Stronger Super: a new dawn for trustee governance

Abstract

The question of what is adequate in terms of governance standards for trustees of superannuation funds has been the subject of considerable debate in the Australian superannuation industry for many years. For the purposes of this paper, trustee governance is taken to encompass the processes by which trustee companies, and their directors, are held to account. Further, trustee governance is viewed as a product of the rules, relationships, systems and processes within and by which authority is exercised and monitored by the trustee.

It is no surprise that the topic of trustee governance featured prominently in the findings of the recent Cooper Review and the Federal Government's subsequent response entitled "Stronger Super". A key feature of the proposed reforms is the creation of a new office of "trustee-director" which seeks to impose enhanced statutory duties for trustee-directors with additional duties for those who offer MySuper products.

This paper examines this important aspect of the Cooper Review proposals and considers whether it represents a new dawn for trustee governance in Australia's superannuation industry. It will consider a range of questions, including: whether a statutory tidy-up will place all relevant duties for trustee-directors in the one place – what about duties imposed by regulators, under the general law, or other important statutes such as state and territory trustee legislation? Will the prescriptive duties in the regulatory regime sit comfortably with the proscriptive duties for trustees under the general law? Is the position of superannuation fund trustees so unique to warrant a stand alone regime and office of trustee-director? Will the alphabet soup of recommendations actually promote better decision-making by trustees, encourage greater accountability and reduce risks for the entity, or is it likely to suffer the same shortcomings associated with the introduction of the financial services reform regime in Australia? The conclusion reached in this paper suggests the answers to these questions lie in producing "better" regulation (and to some extent, better supervision) rather than just "more" regulation.

Introduction

The Cooper Review published its Final Report on 5 July 2010, in which 177 recommendations were made with the aim of reforming the governance and efficiency of superannuation entities and thereby instilling greater investor confidence.1 Among these recommendations is that there be a detailed clarification of the duties and obligations of a director of a trustee company. To that end, the Final Report recommends the creation of the statutory office of "trustee-director" and that the "duties, power and standards required of that office should be recorded clearly and cogently in one place".2 This has been given support in principle by the Federal Government.3 In order to achieve this aim, the Final Report recommends that the duties under s 52(2) of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) be expanded, and the current duties of directors under the Corporations Act 2001 (Cth) (Corporations Act) be rendered inapplicable to the office of trustee-director.

This paper discusses several possible concerns with this proposal.

First, the statutory reshuffle appears to be incomplete, as it is only removing the directors' duties under the Corporations Act, and is not removing the extensive application of the general law. Further, the various regulatory appendages concerning the financial products and services offered in the superannuation industry will still need to be complied with.

Second, the proposals involve the introduction of new regulations which are all prescriptive in nature, stated in terms of positive duties to be owed by the trustee and its directors. Prescriptive duties are problematic because they involve the creation of new obligations, rather than prohibiting a certain activity under proscriptive duties. These new duties will need to be explored in some detail, which will take many years of judicial and academic commentary, and may sit poorly with other obligations such as the proscriptive system under the general law.

Third, the general trend for the last decade has been to bring uniformity to the regulation of products and services across the financial services industry. The new recommendations place superannuation funds in a unique position, and subject it to a special regime of regulation. This move will segregate the industry in terms of expectations of trustees and their directors, which is unnecessary, and will likely bring greater, rather than lesser, inefficiency. Further, it is unlikely to sit comfortably with recent reform initiatives such as the introduction of the financial services reform regime which has been focussed on uniform regulation and a level playing field across the industry.

Finally, there is a danger that the proposed recommendations if implemented will form yet another layer of regulation that needs to be complied with. It is possible that rather than resulting in better regulation, the alphabet soup of recommendations will merely result in more regulation.

This paper is divided into two parts and organised as follows. Part A provides an overview of the current regulatory system for directors of superannuation trustee companies and a description of some interesting statistical data pertaining to the superannuation industry. Part B discusses the concerns highlighted above, with the aim of encouraging discourse which will lead to acceptable reform.

Part A

Regulatory System for Directors of Superannuation Trustee Companies

Directors are currently subject to regulation in a number of ways and their duties are sourced from a combination of legislative, general law and regulatory prescriptions.

From a legislative perspective, general duties of a director are set out in ss 180, 181, and 182 of the Corporations Act. In simple terms, s 180 requires directors to exercise their powers and discharge their duties with reasonable care and diligence; s 181 requires the exercise of powers and discharge of duties to be done in good faith in the best interests of the corporation and for a proper purpose; and s 182 prohibits improper use of position to gain personal advantage or render a detriment to the corporation.

The directors' duties will be indirectly affected by the type of activity undertaken by the company. For example, s 180 is couched in terms that require the duty to be assessed in terms of what a reasonable director would do in a "corporation in the corporation's circumstances".4 This means that what is reasonable for a director of a trustee company will be different to what is reasonable for a director of a non-trustee company, and their respective duties will vary accordingly.

It should be noted that in the current regulatory system the variation of directors' duties with the particular circumstances of the company they serve does not derogate from the doctrine of separate corporate personality.5 This applies equally in the case of directors serving a trustee company. Despite being able to take into account the interests of the various parties concerned, such as shareholders, beneficiaries or creditors, the duties owed by directors under ss 180, 181, and 182 are owed to the company and the company alone, whether acting as trustee or not.6 Though in the past it has been suggested that the directors' duties prescribed in the Corporations Act extend to include the beneficiaries in the case of the director serving a trustee company,7 the current authorities strongly oppose this extension.8

This is not to say that there is no extension in other ways of the directors' duties in the special case of a trustee company of a superannuation fund. Another important legislative source of duties for directors and trustees is the SIS Act. Under ss 52(2), (5) and 53(2)(a) of the SIS Act, certain covenants are deemed into the governing rules of a superannuation entity. These covenants require the trustees to exercise their powers honestly, and in the best interests of the beneficiaries, and also impose other obligations upon them.

The directors are required under ss 52(8), (9) and 53(2)(b) of the SIS Act to "exercise a reasonable degree of care and diligence for the purposes of ensuring" the trustee carries out its duties in the covenants deemed under s 52(2), (5) and 53(2)(a). Under s 55(1) directors must not contravene these covenants, but s 55(2) provides that a contravention is not an offence, and that the transaction carried out in breach is not rendered invalid as a result of s 55(1). An action for damages may be taken by a person who has suffered loss against a director under s 55(3), but s 57(3) provides that a director may be indemnified from the assets of the entity if the governing rules so provide. This does not apply to contraventions where the director failed to act honestly or where the director intentionally or recklessly failed to exercise the due care and diligence expected of a director.9

Superannuation interests, which are defined in the SIS Act as "beneficial interests in a superannuation fund",10 are also defined as being "financial products" under s 764A of the Corporations Act. Further, the activities carried out by a superannuation trustee company will often fall under the banner of a "financial service", and will therefore be subject to the myriad of regulations imposed on a financial services licensee under Chapter 7 of the Corporations Act relating to licensing, conduct and disclosure. Providers of financial services or financial products such as superannuation fund trustees are subject to the proscriptive obligations under Part 7.10, namely those pertaining to false or misleading statements,11 dishonest conduct,12 or misleading or deceptive conduct,13 all of which may attract civil liability under s 1041I, and are also regulated by Pt 2 Div 2 of the ASIC Act 2001 (Cth) (ASIC Act)...