This article focuses primarily on the superannuation industry. However a Finance Panel is just as vital a solution for all other financial markets participants. A forum for fast, effective and commercially oriented determinations for all financial market participants would set standards for future conduct, and take away many concerns for service providers regarding whether or not decisions made or actions taken would be in breach of the complex legislation regulating the industry.
In the superannuation sector, for instance, questions constantly arise regarding the fiduciary duty of trustees within a retail group, whether or not fees charged are in members’ best interests, trustee money management, and even governance questions, such as the role of trustees when shareholders have the power to appoint directors. A relatively quick determination of issues by finance, legal and commercial experts in the Finance Panel would increase the assurance for regulators, service providers and consumers that best market practices were being exercised to ensure the regulatory compliance, dynamic growth and prudential strength of Australia’s financial sector, with minimal breaches of conduct requiring costly legal action.
Introduction
In February 2019, the Final Report of The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the banking royal commission) was made public by the Australian government. The Honourable Justice Kenneth Hayne AC QC served as the sole commissioner appointed to inquire into misconduct in the banking, superannuation, and financial services industry. One of the banking royal commission’s recommendations was the creation of an oversight body. This would be established by legislation, reporting to the Minister, and would be given the power to rigorously oversee and report on the effectiveness of the twin regulators of the financial markets, the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulatory Authority (APRA).1
This article suggests the new body could also have the authority to set future standards for conduct for those involved in the banking and financial markets. It is proposed that the functions and statutory objects of this oversight body could be even more broadly defined than was recommended, essentially creating a Finance Panel. This would be similar in form to the Takeovers Panel, and have the power to make rules, as the Takeovers Panel does.2
The Takeovers Panel
The Takeovers Panel has performed its functions extremely successfully, within the narrow commercial mandate it has been given. Its role is to make fast, efficient and commercially sound determinations for disputes that arise within the bid period of a takeover.
The Takeovers Panel is comprised of members drawn from the top tier of experts in mergers and acquisitions, with members’ expertise covering financial, legal and commercial disciplines. Each member brings to the Takeovers Panel a multiplicity of experience and understanding of the issues involved when considering modern complex takeovers matters.
The Finance Panel
The Australian Financial Complaints Authority (AFCA) has recently become operational with the mandate to hear consumer complaints against financial market service providers. This article proposes a new regulatory body, similar in form and function to the Takeovers Panel, and with the responsibility for making quick, efficient and commercially sound determinations on matters referred to the Finance Panel by ASIC or APRA, or upon matters which have been brought before it for guidance on complex and difficult issues, by the service providers themselves.
The twin peaks regulatory model: ASIC and APRA
The role of ASIC and APRA, as twin regulators, in securing and maintaining a stable financial system for Australia, both nationally and within the context of the global financial markets, is vitally important. ASIC’s role is to regulate the conduct of market participants by taking action against breaches, and APRA’s duty is to maintain prudential strength within the financial markets.
It is interesting to note that, in 2013, the United Kingdom adopted a similar dual regulatory model, which is an indication of the strongly held belief in the universal soundness of the twin peak regulators’ role in the strengthening of national financial systems.
Superannuation entities are major players in the Australian capital markets. The possibility of creating a new superannuation-only regulator has been considered, but has not found favour. The Wallis Inquiry, APRA and the banking royal commission3 all determined that the twin peaks regulatory model should be retained.
…a Finance Panel could appropriately be given the responsibility of providing commercial solutions for issues and problems which fall into the area of the ‘intersection’ between the roles of ASIC as the conduct regulator, and APRA as the prudential regulator.
Following the banking royal commission, accountability for all financial market participants is the renewed focus for the developed and mature Australian financial system. With this in mind, a Finance Panel could appropriately be given the responsibility of providing commercial solutions for issues and problems which fall into the area of the ‘intersection’ between the roles of ASIC as the conduct regulator, and APRA as the prudential regulator.
The following includes some examples of the types of issues that could be brought before the Finance Panel.
Fees for no service
The banking royal commission found that adviser service fees (ASF) and plan service fees (PSF) were being charged by some institutions involved in the superannuation industry, in cases where no such services had been given.4 Action taken in response to this type of misconduct is always backward-looking. However, the purpose of taking action to enforce trustees’ compliance with their duties is to set the standard for the conduct of trustees in the future in order to ensure positive outcomes for fund members. APRA, under the Superannuation Industry (Supervision) Act 19935 is responsible for monitoring and enforcing a registrable superannuation entity’s conduct to ensure good outcomes for members. Considering the evidence given to the banking royal commission, no steps had been taken in response to reports regarding fees for no service conduct.6 Trustees would generally be considered to be in breach of their fiduciary duty by allowing advisers or advice licensees, especially related parties, to act in this way.7 A commercially sound Finance Panel could be given enforcement powers to require certain actions by trustees which, in turn, would set stronger future standards of behaviour for the entire industry.
Fees not in members’ best interests
Where fees from members tend to be generated or retained for the trustee’s or a related party’s own use, the circumstances frequently indicate this was not in members’ best interests. The potential conflict for retail trustees, which falls below community standards and expectations, may be seen when advisers give advice regarding intra-fund products which results in them receiving, for example, trail commissions, when this conflict of interest is not communicated to clients.8 Of course, the adverse effect of a conflict is that it is not in the members’ best interest.
The Final Report states it is unacceptable that conflicts are resolved in ways which favour the interests of large retail groups rather than the consumer.9 Although these types of situations are considered to be ‘part of the ordinary machinery of business’, the failure to consider the best interests of members is fundamentally a failure of the retail trustee to carry out its fiduciary duty to the trust members. It is arguable that there should be serious consequences for trustees and those involved in contraventions of the provisions aimed at protecting vulnerable consumers of these financial services which are often structured in highly complicated ways. A Finance Panel could have the power to make rules to prevent these types of contraventions from occurring again. This capacity would be similar to the powers held by the commercially sound and well-respected Takeovers Panel.10
Trustees within a retail group
Also, when trustees within a retail group have outsourcing arrangements with other entities in the same group, the rigour and discipline required for the trustee to fulfil its duties to members may be compromised.11 The question is, can the trustee within a vertically-integrated group adequately evaluate whether that trustee is promoting the best interests of members? A trustee within a retail group may rely on others in the group, or substitute the internal corporate processes, believing that they are achieving compliance. This may mean they are not fulfilling their own duty of rigorous oversight for their members. The arguable substitution of form for substance that these practices entail, highlights the difficulties for both the trustee, and APRA, to determine whether the trustee in a vertically-integrated group is actively advancing the best interests of members.
The Final Report suggests that:
‘…certain types of decisions by such trustees might be required to be reviewed by an external expert to certify that they are consistent with their obligations owed to members.’12
Arguably this improvement in the quality of evaluation of conflicts management within retail groups could be ensured by a Finance Panel comprised of industry and commercial experts with the authority to hand down binding decisions, and would thus ensure more than just regulatory box-ticking.
Board governance: Appointment of directors by shareholders
As already stated, as they are fiduciaries, superannuation trustees are required to make the interests of members a priority when making decisions for the funds for which they are responsible. Regarding governance issues, profit-for-member funds are the most straight-forward, as the interests of members are unquestionably paramount. However, with regard to retail-fund trustees, although still required to act in the best interests of the members of the funds, the interests of shareholders must also be considered, for example by making a profit and paying a dividend.13
A number of the case studies in the banking royal commission bring into focus that the governance rules of some corporate retail superannuation funds give shareholders some say, or even control, over the appointment of directors. This may be at odds with the concept that directors should govern with the best interests of members in mind.14
For instance, the case studies of the banking royal commission indicate that a time of instability resulted for a large corporate fund, as a direct result of the exercise of shareholder power of appointment. After numerous communications and meetings between the chair and the shareholders, and APRA expressing serious concerns about the rapidity and extent of the board changes proposed by a significant shareholder, the changes to the composition of the board went ahead. Fortunately, the result was a positive outcome, with successful governance changes being made too. The question to be asked is whether this type of upheaval should occur, and what message does it send to investors?
However, this example does show that serious governance questions, including those involving potentially competing member and shareholder interests, which need an immediate response, could be handled efficiently and effectively by a Finance Panel. Shareholders, in matters such as these, would have standing to put the issue before the Finance Panel.
Trustee money management
A superannuation trustee must always act in the best interests of its members, and exercise the same degree of care, skill and diligence as a prudent trustee. These obligations may be fulfilled by diligent monitoring and managing of an investment, even when an investment’s performance is below expectations.15 A subscription to an online news publication which aimed to provide information to industry super members, and which thus was believed to be for their benefit, was authorised by the board of a superannuation fund. The aim was not only to retain members, but also to grow membership of the fund. Not seen as an investment, but as a ‘tool to enhance the fund’s engagement with members’16 the subscription price was paid out of members’ administration fees, which covered marketing costs. Further spending was also incurred for a political campaign, on a similar basis.
Type of marketing and political advertising expenditure by a superannuation fund is a sensitive topic, when member’s funds are being utilised.17 The Final Report did not propose a more prescriptive law than the tests already to be applied — the best interests and sole purpose tests. The Final Report states that ‘…most trustees would rightly err on the side of caution’18 when determining their compliance. However, it is suggested that a Finance Panel directive would provide greater certainty, as well as guidance, for trustees concerned with such issues.
Conclusion
A clamour of voices may be heard, crying: ‘Not another regulatory body — surely not.’
But Australia is now a dominant force in the global financial economy and our fiscal security is essential. As a country, we do not want to be the weak link, and, in order to avoid systemic risk, prudential strength and irreproachable market conduct is paramount. A Finance Panel which gives guidance and captures potential breaches before they occur will ensure a strong, stable market economy, which will protect and attract international, as well as Australian, investors.