Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Bill 2012

Bills Digest no. 76 2012–13

PDF version  [768KB]

WARNING: This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Paige Darby
Economics Section 
12 February 2013

Contents
Purpose of the Bill
Structure of the Bill
Background
Committee consideration
Position of major interest groups
Financial implications
Statement of Compatibility with Human Rights
Key issues and provisions
Concluding comments

Glossary

The following abbreviations and acronyms are used throughout this Bills Digest

Abbreviation

Definition

APRA

Australian Prudential Regulation Authority

ASIC

Australian Securities and Investments Commission

Corporations Act

Corporations Act 2001

FHSA Act

First Home Saver Accounts Act 2008

Further MySuper and Transparency Measures Act

Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012

MySuper Core Provisions Act

Superannuation Legislation Amendment (MySuper Core Provisions) Act 2012

Resolution of Complaints Act

Superannuation (Resolution of Complaints) Act 1993

RSE

registrable superannuation entity

SCT

Superannuation Complaints Tribunal

SIS Act

Superannuation Industry (Supervision) Act 1993

SIS Regulations

Superannuation Industry (Supervision) Regulations 1994

SMSF

Self managed superannuation fund

TPD

total and permanent disability insurance

Trustee Obligations and Prudential Standards Act

Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012

Date introduced: 29 November 2012
House: House of Representatives
Portfolio: Treasury
Commencement: Various dates in accordance with the table in section 2 of the Bill

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill's home page, or through http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation. When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.

Purpose of the Bill

The Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Bill 2012 (the Bill) seeks to amend superannuation legislation in order to:

  • void any provision in the governing rules of a registrable superannuation entity (RSE) that requires the trustee of the fund to use a particular service provider, investment entity or financial product, unless that arrangement is specified by law
  • give the Australian Prudential Regulation Authority (APRA) the administrative power to issue infringement notices for minor and straightforward breaches of the Superannuation Industry (Supervision) Act 1993 (SIS Act)[1]
  • require trustees to provide reasons for decisions in relation to death benefit complaints and provide reasons for decisions in other complaints when requested in writing
  • extend the time limit for members to lodge a complaint with the Superannuation Complaints Tribunal (SCT) in regards to total and permanent disability insurance (TPD)
  • apply the requirements of the Corporations Act 2001 (Corporations Act)[2] to have available and adequate resources and risk management systems to RSE entities that are also registered managed investment schemes
  • require a person who wishes to bring an action against an individual director of a MySuper product to be granted leave by the court, and make other changes to directors’ defence provisions and
  • make consequential amendments to remove certain voting limitations and clarify the definition of ‘superannuation contribution’, amongst others.

Structure of the Bill

The Bill is made up of one schedule which proposes amendments to the following five Acts:

  • Corporations Act
  • First Home Saver Accounts Act 2008 (FHSA Act)[3]
  • SIS Act
  • Superannuation Legislation Amendment (MySuper Core Provisions) Act 2012 (MySuper Core Provisions Act)[4] and
  • Superannuation (Resolution of Complaints) Act 1993 (Resolution of Complaints Act).[5]

This Bills Digest is written to reflect the themes of the amendments rather than dealing with the Bill in a linear manner.

Background

This Bill represents the fourth and final tranche of the Government’s MySuper and Stronger Super reforms that were based on the recommendations of the Super System Review (also known as the ‘Cooper Review’ after the Chair of the Review Committee, Jeremy Cooper).[6] The earlier legislative response is contained in:

  • MySuper Core Provisions Act
  • Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012 (Trustee Obligations and Prudential Standards Act)[7] and
  • Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012.[8]

An exposure draft of the Bill was released in October 2012, and received 12 submissions.[9] The current Bill has been modified to include some changes recommended by the submissions to the exposure draft, although some have argued they have not been strong enough. The views of major interest groups are discussed further below.

Committee consideration

Joint Committee on Corporations and Financial Services

The Bill had been referred to the Joint Committee on Corporations and Financial Services (the Joint Committee) for inquiry and report by 4 February 2013.[10] The Joint Committee inquiry into the Bill had received ten submissions at the time of writing this Bills Digest. The comments made by the submitters will be discussed in the key issues below.

Senate Standing Committee for the Scrutiny of Bills

At the time of writing this Bills Digest, the Senate Standing Committee for the Scrutiny of Bills had not published any comments about this Bill.

Parliamentary Joint Committee on Human Rights

At the time of writing this Bills Digest, the Parliamentary Joint Committee on Human Rights had not published any comments about this Bill.

Position of major interest groups

The passage of MySuper legislation has been broadly supported by major interest groups, as highlighted by submissions to the Joint Committee in relation to this Bill, the exposure draft legislation, and previous tranches of MySuper legislation. However, a number of technical issues have been raised. These will be discussed in the context of the key issues and provisions below.

Financial implications

According to the Explanatory Memorandum, the Bill has ‘no significant financial impact on Commonwealth expenditure or revenue’.[11]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth) the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act.[12] The Government considers that the Bill is compatible.

Key issues and provisions

Use of specified service providers

The amendments under this heading will apply from 1 July 2013.[13]

Background

The Cooper Review argued that, from a governance perspective, trustees should engage in appropriate due diligence and negotiate terms before appointing a service provider, but they were excluded from doing so in instances where the use of a service provider was specified within a fund’s governing rules. Therefore, recommendation 2.14 of the Cooper Review was:

The SIS Act should be amended so as to override any provision in the governing rules of an APRA-regulated fund that requires the trustee to use a specified service provider in relation to any services in respect of the fund.[14]

The review panel noted that such changes would still allow a trustee to appoint a named service provider if it thought it was in the best interests of its members, but that it would not be bound to do so.[15]

Provisions

Item 72 of the Bill inserts proposed section 58A into the SIS Act. The section does not apply to a regulated superannuation fund that is a self-managed superannuation fund.[16] The proposed section provides that a provision in the governing rules of a regulated superannuation fund is void in the following circumstances:

  • it specifies a person or persons (whether by name or in any other way, directly or indirectly) from whom the trustee, or one or more of the trustees, of the fund may or must acquire a service: proposed subsection 58A(2) of the SIS Act
  • it specifies an entity or entities (whether by name or in any other way, directly or indirectly) in or through which one or more of the assets of the fund may or must be invested: proposed subsection 58A(3) of the SIS Act and
  • it specifies (whether by name or by reference to an entity) a financial product or financial products in or through which one or more of the assets of the fund may or must be invested; that may or must be purchased using assets of the fund; or in relation to which one or more assets of the fund may or must be used to make payments: proposed subsection 58A(4) of the SIS Act.

Proposed subsection 58A(5) contains an exception so that the limitations outlined above do not apply if the relevant person, entity or financial product, as the case may be, is specified in a law of the Commonwealth or of a state or territory, or is required to be specified under such a law.

Key issues

A number of submissions to the Joint Committee in relation to the Bill were concerned that the proposed changes went beyond that recommended by the Cooper Review. For example, the Association of Superannuation Funds of Australia (ASFA) argued that only provisions that stated a trustee ‘must’ use a particular serviced provider (rather than ‘may’) should be void.[17] The Commonwealth Bank of Australia indicated that including the term ‘may’ in the amendments could have unintended impacts on standard conflict of interest, investment management or custodian clauses.[18]

The Law Council of Australia (LCA) acknowledged that the amendment:

… is intended to cause a provision in a fund’s governing rules to be void to the extent that it requires a trustee to use a particular service provider or investment entity or purchase a particular financial product. However, in each relevant sub-provision there is no concept of “to the extent that” and also the wording “may or must” is used.[19]

The LCA suggested that in order to put in place the Cooper Review recommendation, the Bill could provide legislative authority to trustees so that they are not required to comply with such provisions, rather than voiding the provisions.[20]

The Australian Institute of Superannuation Trustees (AIST) recommended that, although existing contracts that are determined not to be in the best interests of members will be able to continue until completion, ‘the legislation should be explicitly amended to prevent this adversely impacting on the financial interests members who have an interest in a MySuper product’. [21] This was also put forward by the Industry Super Network.[22]

Infringement notices

The provisions under this heading apply to contraventions that occur on or after 1 July 2013.[23]

Background

According to the Cooper Review, ‘a credible enforcement capacity and willingness on the part of the regulator is a precondition for ongoing regulatory effectiveness. On the other hand, enforcement has to be proportionate and appropriate to have maximum impact’.[24]

The Cooper Review noted that APRA has powers to issue infringement notices under the Financial Sector (Collection of Data) Act 2001[25] and that ‘the capacity to levy a modest penalty (contestable in the court if the institution objected) resulted in a substantial improvement in the timeliness of lodgement of regulatory returns’.[26]

To that end, the Cooper Review recommended that APRA be given an administrative power to impose fines, contestable in a court, as an alternative to criminal prosecution in relation to selected SIS Act provisions.[27]

Relevant provisions

Item 112 of the Bill inserts proposed Part 22 into the SIS Act.

Proposed section 223C authorises the Chair of APRA[28] to determine, by legislative instrument, that APRA staff members[29], of a class specified in the determination, are to be infringement officers for the purposes of exercising powers under proposed Part 22 in relation to a contravention of a provision that is subject to an infringement notice.

Proposed section 223A lists the provisions which will be subject to an infringement notice. In addition, regulations may provide that an offence against a provision of the SIS Act that is not specified in the lists is subject to an infringement notice under Part 22.[30]

According to proposed subsection 224(1), an infringement officer may give a person an infringement notice if he or she has reasonable grounds to believe that a person has contravened a provision that is subject to an infringement notice. The infringement notice must be given within
12 months after the day on which the contravention is alleged to have taken place.[31]

An infringement notice must contain all the matters set out in proposed section 224A including, but not limited to:

  • brief details of the alleged contravention, including the provision that was allegedly contravened; the maximum penalty that a court could impose if the provision were contravened; and the time (if known) and day of, and the place of, the alleged contravention[32]
  • state the amount that is payable under the notice[33] and explain how payment of the amount is to be made[34]
  • explain the legal effect on future proceedings that payment of the amount within 28 days after the day the notice is given will have[35]
  • state that payment of the amount is not an admission of guilt or liability[36] and
  • state that the person may choose not to pay the amount and, if the person does so that proceedings seeking a civil penalty order may be brought in relation to the alleged contravention.[37]

The infringement notice regime introduced by proposed Part 22 of the SIS Act replaces the current contravention notice regime detailed in section 252B of the SIS Act (which is repealed by item 113). Items 27 and 28 update references to proposed Part 22 in other sections of the SIS Act.

Item 71 inserts proposed paragraphs 56(2)(c) and 57(2)(c) into the SIS Act in order to void any provision in the governing rules of a superannuation entity that indemnifies or exempts a trustee from the payment of any amount payable under an infringement notice.[38] This means that an infringement notice which is issued to a trustee of a superannuation entity or the director of a trustee of a superannuation entity must not be paid from the assets of the fund.

Key issues

Submissions to the Joint Committee recommended that more detail should be required to be set out in infringement notices in regards to both the ‘reasonable grounds’ that APRA has to believe a provision has been contravened and the actual circumstances of the alleged breach (beyond the required time, date and alleged place of the alleged contravention) to increase a person’s ability to challenge, or decide to challenge, the notice.[39]

Further, the LCA was concerned with the potential scope of contraventions for which APRA could issue infringement notices and recommended ‘some limitation be placed upon the other provisions which may become subject to an infringement notice by way of regulation’.[40] This concern was echoed by the Corporate Super Association.[41]

However the drafting of the provision is consistent with the terms of the Guide to framing Commonwealth offences, infringement notices and enforcement powers.[42]

Superannuation Complaints Tribunal

The date of effect of the amendments under this heading is 1 July 2013.[43]

Background—need for a trustee to give reasons for decision

The Superannuation Complaints Tribunal is an independent dispute resolution body which deals with a diverse range of superannuation-related complaints relating to decisions and conduct of trustees, insurers, and other decision-makers in relation to regulated superannuation funds, approved deposit funds, annuities, life policy funds and Retirement Savings Accounts.[44]

According to the Cooper Review:

One of the weaknesses of trust law is that, traditionally, trust beneficiaries often cannot acquire information from trustees about decisions that affect beneficiaries’ interests. This aspect of trust law, when applied to the superannuation context, has attracted adverse comment by the courts on a number of occasions.[45]

In response to that finding, the Cooper Review recommended that section 101 of the SIS Act be amended to require a trustee to provide a member with reasons for its decision in relation to the member’s formal complaint.[46]

Relevant provisions

Existing subsection 101(1A) of the SIS Act sets out those persons who have a right to make an inquiry or a complaint of a specified type. Under existing subsection 101(1) of the SIS Act, each trustee of a regulated superannuation fund (other than a self-managed superannuation fund, or of an approved deposit fund) must ensure that there are, at all times, arrangements so that when a person referred to in subsection 101(1A) makes an inquiry or complaint, it is properly considered and dealt with within 90 days after it was made.

Item 74 of the Bill inserts proposed paragraphs 101(1)(c)–(e) into the SIS Act to require each trustee of a regulated superannuation fund to do the following:

  • where a person referred to in subsection 101(1A) makes a complaint about the payment of a death benefit the person is to be given written reasons for a decision made by the trustee in relation to the complaint. If no decision is made in relation to the complaint within 90 days after the complaint is made, the person may, by giving notice in writing to the trustee of the fund, request written reasons for the failure to make a decision in relation to the complaint within that period
  • where a person referred to in subsection 101(1A) makes a complaint of another kind the person may, by giving notice in writing to a trustee of the fund, request written reasons for a decision made by the trustee in relation to the complaint. If no decision is made in relation to the complaint within 90 days after the complaint is made, the person may, by giving notice in writing to the trustee of the fund, request written reasons for the failure to make a decision in relation to the complaint within that period and
  • where a person does give notice to a trustee requesting written reasons, the written reasons are to be given to the person within 28 days after the notice is given, or such longer period as the Regulator[47], in writing, permits.

Key issues

The LCA argued in its submission to the Joint Committee that as well as time limits being placed on how long a trustee has to respond to a written request for reasons, there should also be time limits applied to how long a complainant can request written reasons, otherwise ‘a trustee could potentially have to stand ready indefinitely so as to respond (in a short time frame) to a request for reasons’. Thus, the LCA and the Corporate Super Association both recommended that a time limit of 90 days after the decision has been communicated to the complainant apply to the making of the request for reasons.[48]

AIST supported the changes to allow complainants to request reasons for decisions, but suggested this should be strengthened by requiring trustees to inform members of these rights.

Super funds are subject to existing requirements to advise their members about their dispute settlement procedures, and to provide information about the Superannuation Complaints Tribunal … These requirements should be extended to advise members that they can request reasons for decisions. Knowledge of a right is crucial to people being able to access it. [49]

The Superannuation Complaints Tribunal was supportive of the amendments requiring written reasons for decisions, and noted that the Bill had adequately incorporated the recommendations it had made in response to the exposure draft.[50]

Background—time for lodging a TPD claim

A claim for Total and Permanent Disability Insurance (TPD) requires that the claimant will never be able to return to work. That being the case a person may choose to delay making a claim to assess their condition and to determine whether there is any possibility of returning to work.[51] This has the benefit of ensuring that the person is able to maximise the chances of rehabilitation.

According to the Cooper Review:

Trust deeds usually do not contain time limits for bringing a TPD claim, but some insurance policies do and members are not always made aware of that fact by the trustee.

However, section 14 of the Superannuation (Resolution of Complaints) Act 1993 … does impose time limits for making a complaint to the Superannuation Complaints Tribunal about a trustee decision on a TPD claim.[52]

That being the case, the Cooper Review recommended that the Resolution of Complaints Act should be amended to allow the Superannuation Complaints Tribunal to consider complaints in respect of TPD claims when the claim has been lodged with the trustee within six years of the member ceasing employment and the complaint has been made to the Superannuation Complaints Tribunal within two years of the trustee’s decision.[53]

Relevant provisions

Item 124 of the Bill amends the Resolution of Complaints Act by repealing and replacing subsection 14(6A) so that, consistent with the recommendation of the Cooper Review, the Superannuation Complaints Tribunal can deal with a complaint about a decision of a trustee relating to the payment of a disability benefit because of total and permanent disability provided that the complaint is made:

  • in the case of a person who, before the making of the decision, permanently ceased particular employment because of the physical or mental condition that gave rise to the claim for disability benefit—four years after the making of the decision and
  • in any other case—six years after the making of the decision.

Dual regulated entities

The date of effect of the amendments under this heading is 1 July 2015.[54]

Background

The changes in this section aim to implement recommendation 6.1(e) of the Cooper Review that:

… any capital requirement that would otherwise be imposed under the trustee’s Australian financial services licence in respect of non‐superannuation business should be in addition to the capital requirement imposed under the SIS Act.[55]

This recommendation addresses a regulatory gap whereby RSE licensees that are also registered managed investment schemes are only required to adhere to capital and risk management requirements under the SIS Act and SIS Regulations, and not those under the Corporations Act.

Relevant provisions

Paragraphs 912A(1)(d) and (h) of the Corporations Act provide an exemption for APRA-regulated bodies from the financial services licensee obligations of having available adequate resources to provide the financial services covered by the licence, and having adequate risk management systems. Items 4 and 5 of the Bill amend the Corporations Act to make these exemptions subject to proposed subsections 912A(4) and (5), respectively.

Proposed subsection 912A(4) provides an exemption from having available adequate resources for an APRA-regulated body, unless that body is an RSE licensee and a responsible entity of a registered scheme.

Proposed subsection 912A(5) provides an exemption from having adequate risk management systems for an APRA-regulated body, unless that body is an RSE licensee and a responsible entity of a registered scheme (to the extent that risk relates solely to the operation of a regulated superannuation fund by the RSE licensee).

Proposed subsection 912A(6) clarifies that the terms ‘regulated superannuation fund’ and ‘RSE licensee’ in proposed subsections 912A(4) and (5) have the same meaning as in the SIS Act.

Key issues

Submissions to the Joint Committee were supportive of the application of Corporations Act requirements to RSE licensees that are also registered managed investment schemes. However, many of the submissions were concerned that rather than just applying the Corporations Act requirements, the amendments actually lead to duplication of APRA and ASIC requirements, resulting in a considerable increase of capital required to be held by dual regulated entities. The Financial Services Council (FSC) suggested that the duplication that would occur under these amendments was not part of the policy intention, but rather an unintended consequence.

We recognise the Government’s rationale for removing the existing exemption in order to address the gap in regulatory coverage that may exist for certain [responsible entities]. However, there are unintended consequences which may flow from this decision without consideration of how APRA and ASIC’s capital regimes operate alongside each other.[56]

The Commonwealth Bank submission agreed with the FSC and made the following recommendation:

the legislation should be clarified to stipulate that the exemption is not removed for those dual regulated entities where there is sufficient evidence that similar risks are already addressed under APRA’s requirements for RSEs. Alternatively, the legislation should be amended to clarify that the same assets should be permitted to contribute towards both ASIC’s and APRA’s requirements.[57]

Breaches of directors’ duties

The date of effect of the amendments under this heading is 1 July 2013.[58]

Background

The changes introduced by the Trustee Obligations and Prudential Standards Act which come into effect on 1 July 2013, sought to improve the governance of superannuation funds. Essentially that Act inserted a new Division 6 into Part 2C of the SIS Act to specify trustee obligations relating to MySuper. However the heightened obligations and accountability of directors has led to concern regarding frivolous legal action against directors of superannuation funds. The Bill amends the SIS Act to change the defences available to directors and to require relevant complainants to seek leave from the court before bringing an action against a director.

Provisions

Trustee Obligations and Prudential Standards Act

Subsection 52A(2) and section 54A were introduced into the SIS Act by the Trustee Obligations and Prudential Standards Act. The covenants included in subsection 52A(2), which are required to be contained within a RSE’s governing rules, are as follows:

(a)  to act honestly in all matters concerning the entity;

(b)  to exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as a prudent superannuation entity director would exercise in relation to an entity where he or she is a director of the trustee of the entity and that trustee makes investments on behalf of the entity’s beneficiaries;

(c)   to perform the director’s duties and exercise the director’s powers as director of the corporate trustee in the best interests of the beneficiaries;

(d)  where there is a conflict between the duties of the director to the beneficiaries, or the interests of the beneficiaries, and the duties of the director to any other person or the interests of the director, the corporate trustee or an associate of the director or corporate trustee:

(i)    to give priority to the duties to and interests of the beneficiaries over the duties to and interests of other persons; and

(ii)          to ensure that the duties to the beneficiaries are met despite the conflict; and

(iii)  to ensure that the interests of the beneficiaries are not adversely affected by the conflict; and

(iv)         to comply with the prudential standards in relation to conflicts;

(e)  not to enter into any contract, or do anything else, that would:

(i)    prevent the director from, or hinder the director in, properly performing or exercising the director’s functions and powers as director of the corporate trustee; or

(ii)   prevent the corporate trustee from, or hinder the corporate trustee in, properly performing or exercising the corporate trustee’s functions and powers as trustee of the entity;

(f)   to exercise a reasonable degree of care and diligence for the purposes of ensuring that the corporate trustee carries out the covenants referred to in section 52.

Section 54A (which was also inserted by the Trustee Obligations and Prudential Standards Act) allows regulations to prescribe other covenants to be included in the governing rules of a superannuation entity, insofar as those covenants can operate concurrently with existing covenants and the SIS Act. Existing subsection 55(1) of the SIS Act provides that a person must not contravene a covenant contained, or taken to be contained, in the governing rules of a superannuation entity. Under existing subsection 55(3) of the SIS Act, a person who suffers loss or damage as a result of the contravention may take action to recover the amount of that loss or damage.

In addition, the Trustee Obligations and Prudential Standards Act inserted sections 29VN and 29VO into the SIS Act setting out formal trustee obligations relating to MySuper. Section 29VP provides that a person must not contravene sections 29VN or 29VO. A contravention of either of those sections does not result in an offence. However a person who suffers loss or damage as a result of the contravention may take action to recover the amount of that loss or damage.

It is these provisions which caused the disquiet amongst directors of superannuation funds.

Amendments to the Trustee Obligations and Prudential Standards Act

Item 66 repeals existing subsection 55(4) of the SIS Act and replaces it with proposed subsections 55(4)–(4D).[59] Under proposed subsection 55(4A), a person must seek leave of the court to bring an action against a director of a RSE if the alleged contravention by the director is of the kind mentioned in subsection 52A(2), or section 54A (in relation to conduct of the director of a RSE).

Proposed subsection 55(4B) allows a person to seek leave of the court to bring such an action against a director who is alleged to have contravened the covenants in subsection 52A(2) or section 54A within six years after the day on which the cause of the action arose.

Under proposed subsection 55(4C) the court must take into account whether the applicant is acting in good faith and whether there is a serious question to be tried when deciding whether to grant an application for leave to bring such an action. Proposed subsection 55(4D) allows the court to specify a period in which the action may be brought.

Item 43 replaces section 29VP of the SIS Act with proposed sections 29VP and 29VPA to apply the same requirements to seek leave of the court for action against a director for an alleged contravention of their obligations as a trustee of a MySuper product (referred to in section 29VN of the SIS Act).

Item 114 extends the current defence under paragraph 323(1)(b) of the SIS Act to proceedings brought under subsections 29VP(3)[60] and 29VPA(3).[61] This means a trustee or director can utilise the existing defences if he, or she, took reasonable precautions and exercised due diligence to avoid the contravention and the contravention was due to:

  • reasonable mistake[62]
  • reasonable reliance on information supplied by another person[63] and
  • due to the act of another person, an accident, or some other cause beyond the defendant’s control.

Subsections 55(5) and (6) of the SIS Act currently provide a defence against an action for loss or damage suffered by a person as a result of the making of an investment by, or on behalf of, a trustee of a superannuation entity, or as a result of the management of the reserves by a trustee of a superannuation entity, if the defendant can establish the investment or management was conducted under the relevant covenant (currently paragraphs 52(2)(f) and 52(2)(g)).

The Trustee Obligations and Prudential Standards Act replaced subsections 55(5) and (6) of the SIS Act so that a defence against an action for loss or damage suffered by a person as a result of the making of an investment by, or on behalf of, a trustee of a superannuation entity, or as a result of the management of the reserves by a trustee of a superannuation entity can only be applied if the defendant can establish it has complied with all of the covenants referred to in sections 52–53, and those in the regulations prescribed under section 54A, and the MySuper obligations referred to in sections 29VN and 29VO, that apply to the defendant in relation to the investment or management.

Items 68 and 69 amend subsections 55(5) and (6) to replace the requirement that such covenants must be ‘in relation to the investment’ with the requirement that they must be ‘in relation to each act, or failure to act, that resulted in the loss or damage’.

Key issues

Significant concerns regarding the changes to actions for breaches of directors’ duties were raised in the submissions to the Joint Committee. The LCA was concerned that the requirement for the court to consider whether there was a ‘serious question to be tried’ before granting leave for an action to be brought against a director could be ambiguous given case law which has made it unclear whether there is a need to show a sufficient likelihood of success under this requirement.[64] The Industry Super Network suggested that the current drafting ‘will not unduly limit frivolous and vexatious claims’.[65]

Further, the LCA argues that the change to the wording of subsections 55(5) and (6) does not address the issues it raised in submissions about the Trustee Obligations and Prudential Standards Act and the onerous level of evidence required to employ a defence under these subsections:

Because of the broadly-stated nature of many of the covenants and obligations, and because of the positive obligation to “establish” compliance, the Committee believes that it will be practically impossible for this defence to be used …

If a trustee or director were able to demonstrate compliance with every such covenant and obligation, the action would necessarily fail and the defence would not even be needed. In other words, the effect of the revised drafting is to provide a defence only where the trustee or director can show that they had done nothing wrong in the first place.[66]

The Industry Super Network submission recommended that the requirement that the defendant establish compliance with the covenants that apply ‘in relation to each act, or failure to act, that resulted in the loss or damage’ be replaced with ‘in relation to the particular loss or damage suffered’ as this would better reflect the stated policy objectives.[67] The FSC made a similar recommendation.[68]

Other provisions

First Home Saver Accounts Act

The Government introduced First Home Saver Accounts (FHSA) to provide a simple, tax effective way for Australians to save for the purchase of their first home in which to live, through a combination of low taxes and Government contributions. The First Home Saver Accounts Act establishes FHSAs, governs their operation, provides for the payment of Government contributions for account holders, and provides for the prudential regulation of account providers.[69]

Items 13–26 of the Bill amend the First Home Saver Accounts Act. In particular, item 14 repeals and replaces section 93 of the Act so that RSE licensees who are authorised by APRA as an FHSA provider will satisfy the capital requirement if the provider satisfies the financial requirements that apply under the Prudential Standards. Items 16–25 of the Bill make consequential amendments to the First Home Saver Accounts Act to ensure that it is consistent with the MySuper Core Provisions Act, the Trustee Obligations and Prudential Standards Act and the Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012.[70]

Fit and proper requirements

Subsection 34C(1) of the SIS Act empowers APRA to determine prudential standards that must be complied with by superannuation entities.[71] APRA has made a ‘fit and proper’ prudential standard which comes into effect on 1 July 2013.

Items 75 and 76 of the Bill amend the SIS Act so that trustees must ensure that rules relating to the removal of a member representative and any independent trustees and directors allow for persons to be removed for failing to meet the fit and proper prudential standard. In addition, item 77 of the Bill inserts proposed subsection 126H(6A) of the SIS Act so that a court, in deciding whether to disqualify a person from being or acting as a trustee of a superannuation entity may take into account the terms of the fit and proper prudential standard.[72] Items 78–84 of the Bill make consequential amendments to include references to the prudential standards in the SIS Act.

Auditors and actuaries

In addition to making the prudential standard about fitness and propriety, APRA has also made a prudential standard about audit and related matters which will come into effect on 1 July 2013.[73]

Existing section 35A of the SIS Act sets out the accounts, audit and recording obligations for all superannuation entities. Item 49 of the Bill repeals section 35A and replaces it with two new Divisions—effectively creating separate obligations for registrable superannuation entities (in proposed sections 35A–35AD) and for self-managed superannuation funds (in proposed section 35AE).

Proposed section 35A sets out the requirements with which each trustee of a RSE must comply in relation to the making and retention of accounting records. Proposed subsection 35A(6) provides that a contravention by a trustee of the terms of subsections 35A(1), (2), (4) or (5) gives rise to an offence. Fault will need to be established to convict a person of an offence under proposed subsection 35A(6), and the maximum penalty will be 100 penalty units.[74] Alternatively, a contravention of subsections 35A(1), (2), (4) or (5) may be treated as an offence of strict liability (that is, there is no requirement to prove fault), with a lower maximum penalty of 50 penalty units, under proposed subsection 35A(7). [75] Importantly, the imposition of strict liability will not criminalise honest errors and a person cannot be held liable if he, or she, had an honest and reasonable belief that they were complying with relevant obligations.[76]

Proposed subsection 35AB(1) provides that where an auditor of a RSE makes a written request to a trustee of the entity for a document, the document must be made available to the auditor within 14 days of the request being made. Proposed subsection 35AB(2) provides that a trustee commits an offence if the trustee contravenes proposed subsection 35AB(1). Fault will need to be established to convict a person of an offence under proposed subsection 35AB(2), and the maximum penalty will be imprisonment for two years. Alternatively, a contravention of subsection 35AB(1) may be treated as an offence of strict liability (that is, there is no requirement to prove fault) under proposed subsection 35A(7). The maximum penalty for that offence will be 50 penalty units.[77]

Proposed section 35AE of the SIS Act creates a fault-based offence and a strict liability offence with the same penalties as those in section 35A, where each trustee of a superannuation entity that is a self‑managed superannuation fund contravenes the requirements to make and retain accounting records.

Concluding comments

This is the fourth tranche of the Government’s MySuper and Stronger Super reforms which were based on the recommendations of the Cooper Review.

Whilst there have been some concerns that the drafting of certain elements in the Bill could bring about unintended consequences—for example the use of the term ’may and must’ in item 72 of the Bill in relation to the use of specified service providers, most of the submitters to the Joint Committee supported the principles underpinning the reforms.

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.

 


 

[1].     The text of the Superannuation Industry (Supervision) Act 1993 can be viewed at: http://www.comlaw.gov.au/Details/C2012C00871/Download

[2].     The text of the Corporations Act 2001 can be viewed at: http://www.comlaw.gov.au/Details/C2013C00003/Download

[3].     The text of the First Home Saver Accounts Act 2008 can be viewed at: http://www.comlaw.gov.au/Details/C2012C00889/Download

[4].     The text of the Superannuation Legislation Amendment (MySuper Core Provisions) Act 2012 can be viewed at: http://www.comlaw.gov.au/Details/C2012A00162/Download

[5].     The text of the Superannuation (Resolution of Complaints) Act 1993 can be viewed at: http://www.comlaw.gov.au/Details/C2012C00357/Download

[6].     Australian Government, Review into the governance, efficiency, structure and operation of Australia’s superannuation system, 2010, website, viewed 3 January 2013, http://www.supersystemreview.gov.au/content/content.aspx?doc=html/final_report.htm. The Cooper Review was chaired by former deputy commissioner of Australian Securities and Investments Commission (ASIC) Jeremy Cooper and was conducted over the period 2009–2010. The Cooper Review covered a broad range of issues including the performance and governance of the superannuation industry and has formed the basis for a number of recent legislative changes under the Government’s ‘Stronger Super’ package of measures. The ‘Stronger Super’ website can be viewed at: http://strongersuper.treasury.gov.au/content/Content.aspx?doc=home.htm

[7].     Details of the passage of the Bill and the relevant Bills Digest can be viewed on the Bill homepage: http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillhome%2Fr4758%22. The text of the Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012 can be viewed at: http://www.comlaw.gov.au/Details/C2012A00117/Download

[8].     Details of the passage of the Bill and relevant Bills Digest can be viewed on the Bill homepage: http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillhome%2Fr4902%22. The text of the Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012 can be viewed at: http://www.comlaw.gov.au/Details/C2012A00171/Download

[9].     Australian Government, ‘Superannuation Legislation Amendment (Further Measures) Bill 2012’, Treasury website, viewed 25 January 2013, http://www.treasury.gov.au/ConsultationsandReviews/Submissions/2012/Superannuation-Legislation-Amendment-Further-Measures-Bill-2012

[10].   The details of the inquiry including the terms of reference, submissions to the inquiry and the final report can be viewed at: http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=corporations_ctte/completed_inquiries/2010-13/superannuation/index.htm

[11].   Explanatory Memorandum, p. 4.

[12].   The Statement of Compatibility with Human Rights can be found at page 49 of the Explanatory Memorandum to the Bill.

[13].   Item 24 of the table in section 2 of the Bill.

[14].   J Cooper (Chair), Super System Review, Final report: chapter 2: trustee governance, Commonwealth of Australia, 2010, p. 60, viewed 26 January 2013, http://www.supersystemreview.gov.au/content/downloads/final_report/part_two/Part_2_Chapter_2.pdf

[15].   Ibid.

[16].   Proposed subsection 58A(1) of the Superannuation Industry (Supervision) Act 1993.

[17].   Association of Superannuation Funds of Australia (ASFA), Submission to the Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Bill 2012, 17 January 2013, p. 4, viewed 25 January 2013, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=corporations_ctte/completed_inquiries/2010-13/superannuation/submissions.htm 

[18].   Commonwealth Bank of Australia, Submission to the Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Bill 2012, 17 January 2013, pp. 3–4, viewed 25 January 2013, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=corporations_ctte/completed_inquiries/2010-13/superannuation/submissions.htm 

[19].   Law Council of Australia, Submission to the Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Bill 2012, 14 January 2013, p. 3, viewed 25 January 2013, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=corporations_ctte/completed_inquiries/2010-13/superannuation/submissions.htm

[20].   Ibid., p. 4.

[21].   Australian Institute of Superannuation Trustees (AIST), Submission to the Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Bill 2012, 17 January 2013, viewed 25 January 2013, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=corporations_ctte/completed_inquiries/2010-13/superannuation/submissions.htm

[22].   Industry Super Network (ISN), Submission to the Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Bill 2012, January 2013, viewed 25 January 2013, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=corporations_ctte/completed_inquiries/2010-13/superannuation/submissions.htm 

[23].   Item 26 of the table in section 2 of the Bill and clause 127 of the Bill.

[24].   J Cooper (Chair), Super System Review, Final report: chapter 10: regulatory settings, Commonwealth of Australia, 2010, p. 314, viewed 26 January 2013, http://www.supersystemreview.gov.au/content/downloads/final_report/part_two/Part_2_Chapter_10.pdf

[25].   The text of the Financial Sector (Collection of Data) Act 2001 can be viewed at: http://www.comlaw.gov.au/Details/C2011C00325/Download

[26].   J Cooper (Chair), Super System Review, Final report: chapter 10: regulatory settings, op. cit., p. 314.

[27].   Ibid., recommendation 10.4.

[28].   Proposed section 223D provides that the Chair of APRA is the relevant chief executive.

[29].   Item 31 inserts the definition of an APRA staff member into subsection 10(1) of the SIS Act so it has the same meaning as in the Australian Prudential Regulation Authority Act 1998. The text of the Australian Prudential Regulation Authority Act 1998 can be viewed at: http://www.comlaw.gov.au/Details/C2012C00593/Download

[30].   Proposed subsection 223A(3) of the Superannuation Industry (Supervision) Act 1993.

[31].   Proposed subsection 224(2) of the Superannuation Industry (Supervision) Act 1993.

[32].   Proposed paragraph 224A(1)(e) of the Superannuation Industry (Supervision) Act 1993.

[33].   Proposed paragraph 224A(1)(f) of the Superannuation Industry (Supervision) Act 1993.

[34].   Proposed paragraph 224A(1)(g) of the Superannuation Industry (Supervision) Act 1993.

[35].   Proposed paragraph 224A(1)(h) of the Superannuation Industry (Supervision) Act 1993.

[36].   Proposed paragraph 224A(1)(i) of the Superannuation Industry (Supervision) Act 1993.

[37].   Proposed paragraph 224A(1)(k) of the Superannuation Industry (Supervision) Act 1993.

[38].   It appears that item 70 of the Bill which purports to insert the same proposed paragraphs may be a drafting error.

[39].   Law Council of Australia, op. cit., pp. 4-5; Corporate Super Association, Submission to the Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Bill 2012, 10 January 2013, p. 2, viewed 25 January 2013, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=corporations_ctte/completed_inquiries/2010-13/superannuation/submissions.htm

[40].   Law Council of Australia, op. cit., p. 5.

[41].   Corporate Super Association, op. cit., p. 2.

[42].   Attorney-General’s Department, A guide to framing Commonwealth offences, infringement notices and enforcement powers, September 2011, viewed 1 February 2013, http://www.ag.gov.au/Publications/Documents/GuidetoFramingCommonwealthOffencesInfringement
NoticesandEnforcementPowers/A%20Guide%20to%20Framing%20Cth%20Offences.pdf

[43].   Item 24 of the table in section 2 of the Bill and clauses 126 and 128 of Part 2 of the Bill.

[44].   Superannuation Complaints Tribunal website, ‘About the Tribunal’, viewed 26 January 2013, http://www.sct.gov.au/pages/about-us/about-the-tribunal

[45].   J Cooper (Chair), Super System Review, Final report: chapter 2: trustee governance, Commonwealth of Australia, 2010, p. 56, viewed 26 January 2013, http://www.supersystemreview.gov.au/content/downloads/final_report/part_two/Part_2_Chapter_2.pdf http://www.supersystemreview.gov.au/content/downloads/final_report/part_two/Final_Report_Part_2_Consolidated.pdf

[46].   Ibid., recommendation 2.9.

[47].   Under section 10 of the Superannuation Industry (Supervision) Act 1993, Regulator means: (a) APRA if the provision in which it occurs is, or is being applied for the purposes of, a provision that is administered by APRA; (b) ASIC if the provision in which it occurs is, or is being applied for the purposes of, a provision that is administered by ASIC; (c) the Commissioner of Taxation if the provision in which it occurs is, or is being applied for the purposes of, a provision that is administered by the Commissioner of Taxation; and (d) the Chief Executive Medicare if the provision in which it occurs is, or is being applied for the purposes of, a provision that is administered by the Chief Executive Medicare under paragraph 6(1)(ba).

[48].   Law Council of Australia, op. cit., pp. 6–7; Corporate Super Association, op. cit., p. 2.

[49].   AIST, op. cit., p. 4.

[50].   Superannuation Complaints Tribunal, Submission to the Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Bill 2012, 17 January 2013, viewed 25 January 2013, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=corporations_ctte/completed_inquiries/2010-13/superannuation/submissions.htm

[51].   For example, Australian Super website, Claiming a TPD benefit, fact sheet, viewed 26 January 2013, http://www.australiansuper.com/~/media/files/Factsheets/Factsheet%20%20Claiming%20a%20TPD%20benefit.ashx

[52].   J Cooper (Chair), Super System Review, Final report: chapter 5: insurance in superannuation, Commonwealth of Australia, 2010, p. 147, viewed 26 January 2013, http://www.supersystemreview.gov.au/content/downloads/final_report/part_two/Part_2_Chapter_5.pdf

[53].   Ibid., recommendation 5.7.

[54].   Item 3 of the table in section 2 of the Bill.

[55].   J Cooper (Chair), Super System Review, Final report: chapter 6: integrity of the system, Commonwealth of Australia, 2010, p. 169, viewed 26 January 2013, http://www.supersystemreview.gov.au/content/downloads/final_report/part_two/Part_2_Chapter_6.pdf

[56].   Financial Services Council, Submission to the Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Bill 2012, 17 January 2013, p. 5, viewed 25 January 2013, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=corporations_ctte/completed_inquiries/2010-13/superannuation/submissions.htm 

[57].   Commonwealth Bank of Australia, op. cit., p. 3. 

[58].   Items 18, 21, and 26 of the table in section 2 of the Bill.

[59].   Items 62–65 and 67–69 of the Bill make consequential amendments to section 55 of the Superannuation Industry (Supervision) Act 1993.

[60].   Loss or damage as a result of a contravention of additional obligations of a trustee in relation to a MySuper product set out in section 29VN of the Superannuation Industry (Supervision) Act 1993 as amended by the Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012.

[61].   Loss or damage as a result of a contravention of additional obligations of a director of a corporate trustee in relation to a MySuper product set out in section 29VO of the Superannuation Industry (Supervision) Act 1993 as amended by the Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012.

[62].   A reasonable mistake is an honest mistake of fact, based on reasonable grounds, which renders conduct innocent that would otherwise have legal consequences. Source: Butterworths concise Australian legal dictionary, third edn, LexisNexis Butterworths, Australia, 2004, p. 365.

[63].   Reasonable reliance refers to the trust, confidence, or dependence which is reasonably established upon the advice or information of another, and which motivates a person’s acts or omission. Source: Butterworths concise Australian legal dictionary, third edn, LexisNexis Butterworths, Australia, 2004, p. 365.

[64].   Law Council of Australia, op. cit., pp. 7–8.

[65].   Industry Super Network, op. cit., p. 2.

[66].   Law Council of Australia, op. cit., p. 8.

[67].   Industry Super Network, op. cit., p. 3.

[68].   Financial Services Council, op. cit., pp. 11–12.

[69].   Explanatory Memorandum, First Home Saver Accounts Bill 2008, p. 3. Information about the First Home Saver Accounts Bill 2008, including the Explanatory Memorandum and the relevant Bills Digest can be accessed from the Bill homepage: http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillhome%2Fr3002%22

[70].   The text of the Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012 can be viewed at: http://www.comlaw.gov.au/Details/C2012A00171/Download

[71].   These are set out on the APRA website, ‘Superannuation prudential standards’, viewed 1 February 2013, http://www.apra.gov.au/Super/PrudentialFramework/Pages/superannuation-prudential-standards.aspx

[72].   Items 78–84, 86–87, 89, 91, 94, 97 and 98 make consequential amendments to the Superannuation Industry (Supervision) Act 1993 to include references to the prudential standards.

[73].   APRA, Audit and related matters, Prudential Standard SPS 310, July 2013, viewed 1 February 2013, http://www.apra.gov.au/Super/PrudentialFramework/Documents/Proposed-Final-SPS-310-Audit-July-2013.pdf

[74].   For those offences committed after 28 December 2012, section 4AA of the Crimes Act 1914 provides that a penalty unit is equivalent to $170. This means that the maximum penalty amounts to $17 000. The text of the Crimes Act 1914 can be viewed at: http://www.comlaw.gov.au/Details/C2013C00031

[75].   This means that the maximum penalty amounts to $8500.

[76].   Attorney-General, A guide to framing Commonwealth offences, infringement notices and enforcement powers, September 2011, op. cit., p. 22.

[77].   This means that the maximum penalty amount to $8500.

 

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