The business of being a trustee: review of 2007

February 2007

Payment to a trustee on retirement

Caution should be exercised where a trustee is offered a payment connected with its retirement from office. This issue could be relevant in the context of a successor fund transfer (SFT) where consideration flows between parties or where a commercial trustee accepts a retirement fee.

The Crimes Acts in Victoria and New South Wales, and their statutory equivalents in Queensland and Western Australia, generally prohibit:

• the giving by any person and the receiving by a trustee of consideration as an inducement for substituted appointment, and
• the gift or receipt of a secret commission in return for advice given with respect to the decision to appoint a certain person as trustee. This prohibition is not limited to payments made to trustees. It essentially renders the gift or receipt of a payment to any person a crime when made with the ultimate purpose of influencing the advice given by the payee to another where the advice concerns the decision of the person advised (such as the trustee) to appoint the payer as the new trustee, unless, in some circumstances, authorised by the trust or the beneficiaries of the trust.

These provisions have not been tested in case law, nor is there any relevant commentary available. As such, it is unknown the manner in which these criminal sanctions would apply, if at all, in the context of a SFT.

However, given the uncertainty associated with the interpretation of these prohibitions and the fact that the penalties involve substantial jail terms, caution should be exercised.

Delegation and ratification

Delegation

Under traditional trust law, a trustee has a duty to act personally. Strictly, trustees are not allowed to delegate their discretions or duties unless the governing rules enable them to do so. SIS does not preclude delegation—indeed SIS seems to acknowledge that a trustee need not perform all of its functions itself.

If the trustee is a company, the directors may delegate any of their powers pursuant to the Corporations Act, unless the company's constitution provides otherwise.

Where directors delegate a power, they are responsible for the exercise of the power by the delegate as if the directors themselves had exercised the power.

Clearly, given all the legal requirements that apply, the trustee’s decision to delegate is a serious one and determining to whom to delegate and the terms of that delegation should not be taken lightly. From a practical compliance perspective, a best practice model would suggest that the directors of a trustee company who delegate their power should ensure that

• the governing rules of the fund permit the delegation
• the delegation is strictly in accordance with the governing rules
• the terms of any delegation are duly voted and minuted by directors when authorising the delegation
• delegates are reliable and competent
• there is reason to believe that the delegate will act within the terms of the delegation
• they continue to monitor the terms of the delegation and the acts of the delegate, and
• compliance and procedures manuals are in place when delegating to employees and/or committees.

The same principles apply whether the trustee directors are delegating internally to individuals, a committee or externally.

Ratification

• have all the material that was before the ‘delegate’
• be aware of and consider the merits of the issue, and
• authorise and accept the decision of a delegate as its own.

If delegations are properly in place, it should not be necessary to effect a ratification. As a consequence of the unwieldy burden imposed by the requirements of ratification, it is imperative for a trustee to ensure that appropriate delegations are properly put in place. Ratification really should only be necessary in circumstances where the decision maker was not properly authorised to make the decision.

April 2007

Trustee liability insurance issues

A trustee’s liability may arise from various sources. However, the principal ones with respect to insurance are:

• breach of fiduciary duty, including breach of the terms of the trust deed
• the Superannuation Industry (Supervision) Act (SIS) or the Corporations Act 2001, and
• fraud, dishonesty or wrongdoing of the trustee’s officers, employees or agents.

Depending on the nature of the wrongdoing, the trustee’s liability could be civil or criminal. Most trustee liability is civil but some actions of the trustee have criminal consequences under SIS and the Corporations Act. Legislation in each jurisdiction in Australia permits a court to excuse a trustee who has committed a breach of trust if that trustee has acted honestly and reasonably and ought fairly to be excused.

A director of a trustee company may be personally liable if he or she is ‘involved in’ a contravention under SIS or the Corporations Act or, for matters falling outside SIS, if the trustee company has committed a breach of trust and the director knowingly or recklessly assists in or procures the breach of trust.

Despite personal liability arising, a trustee (and its directors) may have one or more of the following sources of indemnity available:

• At common law, a trustee generally has a right to be indemnified out of the assets of the fund for costs and expenses properly incurred in the operation of the trust and permitted under the trust deed. This generally includes the right to recover from the fund the amount of damages that the trustee has become liable to pay in the course of administering the trust, provided the trustee has not been dishonest or reckless.
• A trustee may have a right to indemnification under the superannuation fund’s trust deed. However, SIS and the Corporations Act place limits on the extent of indemnification. Naturally, any provision in a deed that purports to excuse dishonesty or bad faith would be ineffective on policy grounds as well as under SIS and the Corporations Act.

For some types of liability, the trustee may seek insurance. There are several types of insurance that may be of use to a trustee, depending on the trustee’s circumstances and that of its directors. Despite the common law indemnity from the assets of the fund that is available to a trustee, the trustee may wish to seek protection from liability where an indemnity from the fund:

• is not available for whatever reason, or
• is insufficient to cover the legal liability of the trustee arising out of its administration of the fund, or
• would result in members bearing the expense.

A trustee indemnity policy usually provides protection in two instances:

• for the trustee where the trustee (or a director) is subject to an action alleging that the trustee has committed a ‘wrongful act’ (ie the insurance operates if the trustee’s indemnity out of the fund cannot be enforced for the benefit of the trustee), and
• for the superannuation fund for losses arising as a result of a wrongful act being committed by the trustee (or director) (ie to the extent that the fund must indemnify the trustee, it is reimbursed by insurance). This prevents members bearing the cost of some (if not all) of the indemnity to the trustee and its directors.

When reviewing your insurance policy, we suggest you consider how your policy addresses the following issues:

Who is insured? It is important to keep in mind that not all indemnity policies insure the same persons and that, depending on the familiarity of the insurer with superannuation funds, clauses vary substantially. At a minimum, the trustee company and all present and former directors should be covered.

What is insured? Care should be taken to ensure that the policy is clear, meets industry standards and is broad enough in its application to cover all items of concern to the trustee.

What is excluded from cover? An indemnity policy will typically exclude certain matters from cover, such as those activities prohibited by SIS as well as other dishonest and fraudulent acts of the insured and events which occurred before the policy commenced. Others exclude cover for regulatory investigation and actions.

What are the duties of the insured? For example, policies tend to exclude claims or events of which the insured is aware, but which the insured did not disclose before the policy commenced or was renewed.

How much indemnity insurance? In the Australian insurance market it may be impossible to obtain insurance covering a loss of the entire amount of the fund. However, insurance for the entire amount of a fund may not be necessary and to purchase excessive cover may amount to a breach of fiduciary duty.

It is the trustee’s responsibility to consider the relevant risks and to purchase appropriate cover. In assessing risk, the trustee should consider factors such as the level of experience and professionalism of the trustee, the quality of its advisers and the size of the membership. It is also necessary to consider the limits of any other indemnity.

In ‘Superannuation Guidance Note SGN 140.1 Adequacy of Resources’, the Australian Prudential Regulation Authority (APRA) indicates that a trustee must maintain an ‘adequate level of insurance against liabilities incurred as aresult of a breach of its professional duty as trustee of an entity, and adequate levels of business insurance in respect of its business or undertaking as trustee of an entity.’ A policy will generally place limits on both the maximum coverage for each claim and the maximum coverage in the aggregate. A trustee should consider these limits when seeking to match a policy to the perceived risk.

Who bears the cost of the insurance? Usually, the cost of trustee insurance is passed on to members of the fund, ie it is an expense taken into account when setting the fund’s earning rate, unit prices or administration fees. Accordingly, the trustee should be even more cautious in obtaining cover in excess of what a risk assessment shows is required.

There is a disparity among insurance policies and care needs to be taken by a trustee in ensuring that the appropriate cover is being provided and the extent to which the policy represents value for money. A trustee should avoid making the amount of premium the sole criterion for selecting the insurer. Regular review of current insurance arrangements should be incorporated into every trustee’s risk management strategy.

May 2007

The practical implications of ‘simpler super’

As trustees commence planning for the practical implications of ‘simpler super’, we detail below a checklist of the major legal issues trustees might need to consider in the planning process. This list is, of course, not necessarily exhaustive.

• Greater importance will be placed on collecting information under the new regime which establishes new categories of contributions and new limits on contributions.

It will be critical for trustees to be able to ascertain whether a contribution is a personal or an employer contribution. Many systems will need to be updated to record this information.

Trustees will also need to ascertain with certainty the age of each member. Does your fund’s application form provide for collection of this information?

Collection of tax file numbers (TFNs) will no longer be optional. Voluntary post-tax contributions by members who have not provided their TFN must be repaid by the trustee within 30 days of becoming aware of receipt of such contributions.

Each trustee should thoroughly review their existing forms and systems to ensure that they can satisfy the new collection of information and record keeping requirements.

• Trustees of superannuation funds should take particular note of whether their fund’s trust deed needs to be amended before the simpler super regime takes effect. There are generally three aspects to consider:

1. Will your fund offer a new product, or be unable to offer a current product, as a result of the new law?
2. Does your trust deed contain an overriding compliance clause which provides sufficient power to comply with your new responsibilities and obligations?
3. Will any further specific deed amendments be required? For example:

• Is there provision to allow for taxation to be calculated at the member level? 
• Is there an ability to deduct taxation from other fund interests held by a member? The combination of fund interests (while required by law) is often difficult to accomplish in practice. 
• Can the trustee be indemnified by the member or employer when incorrect taxation is deducted? 
• Is there an ability to credit taxation offsets where a member quotes his or her TFN after tax has been deducted and an ability to pay any refunds received to ‘former members’? 
• Can administration costs and any investment losses be applied to no-TFN contributions which are returned to members? 
• Will the fund need (or want) to maintain a taxation reserve?

• Communication to members will need to be reviewed closely by trustees in preparation for 1 July 2007. This is a crucial (and complex) element of the planning process and should be well underway by now. The Australian Securities and Investments Commission has said that it would expect this to be completed by 31 July 2007. However, many funds believe it is preferable to communicate well in advance of that date.

For existing members, trustees will need to update members on the taxation reforms by a significant event notice.

For new members, the product disclosure statement (PDS) will need to be updated or a supplementary PDS prepared. Specific information should be given regarding the provision of TFNs, the limits on concessional contributions and the reform of benefit taxation. Further details will need to be included for defined benefit funds and funds which provide pensions.

• Trustees of defined benefit funds will need to consider the particular complexities which arise for them. Actuarial advice on the relevant new entrant rate and the benefit categories applicable to the fund will need to be obtained.
• Changes in portability also form part of the changes and trustees should start preparing to implement the new deadlines: 
  o a 30 day limit after receiving the rollover request on effecting a request for a rollover, and 
  o a 10 day limit after receiving the rollover request to seek additional information.

July 2007

The issues in communicating electronically

Trustees are under constant pressure to keep fund costs to a minimum and to improve their communication with members. Many funds are looking at electronic communication as a means to assist in achieving these aims. The Australian Securities and Investments Commission has endorsed electronic communications in certain instances.

However, before adopting a new approach to fund communications, a trustee needs to consider all of the implications of communicating electronically.

Certain fund information which is prescribed under the Corporations Act, for example annual reports, may be provided in electronic form provided that:

• the member has given an email address
• as far as practicable, the information is presented in a manner which allows the person to whom it is given to keep a copy of it so that the person can have ready access to it in the future, and
• the report is designed so that the prescribed information is identifiable.

We believe that merely directing a member to a website does not fulfil the trustee’s obligation to ‘provide’ mandated communication to a member. Further, if a member were to request a hard copy of a mandated communication, the trustee would need to comply with that request.

Additional considerations for a trustee to consider include:

• The Spam Act 2003 (Cth) will generally apply to electronic messages sent by the trustee, meaning that, at a minimum, the trustee will need to clearly identify itself in its communication and provide its contact details.

Further considerations apply in the case of voluntary communications which are not required by law. Members need to consent to receiving voluntary communications and be able to opt-out of receiving these communications in the manner required by the Spam Act.

• Trustees must comply with privacy legislation (both Commonwealth and state) in collecting, recording and dealing with fund members’ email addresses.
• Trustees should be aware that if they are required under any legislation to produce a ‘document’, for example, as part of an SCT dispute, this obligation will apply equally to electronic communications.

September 2007

Are you acting in accordance with the terms of your insurance policy?

Trustees should take note of the 29 August 2007 High Court decision in CGU Insurance Limited v AMP Financial Planning Pty Ltd [2007] HCA 36.

In this case, the High Court considered an appeal from the Full Federal Court brought by CGU Insurance Ltd (CGU). The issue before the court was whether CGU was liable to indemnify AMP Financial Planning Pty Ltd (AMP) under a professional risks contract of insurance in respect of amounts paid by AMP in settlement to certain investors who had lost money because of investments placed by two financial advisers. The High Court overturned the Full Federal Court's decision and allowed the appeal.

AMP had informed CGU that it was aware of potential claims arising as a result of the investments. ASIC made clear to AMP that it expected an ‘efficient, fair and timely’ resolution of the claims and that this obligation ‘should override any insurance concerns’. AMP argued that ASIC had implied that AMP’s securities dealer’s licence was at risk. AMP clearly indicated to CGU that it intended to have regard to ASIC’s views and settle the claims.

AMP sought confirmation that CGU would indemnify it in relation to the claims on numerous occasions and provided a liability report in respect of the claims in accordance with the agreed protocol. While CGU accepted AMP’s settlement protocol, CGU did not agree to confer indemnity on AMP with respect to the claims before AMP settled the claims. CGU later denied AMP indemnity under the policy. CGU had repeatedly advised AMP to act as a ‘prudent uninsured’.

The High Court, by a 4–1 majority, held in favour of CGU on the basis that at no time did CGU accept liability for the claims and AMP had no reason to believe that CGU had done so. The court stated that AMP settled the claims and made payment to the investors for its own commercial reasons in order to preserve its own goodwill and to preserve relations with ASIC.

The difficulty resulting from this decision is how insureds should manage the competing pressures to deal with customers’ claims and regulators quickly against the need to receive confirmation of indemnification from their insurer before admitting liability or settling a claim.

An insured must be careful to observe the specific terms of its insurance policy before admitting liability to a regulator or to a claimant.

Trustees should also be mindful of the requirements under their indemnity insurance contracts when reporting breaches to ASIC or APRA. Breach reports need to be carefully worded to balance trustees’ obligations under applicable legislation whilst not detrimentally affecting indemnification from their insurer. This can be a tricky matter.

November 2007

When does legal professional privilege apply?

The test is whether the communications between a client and a legal adviser came into existence for the dominant purpose of giving or receiving legal advice or for the purpose of existing or anticipated litigation.

Does it apply to in-house counsel?

Confidential communications between in-house private sector solicitors and their employers have been held to qualify for legal professional privilege in many cases but, in each specific case, the decision will be a question of fact.

The main issue is whether in-house counsel are sufficiently independent of their employers for a legal adviser-client relationship to exist between them.

Whether legal professional privilege applies to a particular communication is generally determined by whether the communication:

• arises as a result of the employer consulting the employee in a professional capacity.

To be acting in a professional capacity, the legal practitioner must:
o hold appropriate qualifications
o be admitted to legal practice, and
o hold a current practising certificate under the appropriate state or territory legislation.

• is in relation to professional matters
• is made in confidence
• arises from the relationship of lawyer and client
• satisfies the dominant purpose test.

The dominant purpose test is particularly applicable to in-house counsel as:

‘they may be in a closer relationship to the management than outside counsel and therefore more exposed to participation in commercial aspects of an enterprise’ Seven Network Limited v News Limited [2005] FCA 142 at [4]

• is independent advice, and
• the privilege has not been waived.

The main concerns of the courts in extending legal professional privilege to communications by in-house counsel have been:

• if the in-house counsel has a significant commercial or administrative role, or
• if the in-house counsel is vulnerable to pressure from their client as the lawyer-client relationship is an employee-employer relationship as well.

It should be noted that recent trends have been to narrow, rather than expand, the scope of legal professional privilege for in-house counsel. This was demonstrated in the recent case Telstra Corporation Ltd v Minister for Communications, Information Technology and the Arts (No 2) where the Federal Court ordered production of certain advice made by Telstra’s in-house counsel where the independence of the advice had not been established by the evidence presented to the court. The approach suggested by that case is that wherever a claim for privilege is to be made over a communication or document which concerns in-house counsel, it will be necessary to support that claim at the time it is made, by evidence which demonstrates the necessary measure of independence of the legal adviser and their ability to provide impartial legal advice given other roles they have performed within the company.

The Australian Law Reform Commission (ALRC) released a discussion paper on 26 September 2007 proposing clarification of legal professional privilege, including with regard to in-house counsel. The ALRC is proposing that legislation be enacted dealing with the law and procedure governing legal privilege claims. As part of these reforms it is suggested that communications by in-house counsel be identified with details provided to demonstrate the independence of the counsel. Submissions on the discussion paper were due by 1 November 2007.

How is a claim of legal professional privilege maximised?

The relevant time for determining whether legal professional privilege applies is the time when the communication comes into existence. Consequently, in-house counsel should ensure that they are working appropriately now.
In order to maximise the chances of a communication from in-house counsel being subject to legal professional privilege:

• the in-house counsel should be acting as independently as possible
• there should be a clear delineation between their legal and commercial input. This may involve separate communications dealing with different aspects of the same issue which may ensure that more care is taken in presenting the legal and commercial considerations
• an appropriate note should be included on all items that may attract privilege, such as 'Prepared by internal legal adviser for the dominant purpose of providing legal advice', and
• if dealing with a particularly contentious issue, advice should be sought on the best manner of protecting legal professional privilege at the time of considering the issue. In the current climate, this may require outsourcing the advice to external solicitors.

December 2007

Issues for trustees in providing website calculators

Many trustees now offer website calculators online for members to analyse their superannuation fund, plan for their retirement and assess differing investment options.

In providing an online calculator, trustees need to be prudent and give consideration to the following issues:

1. Does the calculator amount to the provision of financial product advice as defined in section 766B of the Corporations Act?

A recommendation or a statement of opinion constitutes financial product advice if it is intended to influence a person in making a decision on a particular financial product or class of financial products or could reasonably be regarded as being intended to have such an influence.

If the calculator amounts to the provision of financial product advice, the trustee will need to hold an AFS licence and to comply with disclosure requirements regarding the provision of financial product advice, such as providing an FSG. If general advice is provided, the mandatory general advice warning (pursuant to section 949A) must be given.

We believe that, as a general guide, the output of the calculator and the context in which the output is presented are the riskiest factors in determining whether a recommendation or statement of opinion are provided by the trustee. If an online calculator only contains objectively ascertainable and factual information, then it is arguable that the calculator does not constitute financial product advice.

If the calculator provides personal advice:

• the provider’s AFS licence would need to allow for the provision of personal advice, and
• a Statement of Advice would need to be provided in accordance with the Corporations Act. This would involve identifying and collecting contact details from each person who uses the calculator to enable provision of a Statement of Advice.

2. Does the calculator fall under the relief provided by Class Order 05/1122?

Under Class Order 05/1122, ASIC exempts a provider of a financial calculator who is providing financial product advice from having to comply with the licensing requirements and the resulting FSG, Statement of Advice and other disclosure requirements where the following conditions are met:

• the financial calculator does not advertise or promote a specific financial product (this will not be the case where the calculator compares other financial products)
• if the financial calculator is an electronic facility, it enables the user to calculate an estimate on the basis of changed assumptions
• the assumptions are reasonable
• there is a clear and prominent statement:
  o identifying the purpose and limitations of the calculator
  o explaining the reasonableness of the default assumptions
  o commenting on any significant limitation of the calculator
  o recognising the impact of the time value of any estimates, and
  o to the effect that the calculator is not intended to be relied on for the purposes of making a decision in relation to a financial product and that the user should consider obtaining advice from a financial services licensee before making any financial decisions
• if the calculator is electronic, it does not prevent the user from readily printing or storing the estimate, and
•  the provider keeps a copy of the calculator for seven years.

3. Each AFS licensee must comply with its licence requirements, including to do all things necessary to ensure that its financial services are provided efficiently, honestly and fairly (section 912A of the Corporations Act).

4. Is there an appropriate disclaimer? The financial product advice requirements of the Corporations Act cannot be avoided by use of a disclaimer, however a disclaimer can be used to:

• disclaim other matters attempt to protect the licensee, and
• fulfil the mandatory general advice warning requirements.

5. Is the calculator accurate? Licensees must always ensure that any material which they present to their customers is technically correct and not misleading. Licensees should take care to ensure that the calculator fulfils these basic requirements.

More information

For information regarding possible implications for your business, contact the Superannuation Partners.