The simple case of the SIS Act 'best interests' obligation

In brief 6 min read

Commissioner Hayne's comments in his final report, and the surge of community interest in super, have resulted in a renaissance of sorts for the 'best interests' obligation. Superannuation fund trustees (in some cases, together with their directors) are being accused of various breaches of the obligation in no fewer than eight class actions, as well as one social justice-motivated private action. In this context, we think it's worthwhile to reflect on the current law and how the new cases will test it.

Overview

The 'best interests' obligation arises in a variety of legal contexts. Having been enshrined in statute since 1993, how it applies in one particular context – that of the superannuation fund trustee – should be clearest. Or so you might think.

And you would be in good company. Commissioner Hayne said in his final report that the superannuation fund trustees' obligation was 'simply stated', and appeared to be perplexed by their 'apparent failure to understand' this seemingly straightforward obligation.

The difficulty we see arises, however, not in the statement of the rule but in its practical application – here, in particular, given the complexity and scale of a large superannuation fund and the trustee's various obligations in managing that fund. Case law, which so often helps in providing useful reference points, has also been relatively scarce – until now.

Current law

Section 52 of the Superannuation Industry Supervision Act 1993 (Cth) (the SIS Act) sets out a number of covenants that are taken to be included in the governing rules of superannuation funds in Australia. The best interests duty is set out in s52(2)(c), and provides that the trustee is 'to perform the trustee's duties and exercise the trustee's powers in the best interests of the beneficiaries'.

Australian courts have provided some foundational guidance:

• the statutory covenant reflects, and does not materially add to, the general law duty of trustees to act in the best interests of beneficiaries;
• the duty is to be understood having regard to the superannuation context and the other covenants in s52;
• the 'interests' that are the subject of this duty are usually the beneficiaries' financial interests;
• the duty is not solely concerned with the outcome of a trustee's decision – rather, the emphasis of the duty is on the process by which a decision is made; and
• in keeping with the focus on the process of decision-making, trustees will not be liable if the process that led to the decision was robust, appropriate and had the best interests of all members in mind.¹

Earlier cases considered the scope of the duty in circumstances where a trustee sought to change the status quo. For example, breaches were alleged in circumstances where the trustee changed the members' insurance policy or made amendments to the trust deed. As we will look at in a moment, the current cases tend to arise in a different context – where change is happening around the trustee and it seeks to preserve the status quo.

The difficulty

We accept the apparent simplicity of the best interests obligation. However, we do not pretend that that's the end of the story. Trustees' decisions are often not black and white, where the members' interests are either served or not served. There is, after all, a reason why not everyone can be, or should be, a trustee director.

In reality, trustees continue to struggle with the practical application of this covenant. The case of competing interests is a good example. Where there are competing interests as between the trustee and the members, it is widely understood that the members' interests take priority. But what about where there are competing interests as between different classes of members? Moreover, what about where those interests 'compete' in less obvious and indirect ways (eg affecting one class in obvious dollar terms but affecting another class only by an increased risk that they will be affected in the future in dollar terms)?

Trustees, and their directors, are right to be concerned that their job has become more difficult. Their actions attract more scrutiny, not to mention tougher penalties when they get it wrong.²

Future guidance?

New cases testing the best interests obligation include those from the Royal Commission fallout:

• Fees for no service: ASIC has claimed against superannuation fund trustees for, among other things, failing to act in the best interests of members because they charged fees for advice that was not provided;
• Implementation of MySuper: class actions have been commenced against superannuation fund trustees alleging that they failed to act in the best interests of members because they did not transfer 'accrued default amounts' to low-cost MySuper products as soon as possible; and
• Grandfathered commissions: a class action has been commenced against a superannuation fund trustee alleging that it failed to act in the best interests of members by deciding to maintain grandfathered commissions following the fund's restructure.

Outside that context, a member has claimed against a trustee alleging that it failed to act in the best interests of members in relation to its management and disclosure of climate change-related investment risks.

A number of these cases proceed on the apparent basis that the trustee failed to 'act' where the best interests of the members required it. Departing from the status quo can be a difficult thing for a trustee of a large superannuation fund to do. After all, they need to act with prudence. This context in the new cases seems different from that in previous cases focusing on attempts by the trustee to effect change. These cases will likely test the current law's focus on the 'process' for decision-making.

What's next?

We suspect that, for many of the judges considering these new cases, the best interests duty will not be the simple matter some have said it is.

In any event, for superannuation fund trustees, the surging best interests litigation will continue to require close observation.