subsection 131ED(1)]

5.63 That is, a person receiving the direction must take necessary steps so that the person does not hold a controlling stake or have practical control of the RSE licensee going forth.

5.64 The person must take those steps within 90 days of being given a copy of the direction or before the end of the longer period where APRA has given written notice allowing a longer period to comply with the direction. [Schedule 4, item 10, subsection 131ED(2)]

5.65 Intentionally or recklessly contravening the direction is an offence and results in the person being liable for 400 penalty units. [Schedule 4, item 10, subsection 131ED(3)]

AAT merit review

5.66 The decision to give a person the direction is reviewable by the AAT. [Schedule 4, item 3, paragraph(taac) of definition of 'reviewable decision' in subsection 10(1)]

Interim orders

5.67 Where the AAT has made an order to stay (or otherwise affect the operation or implementation of the decision to give the direction or part of the direction) the direction, APRA may apply to the Federal Court of Australia to seek orders that the person not exercise control until the AAT completes its review of the direction [Schedule 4, item 10, subsection 131EE(1)].

5.68 The Federal Court has the discretion to make such orders, if the court considers that it is appropriate to ensure the person does not exercise control over the RSE licensee in a way that results in the RSE licensee being unable to satisfy its obligations as trustee of the fund, during the period that the AAT orders to stay the direction. [Schedule 4, item 10, subsection 131EE(2)]

5.69 If APRA has reason to believe that the person given the direction may, during the period to comply with direction, exercise control over the RSE licensee in a way that results in the RSE licensee being unable to satisfy its obligations as trustee of the fund, then APRA may apply to the Federal Court to seek orders to deal with the conduct of the person. [Schedule 4, item 10, subsection 131EE(3)]

5.70 The Federal Court has the discretion to make such orders, if the court considers that it is appropriate to ensure the person does not exercise control over the RSE licensee in a way that results in the RSE licensee being unable to satisfy its obligations as trustee of the fund, during the period to comply with direction. [Schedule 4, item 10, subsection 131EE(4)]

Remedial orders

5.71 If the direction is in force, APRA may apply to the Federal Court to seek an order to enforce the direction. [Schedule 4, item 10, subsection 131EF(1)]

5.72 The Federal Court has the discretion to make such orders, if the court considers that it is appropriate to ensure that:

•

the directors of the RSE licensee are not accustomed or under an obligation (formal or informal) to act in accordance with the directions, instructions or wishes of the person (either alone or together with associates);

•

the person (either alone or together with associates) is not in a position to exercise control over the RSE licensee; and

•

the person does not hold a controlling stake in the RSE licensee.

[Schedule 4, item 10, subsection 131EF(2)]

5.73 That is, the Federal Court can make an order to ensure that the person does not hold a controlling stake or have practical control of the RSE licensee going forth.

5.74 However, the Federal Court may only make such orders if it is satisfied that:

•

the person holding a controlling stake in or having practical control of the RSE licensee has been, is or is likely to exercise control over the RSE licensee in a way that results in the RSE licensee being unable to satisfy its obligations as trustee of the fund;

•

the person holding a controlling stake in the RSE licensee does not have approval to do so; or

•

the person holding a controlling stake in the RSE licensee has approval from APRA, but the information given in the application was false or misleading in a material particular.

[Schedule 4, item 10, subsection 131EF(3)]

5.75 These are the same grounds on which APRA can give a person to a direction to relinquish control.

5.76 The types of orders the Federal Court may make include:

•

directing the disposal of shares;

•

restraining the exercise of any rights attached to the shares;

•

prohibiting or deferring the payment of any amount due to a person in respect of shares held by the person; and

•

disregarding any exercise of rights attached to shares.

[Schedule 4, item 10, subsection 131EF(4)]

5.77 The Federal Court has the discretion to make other orders in addition to the ones listed above. [Schedule 4, item 10, subsection 131EF(5)]

5.78 The Federal Court also has the power to:

•

make an order to direct any person to do or refrain from doing a specific act for the purpose of securing compliance with any order the court has made; and

•

make an order containing ancillary or consequential provisions that the court thinks just.

[Schedule 4, item 10, subsection 131EF(6)]

5.79 Before making an order, the Federal Court may direct that the notice of APRA's application for the order be given to any person that the court thinks fit or be published in any manner that the court thinks fit. The court may also direct both actions to be taken. [Schedule 4, item 10, subsection 131EF(7)]

5.80 The Federal Court may rescind, vary or discharge the order made or suspend the operation of the order. [Schedule 4, item 10, subsection 131EF(8)]

Suspension or removal of trustee of superannuation entity

5.81 APRA may suspend or remove a trustee of a superannuation entity on largely the same grounds as those required for APRA to give a direction to a person to relinquish control.

5.82 That is, APRA may suspend or remove the RSE licensee if it has reason to believe that:

•

the person has a controlling stake in or has practical control of the RSE licensee; and

•

APRA has reason to believe that the RSE licensee has been, is or is likely to be unable to satisfy one or more the trustee's obligations contained in a covenant set out in section 52 to 53, or prescribed under section 54A, or referred to in section 29VN or 29VO, because of:

-

the person's controlling stake in or practical control of the RSE licensee; or

-

the way in which that control is likely to be exercised.

[Schedule 4, item 11, paragraph 133(1)(f)]

5.83 APRA may also suspend or remove the RSE licensee if it has reason to believe that the person has a controlling stake in the RSE licensee and the person does not have approval from APRA to hold a controlling stake. [Schedule 4, item 11, paragraph 133(1)(g)]

5.84 This is in addition to existing powers to suspend or remove an RSE licensee under section 133.

Consequential amendments

5.85 The current condition imposed on the RSE licensee to notify APRA of any change in the composition of the RSE licensee is broadened to capture the concept of control. [Schedule 4, items 5 and 6, paragraph 29E(1)(f) and subsection 29E(2)]

5.86 For the purposes of the obligation to notify APRA, any change to the composition of the RSE licensee includes when a person's stake in the RSE licensee changes. [Schedule 4, item 7, paragraph 29E(2)(a)]

5.87 A definition of stake is inserted to ensure consistency in the meaning with the concept in the FSSA. [Schedule 4, item 4, definition of 'stake' in subsection 10(1)]

Application and transitional provisions

5.88 Schedule 4 commences on the day after the Bill receives the Royal Assent.

5.89 The amendments apply to a person holding a controlling stake from commencement day. [Schedule 4, item 13]

5.90 However, if a person holds a controlling stake in an RSE licensee before that day and continues to hold a controlling stake on or after that day, the person is deemed to have approval from APRA to hold a controlling stake in the RSE licensee. This approval is deemed for the period from the commencement day until when the person no longer holds a controlling stake. [Schedule 4, item 14]

5.91 This is to ensure that the need to seek APRA approval to hold a controlling stake in an RSE licensee will only apply to persons who do not have an existing controlling stake in an RSE licensee at the date of commencement.

5.92 The offence for holding a controlling stake in an RSE licensee without approval applies only to a person that begins to hold a controlling stake on or after the day that is three months after the commencement day. [Schedule 4, item 15]

STATEMENT OF COMPATIBILITY OF HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Approval to own or control an RSE licensee

5.93 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

5.94 Schedule 4 to this Bill amends the SIS Act to strengthen APRA's supervision and enforcement powers when a change of ownership or control of an RSE licensee takes place.

Human rights implications

5.95 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

5.96 This Schedule is compatible with human rights as it does not raise any human rights issues.

Chapter 6 APRA directions power

Outline of chapter

6.1 Schedule 5 to this Bill amends the SIS Act to strengthen APRA's supervision and enforcement powers to include the power to issue a direction to an RSE licensee where APRA has prudential concerns.

6.2 These changes align the directions powers in the SIS Act with similar reforms being made across the banking and insurance laws.

6.3 These amendments enable APRA to intervene at an early stage to address prudential concerns in a manner that ensures the required actions are in the best interests of members. Early intervention may be necessary due to the serious consequences for fund beneficiaries which can flow from actions and matters that give rise to prudential risk.

6.4 Flexible directions powers allow APRA to respond appropriately in a variety of circumstances, not all of which can be foreseen.

6.5 All legislative references in this chapter are to the SIS Act unless otherwise stated.

Context of amendments

APRA's existing directions powers

6.6 APRA currently has broad general powers of direction under the Acts it administers in the banking and insurance industries. However, the directions powers available to APRA in respect of the superannuation industry are much narrower in scope. In this regard, APRA can only issue directions to an RSE licensee for it to:

•

comply with a condition of an RSE licence;

-

including a direction to comply with a particular provision of the SIS Act, Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) or prudential standards;

•

not accept contributions from employer sponsors where there has been a contravention of the equal representation rules;

•

remove an auditor or approved actuary; or

•

not acquire or dispose assets.

6.7 APRA also has power to remove an RSE licensee and appoint an acting RSE licensee in certain circumstances and can give a direction to the acting RSE licensee.

6.8 Given the limited scope of APRA's capacity to direct RSE licensees, APRA may not have power to resolve or address a prudential concern before it results in significant detriment to a fund's beneficiaries.

6.9 The Final Report of the FSI contained a recommendation that existing processes for strengthening crisis management powers be completed. The existing processes included strengthening APRA's directions powers across the industries that it regulates, including superannuation.

6.10 The amendments in Schedule 5 align APRA's directions powers in relation to the superannuation industry with its broader directions powers in the banking and insurance industries.

6.11 Providing APRA with powers similar to other financial service industries strengthens APRA's ability to quickly intervene in prudential matters to ensure that actions are taken which protect the interests of beneficiaries in circumstances of prudential concern.

Summary of new law

6.12 The amendments provide APRA the power to give a direction to:

•

an RSE licensee where it has concerns about one of the RSE licensee's connected entities which raise prudential concerns; and/or

•

a connected entity of the RSE licensee directly.

6.13 APRA may also issue a direction to an acting RSE licensee in circumstances in which that direction can be made.

6.14 An RSE licensee will commit an offence if it contravenes a direction from APRA. The offence is a strict liability offence subject to a penalty of 100 units, consistent with the current penalty for breach of a direction by an acting trustee.

Comparison of key features of new law and current law

Detailed explanation of new law

6.15 Schedule 5 to this Bill inserts Part 16A into the SIS Act to provide APRA with further powers to issue directions.

6.16 APRA may give a direction to an RSE licensee where:

•

APRA has a reason to believe that the RSE licensee either has, or is reasonably likely to, contravene its prudential obligations; or

•

certain financial risks are present, or there are risks to the interests of the beneficiaries of a superannuation entity or the financial system more generally.

[Schedule 5, item 11, subsection 131D(1)]

6.17 Issuing directions in these circumstances allows APRA to require that actions be taken to address or avoid a contravention, or to mitigate risks.

6.18 Directions may also be issued to an RSE licensee where the conduct of a connected entity of the RSE licensee is of the kind that is described in paragraph 6.16. Where APRA is able to give a direction to an RSE licensee because of the conduct of one of its connected entities, as it relates to a prudential matter, APRA may also give a direction to the connected entity of the licensee. [Schedule 5, item 11, subsections 131DA(1) and (2)]

6.19 Extending the directions powers to these circumstances recognises that in some situations, it is the conduct of an entity that undertakes particular functions of an RSE licensee that can result in particular contraventions or risks.

6.20 Where APRA has concerns about the actions of a third party (related or otherwise) that the RSE licensee has contracted with, APRA can direct the RSE licensee to do or not do something (including requiring the RSE licensee to cease dealing with a related body corporate where it has grounds under its direction powers).

6.21 The circumstances in which directions can be issued and the types of directions that can be issued are explained from paragraph 6.24.

6.22 A decision of APRA to give or vary a direction under Division 1 of Part 16A is a reviewable decision for the purposes of SIS Act. [Schedule 5, item 3, subsection 10(1), paragraphs (taaa) and (taab) in the definition of 'reviewable decision']

6.23 As such, the standard processes for internal and external review in the AAT that are prescribed under section 344 apply in respect of a decision by APRA to issue a direction.

Directions to RSE licensee about the conduct of the licensee

Directions for contraventions of regulatory or prudential obligations

6.24 RSE licensees have obligations to comply with a number of provisions contained in the SIS Act, the SIS Regulations, the prudential standards (which are a standard determined by APRA under subsection 34C(1)), and the FSCODA. RSE licensees are also obliged to comply with certain conditions and directions under the SIS Act and the FSCODA.

6.25 APRA may issue a direction to an RSE licensee if it has reason to believe that the licensee has contravened one of these provisions, conditions or directions. [Schedule 5, item 11, paragraphs 131D(1(a) and (c)]

6.26 Whether or not an RSE licensee has contravened a provision, condition or direction is a matter of fact. However, the requirement that APRA has 'reason to believe' (in this, and other conditions for giving directions) means that all of the formal proceedings that must be undertaken to establish that a contravention has actually occurred do not necessarily need to be resolved. This approach ensures that APRA is able to take early action to remedy or mitigate the impact of a contravention.

6.27 APRA may also issue a direction to an RSE licensee if it has reason to believe that the licensee is likely to contravene a provision of the SIS Act, the SIS Regulations, the prudential standards or the FSCODA. However, directions can only be issued in these circumstances where the direction is reasonably necessary to deal with one or more prudential matters in relation to the RSE licensee. [Schedule 5, item 11, paragraph 131D(1)(b)]

6.28 The additional condition in respect of likely contraventions strengthens APRA's ability to intervene to prevent a contravention from occurring. The additional requirement around prudential matters limits the scope of the ground for giving directions. Prudential matters are defined by subsection 34C(4) and relate to matters such as the conduct of an RSE licensee or a connected entity required to protect the interests of beneficiaries, or ensure the financial stability of the superannuation entity.

Directions to protect the interests of beneficiaries

6.29 APRA may issue directions to an RSE licensee if it has reason to believe that the direction is necessary in the interests of beneficiaries of an RSE of the licensee, or where the failure to issue a direction would materially prejudice the interests or reasonable expectations of those beneficiaries. [Schedule 5, item 11, paragraphs 131D(1)(d) and (i)]

6.30 Giving directions in these circumstances requires APRA to form a view about the interests and expectations of beneficiaries, and why the relevant direction is necessary to protect those interests or expectations.

Directions to address certain financial risks

6.31 APRA may issue directions to an RSE licensee if it has reason to believe that one of the following applies, or is likely to apply:

•

the licensee is unable to meet its liabilities;

•

there is a material risk to the security of the assets of the licensee; or

•

there has been a material deterioration in the financial condition of the licensee or the registerable superannuation entity of which it is a trustee.

[Schedule 5, item 11, paragraphs 131L(1)(e) to (g)]

6.32 APRA may also issue directions if it has reason to believe that an RSE licensee is conducting its affairs, or the affairs of the RSE of which it is a trustee, in an improper or financially unsound way, or in a way that may cause or promote instability in the Australian financial system. [Schedule 5, item 11, paragraphs 131D(1)(h) and (j)]

6.33 Directions in the above circumstances ensure that APRA can require action to prevent a further deterioration in the financial position of the trustee (or the RSE), or to minimise the impact on the beneficiaries of the RSE.

6.34 In addition, the direction about conduct that may adversely affect the stability of the Australian financial system allows APRA to take into account the broader implications of the conduct of an RSE licensee, and require that appropriate action be taken to prevent or reduce the adverse consequences of such actions.

6.35 In assessing whether an RSE licensee is unable to meet its liabilities, or whether there is a material risk to the security of its assets, it does not matter whether the liability or assets relates to the licensee's position as a trustee of an RSE or not. [Schedule 5, item 11, paragraphs 131D(1)(e) and (f)]

6.36 This scope is appropriate because the general financial position of an RSE licensee is relevant to its ability to comply with its specific duties as the trustee of an RSE.

Types of directions that may be given

6.37 Where one of the above conditions about the conduct of an RSE licensee is satisfied, APRA may give one or more of the directions outlined below.

6.38 While the type of direction that APRA issues will depend on the facts and circumstances of a particular case, some of these directions are directly relevant to the ground on which directions can be issued.

6.39 APRA may give a direction to an RSE licensee that covers only some of the matters to which a direction relates, deals only with particular classes of matters, or requires different actions to be taken in respect different classes of matters. [Schedule 5, item 11, subsection 131D(4)]

6.40 Directions may also contain particulars about the timing for complying with the direction. [Schedule 5, item 11, subsection 131D(5)]

Directions to comply with regulatory or prudential obligations

6.41 APRA may give a direction to an RSE licensee to comply with the whole or part of one of the regulatory or prudential obligations in relation to which a contravention is a ground for giving a direction. [Schedule 5, item 11, paragraphs 131D(2)(a) and (b)]

6.42 As noted above, these regulatory and prudential obligations relate to provisions of the SIS Act, SIS Regulations, prudential standards and the FSCODA, as well as certain conditions and directions under the SIS Act and the FSCODA.

6.43 A direction to comply with one of the obligations would generally be relevant where the basis for issuing a direction was related to the contravention of one of these obligations.

Directions about responsible officers

6.44 APRA may give a direction to an RSE licensee that is a body corporate to remove a responsible officer from office, to ensure that a responsible officer does not take part in the management or conduct of the business of the RSE licensee or the business of an RSE, or to appoint a person as a responsible officer on certain terms. [Schedule 5, item 11, paragraph 131D(2)(c)]

6.45 Directions of this kind will generally be relevant where the conduct of a particular responsible officer of an RSE licensee has formed the basis of one or more of the grounds on which directions can be issued.

6.46 The term responsible officer is defined by subsection 10(1), and relates to a director, secretary or executive officer of a body corporate. Restricting such directions to RSE licensees that are body corporates reflects that body corporates are the only entities that have responsible officers.

Directions where RSE licensee has failed to meet benchmarks

6.47 Amendments made by the Senate to this Schedule that were tabled by the Opposition allow APRA to give a direction where a fund has failed to meet a benchmark that relates to the licensee or entity. [Schedule 5, item 11, paragraph 131D(2)(ca)]

6.48 This allows APRA to direct trustees where it has concern about actions of trustees that are not in members' best interests.

Directions about audits or actuarial investigations

6.49 APRA may give a direction to an RSE licensee to order the audit of the affairs of the licensee or an RSE. Such audits are to be made at the expense of the RSE licensee and be undertaken by an auditor that is chosen by APRA. APRA may also remove an auditor from office and appoint another auditor to hold office on particular terms. [Schedule 5, item 11, paragraphs 131D(2)(d) and (e)]

6.50 APRA may also give a direction to an RSE licensee to order an actuarial investigation of the affairs of an RSE. Such investigations are to be made at the expense of the RSE licensee and be undertaken by an actuary that is chosen by APRA. APRA may also remove an actuary from office and appoint another actuary to hold office on particular terms. [Schedule 5, item 11, paragraphs 131D(2)(f) and (g)]

6.51 These types of directions are most relevant where APRA requires additional information about the affairs of an RSE licensee or an RSE, or has reason to believe that audit or actuarial information provided by an RSE licensee does not reflect the true position of the licensee or RSE.

6.52 Removing an existing auditor or actuary, as well as replacing them with another auditor or actuary, enables APRA to ensure that the financial position of a licensee or RSE is accurately reported in the future.

Directions about certain actions

6.53 APRA may give a direction to an RSE licensee to not do any of the following:

•

accept contributions to an RSE:

•

borrow any amount;

•

pay or transfer any amount or asset (or create an obligation to do so);

•

undertake a financial obligation; or

•

discharge a liability of the licensee or an RSE.

[Schedule 5, item 11, paragraphs 131D(2)(h) to (l)]

6.54 Directions of this kind are most relevant where there are substantial issues in respect of the financial position of an RSE licensee or the RSE.

6.55 Preventing contributions being made to an RSE ensures that members are not put at further risk by contributing amounts to the entity.

6.56 Enabling APRA to direct an RSE licensee to suspend further actions that it would ordinarily take in respect of its assets or liabilities would generally only be done where there is a substantial risk that continued actions would be to the detriment of the beneficiaries of the RSE, or would substantially increase the financial risks that were relevant to the direction.

6.57 However, a direction to not pay or transfer an amount or an asset does not apply to payments or transfer of money pursuant to an order of the court or a process of execution. [Schedule 5, item 11, subsection 131D(3)]

6.58 This limitation ensures that court orders and processes of execution take priority over any directions that APRA gives to an RSE licensee.

6.59 APRA may also direct an RSE licensee to do, or refrain from doing, anything else in relation to its affairs, or the affairs of the RSE of which it is a licensee. [Schedule 5, item 11, paragraph 131D(2)(n)]

6.60 Enabling APRA to issue directions about the affairs of a licensee or RSE ensures sufficient flexibility for APRA to make the directions that are necessary to prevent or mitigate the risks associated with the various grounds on which directions can be made.

Directions about the RSE licensee

6.61 APRA may give directions to an RSE licensee to make changes to its system, business practices or operations. [Schedule 5, item 11, paragraph 131D(2)(m)]

6.62 These directions cover organisational matters that are relevant to an RSE licensee's internal business structures. Enabling APRA to make directions of this kind enables actions to be undertaken to address broader issues that may arise as a result of the way an RSE licensee conducts its business.

Directions to RSE licensee about the conduct of a connected entity

6.63 In certain circumstances, the conduct of a connected entity of an RSE will give rise to the same sorts of contraventions and risks that are outlined above.

6.64 Where this is the case, the general requirements for issuing a direction on the basis of actions or risks that result from the conduct of the RSE licensee may not be able to be satisfied, because the conduct of a connected entity that is relevant.

6.65 Amendments made by the Senate to this Schedule that were tabled by the Opposition amends the definition of connected entity as being:

•

an associated entity (within the meaning of the Corporations Act);

•

if the RSE licensee is a group of individual trustees, an entity that has the capacity to determine or influence decisions made by the members in relation to the RSE; and

•

any other entity prescribed by regulations.

[Schedule 5, item 2A, subsection 10(1) definition of 'connected entity']

6.66 This amendment expands the scope of the directions power to an entity that has the capacity to determine or influence decisions made by one or more of the members of the group in relation to an RSE. Currently, no regulations have been prescribed meaning that connected entities are the subsidiaries of body corporates.

6.67 These amendments ensure that APRA is also able to give a direction to an RSE licensee in respect of the conduct of one of its connected entities.

6.68 The grounds on which such directions may be given are based on the ground on which directions about the conduct of an RSE licensee can be given.

6.69 APRA may give a direction where it has reason to believe that:

•

a connected entity has contravened, or is likely to contravene, a provision of the SIS Act, the SIS Regulations, the prudential standards, or the FSCODA;

•

the direction relates to the connected entity and is necessary to protect the interests of beneficiaries;

•

the direction is required to prevent the interests of beneficiaries from being materially prejudiced;

•

the connected entity is unable to meet its liabilities;

•

there is a material risk to the security of the assets of the connected entity;

•

there has been a material deterioration in the financial condition of the connected entity; or

•

the connected entity is conducting its affairs in an improper or financially unsound way or in a way that negatively affects the stability of Australia's financial system.

[Schedule 5, item 11, paragraphs 131DA(1)(a) to (h) and (j)]

Example 6.1

Moira Superannuation Limited (Moira Super) is the RSE licensee of a number of large superannuation funds. The investment management of each of the RSEs under Moira Super is outsourced to Pyramid Investment Limited, which is a subsidiary of Moira Super.

Based on historical experience with a now closed RSE licensee, APRA has significant concerns about fitness of Mr Gibbs, a director and responsible officer of Pyramid Investments Limited, who has previously been disqualified from acting as a director or senior officer of an RSE licensee.

APRA believes that Mr Gibbs' involvement represents a serious concern and threat to the security of the assets of the funds under the trusteeship of Moira Super. APRA decides to direct Pyramid Investments Limited to ensure that Mr Gibbs does not take part in the conduct of the business of Moira Super except as permitted by APRA.

6.70 Each of these grounds for issuing a direction in respect of a connected entity is based on the grounds that apply in respect of the conduct of an RSE licensee. The matters set out above in respect of the equivalent grounds are also relevant for connected entities.

6.71 However, unless the grounds relate to contraventions of particular provisions or to the interests of beneficiaries, APRA can only give a direction in respect of the conduct of a connected entity if APRA considers that the direction is reasonably necessary to ensure that the RSE licensees duties as trustee of an RSE are properly performed. [Schedule 5, item 11, subsection 131DA(2)]

6.72 This additional requirement about the performance of the RSE licensee's duties ensures that there is a nexus between the functions of the RSE licensee that are regulated and the activities of, or conduct undertaken, by the connected entity. This means that there will not be grounds for issuing a direction in respect of the conduct of a connected entity where that conduct relates to something that has no impact on an RSE licensee or its ability to perform its functions.

6.73 The additional requirement is not explicitly applied to the grounds about contravening certain provisions or protecting the interests of beneficiaries because those grounds already relate to matters that are directly relevant to the RSE licensee's duties or obligations that are separately imposed on the connected entity.

6.74 In addition to the above grounds for giving a direction, APRA may also give a direction if it has reason to believe that a connected entity of an RSE licensee is conducting its affairs in a way that may cause the connected entity to be unable to continue to supply products or services to the licensee or an RSE of the licensee. [Schedule 5, item 11, paragraphs 131DA(1)(i)]

6.75 This additional ground recognises that in certain circumstances, a connected entity provides products and services that are integral to an RSE licensee complying with its own obligations.

Types of directions that may be given

6.76 Consistent with directions in relation to the conduct of RSE licensees, APRA may give one or more direction where the grounds for doing so are satisfied.

6.77 However, for directions about the conduct of a connected entity, APRA may give the direction to the RSE licensee to cause the connected entity to do or not do a particular thing. [Schedule 5, item 11, subsection 131DA(1)]

6.78 In certain circumstances, it may be more efficient for APRA give a direction directly to the connected entity. However, APRA may do so only in circumstances where it is able to give a direction to the RSE licensee in respect of the conduct of a connected entity (including where it has already given such a direction). [Schedule 5, item 11, subsection 131DA(3)]

6.79 Based on the current definition, all connected entities are the subsidiaries of an RSE licensee that is a body corporate. Given this parent-subsidiary relationship, an RSE licensee has the ability to direct its connected entities to take, or not take, the action specified in a direction.

6.80 To ensure that directions powers in respect of connected entities operate appropriately, regulations may be made to prevent APRA from giving directions to a particular type of connected entities. For example, regulations may carve out entities that are regulated under other legislation and subject to a separate directions powers regime. [Schedule 5, item 11, subsection 131DA(4)]

6.81 As with the directions for the conduct of RSE licensees, APRA may give a direction that covers only some of the matters to which a direction relates, deals only with particular classes of matters, or requires different actions to be taken in respect different classes of matters. [Schedule 5, item 11, subsection 131DA(7)]

6.82 Directions may also contain particulars about the timing for complying with the direction. [Schedule 5, item 11, subsection 131DA(8)]

6.83 As with the directions in respect of the conduct of an RSE licensee, APRA may give a direction in respect of a connected entity that requires the connected entity to:

•

comply with certain regulatory or prudential obligations;

•

remove or appoint responsible officers, or to prevent responsible officers from taking part in certain activities;

•

order an audit or actuarial investigation;

•

remove or appoint an auditor or actuary;

•

not undertake particular actions, including:

-

borrowing any amount;

-

paying or transferring any amount or asset (or create an obligation to do so);

-

undertaking a financial obligation; or

-

discharging a liability of the connected or an RSE;

•

take actions in respect of the connected entity's systems, business or operations; or

•

do, or refrain from doing, particular things in relation to the affairs of the connected entity or an RSE.

[Schedule 5, item 11, section 131DA(5) ]

Example 6.2

Fortis Superannuation Limited (Fortis Super), an RSE licensee, has established a subsidiary company (Strongarm Limited) which undertakes the administration of Grapple Super. Fortis Super has also established an RSE under its trusteeship.

In addition to providing administrative services, Strongarm provides general financial advice to members of Grapple Super including advice relating to superannuation.

Information becomes available which indicates that several financial advisors previously employed by Strongarm have been disqualified from providing financial services. Whilst these financial advisors are no longer employed by Strongarm, Strongarm has employed a number of disqualified financial advisors over a period ten years. APRA has reason to believe that there are significant gaps in the risk mitigation systems of Strongarm and issues a direction to Strongarm Limited to make changes to its processes for vetting and training its financial advisors.

6.84 As with the grounds on which these directions can be made, the particulars of each type of direction are based on the types of directions that can be issued to RSE licensees in respect of their conduct. The matters set out above in respect of the equivalent directions for RSE licensees are also relevant for connected entities.

Requirements for giving a direction

6.85 To be a valid direction under Division 1 of Part 16A, the direction must be given by notice in writing. For directions about the conduct of an RSE licensee, the notice must be given to the licensee. For directions about the conduct of a connected entity, the direction must be given by notice to both the connected entity and the RSE licensee. [Schedule 5, item 11, paragraph 131DB(1)(a)]

6.86 The notice must specify the ground on which the direction was given. [Schedule 5, item 11, paragraph 131DB(1)(b)]

6.87 These requirements ensure that RSE licensees and connected entities are provided with the information that is necessary for them to understand the basis on which a direction is given, and to comply with the direction that APRA has given.

6.88 A direction given under Division 1 of Part 16A is not a legislative instrument. [Schedule 5, item 11, subsection 131DB(2)]

6.89 Directions that are made by APRA are not legislative instruments within the meaning of subsection 8(1) of the Legislation Act 2003 as they merely apply provisions of the SIS Act to an RSE licensee or connected entity (rather than determining the content of the law). Subsection 131DB(2) does not alter the scope of this existing exclusion and therefore is not strictly necessary. However, it is being inserted to clarify this position for RSE licensees and connected entities.

6.90 In deciding whether to give a direction to an RSE licensee or a connected entity, APRA may disregard any external support for the RSE licensee or the connected entity. [Schedule 5, item 11, subsections 131DB(3) and (4)]

6.91 External support includes particular guarantees or assurances, and are required to support the stability of the superannuation system.

6.92 For example, the provision of external support to a stressed entity in some form of temporary public support would not fetter the ability of APRA to determine that the preconditions are met for giving a direction to the entity.

6.93 Regulations may also specify that particular types of support are not external support for these purposes. [Schedule 5, item 11, subsection 131DB(5)]

Varying or revoking directions

6.94 APRA may vary or revoke a direction under Division 1 of Part 16A where it considers that it is necessary or appropriate to do so. [Schedule 5, item 11, subsections 131DC(1) and (3)]

6.95 Directions continue to have effect according to their terms up until the time that APRA revokes the direction. [Schedule 5, item 11, subsection 131DC(2)]

6.96 Variations and revocations may be necessary where APRA's view about particular contraventions or risks has changed, based on the available information or actions that an RSE licensee or connected entity has undertaken. For example, some directions to not do particular things may not be required if corrective action is taken by an RSE licensee or connected entity.

Consequences of failing to comply with a direction

6.97 A failure to comply with a direction given under Division 1 of Part 16A is an offence that may result in a penalty of 100 penalty units. Offences of this kind are strict liability offences consistent with Commonwealth guidelines for drafting offences. [Schedule 5, item 11, subsections 131DD(1) to (4) and (6)]

6.98 Directions given by APRA are to protect the interests of the beneficiaries of an RSE and to ensure the stability of the Australian financial system by maintaining the integrity of the regulatory and prudential framework. Therefore, an entity subject to such a direction needs to undertake reasonable steps to comply with the direction. The gravity of consequences following non-compliance with a direction makes it appropriate for the non-compliance to be strict liability offence. This is also likely to significantly enhance the effectiveness of the enforcement regime in deterring the conduct.

6.99 A person who commits an offence for not complying with a direction given under Division 1 does so from the day that the offence was committed until the circumstances that caused the offence no longer exist. [Schedule 5, item 11, subsections 131DD(5)]

6.100 The entity that commits an offence for a failure to comply with a direction will depend on the type of direction.

6.101 For directions given to RSE licensees, a person commits an offence if they are the RSE licensee, or if they are a member of a group of individual trustees that is an RSE licensee, and the RSE licensee does or fails to do something that results in a contravention of the direction. [Schedule 5, item 11, subsection 131DD(1)]

6.102 A person also commits an offence if they are an officer of an RSE licensee who is responsible for ensuring the licensee complies with directions, and the person fails to take reasonable steps to ensure that the licensee complies with a direction. [Schedule 5, item 11, subsection 131DD(2)]

6.103 For directions given to a connected entity, the connected entity commits an offence if it fails to do something that results in a contravention of the direction. [Schedule 5, item 11, subsection 131DD(3)]

6.104 A person also commits an offence if they are an officer of a connected entity who is responsible for ensuring the entity complies with directions, and the person fails to take reasonable steps to ensure that the connected entity complies with a direction. [Schedule 5, item 11, subsection 131DD(4)]

6.105 For the purposes of working out whether a person is an officer of an RSE licensee or a connected entity, the definition of officer in section 9 of the Corporations Act applies. [Schedule 5, item 11, subsection 131DD(7)]

Provision relating to all directions under the SIS Act

6.106 In addition to introducing the new directions that may be issued, Schedule 5 introduces provisions that relate to all directions that may be issued under the SIS Act.

6.107 These rules insert Division 3 into Part 16A to:

•

ensure that APRA can give more than one direction;

•

ensure that RSE licensees and connected entities can comply with directions;

•

provide protections from liability for complying with directions;

•

provide for information about directions to be provided to the Treasurer; and

•

ensure that a person does not have to comply with a direction that would result in the acquisition of property, other than on just terms.

APRA may give more than one direction

6.108 These amendments clarify that APRA's ability to give a direction is not affected by the fact it has given, or can give, another direction under any provision of the SIS Act. [Schedule 5, item 11, subsection 131F(1)]

6.109 This ensures that APRA is able to use a combination of directions, where it is appropriate to do so, and clarifies that an earlier direction does not prevent APRA from issuing another direction.

6.110 The amendments also clarify that the types of directions that may be given under a particular provision do not affect the type of direction that can be given under a different provision of the Act. [Schedule 5, item 11, subsection 131F(2)]

RSE licensees and connected entities can comply with directions

6.111 If an RSE licensee is required to comply with any direction issued under the SIS Act, the licensee has the power to comply with the direction despite anything in its constitution or any contract or arrangement that it has with another entity. [Schedule 5, item 11, subsection 131FA(1)]

6.112 A connected entity that is required to comply with a direction issued has the power to comply with the direction despite anything in its constitution or any contract or arrangement that it has with another entity. [Schedule 5, item 11, subsection 131FA(3)]

6.113 RSE licensees also have the power to cause a connected entity to do, or not to do, something in accordance with a direction. Similarly, the connected entity has the power to do the thing, or not do the thing, that is required of it. These powers exist irrespective of anything in the connected entity's constitution, or any contract or arrangement to which it is a party. [Schedule 5, item 11, subsection 131FA(2)]

6.114 These amendments ensure that any obligation to comply with a direction takes priority over other requirements that an RSE licensee or connected entity would otherwise be subject to that would prevent them from complying with the direction.

Protection from liability

General protection from liability

6.115 The amendments also prevent a person from being subject to any liability that would otherwise arise from any act or omission that is performed in good faith and without negligence in complying with the performance of powers, functions or duties under the SIS Act. [Schedule 5, item 11, subsection 131FB(1)]

6.116 This general protection from liability ensures that persons who genuinely comply with the provisions of the SIS Act are not subject to liability for having done so.

6.117 The general protection extends to the provision of any information by an auditor or actuary to APRA under section 130A of the SIS Act (which relates to circumstances in which an auditor or actuary considers that giving the information will assist APRA in performing its function under the SIS Act). [Schedule 5, item 11, subsection 131FB(2)]

6.118 However, this general protection does not apply persons referred to in section 58 of the Australian Prudential Regulation Authority Act 1998 (APRA Act) or affect the operation of that section. [Schedule 5, item 11, subsection 131FB(3)]

6.119 Section 58 of the APRA Act provides a protection from liability to APRA, its staff members and its agents. Limiting the general protection in the SIS Act to persons that are not covered by section 58 is appropriate because the protections in section 58 are specifically targeted towards APRA, its staff members and agents.

Protection from liability for complying with direction

6.120 In addition to the general protection with complying with the SIS Act, these amendments also prevent any action, suit or proceeding (whether criminal or civil) from being brought against a person who does something, or omits doing something, in compliance with a direction given by APRA to an RSE licensee or a connected entity. [Schedule 5, item 11, paragraph 131FC(1)(a)]

6.121 For this protection to apply, it must have been reasonable for the person to do the thing, or omit to do thing, and the person must be an officer, agent or employee of the RSE licensee or connected entity. [Schedule 5, item 11, paragraphs 131FC(1)(b) and (c)]

6.122 These protections are necessary to ensure that persons can take the action that is required to ensure compliance with a direction given under the SIS Act. The protections are particularly relevant given the penalties that apply for not complying with a direction, and the fact that RSE licensees and connected entities are empowered to comply despite provision in their constitution, or any other contract or arrangement, that would otherwise prevent them from complying.

6.123 For the purposes of this protection from liability, the term officer has the meaning given by section 9 of the Corporations Act, and the term employee means a person who is engaged to provide advice or services to the RSE licensee or connected entity. [Schedule 5, item 11, subsection 131FC(2)]

6.124 This meaning of employee is an expansive one, and enables the protection from liability to extend to persons who undertake a range of functions on behalf of a licensee or connected entity.

Protections do not limit each other

6.125 The amendments also clarify that the various protections offered by section 336B (protections for disclosure by whistleblowers), section 131RA (the general protection for compliance with the SIS Act), section 131S (protection for complying with a direction) and section 58 of the APRA Act (protection for APRA, APRA members or agents) do not limit each other. [Schedule 5, item 11, section 131FD]

6.126 As a result, a person who is covered by more than one of the above protections can be protected from liability under more than one provision. Similarly, a failure to be protected by one of the provisions does not affect the protection that a person may receive under another provision.

Providing information to the Treasurer

6.127 APRA must comply with a request that is made by the Treasurer to provide information about any directions given under the SIS Act to a particular entity, or about any directions given over a specified period to an entity of a specified kind. [Schedule 5, item 11, subsection 131FE(1)]

6.128 APRA may also provide the Treasurer with any information that it considers appropriate about directions that it has given, or revocations about any such directions. [Schedule 5, item 11, subsection 131FE(2)]

6.129 Where APRA has provided the Treasurer with information about a direction but later revokes that direction, it must notify the Treasurer of the revocation as soon as is practicable. However, a failure to notify the Treasurer of a revocation does not affect its validity. [Schedule 5, item 11, subsection 131FE(3)]

6.130 Requiring APRA to make notifications about revocations ensures that the Treasurer is made aware that a direction is no longer in effect.

Acquisitions of property

6.131 Despite the general obligation to comply with a direction given under the SIS Act, a person is not required to comply with a direction in circumstances that would result in an acquisition of property otherwise than on just terms. [Schedule 5, item 12, subsection 349B(6A)]

6.132 This limitation supplements the general restriction contained in subsection 349B(1) about acquisitions of property and ensures that the rules about directions in the SIS Act do not purport to require a person to comply with a direction that would otherwise be inconsistent with paragraph 51(xxxi) of the Constitution.

6.133 The amendments also clarify that any provision that requires a person to comply with a direction that does not result in an acquisition of property continues to apply in relation to a direction given under the SIS Act. [Schedule 5, item 13, paragraph 349B(7)(f)]

Consequential amendments

6.134 Schedule 5 makes consequential amendments to repeal the provision that permitted APRA to issue a direction to an RSE licensee to comply with the conditions of its licence, and the provisions that specified that non-compliance with such a direction constituted an offence. [Schedule 5, items 6 and 8, sections 29EB and 29JB]

6.135 These specific provisions are no longer required as APRA can now issue such directions under Division 1 of Part 16A.

6.136 Schedule 5 also makes consequential amendments to update references to the direction to comply with the conditions of an RSE license to reflect the relevant provisions in Division 1. [Schedule 5, items 4, 5, 7, 9 and 10, note 1 to subsection 29E(1), note 1 to subsection 29EA(2), paragraphs 29G(2)(e) and (f), section 29JD and note to subsection 29K(2)]

6.137 Amendments to the summary of provisions and the allocation of administrator for specific provisions are made to reflect the insertion of Part 16A (including those directions about relinquishing controlling stakes described in Chapter 5) and that APRA has general administration of those provisions. [Schedule 5, items 1 and 2, section 4 and subparagraph 6(1)(a)(vii)]

Application and transitional provisions

6.138 The amendments in Schedule 5 apply to events that occur on or after the commencement of the Schedule, being the day after the Schedule receives the Royal Assent. [Schedule 5, item 14]

STATEMENT OF COMPATIBILITY OF HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

APRA directions power

6.139 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

6.140 Schedule 5 to this Bill amends SIS Act to strengthen APRA's supervision and enforcement powers to include the power to issue a direction to an RSE licensee where APRA has prudential concerns.

Human rights implications

6.141 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

6.142 This Schedule is compatible with human rights as it does not raise any human rights issues.

Chapter 7 Portfolio holdings disclosure

Outline of chapter

7.1 Schedule 6 to this Bill amends the Corporations Act to refine the requirements for RSE licensees to make publically available their portfolio holdings.

7.2 The purpose of these amendments is to ensure that superannuation fund members, and others including financial analysts, have access to publicly available information about the portfolio holdings of superannuation funds, while minimising the compliance burden on RSE licensees.

7.3 All legislative references in this chapter are to the Corporations Act unless otherwise indicated.

Context of amendments

Existing requirements for trustees to publish details of portfolio holdings

7.4 Under the current law, trustees of an RSE (other than a pooled superannuation trust) must publish their fund's portfolio holdings on the fund's website twice a year.

7.5 The information must be sufficient to identify each financial product or other property, and the value of the investment in each financial product or other property. The law does not differentiate between assets held in a fund's associated entities and its non-associated entities. As such, the same level of disclosure is required.

7.6 Disclosure is required for all assets the fund invests in on a full 'look through' basis, including assets derived from assets in the scope of investments. This means that full disclosure must be made with respect to multiple levels of investments.

7.7 To enable trustees to meet these obligations, a party acquiring a financial product from another party must notify the second party if the purchase is being made using the funds of the RSE and provide the second party with details of the RSE. Where this occurs, the second party is required to provide the trustees of the RSE with information on the financial product or any other property acquired using assets of the RSE.

7.8 The existing portfolio holdings disclosure (PHD) requirements were introduced in 2012 by the Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012.

7.9 Commencement of these disclosure requirements was initially delayed until 1 July 2015 through Australian Securities and Investments Commission (ASIC) Class Order CO 14/443. The requirements were initially due to take effect from 31 December 2013. Subsequently, ASIC amended the Class Order to defer the first reporting day for PHD disclosure to 31 December 2019.

7.10 Consultation on the existing PHD obligations indicated that there were significant compliance costs in collecting and collating data for all assets held indirectly (held by third parties). Concerns have also been raised by some superannuation funds about the requirement to disclose data which relates to private equity investments, unlisted assets and other commercial-in-confidence arrangements. The amendments in this Schedule will address these and other concerns raised by industry stakeholders.

Summary of new law

7.11 Amendments are made to the existing PHD obligations in the Corporations Act.

7.12 Two important changes to the obligations are the removal of:

•

the obligation to include information about financial products, or other property that non-associated entities or non-pooled superannuation trusts have directly invested in; and

•

the reporting obligations on parties to contracts and arrangements that acquire a financial product using the assets, or assets derived from assets, of an RSE.

Comparison of key features of new law and current law

Detailed explanation of new law

Trustees must publish details of portfolio holdings

7.13 RSE licensees will continue to have an obligation to make publicly available the details of their portfolio holdings twice annually after each reporting day, which are 30 June and 31 December each year, by publishing this information on the fund's website within 90 days. [Schedule 6, items 1, subsections 1017BB(1)]

7.14 For each investment option offered by the RSE, the details published must include information sufficient to identify:

•

each investment item (disclosable item) held by the RSE, its associated entity or a pooled superannuation trust; and

•

the value and the weighting or exposure of each disclosable item.

[Schedule 6, item 1, paragraphs 1017BB(1)(a) and (b)]

7.15 However, if an investment item is an investment in an associated entity of the RSE that is held by the RSE, then the investment item is not a disclosable item. [Schedule 6, item 3, subparagraph 1017BB(1)(a)(ii)]

7.16 An investment item is an asset or a derivative that is not otherwise an asset. [Schedule 6, item 3, definition of 'investment item' in subsection 1017BB(6)]

7.17 The sufficient information required to be obtained, will be determined by the way that the information will be disclosed. This information will include but is not limited to the name of the disclosable item. For example, if a disclosable item is listed on the ASX, the ASX code for the investment item would also be required in order to ensure sufficient information is available to identify the investment item.

7.18 The total value and total weighting or exposure of all investment items must also be provided. [Schedule 6, item 1, paragraph 1017BB(1)(c)]

7.19 However, regulations may prescribe, for certain kinds of disclosable items, that only the following information need to be disclosed:

•

the name of the kind of disclosable item; and

•

the total value and the total weighting or exposure of all disclosable items of that kind.

[Schedule 6, item 1, subsection 1017BB(1A)]

7.20 That is, the value and name of each disclosable item must be reported separately, unless the regulations prescribe otherwise.

7.21 The regulation-making power is inserted to address potential situations where disclosure of the value of particular investments would be inappropriate when disclosed separately.

7.22 The disclosure of a fund's portfolio holdings will provide its members with information on where their member contributions are being directed. It is expected that given the detailed nature of the information required to be disclosed, financial analysts will disseminate the information to facilitate increased useability of the disclosed information.

7.23 Importantly, while the RSE must disclose information about its and its associates' investments, including investments in a non-associated entity, it does not need to disclose information about the investments of non-associated entities (see section 50AAA for definition of associated entities) or a non-pooled superannuation trust. The PHD obligations apply to all assets and derivatives held directly or through associated entities, regardless of the legal structure through which the investments are made.

7.24 As required under the current law the RSE must ensure that the information:

•

continues to be made publicly available on the RSE's website until it makes the information pertaining to the next reporting period publicly available (subsection 1017BB(2)); and

•

is organised in accordance with the regulations (subsection 1017BB(3)).

Example 7.1 PHD regime requirements for Top Super's High Growth Fund

Top Super directs $100 million of its member contributions into its High Growth Fund investment option.

High Growth Fund subsequently directs the $100 million as follows:

•

$50 million into Eagle Six Corporation (an associated managed investment scheme);

•

$10 million into shares in WYE;

•

$20 million into Oniv Trust (a PST); and

•

$20 million into Nestar Holdings (a non-associated managed investment scheme).

Subsequently:

•

Eagle Six Corporation directed $20 million (of the $50 million) into Atar Limited (an associated entity) and $30 million into Prodime Corporation (a non-associated entity);

•

Oniv Trust directs $5 million (of $20 million) into government bonds, $15 million into Flint Corporation (a non-associated entity); and

•

Nestar Holdings directed $20 million into shares in KPF.

Finally:

•

Atar Limited directed $20 million into shares in WJL; and

•

Prodime Corporation directed $30 million into the Westbank Estate commercial property.

PHD regime requirements

The table below sets out the disclosure requirements for the investment items that Top Super has allocated to High Growth Fund.

Investment item	Disclosable item	Reason
Eagle Six Corp $50 million	No	Eagle Six Corp is an associated entity of Top Super
Atar Ltd $20 million (of the $50 million invested in Eagle Corp MIS)	No	Atar Ltd is an associated entity of Top Super
Shares in WJL $20 million (of the $20 million invested in Atar Ltd)	Yes	WJL shares are held by Atar Ltd, which is an associated entity of Top Super
Prodime Corp $30 million (of the $50 million invested in Eagle Six Corp MIS)	Yes	Eagle Six Corp (an associated entity of Top Super) invests in Prodime Corp, which is not an associated entity of Top Super
Westbank Estate $30 million (of the $30 million invested in Prodime Corp)	No	Prodime Corp (non-associated entity of Top Super) invests in Westbank Estate
Shares in WYE $10 million	Yes	WYE shares are held directly by Top Super
Oniv Trust $20 million	No	Oniv Trust is a PST in which Top Super invests
Government Bonds $5 million (of the $20 million invested in Oniv Trust)	Yes	Government bonds are held directly by Oniv Trust, a PST in which Top Super invests
Flint Corp $15 million (of the $20 million invested in Oniv Trust)	Yes	Oniv Trust (a PST) invests in Flint Corp (non-associated entity of Top Super)
Nestar Holdings $20 million	Yes	Top Super invests directly in Nestar Holdings, which is not an associated entity of Top Super
Shares in KPF $20 million (of the $20 million invested in Nestar Holdings).	No	KPF shares are held by Nestar Holdings (non-associated entity of Top Super)

7.25 Whether an entity is an associated entity of the RSE is determined in accordance with section 50AAA. The provision provides various circumstances that an entity is an associated entity of an RSE, including where the entity is a related body corporate or is controlled by the RSE.

7.26 The provision also provides that an entity is an associated entity of an RSE if:

•

the RSE invests in the entity or has beneficial ownership in an investment asset of the entity which the RSE controls;

•

the RSE has significant influence over the entity; and

•

the interest in the entity or the beneficial ownership in the investment asset of the entity which the RSE controls is material to the RSE.

7.27 Significant influence and materiality is assessed on a case-by-case basis. Various factors need to be taken into consideration when making an assessment of whether an RSE has significant influence over an entity, including guidance and factors provided in the AASB accounting standards. Ultimately, whether an RSE has significant influence over a particular entity turns on the facts of each case.

7.28 The Accounting Standard AASB 128 Investments in Associates and Joint Ventures (AASB 128) defines significant influence as 'the power to participate in the financial and operating policy decisions of the investee but ... not control or joint control of those policies.'

7.29 The AASB 128 also provides some indicators in determining whether an entity has a significant influence on another entity:

If an entity holds, directly or indirectly (eg through subsidiaries), 20 per cent or more of the voting power of the investee, it is presumed that the entity has significant influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the entity holds, directly or indirectly (eg through subsidiaries), less than 20 per cent of the voting power of the investee, it is presumed that the entity does not have significant influence, unless such influence can be clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an entity from having significant influence.

The existence of significant influence by an entity is usually evidenced in one or more of the following ways:

(a)

representation on the board of directors or equivalent governing body of the investee;

(b)

participation in policy-making processes, including participation in decisions about dividends or other distributions;

(c)

material transactions between the entity and its investee;

(d)

interchange of managerial personnel; or

(e)

provision of essential technical information.

Exemptions from the disclosure requirements

7.30 There are a number of exclusions from the PHD requirements to reduce the compliance burden on RSEs where the benefit of disclosure of investment details for members and their employers is outweighed by the compliance burden associated with publically disclosing the information.

7.31 The trustee(s) of an RSE is exempted from the PHD requirements if the RSE is a pooled superannuation trust, single member fund or a small APRA fund. Pooled superannuation trusts have no individual members, and single member funds and small APRA funds only have one member or a very small number of members who can obtain information on their fund's portfolio holdings through other means. [Schedule 6, item 1, subsection 1017BB(4)]

7.32 Pooled superannuation trust and MySuper product has the same meaning as in the SIS Act and small APRA fund has the same meaning as in prudential standards determined under section 34C of the SIS Act. [Schedule 6, item 3, definitions of 'pooled superannuation trust', 'MySuper product' and 'small APRA fund' in subsection 1017BB(6)]

7.33 The trustee(s) of an RSE is also exempted in respect of the RSE's investment option that has been closed to new members for at least five years (legacy products). This exemption recognises that these investment options are not able to be accessed by new members, so the costs that the requirements impose on superannuation funds will ultimately be borne by the members and thus outweigh any benefits that asset level disclosure may provide. [Schedule 6, item 1, paragraph 1017BB(5)(a)]

7.34 Furthermore, the exemptions from the PHD requirements cover an investment item that is:

•

not a material investment for an investment option in accordance with regulations;

•

invested solely to support a defined benefit interest; and

•

invested in a life policy or an investment account contract described in paragraph 1017BA(4)(a).

[Schedule 6, item 1, paragraphs 1017BB(5)(b) to (d)]

7.35 The ability for regulations to provide that an investment is not a material investment is carried over from the current law (see subsection 1017BB(4)).

7.36 The exemption in respect of defined benefit interest is to exempt investments allocated to a defined benefit fund on the basis that their returns are not dependent on the fund's holdings. This provision will also exempt the defined benefit element of a hybrid fund but not the accumulation element, for which the prescribed information will have to be disclosed. This exemption will apply as long as the assets which support the defined benefit element of a hybrid fund can be identified. If that is not possible or is difficult to achieve, the amendment does not prevent RSEs from voluntarily disclosing PHD information relating to defined benefit funds.

7.37 The exemption in respect of a life policy or an investment account contract as describe in paragraph 1017BA(4)(a) is to reflect that the benefits provided to members of such products are not dependent on the performance of the underlying investments of the fund.

7.38 In addition to the exemptions listed above, regulations may exempt a kind of investment item held by the fund. This power provides the flexibility to exempt other types of investments for which disclosure of the prescribed information may be of no or little benefit to members or detrimental to the interests of the fund and its members. [Schedule 6, item 1, paragraph 1017BB(5)(e)]

7.39 For avoidance of doubt, an investment item is not a disclosable item if it is not a material investment, is invested solely to support a defined benefit interest, is invested in a life policy or an investment account contract, or is a kind of investment item prescribed by regulations to be exempt. [Schedule 6, item 1, note to subsection 1017BB(5)]

7.40 The trustee(s) of an RSE may determine up to five per cent of the assets (excluding derivative assets) attributable to each of their investment options for which they are not required to make information publicly available. In order to qualify for this exemption, the prescribed information that would otherwise have to be disclosed about the investment items must be commercially sensitive and the disclosure of the information must be detrimental to the interests of the members of the fund. [Schedule 6, item 1, subsection 1017BB(5A)]

7.41 This provides RSE trustees with the flexibility to select a limited number of investment items which comply with the prescribed criteria for which the information required under subsection 1017BB(1) does not have to be made publicly available.

7.42 Examples of where the disclosure of information in relation to an investment would be detrimental to the interests of the members of the fund include situations where:

•

the disclosure of the investment would negatively impact the potential return from a particular investment; or

•

an investment would not be available if the investment information was to be disclosed, and the RSE was of the view that the members of the fund would benefit from the making of that investment.

7.43 The types of investments that are likely to fall within this exemption are asset classes such as private equity and venture capital investments.

7.44 This is subject to the ability of regulations to prescribe that the total value and the total weighting or exposure of these commercially sensitive assets needs to be disclosed. That is, each commercially sensitive asset does not need to be disclosed separately. [Schedule 6, item 1, subsection 1017BB(5A)]

Consequential amendments

7.45 Amendments made by the Senate to this Schedule that were tabled by the Opposition clarifies that for purposes of section 1017BB, an investment option means:

•

an investment pool maintained within the entity or

•

a platform product.

[Schedule 6, item 3, subsection 1017BB(6) definition of 'investment option']

7.46 This definition is intended to capture all superannuation products - including choice products and clarifies that all types of superannuation products are subject to the PHD regime.

7.47 The reporting obligations on parties to contracts and arrangements under which financial products or other property are acquired using the assets, or assets derived from assets, of an RSE will be repealed. These obligations were primarily designed to enable trustees to obtain information from non-associated entities. They are no longer required because the amended PHD obligations only extend to associated entities. [Schedule 6, item 4, sections 1017BC, 1017BD and 1017BE]

7.48 A number of amendments are required as a consequence of the repeal of sections 1017BC, 1017BD and 1017BE. [Schedule 6, items 5 to 16, 18, and 20 to 22, paragraph 1020E(1)(c), paragraph (d) of definition 'defective' in subsection 1020E(11), section 1021NC, section 1022B, subparagraphs 1041H(3)(a)(iii) and 1041K(1)(a)(iii), section 1541, table items 308AG, 308AH and 308AI in Schedule 3, and subsparagraph (c)(iii) of the definition of 'regulatory provision' in section 38A of the SIS Act]

Application and transitional provisions

7.49 The new application date of 31 December 2019 is established for the PHD reporting obligation in subsection 1017BB(1). [Schedule 6, item 17, section 1540]

7.50 Part 10.22A, containing section 1541A, is inserted to provide the location for the transitional provisions relating to the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation) Act 2017. The amendments made by this Act will apply to a reporting day that is on or after 31 December 2019. [Schedule 6, item 19, section 1541A]

STATEMENT OF COMPATIBILITY OF HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Portfolio holdings disclosure

7.51 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

7.52 Schedule 6 to this Bill amends the Corporations Act to refine the requirements for RSE licensees to make publically available their portfolio holdings.

Human rights implications

7.53 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

7.54 This Schedule is compatible with human rights as it does not raise any human rights issues.

Chapter 8 Annual members' meetings

Outline of chapter

8.1 Schedule 7 to this Bill amends the SIS Act to require RSE licensees to hold AMMs. The meetings are to discuss the key aspects of the fund and to provide members with a forum to ask questions about all areas of the fund's performance and operations.

8.2 All legislative references in this chapter are to the SIS Act unless otherwise stated.

Context of amendments

8.3 Many superannuation fund members seek to ask questions of their funds concerning their operation and performance. However, in a large number of cases members have little or no ability to have their questions asked or answered.

Summary of new law

8.4 The amendments require the RSE licensee of an RSE to hold an AMM for which a notice of the AMM is to be given 21 days prior to the meeting.

8.5 To ensure that members have useful information on fund performance and fund operations, regulations may require certain information to be included in the notice.

8.6 The Chair of the board of directors, a director and an executive officer of an RSE licensee (if the RSE licensee is a body corporate), an individual trustee (if the RSE licensee is a group of individual trustees), relevant auditors and actuary must attend the AMM. The notice of the meeting is to be given to them and the members of the RSE.

8.7 At the AMM, the members must be given reasonable opportunity to ask questions about the RSE, the RSE licensee (and its responsible officers) or each individual trustee, the audit or the actuarial investigation of the entity, and any other information included with the notice of the meeting.

8.8 To minimise compliance costs, superannuation funds can hold the AMM by electronic means.

Comparison of key features of new law and current law

Detailed explanation of new law

8.9 The amendments require the RSE licensee of an RSE to hold an AMM. [Schedule 7, item 5, subsection 29P(1) ]

8.10 However, this does not apply in relation to:

•

a superannuation fund with less than five members;

•

an excluded approved deposit fund;

•

a pooled superannuation trust; or

•

an eligible rollover fund.

[Schedule 7, item 5, subsection 29P(7)]

8.11 The meeting must be held within three months of the notice of the meeting having been given and the notice must be given within six months after the end of the entity's income year. [Schedule 7, item 5, subparagraph 29P(3)(d)(i) and subsection 29P(4)]

8.12 That is, the RSE licensee has up to nine months after the end of the entity's income year to hold an AMM.

8.13 The requirement to hold an AMM does not limit the RSE licensee's ability to hold more than one AMM or hold AMMs in multiple locations.

8.14 Furthermore, the RSE licensee is able to determine the platform in which the AMM is to be held - in person, electronically or a combination of both. This is to ensure that the RSE licensee has sufficient flexibility to engage with their members in a way that suits their members and minimises cost.

8.15 It is an offence to contravene the obligation to hold an AMM. The penalty for the RSE licensee or an individual trustee (if the RSE licensee is a group of individual trustees) committing the offence is 50 penalty units. [Schedule 7, item 5, subsection 29P(8)]

Notice to be given before the AMM

8.16 21 days before the AMM, the RSE licensee must give notice of the meeting to:

•

all members of the RSE;

•

all responsible officers of the RSE licensee that is a body corporate;

•

any person who has been an auditor of the entity for the income year; and

•

any person who has been an actuary of the entity during the income year.

[Schedule 7, item 5, subsection 29P(2) and subparagraph 29P(3)(d)(ii)]

8.17 A responsible officer includes a director and an executive officer of the RSE licensee (see subsection 10(1) of the SIS Act).

8.18 The notice of the AMM must include the time and location of the meeting, or if the meeting is held by electronic means the details of how the meeting can be attended electronically. [Schedule 7, item 5, subparagraphs 29P(3)(a)(i) and (ii)]

8.19 The notice must also include the agenda of matters to be discussed at the AMM. [Schedule 7, item 5, subparagraph 29P(3)(a)(iii)]

8.20 Regulations may prescribe any other information that must be included with the notice. [Schedule 7, item 5, paragraph 29P(3)(b)]

8.21 The regulations may prescribe that the annual report or information on operational matters of the fund be included with the notice of the AMM.

8.22 The notice and any information required to be included with the notice must be given in a manner prescribed by regulations. [Schedule 7, item 5, paragraph 29P(3)(c)]

8.23 The regulations may prescribe that the manner be the same as the manner in which the RSE licensee usually sends correspondence to or notifies a member, responsible officer, auditor or actuary.

8.24 This includes electronic means as provided by the application of the Electronic Transactions Act 1999.

8.25 Regulations made for the purposes of paragraph 29P(3)(b) (about information to be included in an annual members' meeting notices) may prescribe information by referring to, or adopting content contained within, a reporting standard made by APRA. [Schedule 7, item 5, section 29P(3A)]

8.26 Permitting the regulations to incorporate, by reference, material already set out in the APRA reporting standards for other purposes, will reduce unnecessary duplication and red tape on the superannuation industry.

8.27 It is an offence to contravene the obligation to provide the notice and the obligation to provide information to be included in or with the notice. The penalty for the RSE licensee or an individual trustee (if the RSE licensee is a group of individual trustees) committing the offence is 50 penalty units. [Schedule 7, item 5, subsection 29P(8)]

Obligation to attend the AMM

8.28 The Chair of the board of directors, a director and an executive officer an RSE licensee, relevant auditors and actuaries must attend the AMM, if they were given the notice of the AMM. [Schedule 7, item 5, subsections 29PA(1), (3) and (4)].

8.29 However, a director is not required to attend the AMM if other directors would be attending and those directors would constitute a quorum of directors for a board of directors meeting. [Schedule 7, item 5, subsection 29PA(6)]

8.30 Where the RSE licensee is a group of individual trustees, each of the individual trustees must attend the AMM. [Schedule 7, item 5, subsection 29PA(2)].

8.31 Unless there is a reasonable excuse for not attending, those that are required to attend will be subject to a penalty of 50 penalty units for non-attendance of the AMM. [Schedule 7, item 5, subsection 29PA(5)].

8.32 Whether a reason for non-attendance is considered a reasonable excuse will be considered on a case-by-case basis in light of the circumstances.

Example 8.1

In the days leading up to XYZ Super Plus' AMM, the person that undertook the audit of its financial statements fell sick and was subsequently hospitalised the night before the annual members meeting.

In this case the failure for the auditor to attend XYZ Super Plus's AMM would be considered to be reasonable.

Example 8.2

On the day of EFG Super Fund's AMM, the Chair of the board of directors missed their flight and decided not to take a later flight, because the later flight ensures that the Chair will be late to the meeting and miss the start when they were to make their opening remarks.

In this case, the failure for the Chair to attend EFG Super Fund's AMM would not be considered to be reasonable.

Conduct at the AMM

8.33 At the AMM, the RSE licensee must give members reasonable opportunities to ask questions about:

•

the RSE;

•

the RSE licensee and its responsible officers, where the RSE licensee is a body corporate;

•

each individual trustee where the RSE licensee is a group of individual trustees;

•

any audit of the entity for the income year;

•

any actuarial investigation of the entity for the income year; and

•

any information included with the notice of the AMM.

[Schedule 7, item 5, subsection 29P(5)]

8.34 That includes discussions on any information required by regulation to be included with the notice.

8.35 It is an offence to contravene the obligation to give members reasonable opportunity to ask questions. The penalty for the RSE licensee or an individual trustee (if the RSE licensee is a group of individual trustees) committing the offence is 50 penalty units. [Schedule 7, item 5, subsection 29P(8)]

8.36 However, to ensure that the effective running of the AMM and that the AMM is beneficial to the members as a whole, the RSE licensee is able to determine the duration and content of the AMM.

8.37 Unless it is not reasonably practicable to do so, if the Chair of the board of directors, a director or an executive officer of an RSE licensee is asked a question by a member at the AMM, the Chair of the board of directors, a director or an executive officer must answer the question at the AMM, otherwise, the question must be answered within one month. [Schedule 7, item 5, subsections 29PB(1) and (2)]

8.38 The same obligation applies for an individual trustee, an auditor or an actuary if they are asked a question. [Schedule 7, item 5, subsections 29PC(1) and (2), 29PD(1) and (2), and 29PE(1) and (2)]

8.39 Unless a defence is available, the responsible officer, individual trustee, auditor or actuary will be subject to a penalty of 50 penalty units for not answering the questions at the AMM or within one month of the AMM. [Schedule 7, item 5, subsections 29PB(2), 29PC(2), 29PD(2) and 29PE(2)]

8.40 Where a person is asked a question that could be answered another person who is in a better position to provide the answer, there is no hindrance on the other person answering the question.

Defences to not answering the questions

8.41 A responsible officer of an RSE licensee, an individual trustee, an auditor or an actuary does not need to answer a question if:

•

the question is not relevant to an action or failure or act by the RSE licensee in relation to the RSE or one or more of its members;

•

the question is not relevant to the RSE;

•

it would be in breach of the governing rules of the RSE, the SIS Act or any other law to answer the question;

•

answering the question would result in detriment to the members taken as a whole; or

•

any other circumstances prescribed by regulations.

[Schedule 7, item 5, subsections 29PB(3), 29PC(3), 29PD(3) and 29PE(3)]

Example 8.3

A member attending WYE Super's annual members meeting asked the director of WYE Super's RSE licensee a question regarding a potential investment opportunity that the RSE licensee is currently considering.

In order to answer the question, the director would be required to breach confidentiality agreements and in doing so would preclude the RSE licensee from the investment opportunity and may lead to action being taken against the director and the RSE licensee.

In this circumstance, answering this question would result in detriment to the members taken as a whole and as such would not be required to be answered.

8.42 In addition, an auditor also does not need to answer a question if:

•

the question is not relevant to an audit of the RSE; or

•

the question is not relevant to any matter that might reasonably be expected to be apparent to the auditor in relation to the entity.

[Schedule 7, item 5, subparagraphs 29PD(3)(a)(iii) and (iv)]

8.43 Whereas, an actuary does not need to answer a question if:

•

the question is not relevant to an actuarial investigation of the RSE;

•

the question is not relevant to any matter that might reasonably be expected to be apparent to the actuary in relation to the entity;

[Schedule 7, item 5, subparagraphs 29PE(3)(a)(iii) and (iv)]

Recording of the AMM

8.44 The RSE licensee must ensure that the minutes of AMM are prepared and made available on the RSE's website to all members, including those that were not able to attend. [Schedule 7, item 5, paragraphs 29P(6)(a) and (c)]

8.45 The minutes would include material matters raised at the AMM.

8.46 The minutes are also to include the answers to any questions asked at the meeting that a person is answer either at or after the AMM. [Schedule 7, item 5, paragraph 29P(6)(b)]

8.47 It is an offence to contravene the obligation to prepare the minutes or to make them available on the entity's website to all members. The penalty for the RSE licensee or an individual trustee (if the RSE licensee is a group of individual trustees) committing the offence is 50 penalty units. [Schedule 7, item 5, subsection 29P(8)]

Consequential amendments

8.48 This Schedule inserts the definition of annual members' meeting into the SIS Act. [Schedule 7, item 3, subsection 10(1)]

8.49 The amendments to the allocation of general administration of the SIS Act ensure that ASIC has administration of the provisions in respect of AMMs. [Schedule 7, items 1 and 2, subparagraphs 6(1)(a)(i) and 6(1)(c)(ia)]

8.50 The amendment to the heading for Division 5 of Part 2B is to reflect the inclusion of the provisions dealing with AMM in the Division. [Schedule 7, item 4, Division 5 of Part 2B heading]

Application and transitional provisions

8.51 The amendments apply in relation to an RSE's income year that begins on or after the day after the Bill receives the Royal Assent. [Schedule 7, item 6]

STATEMENT OF COMPATIBILITY OF HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Annual members' meetings

8.52 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

8.53 Schedule 7 to this Bill amends SIS Act to require RSE licensees to hold AMMs. The meetings are to discuss the key aspects of the fund and to provide members with a forum to ask questions about all areas of the fund's performance and operations.

Human rights implications

8.54 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

8.55 This Schedule is compatible with human rights as it does not raise any human rights issues.

REGULATION IMPACT STATEMENT

Background

Australia's superannuation system

8.56 Australia's superannuation system contains around $2.3 trillion in assets. Around $1.4 trillion of these assets are held by trustees on behalf of members of APRA regulated funds.

8.57 Currently there are approximately 28 million superannuation fund member accounts, with around 40 per cent of members holding multiple accounts.

8.58 Under the current regulatory framework, trustees of APRA-regulated funds are required to provide annual reports and periodic statements to members. Members are able to request information from trustees under section 1017C of the Corporations Act 2001 to assist in understanding benefit entitlements. However, there is no statutory mechanism that gives fund members the right to engage directly with trustees, senior executives and other relevant office-holders of APRA-regulated superannuation funds and question them about the operation and performance of the fund. While member information sessions do exist, they are conducted on a voluntary basis and not all funds hold them.^[10]

8.59 By contrast, shareholders of public companies can engage directly with directors and executives through compulsory annual general meetings (AGMs). Shareholders also have the capacity to vote on binding resolutions. The purpose of corporate AGMs is to hold directors to account for their decisions. Members of registered managed investment schemes do not have the capacity to vote on ordinary resolutions. However, they do have the capacity to hold member meetings to vote on special and extraordinary resolutions, including removal of the responsible entity and winding-up the scheme.

Regulation Impact Statement (RIS) status at each major decision point

8.60 On 7 June 2017 the Treasury certified that the Review into the governance, efficiency, structure and operation of Australia's superannuation system - final report involved a process and analysis equivalent to an Early Assessment Regulation Impact Statement for the AMM measure.

8.61 The Office of Best Practice Regulation (OBPR) agreed that a RIS would be prepared through consultation to accompany the legislation for introduction into Parliament. The first pass RIS process began on 21 August 2017.

The Problem

8.62 Trustees of superannuation funds are required to act in the best interests of their members. However, there are currently weaknesses in the accountability framework governing trustees. In particular, members do not receive clear information about fund expenses in annual reports. In addition, members do not have statutory mechanisms for questioning trustees about a fund's overall performance.

8.63 This problem was clearly identified in the 2010 Super System Review, which highlighted the need for improved trustee governance and accountability to members. It stated that trustees should 'demonstrate that they know what they are doing and that they are willing to be open and transparent in their decision-making and regarding the outcomes they achieve for members'.^[11]

8.64 It is also widely acknowledged that there is a lack of engagement between members of APRA-regulated funds and their superannuation. This likely reflects a range of factors, including failure to exercise choice, lack of interest and complexity^[12]. While an overall low level of member engagement may not necessarily be a problem in and of itself, those members who want to engage with their superannuation fund should be able to do so. The 2010 Cooper Review stated that 'the system should operate for members, not vice versa'^[13]. The most recent ANZ Survey of Adult Financial Literacy in Australia found that around one-fifth of respondents could not reply to questions regarding the best indicator of fund performance, and a similar number could not name any factors they would consider in selecting a fund^[14].

8.65 The Cooper Review also stated that trustees 'often seem removed from members and do not always understand, or seek to understand, members' positions or concerns'.^[15] It highlighted the importance of increased accountability through higher levels of engagement and effective communication between trustees and their members.^[16]

8.66 Against this background, there are limited opportunities for superannuation fund members to hold trustees and responsible officers' to account for the fund's performance. The inability of members to formally engage with the trustees of their funds can result in negative consequences for them.

•

If trustees do not have a good appreciation of member needs it will be more difficult for them to act in members' best interests. There is a greater risk they will design products that are not suitable for their members

•

Members may not be making informed decisions about their superannuation.

8.67 While Australia's superannuation system is compulsory, most members are free to move between funds. However, the transaction costs associated with moving can be significant. As such, it may be better for members to seek to improve the operation of their current fund.

8.68 At present, some trustees take active steps to facilitate engagement with members, including through roadshows and member meetings. However, these practices are not uniform across the industry. It is also recognised that while peak bodies encourage trustees to actively engage with their members, funds do not always do so.

8.69 While it is difficult to establish an explicit link between the level of member engagement and fund performance, it is clear that performance may suffer in the absence of member oversight and accountability. For example, funds may incur higher or unnecessary expenses or may adopt investment or insurance strategies that are not suited to members.

8.70 While trustees are charged with acting in members' best interests, there is currently no statutory mechanism through which effective communication can occur between engaged members and their trustee. This has the potential to discourage engagement and erode confidence in the system as trustees are not held to account for their actions.

Why is Government action needed?

8.71 Government action is required because the problem stems from an information asymmetry, which funds have been unable to resolve. High levels of disengagement mean that the capacity of fund members - the ultimate beneficiaries of superannuation - to request information from their funds, and to hold trustees accountable for their performance, is reduced. Industry, left to its own devices, has not developed a uniform mechanism for enabling members to hold trustees accountable.

8.72 The law does not prevent trustees of APRA-regulated funds from holding member meetings on a voluntary basis. However it does not require them to do so. Members of certain APRA-regulated funds will not have the opportunity to hold their trustee to account via an Annual Members' Meeting unless this requirement is made compulsory through regulation, which will require government action (in line with the statutory requirements that apply to directors of public companies and responsible entities of registered managed investment schemes).

Policy options

8.73 Three policy options were considered to address the problem identified in this regulation impact statement (RIS) - that is, the accountability deficit arising from a lack of opportunity for members of certain APRA-regulated superannuation funds to question trustees, executives and other relevant office-holders on fund performance.

Option 1: Status quo

8.74 This option involves no change to the current law. Trustees could choose to engage with members if they wish, but it would not be compulsory to do so and the law would not contain rules on how this should be done.

Option 2: Flexible annual members' meetings (AMMs) without voting

8.75 This option involves a change of law to require trustees of certain APRA-regulated funds to hold annual member meetings and to allow regulations to be made prescribing information to be provided to members. However, trustees would retain flexibility over how AMMs are conducted including holding virtual meetings. Also, while members would be able to ask questions, and trustees would be required to answer them, there would be no formal voting on resolutions.

Option 3: Physical annual members' meeting with voting

8.76 This option differs from Option 2 in two respects. Firstly, trustees would be required to hold a physical members' meeting each year. Secondly, in addition to questioning trustees, executives and other relevant officeholders, members would be able to vote on non-binding resolutions.

Impact analysis

8.77 This section discusses the costs and benefits (including compliance costs) of each option. The Office of Best Practice Regulation has agreed to the compliance cost estimates discussed in this section.

8.78 Community organisations will not be affected by the options.

8.79 Small businesses should not be affected by the changes as they will not apply to self-managed superannuation funds (SMSFs) or small APRA funds (SAFs). Each member of a SMSF must also be a trustee. While SAFs have separate trustees, they only have up to four members.

8.80 The impact on government will be minor. In the short term, implementation costs will be incurred to draft the legislation for the proposed amendments. In the longer term it will be necessary for the regulator to monitor compliance with any new legal requirements.

Option 1 - Status quo

8.81 This option would result in no additional costs or benefits for stakeholders. It would not impose any additional compliance burden on superannuation fund trustees.

8.82 Under this option, there would be no obligation on trustees to hold members' meetings to discuss the performance of the fund. These meetings would occur only on a voluntary basis. As such, many members would remain unable to question trustees on the performance of their fund. The current accountability gap would remain.

Option 2 - Flexible annual members' meeting without voting

Costs

8.83 Option 2 would impose direct costs on superannuation funds in relation to:

•

required attendees (which would include directors, auditors, actuaries and relevant senior executives). In this regard, executives would need to be at the AMM for the period of time to be questioned about the fund's operation and performance;

•

notifying members of the AMM; and

•

an information technology (IT) build to create a mechanism to conduct the AMM (i.e. online portal to facilitate delivery of podcasts and any distribution of relevant electronic statements).

8.84 This option would create some costs for fund members as they will ultimately bear the cost of holding AMMs. Compared with Option 1 (status quo), we estimate that Option 2 would involve an overall initial cost of $8.5 million (mainly related to IT) and ongoing costs of around $13.7 million per year. The annual compliance cost impact, averaged over 10 years, is estimated at $14.6 million. These costs would be spread across 144 RSE licensees and 221 funds (around $66,000 p.a. per fund). Page 108 provides more information on how these costs are calculated.

Benefits

8.85 By increasing the visibility of fund operations and the opportunities for members to involve themselves more actively with their funds, this option may improve incentives for members to engage directly with funds. By increasing accountability, it has the potential to improve fund performance, which will benefit all members, and strengthen confidence in the superannuation system as a whole.

8.86 Engaged fund members will benefit from the capacity to ask and have answered questions about the overall operation and performance of their funds. This will help to overcome the current accountability gap. For example, members will be able to ask questions about the rationale for particular investment strategies. Members will also be able to question trustees about fees and fund expenses.

8.87 The extent to which the benefits are realised will depend on the level of interest of fund members. It is therefore important to provide trustees with flexibility to hold AMMs in a way that best suits their membership base. This will have the best chance of maximising member engagement.

8.88 More broadly, more engaged members are more likely to improve the performance of the sector. They may exert downward pressure on fees and increase returns to members. Making trustees more accountable to members may also improve governance standards. The final report of the Fraser Superannuation Governance Review noted the potential value of AGM-style meetings as one way of improving transparency and accountability.^[17]

8.89 Providing an avenue for members, and other stakeholders, to directly engage with the trustee and ask questions is an effective way for trustees and funds to identify and respond to issues that are of interest to their members and stakeholders.

8.90 Compared with Option 3, members and trustees will benefit from increased flexibility and lower ongoing compliance costs.

Net benefit

8.91 Option 2 provides a formal opportunity for engaged members to question superannuation fund trustees, executives and other relevant officers, holding them to account at reasonably low cost. It also provides funds with the freedom to choose the most appropriate approach to AMMs.

8.92 The net benefit of Option 2 over the status quo will ultimately depend on the willingness of members to take advantage of the opportunity to participate in AMMs and the extent to which this results in better performance by trustees. Based on attendance rates for AGMs of ASX200 entities, it is likely that superannuation fund AMMs would attract up to 140,000 attendees.

8.93 Option 2 will provide a net benefit to members if the improvements in performance exceed the cost of holding AMMs, in other words, if it delivers annual improvements of more than $66,000 per fund in funds' performance.

Option 3 - Physical annual members' meetings with voting

Costs

8.94 This option would impose similar costs as Option 2 above.

8.95 In addition, Option 3 would restrict the ability of funds' to utilise existing practices, where they might have flexible member engagement programs already in place.

8.96 Fundamentally though, the two key differences are that funds would be subject to the additional costs of holding physical meetings and facilitating voting. However, as trustees cannot be subject to direction under current superannuation law (reflecting the trust framework underpinning superannuation), voting would be on a non-binding basis.

8.97 As with Option 2, this option would impose costs on fund members as they will ultimately bear the cost of holding AMMs. The cost of Option 3 is expected to be higher than the cost of Option 2. Compared with Option 1 (status quo), we estimate that Option 3 would involve an overall initial cost of $8.5 million and ongoing costs of around $19.3 million per year. The annual compliance cost impact, averaged over 10 years, is estimated at $20.1 million. This is materially larger than Option 2 (which was estimated at $14.6 million per year). These costs would be spread across 144 RSE licensees and 221 funds (around $91,000 p.a. per fund). Page 108 provides more information on how these costs are calculated.

Benefits

8.98 The potential benefits of Option 3 are expected to be largely the same as Option 2.

8.99 Physical AMMs may provide more accountability to the extent that trustees are 'put on the spot'.

8.100 However, there do not appear to be any other additional benefits from requiring physical meetings (as opposed to allowing trustees to hold meetings in a flexible manner i.e. on-line). Also, it may be harder for members to participate in a physical meeting compared with a virtual meeting.

8.101 The capacity to vote on non-binding resolutions may be an additional benefit of Option 3 compared with Option 2 (under which members would just be able to ask questions).

8.102 Voting could provide an additional level of accountability for trustees. The outcomes from voting would send a clear message on how members view their actions or decisions. While this additional level of accountability is beneficial, the fact it would be non-binding lessens those benefits.

8.103 While the outcomes of voting would not be binding on trustees, trustees may take the outcomes of the voting into account when meeting their fiduciary obligation to act in their members' best interests. However, it is unclear whether votes of this type would have much 'weight' if participation is limited to a small proportion of members.

Net benefit

8.104 Option 3 appears to offer many of the same potential benefits as Option 2 at a higher cost.

8.105 The net benefit of Option 3 over the status quo will ultimately depend on the willingness of members to take advantage of the opportunity to participate in AMMs and the extent to which this results in better performance by trustees. Based on attendance rates for AGMs of ASX200 entities, it is likely that superannuation fund AMMs would attract up to 140,000 attendees.

8.106 Option 3 will provide a net benefit to members if the improvements in performance exceed the cost of holding AMMs, in other words, if it delivers annual improvements of more than $91,000 in the performance of a fund.

8.107 The key issue is the extent to which the potential benefits of allowing AMM participants to vote on non-binding resolutions justifies the additional cost and complexity of introducing non-binding voting.

8.108 We consider that non-binding voting is unlikely to increase member engagement compared with Option 2 and therefore that the additional expense to facilitate this would not be justified.

Calculations

8.109 The table below shows the assumptions underpinning the estimated cost impact of each of the options, beyond the status quo.

Methodology

8.110 Data used in the determination of the cost impact of the proposed options was obtained from the public and private sectors, including through a direct public consultation process.

8.111 The following key assumptions were made:

•

144 RSE licensees (trustees) with 221 superannuation funds will be affected by the requirement to have an AMM. The requirement will not apply to trustees of SMSFs or SAFs.

•

AMMs will be held per fund for trustees with one fund. 50 per cent of trustees with multiple funds will hold a single AMM while the remaining 50 per cent of trustees with multiple funds will choose to run independent AMMs for each of their respective funds.

•

Given the low attendance by shareholders of ASX200 companies of 0.5 per cent and small ASX companies of 0.2 per cent, funds are unlikely to hold physical AMMs in large locations given the choice.

•

For the flexible options, it is assumed that 80 per cent of funds would hold AMMs online.

•

Notification of the AMM will be incorporated into current requirements or via Email.

8.112 In the development of the costing in this RIS, consultation was undertaken with key industry stakeholders.

Consultation

8.113 On 24 July 2017, the Government released the draft Treasury Legislation Amendment (Improving Accountability and Member Outcomes in Superannuation) Bill 2019 (the draft legislation) for public consultation.

8.114 The legislation is part of a broader package of measures to improve accountability and member outcomes. The package also comprises changes to APRA's prudential framework.

8.115 All interested parties were invited to make a submission by 11 August 2017.

8.116 Treasury held roundtables in Sydney and Melbourne during the consultation period.

8.117 Stakeholders were broadly supportive of the AMM measure. However there were some doubts about the effectiveness of AMMs as an accountability device given high levels of member disengagement. Participants emphasised the need to maximise flexibility and minimise compliance costs associated with AMMs.

8.118 In particular, stakeholders were concerned that the requirement to notify members 21 days before the AMM would create additional compliance costs (i.e. notification by physical mail outs).

8.119 To address this concern, the Bill has been amended to align the time period for sending documents with existing Corporations Act periodic disclosure requirements. The explanatory memorandum to the Bill has also been amended to clarify that notification can be by electronic means as provided by the application of the Electronic Transactions Act 1999.

8.120 Stakeholders were also concerned that the draft law did not provide enough clarity on how AMMs will work in practice. This could result in some stakeholders 'over-engineering' their AMMs, adding to the cost of holding them. We are confident that the current Bill provides adequate flexibility. However, regulations can be made if necessary to provide certainty on particular issues that may arise in the future.

8.121 Specific comments on the AMM proposal are noted below.

8.122 The Australian Institute of Superannuation Trustees (AIST) recognized the value of direct member contact with superannuation fund boards and senior management.

"Providing a means for members to engage with the people managing their hard earned superannuation is a good way to identify those issues which are of most interest to members," Ms Scheerlinck said. (AIST, Media Release: 'Superannuation reform package requires careful analysis' 25 July 2017)

8.123 In its final submission on the draft legislation AIST stressed "that funds should be given the freedom to choose the most appropriate engagement strategy with their members, while ensuring that such engagement occurs." (AIST Submission, 'Improving Accountability and Member Outcomes in Superannuation', 11 August 2017)

8.124 In a similar vein, Cbus recommended that the legislation "avoid being overly prescriptive in terms of limiting trustee decision making regarding the most appropriate way to deliver member briefings." (Cbus Submission, 11 August 2017)

8.125 Industry Super Australia (ISA) was similarly supportive in their response to the draft legislation.

"Industry Super has welcomed the adoption of the Fraser Review recommendation that funds hold annual member meetings." (ISA, Media Release: 'New consumer protections in super welcome but should go further' 24 July 2017)

8.126 However, in its final submission on the draft legislation ISA did note that "specific implementation of this reform could be improved because the practical differences between the proposed superannuation Annual Member Meeting and Annual General Meeting (AGM) (pursuant to the Corporations Act) seem to be ignored." (ISA Submission: 'Superannuation Reform Package', 11 August 2017)

8.127 The SMSF Association said that the "move to allow fund members to question the trustee board and executives of their superannuation fund annually will promote accountability and competition that should drive better outcomes for fund members." (Media Release: "Government's super reforms get thumbs up from SMSF Association", 25 July 2017)

8.128 REST Industry Super stated that "careful thought needs to be given to any move to require that superannuation funds hold an annual member meeting." (REST Industry Super, 'Comments on draft Treasury Legislation Amendment (Improving Accountability and Member Outcomes in Superannuation) Bill 2017', 11 August 2017)

8.129 The Association of Financial Advisers Limited (AFA) was broadly supportive of the Annual Members' Meeting measure provided it "can be done in a cost effective manner and subject to sensible and pragmatic rules." (AFA Submission, 'Treasury Legislation Amendment (Improving Accountability and Member Outcomes in Superannuation) Bill 2017', 11 August 2017).

8.130 We note that if the costs identified in submissions were to extend to apply to all superannuation funds then they would be significantly higher than the compliance costs identified in this RIS. This is largely due to the concern that the current processes for delivering information to members' cannot be used to meet the new requirements.

8.131 Consultation indicated a strong industry preference for Option 2 over Option 3.

Conclusion

8.132 Both Option 2 and Option 3 would allow superannuation fund members to formally question and engage with their superannuation funds, to hold trustees and responsible officers to account for their funds' performance.

8.133 Option 2 provides clear benefits over the status quo. The costs of Option 2 are relatively small - $14.6 million in compliance costs, compared to $1.44 trillion in funds under management in the sector. However, given the vast size of the superannuation sector, even a small increase in competitive pressures through greater member engagement would have a significant overall benefit.

8.134 Option 3 also provides clear benefits over the status quo. It would also impose relatively small costs, which would be outweighed by even a minor rise in competitiveness. However, Option 3 does impose greater costs than Option 2, and is less flexible in its mechanisms for engaging members. This makes it unlikely that the greater costs would be offset by greater levels of engagement. The non-binding nature of voting under the Superannuation Industry (Supervision) Act 1993 makes it unlikely that voting would offer additional benefits that would offset the associated cost.

8.135 Option 2 is the therefore the best policy option for addressing the problem.

8.136 Ultimately, the question of Option 2 is better than the status quo will depend on the extent to which members participate in AMMs and the extent to which the introduction of AMMs strengthens trustee accountability and improves their financial performance for the benefit of all members, not just those who participate in AMMs.

Implementation and review

8.137 The Government intends to implement Option 2 by introducing legislation into Parliament in the Spring Sittings with application of this measure from the 2017-18 income year and later income years.

8.138 Ongoing compliance and consideration of the benefits of AMMs will be monitored. Success will ultimately be marked by levels of member engagement. Measures include how many members participate in the meetings, whether the current disconnect between members and funds is reduced, whether superannuation products that more closely reflect the needs of members are developed, levels of trustee accountability in future meetings and engagement as measured by financial literacy surveys, such as the 'ANZ Survey Of Adult Financial Literacy in Australia'.

Chapter 9 Reporting standards

Outline of chapter

9.1 Schedule 8 to this Bill amends the FSCODA to provide APRA with the ability to obtain information on expenses incurred by RSE and RSE licensees in managing or operating the RSE.

9.2 All legislative references in this chapter are to the FSCODA unless otherwise indicated.

Context of amendments

9.3 The FSCODA provides APRA with the power to make reporting standards that require RSE licensees to report expenses relating to investments of an RSE on a look through basis.

9.4 Look-through reporting involves requiring the RSE licensee to seek information from the third party to which expenses are being paid for reporting purposes.

9.5 Look-through reporting of investment expenses enables APRA to obtain a full picture of how RSEs are investing member contributions and provides APRA with the ability to consider whether the investments of individual RSEs are in line with their obligations under the SIS Act.

9.6 While expenses relating to investments are subject to look through reporting obligations, expenses relating to the management and operation of the RSE are not currently captured.

9.7 The amendments in this Schedule enable reporting standards to be made that require RSEs to provide APRA with their expenses relating to the management and operation on a look through basis, allowing all RSE expenses to be collected under reporting standards.

9.8 This additional information will enable APRA to understand the full picture of how RSEs are using member contributions and will enable APRA to consider whether expenses of individual RSEs are in line with the RSE licensee's obligations under the SIS Act, including the obligation to act in the best interests of beneficiaries as per paragraph 52(2)(c).

Summary of new law

9.9 The amendments enhance the ability of APRA to collect information in relation to a transaction between an RSE licensee and another entity where the money, consideration or other benefit originated from the assets of an RSE of the RSE licensee.

9.10 In those situations, the reporting standards may require the RSE licensee to provide information in relation to the transaction including:

•

details of the other entity;

•

the purpose for the transaction;

•

the way the other entity used the money, consideration or benefit received; and

•

any entity with which the other entity deals.

9.11 Amendments made by the Senate to this Schedule that were tabled by the Greens extend the reporting requirements to amounts paid by a person connected with the RSE licensee and expand the listed examples of the types of information that can be required to be provided by an RSE licensee about the receiving entity.

9.12 To facilitate the information gathering process in order for the RSE licensee to meet its obligation to report the required information to APRA under the reporting standards, the amendments also require the RSE licensee to notify the other entity and the other entity to provide the required information after being notified.

9.13 The Senate amendments also expand on the list of information that a reporting standard may require an RSE licensee to provide in relation to the investment of assets of the RSE licensee's registerable superannuation entities.

Comparison of key features of new law and current law

Detailed explanation of new law

9.14 The amendments enhance APRA's ability to collect information in relation to a transaction between an RSE licensee and another entity where the money, consideration or other benefit originated from the assets of an RSE of the RSE licensee.

9.15 APRA is able to collect the information through the reporting standards determined by APRA under section 13 of the FSCODA.

9.16 If an RSE licensee gives money, consideration or some other benefit out of the assets of an RSE of the licensee to another entity, the reporting standards may require the RSE licensee to provide information in relation to the transaction including:

•

details of the other entity;

•

the purpose for which the money, consideration or other benefit is given;

•

the way in which the other entity used the money, consideration or benefit received; and

•

any entity with which the other entity deals.

[Schedule 8, item 3, subsection 13(4D)]

9.17 That is, where the money, consideration or benefit received by the other entity was used in its dealings with any further entities, information about the further entities are required to be provided by the RSE licensee in accordance with the reporting standard. This is in addition to the RSE licensee needing to provide information about the details of the other entity, the purpose for the transaction and the way the other entity used the money, consideration or benefit received.

Example 9.1

The trustee of BetterSuper enters into a contract with Bubbles Ltd (an associated entity of BetterSuper) to provide assistance with their administration including their advertising campaigns. Subsequently, Bubbles Ltd enters into a contract with BetterLook Promotion Company to create an advertisement to create BetterSuper's membership base.

When tracing the expenses of BetterSuper, BetterSuper's trustee will need to capture the expenses relating to advertising undertaken by BetterLook through Bubbles Ltd and the expenses relating to the administration services provided by Bubbles Ltd.

9.18 Amendments made by the Senate to this Schedule that were tabled by the Greens expanded the listed examples of the types of information that can be required to be provided by an RSE licensee to include:

•

information about how money is given to the other entity;

•

if the entity receiving the money, consideration or benefit is not the RSE licensee - the relationship between the licensee and the other entity; and

•

the extent to which the other entity's profit is attributable to the money, consideration or benefit it received.

[Schedule 8, item 3, paragraphs 13(4D)(b), (c) and (e)]

9.19 The Senate amendments also extended the reporting requirements to amounts paid by a person connected with the RSE licensee. To facilitate this extension, the amendments specify that a person is connected to an RSE licensee for the purposes of reporting information related to the payment of money, consideration or a benefit from the assets of an RSE if the person is:

•

a related body corporate of the RSE licensee; or

•

a custodian in relation to assets of the RSE licensee's registerable superannuation entities, and in relation to the license or a related body corporate; or

•

a person who invests the assets of the RSE licensee's registerable superannuation entities, or provides a financial service in relation to such assets, under a contract with the RSE licensee, a related body corporate or a custodian.

[Schedule 8, item 3, subsection 13(4F)]

9.20 These requirements are consistent with the equivalent connected person rules in subsection 13(4C) for reporting standards in relation to the investment of assets, or assets derived from assets, of the licensee's registerable superannuation entities.

9.21 Where an RSE licensee, or a connected person, gives money, consideration or some other benefit out of the assets of its RSE to another entity under a contract or arrangement, the contract or arrangement is taken to contain the following terms:

•

at the time of the money, consideration or other benefit is given, or as soon as reasonably practicable after that time, the RSE licensee must notify the other entity that the transaction is made out of the assets of the RSE; and

•

the other entity must, as soon as reasonably practicable after being notified by the RSE licensee, provide the RSE licensee with the required information of which the other entity is aware.

[Schedule 8, item 3, subsection 13(4E)]

9.22 This mechanism is to facilitate the information gathering process in order for the RSE licensee to meet its obligation to report the required information to APRA under the reporting standards.

9.23 However, if the transaction is in relation to investment assets of the RSE licensee's RSE by the RSE licensee, then the amendments do not apply. [Schedule 8, item 3, subsection 13(4F)]

9.24 This reflects that APRA can currently determine reporting standards requiring the RSE licensee to provide information in relation to investment assets under subsection 13(4A).

9.25 The Senate amendments also expand on the list of information that a reporting standard may require an RSE licensee to provide in relation to the investment of assets of the RSE licensee's registerable superannuation entities. The intent of these amendments is to ensure that information can be obtained about the entity that makes the investment and the impact of the costs of the investment on members.

9.26 To this end, the amendments clarify, that in addition to the existing examples of information that can be required under a reporting standard in relation to the investment of assets, such reporting standards may require information about:

•

the extent to which the profits of the investor are attributable to the deductions made by the investor;

•

the effect of any deductions on the returns on the investment that are passed on to members;

•

if the investor is a person connected with the RSE licensee - the relationship between the licensee and the investor.

[Schedule 8, item 3, paragraphs 13(4A)(aa) to (ac)]

Consequential amendments

9.27 Subsection 56(1) of the APRA Act is updated to ensure that the information collected by APRA under the amendments are given the same treatment as the information collected in relation to investment assets under subsection 13(4A). [Schedule 8, items 1 and 2, paragraphs (ca) of the definitions of 'protected document' and 'protected information' in subsection 56(1) of the APRA Act 1998]

Application and transitional provisions

9.28 These amendments commence on or after the day after the Bill receives the Royal Assent, so from that date APRA can determine reporting standards giving effect to the amendments.

9.29 The obligation for the RSE licensee to notify the other entity and the obligation for the other entity to provide the required information will be implied into a contract or arrangement, regardless of whether it is entered into before or after these amendments commence. [Schedule 8, subitem 4(1)]

9.30 The ability to imply such terms into existing contracts is to address future transactions under contracts that are currently on foot.

9.31 For example, if a contract or arrangement provides for payments over a period of time, the obligations on the RSE licensee to notify, and the other entity to provide, the required information will only apply to the payments made on or after the day after the Bill receives the Royal Assent.

9.32 That is, the RSE licensee does not need to notify the other entity in respect of past transactions made under the contract or arrangement, and the other entity would not have the obligation to provide the information as there is no requirement for the RSE licensee to notify.

9.33 This ensures that all transactions to be made on or after the commencement of the amendments are subject to the same requirements, regardless of whether the transaction is made under an existing contract or a contract entered into after the commencement of the amendments.

9.34 However, to the extent that the operation of the reporting standard would result in an acquisition of property from a person other than on just terms, the obligations will not be implied into a contract or arrangement that is entered into before the commencement of these amendments. [Schedule 8, subitem 4(2)]

9.35 This is to recognise the different circumstances in which the contracts are entered into. Where contracts are entered into after the commencement of these amendments, the RSE licensee (and entities it contracts with) would be aware of the requirements under the reporting standards and are able to address the potential acquisition of property matters in the terms of the contract.

9.36 Furthermore, if an RSE licensee is unable to obtain particular required information to provide to APRA due to the obligations not being implied into the contract or arrangement, then the RSE licensee is not required to comply with the reporting standard to the extent that it is required to provide that particular information. [Schedule 8, subitem 4(3)]

STATEMENT OF COMPATIBILITY OF HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Reporting standards

9.37 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

9.38 Schedule 8 to this Bill amends the FSCODA to provide APRA with the ability to obtain information on expenses incurred by RSE and RSE licensees in managing or operating the RSE

Human rights implications

9.39 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

9.40 This Schedule is compatible with human rights as it does not raise any human rights issues.

Chapter 10 Superannuation trustees not to incentivise employers

Outline of chapter

10.1 Schedule 9 to this Bill allow civil and criminal penalties to be imposed on the trustee of a superannuation fund who uses goods or services to influence employers to nominate the superannuation fund as the default fund or influence employers to encourage their employees to nominate the fund as their choice of fund (no treating of employers).

10.2 All legislative references in this Chapter are to the SIS Act unless otherwise indicated.

Context of amendments

10.3 Recommendation 3.6 of the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry recommended that section 68A should be amended to prohibit trustees of a superannuation fund and their associates (including relatives) from providing goods or services to an employer (or 'treating' an employer) where the action may reasonably influence the employer to nominate the fund as a default fund or having one or more of their employees apply or agree to become a member of the fund. It was recommended that the provision should be enforced by ASIC as a civil penalty provision. Recommendation 3.6 was adopted in the Government's response to the Royal Commission.

10.4 Evidence was given to the Commission which showed that some large funds were spending significant amounts to maintain or establish good relationships with employers who are responsible for nominating the default fund for their employees. The Report highlighted the deficiencies in the current application of section 68A which prohibits funds from providing goods or services to employers on the condition that an employee will apply to become a member of the fund. This sets the bar for connecting the actions of the fund to the result of the employee joining the fund too high.

Summary of new law

10.5 Schedule 9 to this Bill allow civil and criminal penalties to be imposed on the trustee of a superannuation fund who uses goods or services to influence employers to nominate the superannuation fund as the default fund or influence employers to encourage their employees to nominate the fund as their choice of fund (no treating of employers).

Comparison of key features of new law and current law

Detailed explanation of new law

10.6 Schedule 9 to the Bill allow civil and criminal penalties to be imposed on the trustee of a superannuation fund who uses goods or services to influence employers to nominate the superannuation fund as the default fund or influence employers to encourage their employees to nominate the fund as their choice of fund (no treating of employers). The amendments also specify that the obligation not to contravene this obligation is a civil penalty provision. [Schedule 9, items 3, 4, 6 and 7, sections 68A (heading), subsections 68A(1) and (4A), paragraphs 193(caa) and (cab)]

10.7 Schedule 9 to the Bill gives effect to Recommendation 3.6 to the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

10.8 The amendments place obligations on the trustee of a superannuation fund or its associates prohibiting them from:

•

providing goods or services (or at particular prices) to the employer or their associates; or

•

give discounts, allowances, rebates or credits in providing goods or services to the employer or their associates,

if that relevant action could reasonably be expected to influence the choice of fund for which the employer contributes superannuation for its employees or influences the employer to encourage their employees to stay with the fund or become a member of the fund.

10.9 This test lowers the bar for connecting the actions of the funds by using an objective or 'reasonableness' test to determine the intended effect of that action on the employer.

10.10 Similar obligations are also imposed on the trustee or its associates for refusing to provide goods or services to employers or their associates because it is reasonable to conclude that the refusal was done because the employer has not chosen the fund as the default fund or the employer has not encouraged their employees to stay with or become a member of the fund. [Schedule 9, item 5, section 68A(3)]

10.11 Listing these additional obligations as civil penalty provisions means that a failure to comply with them can result in civil or criminal penalties under Part 21.

10.12 When a contravention of a civil penalty provision occurs ASIC can apply to the Court for a civil penalty order as ASIC has the general administration of section 68A. [Schedule 9, items 1 and 2, subparagraphs 6(1)(a)(ix) and 6(1)(c)(iv)]

10.13 If the Court finds that a trustee has contravened one of these civil penalty provisions, the Court must declare that they have contravened the provision, and may fine the trustee up to 2,000 penalty units.

Application and transitional provisions

10.14 The amendments apply in relation to the provision of goods or services, or the refusal to provide goods or services that occur on or after the day this Schedule commences. [Schedule 9, item 8]

STATEMENT OF COMPATIBILITY OF HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Superannuation trustees not to incentivise employers

10.15 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

10.16 Schedule 9 to this Bill allow civil and criminal penalties to be imposed on the trustee of a superannuation fund who uses goods or services to influence employers to nominate the superannuation fund as the default fund or influence employers to encourage their employees to nominate the fund as their choice of fund.

Human rights implications

10.17 This Schedule is compatible with applicable human rights.

10.18 In forming this view, consideration has been given as to whether the imposition of a civil penalty for a violation of either a trustees or directors duties in proceedings under Part 21 of the SIS Act would involve the 'determination of a criminal charge' within the meaning of article 14 of the International Covenant on Civil and Political Rights (ICCPR) and, if so, whether the application of the rules of evidence and of the procedure applicable in civil proceedings would be inconsistent with that article.

10.19 Article 14 of the ICCPR contains the right to a fair trial and fair hearing, and minimum guarantees in the determination of a criminal charge.

10.20 The civil penalty should not be considered 'criminal' for the purposes of human rights law because there is a clear demarcation between what constitutes a civil and a criminal penalty under Part 21 of the SIS Act; no term of imprisonment is available as an alternative to the monetary penalty; and the courts can tailor the amount of the monetary penalty to the circumstances of the case.

10.21 The civil penalty regime in the SIS Act consists of two distinct elements.

10.22 Firstly, the Regulator may seek a civil penalty order from the Federal Court of Australia (FCA) declaring that the person has contravened a provision and imposing a monetary penalty of up to 2,000 penalty units.^[18] The court may also or alternatively order a person to pay compensation where they are satisfied that a superannuation fund has suffered loss or damage as a result of the contravention.^[19] An application for a civil penalty order is a civil proceeding,^[20] and the parties are required to comply with the civil rules of evidence and procedure.

10.23 In civil proceedings, the law provides for specific relief from liability for contravention of a civil penalty provision where a person acted honestly and having regard to all of the circumstances of the case it appears to the court that the person ought to be excused for the contravention.^[21]

10.24 Secondly, contravention of a civil penalty provision may constitute an offence, which is punishable on conviction by imprisonment, only where a person contravenes dishonestly, intending to gain, whether directly or indirectly, an advantage for a person, or intending to deceive or defraud someone. The prosecution of an offence is a separate criminal proceeding conducted by the Commonwealth Director of Public Prosecutions. The FCA does not have jurisdiction with respect to a proceeding for an offence. A person guilty of an offence may be imprisoned for not longer than five years.

10.25 There is therefore a clear demarcation between what constitutes a civil and a criminal penalty under Part 21 of the SIS Act.

10.26 As to purpose, Australian case law indicates that a civil penalty for a contravention should be sufficiently high to demonstrate the importance of not contravening the relevant part of the SIS Act, but not so high as to be oppressive.^[22] The law specifically states that the court is not to make a civil penalty order unless it is satisfied that the contravention is a serious one.^[23] Consideration of the deterrent or compensatory purpose of the penalty applies differently in the Australian context as a civil penalty order is enforceable as a judgment of the FCA,^[24] and no term of imprisonment may apply as an alternative.

10.27 Further, in the Australian context the amount of loss or damage caused (and any compensation that might already have been paid) has also been recognised as a relevant factor to consider when determining the amount of a civil penalty.^[25]

10.28 Part 21 of the SIS Act specifies a maximum penalty amount of 2,000 penalty units which encompasses all types of superannuation funds in the industry. Whilst the maximum penalty amount applies to all contraventions in relation to all types of superannuation funds, a court will determine the appropriate amount of any monetary penalty.

10.29 The case law to date indicates that the higher end monetary penalty orders, for example over $50,000, have only been applied in very serious circumstances and where multiple contraventions of the SIS Act have occurred. The FCA has found that multiple contraventions may be properly seen as one contravening course of conduct,^[26] and therefore the maximum potential penalty is not multiplied in the case of several contraventions.

10.30 Although the maximum penalty of 2,000 penalty units (currently $420,000) may seem significant, the maximum penalty is considered appropriate in this circumstance.

10.31 Most members of superannuation funds are required by law to participate in the superannuation system and a trustee relationship between the fund and the members exist. Directors of corporate trustees are therefore in a unique position to ensure the trustee acts in the best interest of the members.

10.32 The maximum penalty of $420,000 is considered appropriate to provide sufficient deterrence to directors to not breach their obligations to ensure the corporate trustee acts in the best interest of the members of a superannuation fund.

10.33 Following the analysis above, the civil penalty provisions do not involve the 'determination of a criminal charge' within the meaning of article 14 of the ICCPR, and consequently the Amendments to Schedule 3 does not engage any human rights.

Conclusion

10.34 This Schedule is compatible with applicable human rights.