Superannuation Update August 2008 – General update

Watson Wyatt Superannuation Pty Ltd v Oberlechner

The recent case of Watson Wyatt Superannuation Pty Ltd v Oberlechner [2008] NSWSC 272 involved an attempt by a member of a superannuation fund, who was in default of his loan agreement and mortgage over a property, to enter into a deed of charge with his mortgagor over ‘proceeds’ from his superannuation fund. The deed of charge included a term that the member would, at the request of the mortgagor, complete and send the superannuation fund an irrevocable direction as prescribed by the agreement.

When a total and permanent disablement benefit of $339,360 became payable from the superannuation fund pursuant to a contested total and permanent disablement claim, the mortgagor sought an order that $70,000 of the benefit in the hands of the trustee was caught by the charge.

Justice Brereton handed down judgment in the New South Wales Supreme Court on 28 February 2008. Justice Brereton referred to the restrictions under the SIS Regulations on assignment of superannuation interests (SIS Regulation 13.12) and charges over a member’s benefits (SIS Regulation 13.13). Further, clause 15 of the relevant superannuation fund’s trust deed included a clause which stated:

‘15. Benefits are Personal and Non-Assignable
All rights, interests and benefits of Members are strictly personal and except as provided in this Deed no Member shall assign or charge his or her interest in the Fund either absolutely or conditionally without the written consent of the Trustee first being obtained (which consent the Trustee may refuse without assigning any reason therefore or may grant subject to conditions). If any Member becomes bankrupt or commits any act of bankruptcy or attempts without the consent aforesaid to assign or charge his or her interest in the Fund or any part thereof or does, suffers or incurs anything by which his or her interest in the Fund or any part thereof through his or her act or default or by operation or process of law would become vested in or payable to some other person or if any other event happens by which he might be wholly or partly deprived of the personal enjoyment of any of his or her rights, interests or benefits under this Deed the right, interest or benefit thereby affected shall, to the extent permitted by the relevant requirements of the Relevant Law, thereupon determine. In any such event the Trustee may at the discretion of the Trustee apply or cause to be applied the money representing such determined right, interest or benefit for or towards the maintenance or otherwise for the benefit of such Member and the spouse, children and Dependants of such Member or such one or more of them to the exclusion of the other or others and in such shares and proportions as the Trustee may from time to time in the absolute discretion of the Trustee determine and any part of the money representing such determined right, interest or benefit which is not to be so applied shall form part of the Fund to be used for the general purposes thereof.’

Justice Brereton found that:

• The $339,360 benefit constituted ‘proceeds’ caught by the terms of the charge, even though the benefit was payable pursuant to a court judgment.
• Mr Oberlechner had attempted to charge his benefit without consent of the trustee as prohibited by clause 15 of the fund’s trust deed. Consequently, clause 15 automatically determined that Mr Oberlechner no longer had any interest in the fund which could be the subject of the claim. In so deciding, Brereton J noted that ‘[n]o one has drawn my attention to any relevant law which would prohibit that consequence.’

Justice Brereton found the deed of charge was ineffective to give the mortgagee an interest in any part of the $339,360 benefit.

Freehills suggests trustees exercise caution in applying this case to any future examples of the charges over benefits. This is a complex area of the law which requires careful review of the individual terms of each charge and the nature and restrictions placed on the superannuation interest. Some additional considerations which could be relevant include:

• if a benefit is accrued, SIS Regulation 13.16 which restricts alteration of accrued benefits. Regulation 13.16(1) states:
  1. ‘a beneficiary’s right or claim to accrued benefits, and the amount of those accrued benefits, must not be altered adversely to the beneficiary by amendment of the governing rules or by any other act carried out, or consented to, by the trustee of the fund’
• how a trustee should manage a discretion under a clause similar to clause 15 of the trust deed to apply the money representing a determined interest for the member or other beneficiaries, and
• whether a benefit can be cashed ‘in favour of’ the member under SIS Regulation 6.22.

VCA v Australian Prudential Regulation Authority

On 4 July 2008, the AAT handed down its decision following an appeal from three responsible officers of a trustee company who had been ‘disqualified’ by APRA under the SIS Act section 120A. The AAT found that there were no grounds on which the three trustee responsible officers be disqualified and reversed APRA’s decision.

The case involved the trustee of a superannuation fund that removed the administrator of the fund because of misgivings regarding the performance of the administrator, and then replaced the administrator with a new administration company set up by the trustee. APRA had alleged the following sections of the SIS Act were breached by the trustee while the three disqualified persons were responsible officers of the trustee:

• section 29—failure to give APRA written notice of contraventions of the trustee’s Instrument of Approval
• section 55—contravention of a SIS covenant
• section 62—contravention of the sole purpose test by running an administration company
• section 109—making investments on a basis other than at arm’s length, and
• section 111—failure to keep proper accounting records.

Of particular note, the AAT revisited its decision in VBN v APRA with regard to the meaning of the prudent person and best interest covenants under SIS.

The AAT confirmed its view that these covenants were intended to be more than a mere restatement of the general law and stated:

• With regard to the prudent person covenant, the duty to exercise ‘care, skill and diligence’ extends to all matters affecting the superannuation entity and that a trustee ‘must exercise, in relation to all matters affecting the entity, care, skill and diligence of the sort that an ordinary person who is careful, astute and exercises sound judgment would show in dealing with property, which is not his or her own but which belongs to another and which the person feels morally bound to preserve.’ The extent of the duty as stated by the AAT may exceed that recognised at general law.
• With regard to the best interests covenant, ‘regard must be had not only to what the beneficiaries would have done in the circumstances to protect their position. What they would have done must be weighted with what others would have, or be likely to have, done as a result of their action together with the effect that would have on them and on the circumstances in which they would then find themselves.’ This seems to suggest a wider test than applied under the general law.

In general, the above pronouncements by the AAT only serve to add to the uncertainty regarding the meaning of the covenants under SIS.

It is also important to note that the Financial Sector Legislation Amendment (Review of Prudential Decisions) Act 2008 amended the disqualification powers under SIS section 120A from 26 May 2008 to limit the power of disqualification to the Federal Court of Australia on application by APRA.

New Financial Ombudsman Service

On 10 July 2008, the Minister for Superannuation and Corporate Law, the Hon. Nick Sherry, launched a new Financial Ombudsman Service which replaces the Banking and Financial Services Ombudsman, the Financial Industry Complaints Service and the Insurance Ombudsman Service.

Parliamentary update

• The Family Law Amendment (De Facto Financial Matters and Other Measures) Bill 2008 was introduced into the House of Representatives on 25 June 2008. This Bill seeks to amend the Family Law Act 1975 (Cth) (Family Law Act) to extend access to family law, including extending the superannuation splitting arrangements under Part VIIIB of the Family Law Act, to de facto relationships where certain conditions are satisfied.
• The First Home Savers Accounts Act 2008 (Cth) and the First Home Saver Accounts (Consequential Amendments) Act 2008 (Cth) received Royal Assent on 25 June 2008. We discussed the First Home Savers Account in our February 2008 General Update. APRA has released a consultation package detailing the proposed standards for First Home Savers Accounts. Comments were due by 4 July 2008.
• The Same-Sex Relationships (Equal Treatment in Commonwealth Laws—Superannuation) Bill was referred to the Senate Community Affairs Committee on 16 June 2008. The report is due after 18 August 2008.

New ASIC Regulatory Guide

ASIC has released a new Regulatory Guide 191 ‘Superannuation: helping investors look at longer-term returns—ASIC’s best practice guide’ which provides guidelines for providing members with personalised information on long-term returns.

ATO Self-Managed Superannuation Funds Ruling

The ATO has issued two new rulings for SMSFs:

• SMSFR 2008/1 which relates to giving financial assistance using the resources of a SMSF to a member or relative. This ruling clarifies the instances where the prohibition under section 65 will be breached, including indirect provision of financial assistance through another entity. The ruling gives detailed examples as guidance.
• SMSFR 2008/2 which details the application of the sole purpose test in section 62 of the Superannuation Industry (Supervision) Act 1993. This ruling discusses the provision of benefits which are incidental, remote or insignificant. Again, a summary of examples is provided for practical guidance on this issue.

The business of being a trustee – conflicts of interest

Conflicts of interest are increasingly on the agenda as regulators focus on conflicts as an issue in the converging superannuation industry. Care needs to be taken at all times to manage the risk of a conflict arising, identifying it in a timely fashion and dealing with the conflict appropriately.

What is a conflict of interest?

A fiduciary has certain obligations to its beneficiaries. This is so for a trustee in relation to a beneficiary of a superannuation fund and a company director in relation to the company.

This includes a duty of loyalty which has two main components:

• a duty to avoid a position where the fiduciary is tempted to prefer his or her own interests or the interests of a third party over the beneficiaries’ interests, and
• a duty not to receive any advantage from the position.

If a fiduciary breaches this duty of loyalty, they will be liable unless they are excepted by the terms of the trust or have obtained the informed consent of the person to whom the fiduciary owes the duties. In order to obtain full informed consent, the fiduciary must disclose all relevant information.

These duties exist at general law, under the Superannuation Industry (Supervision) Act 1993 (Cth) and the Corporations Act 2001 (Cth) (Corporations Act). ASIC has issued Policy Statement 181 Licensing: Managing conflicts of interest detailing its views of the conflicts laws. We understand that APRA is currently working on its own guidelines on conflicts of interest.

ASIC Regulatory Guide 181 paragraph 15 states:

‘Conflicts of interest are circumstances where some or all of the interests of people (clients) to whom a licensee (or its representatives) provides financial services are inconsistent with, or diverge from, some or all of the interests of the licensee or its representatives. This includes actual, apparent and potential conflicts of interest.’

The legislative requirements build upon the general law requirements by requiring a policy to be in place regarding how an AFS licensee and a RSE licensee manage conflicts of interest.

How is a conflict of interest different to a conflict of duty?

A conflict of duty occurs where a fiduciary has two competing duties which conflict.

The classic scenario in which this may occur in the superannuation context is where a particular person is on the board of two related companies, one a trustee of a superannuation fund, the other a service company of the superannuation fund. The director’s duty to both companies may at times conflict and particular caution needs to be exercised in this scenario.

Can a director’s fiduciary duty to a company co-exist with a director’s fiduciary duty to members?

The trustee company owes fiduciary duties to the members of the superannuation fund.

Directors of a corporate trustee owe fiduciary duties to the trustee company itself.

It is unclear whether at general law directors of a trustee company owe fiduciary duties directly to the members of the fund. It is arguable that under section 52(8) of the SIS Act they do, either directly or indirectly.

When do conflicts commonly arise?

In practice, the most common examples of conflicts of interest include contracting with a company and when a personal profit is made or benefit derived.

Contracting with the company

For example, this occurs where a fund outsources a function of the superannuation fund to a related company, such as an administrator, life insurer or investment manager. This can create conflicts at the time of outsourcing or in supervising the related company during the life of the contract.

It is important for the agreements between these related parties to be appropriate and on a true commercial basis, that is, on terms no less favourable than an arms length arrangement.

The trustee of a superannuation fund cannot outsource to a related party without adequately considering the outsourcing, acting in the best interests of members at all times and providing proper disclosure to members.

When a personal profit is made or benefit derived

Remuneration of a trustee or a trustee company can occur where the trust deed allows the trustee to be remunerated or if fully informed consent is obtained.

If fully informed consent is being obtained, it is necessary to ensure that the consent is obtained from the appropriate persons. This would be the members of the fund where a corporate trustee is involved. However, identification of the appropriate party for providing consent is a more difficult issue in relation to remuneration of a director of a corporate trustee.

Part 7.7 of the Corporations Act requires full disclosure of remuneration. However, there remains a question as to whether the product disclosure statement or the financial services guide provides enough information to allow fully informed consent. And consent would actually need to be obtained in order for this exception to be relied upon. This would require careful consideration of the application forms for the fund.

How are conflicts best handled in practice?

There are a number of approaches that can be taken to address conflicts of interest. The most appropriate measure will depend on the nature of the conflict and the relevant regulatory requirements which apply to the conflict.

ASIC expects AFS licensees to establish a written conflicts management arrangement which:

• identifies the conflicts of interest relating to the business
• assesses and evaluates those conflicts, and
• provides for implementation of an appropriate response to the conflict.

Disclosure is an integral part of managing conflicts but disclosure will not be effective management of all conflicts.

ASIC Regulatory Guide 181 paragraph 42 recognises that in some cases the ‘only way to adequately manage those conflicts will be to avoid them’.

ASIC expressly discourages some conflicts, such as:

• advice about a particular financial product issue or product in return for benefits or business, and
• remuneration arrangements where advisers are paid exclusively by commission.

When can a conflict of interest or duty mean that a director is no longer ‘fit and proper’ for the role?

This will depend upon the circumstances. It is conceivable that a director of a corporate trustee may not be a ‘fit and proper’ person for the position by virtue of other positions held by the director which give rise to unacceptable conflicts of interest.

It should be noted that APRA and ASIC both have the power to require additional licence conditions to deal with any conflicts of interest concerns if necessary.

Freehills update

Michael Vrisakis published an article entitled ‘Trustee not discriminating against its children’ in the June 2008 edition of Australian Superannuation Law Bulletin which discusses the recent case of Avanteos Investments Ltd [2008] NSWSC 370.

More information

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