In brief
The Federal Government's proposed new superannuation legislation imposes significant new obligations on RSE licensees and could have a material effect on shareholders. The Allens Superannuation team reports on the key changes.
The Government has just released an exposure draft of the Treasury Legislation Amendment (Improving Accountability and Member Outcomes in Superannuation) Bill 2017. If made, it will require RSE licensees to confirm on an annual basis that they are promoting the financial interests of MySuper members. It will give APRA the power to approve (or not) changes in control of an RSE licensee and to require the holder of a controlling stake to divest their stake if they have interfered with, or are likely to interfere with, the RSE licensee's obligations as trustee. APRA will also have very wide powers to give directions to an RSE licensee, including where the direction 'is necessary in the interests of beneficiaries'. Trustees will also have to convene annual general meetings of members in order to answer questions by members.
Submissions are due by 11 August and that is not enough time for the considered responses the draft Bill needs. There are 45 pages of draft legislation imposing significant new obligations on RSE licensees, additional liability on RSE licensees and their directors and extensive new powers and responsibilities on APRA. It could easily have a very significant effect on shareholders. None of it appears to be responding to anything in particular and it comes in the middle of the Productivity Commission's inquiry into default superannuation and the Government's consultation on the proposed Banking Executive Accountability Regime that will apply to those RSE licensees owned by a bank. And the main question is the same as it always is whenever APRA (or ASIC) gets a new raft of powers – will the regulator ever use them?
MySuper outcomes
The Bill will replace the existing additional obligations of a trustee in relation to a MySuper product. The trustee will still be required to promote the financial interests of MySuper members and, in addition, they will have to make an annual determination, in writing, about whether the financial interests of MySuper members are being promoted by the trustee having regard to whether the options, benefits and facilities offered to members are appropriate, whether the investment strategy and insurance strategy are appropriate, whether there are problems of scale and similar things. In making a determination, the trustee must compare the MySuper product against other MySuper products using prescribed metrics: fees, costs and tax, return target and return, and investment risk.
There are lots of problems with MySuper, not least of which is the duty to promote the financial interests of members. The problem with it is not whether it is a process or outcomes test (we have always thought it was about outcomes), but rather that it doesn't take one very far. It doesn't have any tangible meaning and it is largely untestable. A requirement for trustees to make a determination each year does create some point at which the duty might be tested – but that really just exacerbates the primary difficulty with the duty to promote the financial interests of MySuper members. The obligation in section 29VN(a) of the SIS Act does not create a clear or enforceable duty. This neatly, although we would say, unfairly, fits with the proposal to give APRA new powers that can be exercised when APRA thinks it might be in the interests of beneficiaries.
Director penalties
Directors of trustees might think they already have a rough trot – they have personal obligations to beneficiaries and beneficiaries can sue them for breaching those duties. This Bill will mean that directors will also be subject to civil penalty orders if they breach their obligations to beneficiaries.
Approval to own or control an RSE licensee
APRA will be required to approve the acquisition of a controlling stake (15 per cent or more) of an RSE licensee. This change will bring RSE licensees into line with banks and insurers. In addition, APRA will be able to direct a controlling shareholder (or a person who has practical control) to relinquish that control. This change will arguably make owners of RSE licensees more vulnerable to divestiture than owners of banks or insurers.
Existing controlling stakeholders will not have to be authorised, although they can be subject to a direction from APRA to relinquish their stake.
The Government is alive to the constitutional law issues here and says the obligation doesn't apply where the direction would result in an acquisition of property other than on just terms. This drafting is now commonplace and we have complained about it before – the Government should not, in our view, pass legislation that requires or empowers a person to do something that the Government suspects might be in breach of the Constitution and rely on that person (or someone else) to prosecute or defend the case.
APRA directions power
APRA will have new powers to give directions to an RSE licensee. It will also have the power to give a direction to a connected entity (a subsidiary). The circumstances in which APRA can issue directions are very wide and they include if APRA has reason to believe that the direction is necessary in the interest of beneficiaries of any RSE or where the failure to issue a direction would materially prejudice the interests or reasonable expectations of those beneficiaries.
And this is another area for frustration – legislation should not use terms that have been considered closely and developed by courts (and, in any event, legislation should not use them loosely) and this is not merely a lawyer's point – it is because, again, it creates genuine uncertainty and, in this case, makes more of a trustee's duty to exercise its powers in the best interests of beneficiaries than the case law or SIS Act does.
An RSE licensee is protected from liability if it complies with a direction, which is good because directions can be to do anything really, including to remove a responsible officer from office or to appoint a person as a responsible officer on certain terms. Those with long memories may recall that once upon a time APRA had the power to disqualify directors of superannuation trustees but that, after a certain AAT case that APRA will be keen to forget, that power was removed, so that APRA must now go to the Federal Court and ask the court to disqualify the individual. The new power to give directions might render that protection illusory.
Annual general meeting of members
RSE licensees will be required to hold annual general meetings of members. Members must be given a reasonable opportunity to ask questions. We wish them luck and hope the answers are worth the expense.