Superannuation Update February 2008 - The business of being a trustee: enforcement of the law by APRA – what do you need to know?

26 February 2008

Current situation

The Superannuation Industry (Supervision) Act (SIS) section 120A currently confers on APRA the power to disqualify individuals where:

• an individual contravenes SIS
• the individual is a responsible officer of a corporate entity at a time when the entity contravenes SIS, or
• the individual is not otherwise a fit and proper person.

In the first two circumstances, APRA has to be satisfied that the nature, seriousness and number of contraventions justify disqualification. A disqualified individual can appeal APRA’s decision to the Administrative Appeals Tribunal (AAT) or the Federal Court.

While it appears on the face of SIS section 120A that each of the grounds for disqualification is separate (and the AAT has not expressly indicated otherwise), we believe that the better view is that disqualification should not occur unless there is an absence of fitness and propriety. This is of particular concern for innocent directors. We note in this regard the AAT decision of VBN v APRA on 25 July 2006 which reversed APRA’s decision to disqualify seven directors of a staff superannuation fund trustee by finding that there was no breach of the prudent person or best interest covenants. APRA had disqualified these directors for allegedly breaching these covenants but had not alleged that these directors had acted dishonesty or for an improper purpose.

There remains a lack of clarity regarding the application of section 120A where there is no absence of fitness and propriety and while this remains so there is scope for inappropriate outcomes in the disqualification of trustees and trustee directors.

APRA has shown increasing willingness to exercise its powers of disqualification under section 120A since the introduction of this section on 18 January 2001. In more recent years, this has been matched by an increasing number of appeals against APRA’s disqualifications.

Proposed changes

By the introduction of the Financial Sector Legislation Amendment (Review of Prudential Decisions) Bill 2007, the Howard Government sought to improve the 'efficiency, transparency and consistency of the process for disqualifying  individuals from operating financial sector entities and enhance the accountability of the regulator for administrative decision-making'. This Bill lapsed when Parliament was prorogued before the federal election.

On 13 February 2008, the Rudd Government re-introduced the Financial Sector Amendment (Review of Prudential Decisions) Bill 2008 to the Senate. This Bill sets out the same amendments to SIS section 120A which were proposed in relation to disqualification of trustees under the Financial Sector Legislation Amendment (Review of Prudential Decisions) Bill 2007.

The 2008 Bill proposes:

• repeal of the current SIS section 120A
• introduction of a court-based process for disqualification of an individual from an APRA-regulated entity, and
• disqualification must be ‘justified’—in deciding whether disqualification is justified, the court may have regard to the individual’s conduct in relation to the management, business or property of any corporation and any other matters the court considers relevant.

However, the 2008 Bill uses the same criteria for disqualification as current SIS section 120A. Consequently, the interpretation issues mentioned earlier could still arise under the proposed new court-based disqualification. Once again, this is of particular concern for innocent directors who are a responsible officer of a trustee at the time of a contravention.

It is hoped that, if the 2008 Bill is passed in its current form, the courts would develop some guidance as to whether a trustee or trustee director could be disqualified where there is no absence of fitness and propriety. It also remains open to the government to fix this uncertainty, either by amendment of the Bill or by regulation. The 2008 Bill allows regulations to specify further matters for the court to take into consideration in determining whether a person may be disqualified.

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