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Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017



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BILLS DIGEST NO. 50, 2017-18 13 NOVEMBER 2017

Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017 Paula Pyburne Law and Bills Digests Section

Contents

The Bills Digest at a glance ................................................... 4

Purpose of the Bill ............................................................... 5

Structure of the Bill ............................................................. 5

Structure of this Bills Digest .................................................... 5

Background ......................................................................... 5

MySuper and superannuation industry structure ................. 5

Initial policy development ..................................................... 6

Financial system review ........................................................ 7

Ongoing Productivity Commission review ............................ 7

Committee consideration .................................................... 7

Senate Standing Committee on Economics ............................. 7

Senate Standing Committee for the Scrutiny of Bills .............. 8

Policy position of non-government parties/independents ..... 8

Statement of Compatibility with Human Rights .................... 8

Parliamentary Joint Committee on Human Rights .................. 8

Schedule 1—MySuper outcomes assessment ....................... 8

Financial implications .............................................................. 8

Key provisions ..................................................................... 9

The outcomes test ................................................................... 9

Stakeholder comments ....................................................... 10

Schedule 2—authority to offer MySuper product ................ 10

Financial implications ............................................................ 11

Key provisions ................................................................... 11

Date introduced: 14 September 2017

House: The Senate

Portfolio: Treasury

Commencement: Sections 1-3 on Royal Assent; all Schedules except Schedule 4 on the day after Royal Assent; Schedule 4 three months after Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at

November 2017.

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Test for authorising ............................................................... 11

Cancelling an authorisation ................................................... 11

Meaning of reason to believe ............................................. 12

Schedule 3—director penalties .......................................... 12

Financial implications ............................................................ 12

Key provisions ................................................................... 12

Contravening director obligations ......................................... 12

Additional consequences for directors .................................. 13

Key issues ............................................................................ 13

Schedule 4—approval to own or control RSE licensee ......... 14

Financial implications ............................................................ 14

Key provisions ................................................................... 14

Application for approval ........................................................ 15

Approval ................................................................................ 15

Scrutiny of Bills Committee ................................................. 15

Directions to relinquish control ............................................. 16

Consequences ..................................................................... 16

Court orders........................................................................... 17

Interim orders ..................................................................... 17

Remedial orders .................................................................. 17

Suspension or removal of a trustee .................................... 17

Key issues ............................................................................ 17

Schedule 5 ........................................................................ 18

Financial implications ............................................................ 18

Key provisions ................................................................... 18

General powers ..................................................................... 18

Stakeholder comments ....................................................... 19

Reasons for exercising the power ......................................... 19

Stakeholder comments ....................................................... 20

Directions to a connected entity ........................................... 20

Machinery provisions .......................................................... 21

Varying or revoking a direction ............................................. 21

Offences ................................................................................. 21

Scrutiny of Bills Committee ................................................. 22

Protection from liability ...................................................... 22

Schedule 6—portfolio holdings disclosure .......................... 22

Financial implications ............................................................ 22

Key provisions ................................................................... 22

Disclosure .............................................................................. 22

Stakeholder comments ....................................................... 23

Exemptions ............................................................................ 23

Stakeholder comments ....................................................... 23

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Schedule 7—annual members’ meetings ............................ 24

Financial implications ............................................................ 24

Key provisions ................................................................... 24

Requirement for annual members meeting .......................... 24

Stakeholder comments ....................................................... 25

Conduct of the meeting ......................................................... 26

Stakeholder comments ....................................................... 26

Obligation to attend .............................................................. 27

Stakeholder comment ......................................................... 27

Scrutiny of Bills Committee ................................................. 28

Key issues............................................................................... 28

Schedule 8—reporting standards ....................................... 28

Financial implications ............................................................ 28

Key provisions ........................................................................ 29

Key issues ............................................................................ 29

Concluding comments ....................................................... 29

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The Bills Digest at a glance What the Bill does

The Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017 (the Bill) contains eight Schedules, each of which makes legislative amendments to achieve eight separate measures:

• To replace the current ‘scale test’ with an ‘outcomes test’ which will require each trustee of a regulated superannuation fund that includes a MySuper product to make an annual determination on whether the financial interests of the beneficiaries of the fund are being promoted by the trustee.

• To give the Australian Prudential Regulation Authority (APRA) improved power to refuse to authorise a registrable superannuation entity (RSE) licensee to offer a MySuper product or to cancel an existing authority.

• To impose civil and criminal penalties on directors of RSE licensees who fail to execute their responsibilities to act in the best interests of members.

• To strengthen APRA’s supervision and enforcement powers when a change of ownership or control of an RSE licensee takes place.

• To give APRA a broad power to issue a direction to an RSE licensee where APRA has prudential concerns.

• To require RSE licensees to make publicly available their portfolio holdings.

• To require RSE licensees to hold annual members’ meetings.

• To provide APRA with the ability to obtain information on expenses incurred by RSE and RSE licensees in managing or operating the RSE.

Committee consideration

The Bill was referred to the Senate Standing Committee on Economics (Economics Committee) for inquiry and report. The majority of Senators on the Economics Committee recommended that the Senate pass the Bill. However, the Labor Senators on the Economics Committee recommended that the Bill be opposed unless it is amended to apply consistently and comprehensively across the superannuation system.

Stakeholder views

Some of the measures in the Bill were strongly opposed by stakeholders. In particular, stakeholders argued that the costs and logistical difficulties in conducting annual members’ meetings outweighed any perceived benefit of the measure.

In addition, stakeholders were deeply concerned about APRA’s proposed power to issue directions and the low threshold test for exercising that power.

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Purpose of the Bill The purpose of the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017 (the Bill) is to amend a number of statutes to implement eight separate measures which are intended to improve accountability and transparency of registrable superannuation entities (RSE) and RSE licensees.

Structure of the Bill The Bill contains eight Schedules:

• Schedule 1 amends the Superannuation Industry (Supervision) Act 1993 (SIS Act) to strengthen the obligation on superannuation trustees to consider the appropriateness of their MySuper product offering annually

• Schedule 2 amends the SIS Act to give the Australian Prudential Regulation Authority (APRA) an enhanced capacity to refuse a registrable superannuation entity (RSE) licensee a new authority to offer a MySuper product or to cancel an existing authority

• Schedule 3 amends the SIS Act to impose civil and criminal penalties on directors of RSE licensees who fail to execute their responsibilities to act in the best interest of members

• Schedule 4 amends the SIS Act to strengthen APRA's supervision and enforcement powers when a change of ownership or control of an RSE licensee takes place

• Schedule 5 amends the SIS Act to strengthen APRA's supervision and enforcement powers to include the power to issue a direction to an RSE licensee where APRA has prudential concerns

• Schedule 6 amends the Corporations Act 2001 to refine the requirements for RSE licensees to make publicly available their portfolio holdings

• Schedule 7 amends the SIS Act to require RSE licensees to hold annual members meetings and

• Schedule 8 amends the Australian Prudential Regulation Authority Act 1998 and the Financial Sector (Collection of Data) Act 2001 to provide APRA with the ability to obtain information on expenses incurred by RSE and RSE licensees in managing or operating the RSE.

Structure of this Bills Digest As the matters covered by each of the Schedules are independent of each other, the relevant background, stakeholder comments (where available) and analysis of the provisions are set out under each Schedule number.

Background MySuper and superannuation industry structure ‘MySuper’ is an outcome of the ‘Stronger Super’ package of measures for the superannuation industry. The ‘Stronger Super’ package of reforms essentially represents the response to the ‘Super System Review’— commonly referred to as the Cooper Review—which examined a broad range of issues in the superannuation industry over the period 2008-2010.1

MySuper is one element of the Stronger Super package of measures and is intended to be a ‘low cost and simple superannuation product that will replace existing default funds’.2 Key regulatory aspects of MySuper superannuation accounts include:

• required product rules including setting of fees

• single diversified investment strategy (which may take account of a person’s age)

• selection of ‘default’ MySuper products in modern awards by a special panel of the Fair Work Commission

1. Review into the Governance, Efficiency, Structure and Operation of Australia’s Superannuation System, Super system review, final report, (Cooper Review), [Review into the Governance, Efficiency, Structure and Operation of Australia’s Superannuation System, Canberra, 2010]. The Cooper Review was chaired by former deputy commissioner of ASIC Jeremy Cooper and was conducted over the period 2009-2010. The Cooper Review covered a broad range of issues including the performance and governance of the superannuation industry and has formed the basis for a number of recent legislative changes under the Government’s ‘Stronger Super’ package of measures. 2. Australian Government, ‘MySuper’, Treasury website.

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• collection and publication of comparable MySuper product performance information

• specific superannuation trustee obligations including satisfying a ‘scale test’3

• mandatory requirements for employers to make contributions for employees who have not made a choice of fund to a fund that offers a MySuper product by 1 January 2014 and

• the transfer of existing ‘default’ superannuation balances where the member has not exercised choice of superannuation fund into a MySuper account by 1 July 2017.4

The MySuper reforms were brought about by a number of enactments, including but not limited to:

• Superannuation Legislation Amendment (MySuper Core Provisions) Act 2012—included licensing arrangement for funds offering a MySuper produce and key features of a MySuper product such as:

- requiring a single diversified or lifecycle investment strategy - all members having access to the same options and facilities and - limiting the fees that can be charged to members of a MySuper product • Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012—general

enhancements to superannuation trustee obligations but also specific ‘enhanced trustee obligations’ for MySuper products that require the trustees to determine annually whether the scale of the fund is sufficient to continue to offer a MySuper product

• Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012—included additional fee rules, required funds to publish a ‘product dashboard’ for each of the fund’s MySuper and choice products on a part of their website, the provision of death and disability benefits within MySuper, the Fair Work Commission to only list funds that have a MySuper product as a default fund in modern awards by 1 January 2014, and funds having until 1 July 2017 to transfer all accrued default amounts to a MySuper product unless the member opts-out in writing and

• Superannuation Laws Amendment (Capital Gains Tax Relief and Other Efficiency Measures) Act 2012— permitted merging superannuation funds to choose to take up capital gains tax loss relief where the transferring entity transfers assets to the receiving entity on, or after, 1 October 2011 and before 2 July 2017.

At the time of writing this Bills Digest, 117 Registrable Superannuation Entities (RSEs) had an authorised MySuper product.5

Initial policy development The Labor Government’s initial response to the Cooper Review in December 2010 broadly endorsed its recommendations relating to the development of a ‘simple, cost-effective product with a diversified portfolio of investments for the vast majority of Australian workers who are invested in the default option of their current fund’.6

The policy requiring superannuation funds to transfer the accrued balances of default members to a MySuper product by 1 July 2017 was part of the Labor Government’s more detailed response to the Cooper Review in September 2011.7

According to the Minister for Revenue and Financial Services, Kelly O’Dwyer, ‘many of the measures in this package have been recommended by past reviews into superannuation, commissioned by both Coalition and Labor governments’.8

3. The ‘scale test’ requires trustees of a superannuation fund that includes a MySuper product to determine on an annual basis whether the beneficiaries of the fund who hold the MySuper product are disadvantaged, in comparison to the beneficiaries of other funds who hold a MySuper product within those other funds, based on the number of members or assets in the MySuper product or fund. This requirement was inserted into the SIS Act by the Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012.

4. K Swoboda, Superannuation Laws Amendment (MySuper Capital Gains Tax Relief and Other Measures) Bill 2013, Bills digest, 158, 2012-13, Parliamentary Library, Canberra, 2013, pp. 6-7. 5. Australian Prudential Regulation Authority (APRA), ‘Register of RSE Licensees and RSEs: list of MySuper authorisations’, APRA website. 6. Australian Government, Stronger super: Government response to the review into the governance, efficiency, structure and operation of

Australia’s superannuation system, Canberra, 16 December 2010, pp. 5-8. 7. Australian Government, Stronger super: information pack, 21 September 2011, p. 3.

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Financial system review In November 2013, then Treasurer, Joe Hockey, announced an inquiry into Australia’s financial system (known as the Murray Review after the chair of the review, former CEO of the Commonwealth Bank David Murray AO).9

The Final Report of the Murray Review noted that there was scope to improve the efficiency of the superannuation system in a number of areas.

Substantially higher superannuation balances and fund consolidation over the past decade have not delivered the benefits that would have been expected; these benefits have been offset by higher costs elsewhere in the system rather than being reflected in lower fees. 10

Some of the amendments in the Bill reflect recommendations made by the Murray Review.

Ongoing Productivity Commission review In 2016, the Australian Government asked the Productivity Commission to undertake a review of the competitiveness and efficiency of the Australian superannuation system.11 The review is being undertaken in three stages:

• Stage 1 developed a framework for assessing the competitiveness and efficiency of the superannuation system, which forms the basis for the assessment in stage 3. The final report for stage 1 was published in November 2016.

• Stage 2 examines alternative models for a formal competitive process for allocating default fund members to default superannuation products.

• The stage 2 inquiry will be incorporated into and finalised as part of the stage 3 inquiry by June 2018.12

It is likely that further amendment to superannuation laws will arise from the ongoing review by the Productivity Commission.

That being the case, the question arises as to whether the Bill pre-empts the work that is underway by the Productivity Commission’s review into superannuation and default models. The danger is:

… [that] fragmented and piecemeal introductions of new standards may result in regulatory inefficiency, duplication in consumer and industry standards, increase consumer confusion in navigating the system as well as impose additional costs on businesses in complying with the new laws and regulations. 13

Committee consideration Senate Standing Committee on Economics This Bill (along with the Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017)14 was referred to the Senate Standing Committee on Economics (the Economics Committee) for inquiry and report by 23 October 2017.15 The Economics Committee received 38 submissions. The majority of Senators on the

8. K O’Dwyer (Minister for Revenue and Financial Services), Reforms to give consumers more power at the heart of a stronger superannuation system, media release, 24 July 2017. 9. T Abbott (Prime Minister) and J Hockey (Treasurer), Financial system inquiry, joint media release, 20 November 2013. 10. Financial System Inquiry, Financial System Inquiry: final report, (Murray Review), Treasury, November 2014, p. 89. 11. S Morrison (Treasurer) and K O’Dwyer (Minister for Revenue and Financial Services), Productivity Commission review into the efficiency and

competitiveness of the superannuation system, joint media release, 17 February 2016. 12. Productivity Commission (PC), ‘Superannuation’, PC website. 13. Dixon Advisory, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving

Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, 28 September 2017, p. 1. 14. This Bill is the subject of a separate Bills Digest. See: P Pyburne, Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017, Bills digest, 40, 2017-18, Parliamentary Library, Canberra, 2017. 15. Details of the terms of reference, submissions to the Economics Committee and the Committee’s final report are available on the inquiry

homepage.

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Economics Committee recommended that the Senate pass the Bill.16 However, the Labor Senators on the Economics Committee recommended that the Bill be opposed unless it is amended to apply ‘consistently and comprehensively across the superannuation system’.17

The matters raised by submitters are canvassed under the relevant Schedule heading below.

Senate Standing Committee for the Scrutiny of Bills The Senate Standing Committee for the Scrutiny of Bills (Scrutiny of Bills Committee) considered the Bill in its scrutiny digest of 18 October 2017. The Scrutiny of Bills Committee raised issues about strict liability offences and about significant matters which are to be contained in delegated legislation. 18 These issues are canvassed under the relevant schedule heading below.

Policy position of non-government parties/independents The position of the Australian Labor Party (Labor) in relation to the Bill can be gleaned from the dissenting comments made by the Labor members of the Economics Committee. In particular, the Labor Senators recommended that the Bill be opposed unless it is amended to apply ‘consistently and comprehensively across the superannuation system’—rather than merely to MySuper products.19

Senator Xenophon of South Australia NXT was a member of the Economics Committee and did not dissent from the majority view.20

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.21

Parliamentary Joint Committee on Human Rights The Parliamentary Joint Committee on Human Rights considered the Bill but has reported that it did not raise human rights concerns.22

Schedule 1—MySuper outcomes assessment Quick guide to Schedule 1

Under the SIS Act, only an authorised MySuper product is eligible to operate as a default product for employees who do not choose a fund to receive their mandatory superannuation contributions. Because of their default nature, MySuper products are subject to higher performance requirements.

Under the amendments in Schedule 1 to the Bill, trustees will be required to assess on an annual basis whether the outcomes that are being delivered are promoting the financial interests of their MySuper members. The amendments replace the existing ‘scale test’ with a broader ‘outcomes test’.

Financial implications According to the Explanatory Memorandum to the Bill the measures in Schedule 1 will have nil financial impact.23

16. Senate Economics Legislation Committee, Treasury Laws Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017 [and] Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017, The Senate, Canberra, 23 October 2017, p. 29.

17. Ibid., p. 47. 18. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 12, 2017, The Senate, Canberra, 18 October 2017, pp. 57-61. 19. Australian Labor Party, Dissenting report, Senate Economics Committee, Inquiry into the provisions of the Treasury Laws Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, The Senate, Canberra, 2017, pp. 41-47.

20. Senate Economics Legislation Committee, Treasury Laws Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017 [and] Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017, op. cit. 21. The Statement of Compatibility with Human Rights can be found at pages 22, 28, 35-38, 54, 75, 87, 98 and 118 of the Explanatory Memorandum to the Bill. 22. Parliamentary Joint Committee on Human Rights, Report, 11, 2017, 17 October 2017, p. 60. 23. Explanatory Memorandum, Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1)

Bill 2017, p. 3.

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Key provisions Where an individual does not actively choose a superannuation fund, their employer must pay their superannuation amounts into a superannuation fund that offers MySuper. Part 2C of the SIS Act establishes MySuper products as simple products sharing common characteristics.24

Within Part 2C, section 29VN of the SIS Act sets out trustee obligations relating to MySuper—including the ‘scale test’ which requires trustees of a superannuation fund that includes a MySuper product to determine on an annual basis whether the beneficiaries of the fund who hold the MySuper product are disadvantaged, in comparison to the beneficiaries of other funds who hold a MySuper product within those other funds, based on the number of members or assets in the MySuper product or fund.25

The outcomes test Item 2 of Schedule 1 to the Bill repeals and replaces paragraph 29VN(b) to remove the scale test and insert an ‘outcomes test’. Proposed paragraph 29VN(b) will require each trustee of a regulated superannuation fund that includes a MySuper product to determine, in writing, on an annual basis whether the financial interests of the beneficiaries of the fund who hold the MySuper product are being promoted by the trustee, having regard to a comparison of the MySuper product with other MySuper products and the factors which are listed in proposed subsection 29VN(2) being:

• whether the options, benefits and facilities offered under the MySuper product are appropriate to those beneficiaries

• whether the investment strategy for the MySuper product, including the level of investment risk and the return target, is appropriate to those beneficiaries

• whether the insurance strategy for the MySuper product is appropriate to those beneficiaries

• whether any insurance fees charged in relation to the MySuper product inappropriately erode the retirement income of those beneficiaries

• whether there are problems of scale in relation to the MySuper product:

- because the number of beneficiaries of the fund who hold the MySuper product or the number of beneficiaries of the fund per se is insufficient or - where the assets of the fund that are attributed to the MySuper product are, or are to be, pooled with other assets of the fund or assets of another entity—because that pool of assets is insufficient or because

the assets of the fund that are attributed to the MySuper product are insufficient • any other relevant matters, including matters prescribed by regulations. 26

When comparing the fund’s MySuper product with other MySuper products the trustees must compare each of the following:

• the fees and costs that affect the return to the beneficiaries holding the MySuper products

• the return target and actual return for the MySuper products

• the level of investment risk for the MySuper products and

• any other matter prescribed by regulations.27

The trustee must publish on the website of the regulated superannuation fund its determination of the outcomes test within 28 days after the determination is made. The determination and the summary of the assessments and comparisons on which the determination is based are to remain on the website until a subsequent determination is made.28

24. SIS Act, subsection 29R(1). 25. SIS Act, paragraph 29VN(b). 26. SIS Act, proposed subsection 29VN(4) contains the relevant regulation making power. 27. SIS Act, proposed subsection 29VN(3). 28. SIS Act, proposed subsection 29VN(5).

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According to the Law Council of Australia the obligation in proposed subsection 29VN(3) to compare the fund’s MySuper product with other MySuper products:

… may be inherently problematic because funds operate in different sectors and for different types of members. At worst, this could incentivise trustees to breach their current duty to formulate investment strategies which are suitable for their membership and their funds circumstances. 29

Stakeholder comments The Association of Superannuation Funds of Australia (AFSA) acknowledged the need for the regulators of the superannuation system to ‘have appropriate powers and instruments to ensure that the system is stable, efficient and delivers on its objectives’.30 However, AFSA opposes the requirement to publish the trustees’ determination that it has satisfied the outcomes test because, amongst other things:

• it duplicates the information in the MySuper dashboard that is prescribed by the Australian Securities and Investments Commission (ASIC)31

• there is no clear benefit for members

• there is a cost and resource burden for trustees and

• it creates confusion in the regulatory jurisdiction of APRA and ASIC because the outcomes test sits more squarely in the realm of consumer disclosure than it does in prudential regulation.32

Similarly the Corporate Superannuation Association (CSA) does not support the new outcomes assessment on the grounds that it will ‘affect smaller funds and their members more severely than larger entities’. In addition, the process to be followed in making the assessment may give rise to a ‘risk that trustees will converge towards extremely cautious strategies to avoid investment risk’ resulting in an ‘adverse comparison in any year’.33

Mercer supports the proposed annual MySuper outcomes assessment but not the proposal that the trustees’ determinations be publicly available. They would prefer that the determination was ‘provided to APRA on a confidential basis’.34

Essentially then, whilst stakeholders supported the proposed outcomes test, many ‘queried whether the test should apply to all superannuation products; what value it would add;35 and whether it could be improved’.36

Schedule 2—authority to offer MySuper product Quick guide to Schedule 2

APRA is a prudential regulator; essentially its role is to minimise the risk that the entities it regulates will be unable to fulfil their promises. In doing so APRA promotes the interests of the beneficiaries of those entities (for instance, superannuation fund members) as well as the stability of the financial system.37

Section 11 of the Australian Prudential Regulation Authority Act 1998 confers on APRA the power to do

29. Law Council of Australia (LCA), Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, 9 October 2017, p. 5. 30. Association of Superannuation Funds of Australia (ASFA), Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, 29 September

2017, p. 1.

31. Australian Securities and Investments Commission (ASIC), ‘MySuper product dashboard requirements for superannuation trustees’, ASIC website, last updated 18 January 2017. 32. ASFA, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, op. cit., p. 3. 33. Corporate Superannuation Association (CSA), Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws

Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, 25 September 2017, p. 2. 34. Mercer, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, 29 September 2017, p. 1. 35. Choice, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and

Member Outcomes in Superannuation Measures No. 1) Bill 2017, September 2017, p. 6. 36. Senate Economics Legislation Committee, Treasury Laws Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017 [and] Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017, The Senate, Canberra,

23 October 2017, p. 9. 37. S McCracken, J Bird, J Stumbles and G Tolhurst, Banking and financial institutions law, 8th edn, Lawbook Co., Sydney, 2013, p. 19.

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anything that is necessary or convenient to be done for, or in connection with, the performance of its functions. Accordingly, APRA is empowered to authorise an RSE licensee to offer a MySuper product. The amendments in Schedule 2 to the Bill allow APRA to refuse to authorise an RSE licensee to offer a MySuper product or to cancel an existing authority.

Financial implications According to the Explanatory Memorandum to the Bill the measures in Schedule 2 will have nil financial impact.38

Key provisions Test for authorising Currently, section 29T of the SIS Act, provides that APRA must authorise an RSE licensee to offer a MySuper product provided that specified circumstances are satisfied. Amongst other things, the test to be applied by APRA is whether it is satisfied:

• the RSE licensee, the individual trustees or the directors of the RSE licensee are likely to comply with the enhanced trustee obligations and director obligations (respectively) for MySuper products39

• the RSE licensee or each individual trustee is likely to comply with the relevant fees rules40 and

• the RSE licensee is not likely to contravene certain specified sections of the SIS Act.41

Item 1 of Schedule 2 to the Bill repeals existing paragraphs 29T(1)(h), (ha), (i) and (j) and substitutes proposed paragraphs 29T(h)-(k) so that the test to be applied in deciding whether to authorise an RSE licensee to offer a MySuper product is that APRA has no reason to believe that the RSE licensee (where the RSE licensee is made up of a group of individual trustees, the individual trustees) and the directors of an RSE licensee that is a body corporate may:

• fail to comply with the enhanced trustee obligations for MySuper products42

• fail to comply with the enhanced director obligations for MySuper products43

• fail to comply with the general fees rules and the fees rules in relation to MySuper products 44

• contravene the specified sections of the SIS Act.45

Cancelling an authorisation Existing subsection 29U(1) provides that APRA may cancel an authority to offer a MySuper product. While not restricting this general discretion, subsection 29U(2) provides that APRA may cancel such an authority if it is no longer satisfied about certain matters.

Item 2 of Schedule 2 to the Bill repeals and replaces paragraphs 29U(2)(c), (ca), (d) and (e) of the SIS Act to reframe the wording of these provisions. The amendments operate so that the circumstances in which APRA may cancel an authority to offer a MySuper product include where APRA has reason to believe that the RSE licensee (where the RSE licensee is made up of a group of individual trustees, the individual trustees) and the directors of an RSE licensee that is a body corporate:

• may not comply with the enhanced trustee obligations for MySuper products (whether because of a previous failure to do so, or for any other reason)46

38. Explanatory Memorandum, Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, p. 3. 39. SIS Act, paragraphs 29T(1)(h) and (ha). 40. SIS Act, paragraph 29T(1)(i). 41. SIS Act, paragraph 29T(1)(j). Those sections are 29W (offering a product as a MySuper product when not authorised to do so), 29WA

(contributions in relation to which no election is made are to be paid into a MySuper product) and 29WB (contributions by a large employer in relation to which no election is made are to be paid into a large employer MySuper product). 42. SIS Act, proposed paragraph 29T(1)(h). 43. SIS Act, proposed paragraph 29T(1)(i). 44. SIS Act, proposed paragraph 29T(1)(j). 45. SIS Act, proposed paragraph 29T(1)(k).

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• may not comply with the enhanced director obligations for MySuper products47

• may not comply with the general fees rules and the fees rules in relation to MySuper products48 or

• may contravene the specified sections of the SIS Act.49

Meaning of reason to believe In WA Pines Pty Ltd v Bannerman50 Lockhart J had this to say in relation to the requirement to have a ‘reason to believe’ in the context of section 155 of the then Trade Practices Act 1974:

In my opinion, the words "has reason to believe" in sub-s.155 (1) imply actual belief … Words such as these are found frequently in legislation or regulations conferring powers on Ministers of the Crown or public servants. They must be read as limiting otherwise arbitrary powers. If they are to be read as empowering the person in whom the power is vested, to determine conclusively whether the limitation has been satisfied, the value of the intended limitation is nugatory.

Plainly, the power must not be exercised dishonestly or in bad faith … In my opinion the words "has reason to believe . . ." mean that the Commission must believe that a person is capable of furnishing information, producing documents or giving evidence; and there must be reasonable grounds or cause for that belief, before the powers … may be exercised.

51

Essentially this is one of the least controversial of the measures in the Bill. It strengthens APRA’s existing power to authorise an RSE licensee to offer a MySuper product as well as the existing power to cancel an authorisation.

Schedule 3—director penalties Quick guide to Schedule 3

At present, superannuation directors are not subject to criminal or civil penalties in relation to their duty to act in the best interests of members. A member who has incurred loss or damage as a result of director misconduct can seek recovery through civil action—or APRA can disqualify the director. This is inconsistent with the regime applying to the directors of responsible entities of managed investment schemes under the Corporations Act 2001 who are subject to criminal and civil penalties.52

Schedule 3 imposes civil and criminal penalties on directors of RSE licensees who fail to execute their responsibilities.

Financial implications According to the Explanatory Memorandum to the Bill the measures in Schedule 3 will have nil financial impact.53

Key provisions Contravening director obligations As stated in Schedule 1 to the Bill above, section 29VN of the SIS Act imposes additional obligations on a trustee in relation to a MySuper product. With the enactment of the amendments in Schedule 1, these will include the requirement for trustees to assess, on an annual basis, whether the outcomes that are being delivered are promoting the financial interests of their MySuper members.

46. SIS Act, proposed paragraph 29U(2)(c). 47. SIS Act, proposed paragraph 29U(2)(ca). 48. SIS Act, proposed paragraph 29U(2)(d). 49. SIS Act, proposed paragraph 29U(2)(e). 50. WA Pines Pty Ltd v Bannerman (1980) 41 FLR 175, [1980] FCA 79, (27 June 1980).

51. Ibid.

52. Financial System Inquiry, Financial System Inquiry: final report, (Murray Review), op. cit., p. 135. 53. Explanatory Memorandum, Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, p. 4.

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Section 29VO of the SIS Act imposes additional obligations on a director of a corporate trustee in relation to a MySuper product. In particular, the section requires each director to exercise a reasonable degree of care and diligence for the purposes of ensuring that the corporate trustee carries out the obligations contained in section 29VN.

The existing law provides that a director must not contravene section 29VO.54 If a contravention occurs and results in loss or damage to another person, that person may, with the leave of the court, recover the amount of the loss or damage by action against the director or against any person involved in the contravention.55

Item 1 of Schedule 3 to the Bill repeals and replaces subsection 29VPA(2) of the SIS Act so that the prohibition on contravening section 29VO is a civil penalty provision and gives rise to civil and criminal consequences for the person who is contravening or who is involved in a contravention of, subsection 29VO(1) of the SIS Act.56

Additional consequences for directors Part 6 of the SIS Act contains provisions relating to the governing rules of superannuation entities. Essentially, if the governing rules of an RSE do not contain covenants which are equivalent to those set out in Part 6, the relevant covenants are taken to be contained in the governing rules.57 Within Part 6, section 52 sets out the covenants that apply to the trustees of an entity. Section 52A of the SIS Act sets out in near equivalent form those covenants relating to directors that are to be included in the governing rules of an RSE. These include, amongst other things the duty to:

• act honestly in all matters concerning the entity58

• exercise the same degree of care, skill and diligence as a prudent superannuation director would exercise59

• perform the director’s duties and exercise the director’s powers in the best interests of the beneficiaries60 and

• if there is a conflict between the duties of the director to the beneficiaries and the duties of the director to any other person the director is to give priority to the duties to and interests of the beneficiaries.61 This duty overrides any conflicting obligations under certain other statutes. 62

Item 2 of Schedule 3 to the Bill inserts proposed section 55AA into the SIS Act. A person must not contravene a covenant that is set out in subsection 52A and contained, or taken to be contained, in the governing rules of a superannuation entity.63 The prohibition on contravening such a covenant is a civil penalty provision and gives rise to civil and criminal consequences for the person who is contravening or who is involved in the contravention of proposed subsection 55AA(1).64

Key issues The key issue for stakeholders is that the Bill anticipates that the SIS Act will contain two parallel systems for holding RSE licensee directors accountable. Not only does the possibility of being personally sued for loss and damage in the event that a director breaches the requirement to exercise a reasonable degree of care and diligence remain; but new civil and criminal penalties may be imposed for the same contravention.

54. SIS Act, subsection 29VPA(1). 55. SIS Act, subsection 29VPA(3). 56. SIS Act, proposed subsection 29VPA(2). 57. SIS Act, subsection 52(1). 58. SIS Act, paragraph 52A(2)(a). 59. SIS Act, paragraph 52A(2)(b). 60. SIS Act, paragraph 52A(2)(c). 61. SIS Act, paragraph 52A(2)(d). 62. SIS Act, subsection 52(3). The relevant statutes are Part 2D.1 of the Corporations Act 2001 and Subdivision A of Division 3 of Part 2-2 of the

Public Governance, Performance and Accountability Act 2013. 63. SIS Act, proposed subsection 55AA(1). 64. SIS Act, proposed subsection 55AA(2).

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The rationale for this measure is that the Final Report of the Murray Review recommended that the penalty regime for directors of trustees set out in the SIS Act should be aligned with the penalty regime applying to directors of responsible entities of managed investment schemes under Chapter 5C of the Corporations Act.65

According to the Law Council of Australia:

Directors of superannuation trustees will be exposed to a higher degree of liability than any other directors in Australia … The high degree of exposure will be an obstacle to procuring independent professional directors on superannuation trustee boards. 66

The provisions in Schedule 3 to the Bill do not align the provisions of the SIS Act with those of Chapter 5C of the Corporations Act as recommended.

Under the relevant provisions of the Corporations Act, directors of a responsible entity have no direct liability to individual scheme members for a breach of their statutory duties. Once the court makes a declaration that a civil penalty provision is breached,67 ASIC can seek a pecuniary penalty if the breach is serious and materially prejudices the interests of the scheme or its members.68 In addition, the court may order compensation to be paid to the scheme on application by ASIC or the responsible entity.69

Schedule 4—approval to own or control RSE licensee Quick guide to Schedule 4

The amendments in Schedule 4 to the Bill increase APRA's supervision and enforcement powers when a change of ownership or control of an RSE takes place by giving APRA the power to:

• refuse authority for a change in ownership or control where it has concerns about the person seeking ownership or control

• give a direction to a person to relinquish control of an RSE licensee and

• remove or suspend an RSE licensee where it is subject to the control of its owner.

Financial implications According to the Explanatory Memorandum to the Bill the measures in Schedule 4 will have nil financial impact.70

Key provisions Item 8 of Schedule 4 to the Bill inserts proposed Division 8—Approval to hold a controlling stake in an RSE licensee into Part 2A (licensing of trustees and groups of individual trustees) of the SIS Act. Proposed Division 8 only applies to an RSE licensee that is a body corporate.71 For the purposes of proposed Division 8, a person holds a controlling stake in an RSE licensee that is a body corporate if the person holds a stake of more than 15 per cent in the RSE licensee.72

The amendments set out in Schedule 4 to the Bill are intended to address issues which became apparent following the inquiry into the collapse of Trio Capital.

… a number of investment vehicles operated by Trio Capital appear not to have been legitimate investments but merely conduits through which investors’ money was stolen. In November 2003, a reputable funds manager,

65. Financial System Inquiry, Financial System Inquiry: final report, (Murray Review), op. cit., recommendation 13, p. 133. 66. LCA, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, op. cit., p. 7. 67. Corporations Act, subsection 601FC(5) provides that a breach of the duties of a responsible entity is a civil penalty provision under section

1317E.

68. Corporations Act, subsection 1317G(1). 69. Corporations Act, section 1317H. 70. Explanatory Memorandum, Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, p. 4.

71. SIS Act, proposed section 29H. 72. Item 1 of Schedule 4 to the Bill inserts the definition of controlling stake into subsection 10(1) of the SIS Act.

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Tolhurst, was acquired by new owners; it now appears that they made this acquisition with a view to defrauding Australian investors (particularly superannuation investors) of substantial sums of money. 73

Application for approval The Bill provides that a person may apply to APRA for approval to hold a controlling stake in an RSE licensee by making an application in the approved manner and form and containing the required information.74

APRA must make a decision within 90 days after receiving the application or 90 days after receiving any additional information that has been requested from the person—although APRA may extend the decision making period by up to 30 days provided that APRA informs the person of the extension, in writing, within 90 days after receiving the application. 75

If APRA has not made a decision to approve a person to hold a controlling stake in an RSE licensee by the end of the relevant period, APRA is deemed to have decided to refuse the application.76

Approval Where a person has satisfied all the application requirements, APRA must give approval for the person to hold a controlling stake in an RSE licensee if it has no reason to believe that the RSE licensee may be unable to satisfy one or more of the trustee’s obligations due to the person’s controlling stake in the RSE licensee, or the way in which that controlling stake is likely to be used.77 In that case, APRA must notify the RSE licensee in writing of the approval.78

Where APRA has decided to refuse an application for approval to hold a controlling stake in an RSE licensee, it must take all reasonable steps to ensure that the person is given a notice to that effect, setting out the reasons for the decision, as soon as practicable after refusing the application.79

Item 9 of Schedule 4 to the Bill inserts proposed section 29JCB into the SIS Act so that a person commits an offence of strict liability if the person holds a controlling stake in an RSE licensee but does not have approval from APRA to do so.80 The maximum penalty for the offence is 400 penalty units for each day on which the person holds a controlling stake in the RSE licensee without approval.81

This section applies where a person begins to hold a controlling stake in an RSE licensee on or after the day that is three months after the day that Schedule 4 commences.82

Scrutiny of Bills Committee The Scrutiny of Bills Committee noted that proposed section 29JCB introduces a strict liability offence with a maximum penalty of 400 penalty units for each day on which the person holds a controlling stake without approval. Of concern to the Scrutiny of Bills Committee was that the Guide to Framing Commonwealth Offences states that strict liability should be applied only where the penalty does not include imprisonment and a fine does not exceed 60 penalty units for an individual (or 300 penalty units for a body corporate).83

Given that the proposed offence is subject to a maximum penalty of 400 penalty units applicable on each day of the contravention, the Scrutiny of Bills Committee has requested the Minister’s justification of the proposed penalty.84

73. Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the collapse of Trio Capital, May 2012, p. xix. 74. SIS Act, proposed section 29HA. 75. SIS Act, proposed subsections 29HC(1) and (2). 76. SIS Act, proposed subsection 29HC(4). 77. SIS Act, proposed section 29HD. 78. SIS Act, proposed section 29HE. 79. SIS Act, proposed section 29HF. 80. The imposition of strict liability means that a fault element does not need to be satisfied, but the offence will not criminalise honest errors

and a person cannot be held liable if he, or she, had an honest and reasonable belief that they were complying with relevant obligations. 81. Under section 4AA of the Crimes Act 1914, a penalty unit is equivalent to $210. This means that the maximum daily penalty is $84,000. 82. Item 15 of Schedule 4 to the Bill. 83. Attorney-General’s Department (AGD), A guide to framing Commonwealth offences, infringement notices and enforcement powers,[AGD

Canberra], September 2011, p. 23. 84. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 12, 2017, op. cit., p. 59.

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Directions to relinquish control Item 10 of Schedule 4 to the Bill inserts proposed Division 2 into Part 16A of the SIS Act. Note that Division 1 of Part 16A—APRA’s powers to issue directions is inserted by item 11 of Schedule 5 to the Bill and is discussed under the relevant heading below.

The Bill empowers APRA to give a person a direction to relinquish control of an RSE licensee in a range of circumstances.

The first circumstance is where APRA has reason to believe the person has a controlling stake in, or practical control of the RSE licensee and because of the person’s controlling stake, or practical control, of the RSE licensee or the way in which control has been, is, or is likely to be exercised the RSE licensee has been, is or is likely to be unable to satisfy one or more of the trustee’s obligations.85

The Bill provides that a person has practical control over an RSE licensee that is a body corporate where the person does not hold a controlling stake and either:

• the directors of the RSE licensee are accustomed or under an obligation, whether formal or informal, to act in accordance with the directions, instructions or wishes of the person86 or

• the person (either alone or together with associates) is in a position to exercise control over the RSE licensee.87

The second circumstance is where APRA has reason to believe that the person has a controlling stake in the RSE licensee but does not hold the relevant approval to do so.88

The third circumstance is where APRA has reason to believe that the person who has been approved to hold a controlling stake in the RSE licensee gave APRA information in relation to the application for approval that was false or misleading in a material particular.89

The direction to relinquish a controlling stake in the RSE licensee must be given in writing along with a statement of reasons for giving the direction. 90 The direction to relinquish control may be revoked, in writing, by APRA.91

Consequences Within 90 days (known as the compliance period) of being given a direction to relinquish a controlling stake in the RSE a person must take such steps as are necessary to ensure that:

• the directors of the RSE licensee are not obliged to act in accordance with the directions, instructions or wishes of the person

• the person is not in a position to exercise control over the RSE licensee and

• the person does not hold a controlling stake in the RSE licensee.92

A person who has been given a direction to relinquish a controlling stake in the RSE commits an offence if the person intentionally or recklessly contravenes the requirement. The maximum penalty for the offence is 400 penalty units for each day on which the person holds a controlling stake in the RSE licensee without approval.93

85. SIS Act, proposed subsection 131EB(1). The trustee obligations are contained in a covenant set out in sections 52-53, or prescribed under section 54A, or referred to in section 29VN or 29VO. 86. The reference to being accustomed to acting in accordance with the person’s instructions or wishes reflects the definitions of ‘de facto’ and ‘shadow’ directors inferred from section 9 of the Corporations Act by the courts, including of body corporates that are associates of the entity

in question: Deputy Commissioner of Taxation v Leslie Raymond Austin [1998] FCA 1034; Corporate Affairs Commission v Drysdale [1978] HCA 52; (1978) 141 CLR 236; Ho v Akai Pty Limited (in liquidation) [2006] FCAFC 159; Buzzle Operations Pty Ltd (In Liq) v Apple Computer Australia Pty Ltd [2010] NSWSC 233 (provides a summary of the definition of ‘shadow directors’); Chameleon Mining NL v Murchison Metals Limited [2010] FCA 1129 (provide a summary of definition of de-facto director). 87. SIS Act, proposed section 131EC. 88. SIS Act, proposed subsection 131EB(2). The relevant approval is granted under section 29HD of the SIS Act. 89. SIS Act, proposed subsection 131EB(3). 90. SIS Act, proposed subsections 131EB(5) and (6). 91. SIS Act, proposed subsections 131EB(7) and (8). 92. SIS Act, proposed subsections 131ED(1) and (2). 93. This means that the maximum daily penalty is $84,000.

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Court orders A person who has been given a direction to relinquish control over an RSE licensee may make an application to the Administrative Appeals Tribunal (AAT) for a review of the decision.94 In that case, it is open to the AAT to make an order staying or otherwise affecting the implementation of the direction.95

Interim orders The Bill empowers APRA to apply to the Federal Court for an order to prevent the person, for the duration of any AAT stay, from exercising control over the RSE licensee in a manner that results in the RSE licensee being unable to satisfy one or more of the trustee’s obligations. 96

APRA may also apply to the Federal Court for orders where it has reason to believe that the person may exercise control over the RSE licensee in a manner that results in the RSE licensee being unable to satisfy one or more of the trustee’s obligations, during the compliance period.97

Remedial orders If a direction to relinquish control over an RSE licensee is in force, APRA may apply to the Federal Court for the following orders:

• an order directing the disposal of shares

• an order restraining the exercise of any rights attached to shares

• an order prohibiting or deferring the payment of any sums due to a person in respect of shares held by the person or

• an order that any exercise of rights attached to shares be disregarded.98

Those orders may only be made on application by APRA and where the Federal Court is satisfied of relevant matters in relation to a person who holds a controlling stake in, or has practical control of, the RSE licensee and which are listed in the Bill.99

Suspension or removal of a trustee Currently, section 133 of the SIS Act sets out the circumstances in which APRA may suspend or remove a trustee of a superannuation entity. Item 11 of Schedule 4 to the Bill inserts two additional circumstances, being that APRA has reason to believe:

• either a person holds a controlling stake in, or has practical control of, the RSE licensee and because of the person’s control of the RSE licensee, or the way in which that control has been, is or is likely to be exercised, the RSE licensee has been, is or is likely to be unable to satisfy one or more of the trustee’s obligations 100 or

• a person holds a controlling stake in an RSE licensee but does not have approval to do so.101

Key issues An order directing the disposal of shares—that is, the compulsory divestment of shares—is unusual but not unknown in Australian law. The Financial Sector (Shareholdings) Act 1998 is in similar terms. It provides that:

• if a person holds a stake in a financial sector company that exceeds the allowed percentage (that is, 15 per cent or a higher percentage approved by the Treasurer), the Federal Court may make orders to ensure that the situation ceases to exist and

94. Item 3 of Schedule 4 to the Bill inserts proposed paragraph 10(1)(taac) into the SIS Act so that the decision by APRA to direct a person to relinquish control of an RSE licensee is reviewable by the AAT. 95. Administrative Appeals Tribunal Act 1975, subsection 41(2). 96. SIS Act, proposed subsection 131EE(2). 97. SIS Act, proposed subsection 131EE(3) and (4). 98. SIS Act, proposed subsection 131EF(4). 99. SIS Act, proposed subsection 131EF(3). 100. SIS Act, proposed paragraph 133(1)(f). 101. SIS Act, proposed paragraph 133(1)(g).

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• a person who holds a stake of no more than 15 per cent of a financial sector company may be declared by the Treasurer to have practical control of the company. The person must then take steps to end that control. 102

Under the Foreign Acquisitions and Takeovers Act 1975 (FATA), a significant action is an action to acquire interests in securities, assets or Australian land, or otherwise take action in relation to entities (being corporations and unit trusts) and businesses, that have a connection to Australia that results in a change in control involving a foreign person or control being assumed by a foreign person.103

The FATA empowers the Treasurer—in certain circumstances mostly related to breaching certain obligations under that Act (such as seeking approval to make the acquisition)—to make a disposal order (for example, the disposal of shares acquired by the foreign person) where the result of the significant action is contrary to the national interest. In this regard, the ability of APRA to order the disposal of shares is similar in that it arises in circumstances where certain obligations have been breached, including a failure to obtain approval to hold a controlling stake in the RSE.

Schedule 5 Quick guide to Schedule 5

The amendments in Schedule 5 to the Bill strengthen APRA’s supervision and enforcement powers by giving APRA the power to issue a direction to an RSE licensee where APRA has prudential concerns.

They enable APRA to intervene at an early stage to address prudential concerns in a manner that ensures the required actions are in the best interests of members.104

Financial implications According to the Explanatory Memorandum to the Bill the measures in Schedule 5 will have nil financial impact.105

Key provisions Item 11 of Schedule 5 to the Bill inserts proposed Part 16A—APRA’s powers to issue directions into the SIS Act.106

General powers The Bill gives APRA a very broad power to direct an RSE licensee to do one or more of the following:

• to comply with the whole or a part of the SIS Act, Superannuation Industry (Supervision) Regulations 1994, the prudential standards or the Financial Sector (Collection of Data) Act 2001

• if the RSE licensee is a body corporate, to do one or more of the following:

- to remove a responsible officer of the RSE licensee from office - to ensure that a responsible officer of the RSE licensee does not take part in the management or conduct of the business of the RSE licensee, or the business of a registrable superannuation entity of the RSE licensee, except as permitted by APRA - to appoint a person as a responsible officer of the RSE licensee for such term as APRA directs • to order an audit of the affairs of the RSE licensee or the affairs of a RSE of the licensee at the expense of the

RSE licensee, by an auditor chosen by APRA

• to remove an auditor of the RSE licensee, or of a RSE, from office and appoint another auditor to hold office for such term as APRA directs

102. Financial Sector (Shareholdings) Act, section 8. 103. FATA, section 39. 104. Explanatory Memorandum, Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, p. 55.

105. Ibid., p. 5. 106. Note that Divisions 1 and 3 of proposed Part 16A are inserted into the SIS Act by Schedule 5 to the Bill whilst Division 2 of proposed Part 16A is inserted into the SIS Act by Schedule 4 to the Bill.

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• to order an actuarial investigation of the affairs of a registrable superannuation entity of the RSE licensee, at the expense of the RSE licensee and by an actuary chosen by APRA

• to remove an actuary of a registrable superannuation entity of the RSE licensee from office and appoint another actuary to hold office for such term as APRA directs

• not to accept, or to cease to accept (permanently or temporarily), contributions to a registrable superannuation entity of the RSE licensee

• not to borrow any amount

• not to pay or transfer any amount or asset to any person, or create an obligation (contingent or otherwise) to do so

• not to undertake any financial obligation (contingent or otherwise) on behalf of any other person

• not to discharge any liability of the RSE licensee or a registrable superannuation entity of the RSE licensee

• to make changes to the RSE licensee’s systems, business practices or operations (including the RSE licensee’s systems business practices or operations in relation to a registrable superannuation entity of the RSE licensee)

• to do, or refrain from doing, anything else in relation to the affairs of the RSE licensee or a registrable superannuation entity of the RSE licensee.107

The direction may deal with the time by which, or period during which, it is to be complied with.108

Stakeholder comments The key issue for most stakeholders in relation to the measures in Schedule 5 to the Bill is that the powers proposed in the Bill ‘go beyond what is reasonably necessary to resolve or address prudential concern’.109

In general, stakeholders considered that the range of directions that APRA could make is too wide.110 According to Dr Scott Donald of the University of New South Wales, APRA's response to a situation should be directed towards, or be proportionate to, the risks or potential costs of the situation. He suggested that limiting the directions power to crisis situations may partly address this concern—although doing so would reduce the capacity of APRA to employ a proportionate response to less severe situations.111

It was suggested that in order to limit the risks inherent in such a power, APRA should, in most cases, be required to afford trustees with a reasonable opportunity to respond and submit argument prior to the formal direction being applied.112 However the Bill does not specifically require this.

Reasons for exercising the power APRA may only exercise the power to give a direction if it has reason to believe that:

• the RSE licensee has contravened a provision of the SIS Act, the regulations, the prudential standards or the Financial Sector (Collection of Data) Act

• the RSE licensee is likely to contravene a provision of any one of the above—and the direction is reasonably necessary to deal with one or more prudential matters in relation to the RSE licensee

• the RSE licensee has contravened a condition or direction under the SIS Act or the Financial Sector (Collection of Data) Act

107. SIS Act, proposed subsection 131D(2). 108. SIS Act, proposed subsection 131D(5). 109. Australian Institute of Company Directors, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, 29 September 2017, p. 5.

110. S Donald (Centre for the Law, Markets and Regulation, University of New South Wales), Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, 29 September 2017, p. 4.

111. Ibid., p. 5. 112. LCA, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, op. cit., p. 8.

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• the direction is necessary in the interests of beneficiaries of a registrable superannuation entity of the RSE licensee

• the RSE licensee is, or is about to become, unable to meet its liabilities (whether as trustee of a registrable superannuation entity or otherwise)

• there is, or there might be, a material risk to the security of the assets of the RSE licensee (whether held as trustee of a registrable superannuation entity or otherwise)

• there has been, or there might be, a material deterioration in the financial condition of the RSE licensee or a registrable superannuation entity of which it is trustee

• the RSE licensee is conducting its affairs or the affairs of a registrable superannuation entity of which it is trustee in an improper or financially unsound way

• the failure to issue a direction would materially prejudice the interests or reasonable expectations of beneficiaries of a registrable superannuation entity of the RSE licensee

• the RSE licensee is conducting its affairs or the affairs of a RSE of which it is trustee in a way that may cause or promote instability in the Australian financial system.113

Stakeholder comments Stakeholders considered that the power granted to APRA was too extensive. Of concern was that the requirement for APRA to have ‘reason to believe’ may be satisfied by the presence of a single, perhaps not even compelling, reason.114 The Economics Committee noted the concerns put forward by Industry Super Australia in its submission:

The breadth of the expansion, the sensitivity of the powers to discretion, and the fact that some of the powers are not prudential in nature mean that the powers could achieve both good outcomes as well is bad ones, with little public safeguards to ensure the former. As a result, the proposals are not without risks. 115

And further:

… it is unclear what type of matter would cause APRA to form the view that it must issue a direction because it is “necessary in the interests of beneficiaries”. A nebulous directions power is problematic because the provision is capable of being understood in more ways than one, lending itself to various interpretations by different individuals. The lack of clarity about the application of this reform limits the effectiveness of the provision.

116

Essentially, there is a disconnect between the Explanatory Memorandum, which states that the directions power in the Bill may be exercised ‘where APRA has prudential concerns’ and the actual terms of proposed subsection 131D(1) which allow for the exercise of the directions power for reasons which are not explicitly prudential.117

Directions to a connected entity Section 10 of the SIS Act defines a connected entity, in relation to an RSE licensee of a registrable superannuation entity as a subsidiary of the RSE licensee (where the RSE licensee is a body corporate) and any other entity of a kind prescribed by the regulations. The Bill contains a similar direction making power for APRA in relation to the conduct of a connected entity of an RSE licensee.118

113. SIS Act, proposed subsection 131D(1). 114. Donald (Centre for the Law, Markets and Regulation, University of New South Wales), Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, op. cit., p. 4.

115. Industry Super Australia, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, 28 September 2017, p. 11. 116. Ibid., p. 14. 117. Explanatory Memorandum, Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1)

Bill 2017, p. 55. 118. SIS Act, proposed section 131DA.

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Machinery provisions A direction must be given by notice in writing to the RSE licensee or to the connected entity of the RSE licensee and the relevant RSE licensee. The written notice must set out the grounds on which the direction is given.119

In deciding whether to give a direction under proposed subsection 131D(1) to an RSE licensee or under proposed subsections 131DA(1) or (3) to a connected entity and the relevant RSE, APRA may disregard any external support for the RSE licensee.120

According to the Explanatory Memorandum to the Bill:

External support includes particular guarantees or assurances, and are required to support the stability of the superannuation system. For example, the provision of external support to a stressed entity in some form of temporary public support would not fetter the ability of APRA to determine that the preconditions are met for giving a direction to the entity.

121

A direction under Division 1 (the general powers) of proposed Part 16A—APRA’s powers to issue directions is not a legislative instrument.122

Varying or revoking a direction APRA may vary a direction given to an RSE licensee or to a connected entity of an RSE licensee by notice in writing to the RSE licensee or to the connected entity and the relevant RSE licensee if, at the time of the variation, APRA considers that the variation is necessary and appropriate.123

Similarly, APRA may revoke a direction given to an RSE licensee or to a connected entity of an RSE licensee by notice in writing to the RSE licensee or to the connected entity and the relevant RSE licensee if at the time of the revocation, APRA considers that the direction is no longer necessary or appropriate.124

Offences A person commits an offence of strict liability if the person is an RSE licensee or a member of a group of individual trustees that is an RSE licensee and the RSE licensee does, or fails to do, something that results in a contravention of a direction.125 In that case, the penalty is 100 penalty units.126

The Bill inserts three additional strict liability offences for a failure to comply with a direction given to an RSE licensee by:

• an officer of the RSE licensee who fails to take reasonable steps to ensure that the RSE licensee complies with a direction127

• a connected entity of an RSE licensee which does, or fails to do, something that results in a contravention of a direction128 and

119. SIS Act, proposed subsection 131DB(1). 120. SIS Act, proposed subsections 131DB(3) and (4). 121. Explanatory Memorandum, Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, p. 69.

122. SIS Act, proposed subsection 131DB(2). 123. SIS Act, proposed subsection 131DC(1). 124. SIS Act, proposed subsection 131DC(3). 125. SIS Act, proposed subsection 131DD(1). 126. However, where a body corporate is convicted of an offence against proposed subsection 131DD(1) of the SIS Act, subsection 4B(3) of the

Crimes Act 1914 allows a court to impose a fine of up to five times the penalty stated. 127. SIS Act, proposed subsection 131DD(2). The term officer of a corporation is defined in section 9 of the Corporations Act 2001 as: (a) a director or secretary of the corporation; (b) a person who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation, or who has the capacity to affect significantly the corporation’s financial standing, or in accordance with

whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the corporation); (c) a receiver, or receiver and manager, of the property of the corporation; (d) an administrator of the corporation; (e) an administrator of a deed of company arrangement executed by the corporation; (f) a liquidator of the corporation; or (g) a trustee or other person administering a compromise or arrangement made between the corporation and someone else. Proposed subsection 131DD(7) applies the Corporations Act definition of officer to section 131DD. 128. SIS Act, proposed subsection 131DD(3).

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• an officer of a body corporate that is a connected entity of an RSE licensee where the officer fails to take reasonable steps to ensure that the connected entity complies with the direction.129

If a person commits any of the offences outlined above, the person commits an offence in respect of the first day on which the offence is committed and on each subsequent day on which the circumstances that gave rise to the person committing the offence continues.130

Scrutiny of Bills Committee The Scrutiny of Bills Committee noted that proposed section 131DD introduces a strict liability offence with a maximum penalty of 100 penalty units for each day on which the person fails to comply with a direction given by APRA to an RSE licensee or a connected entity. Of concern to the Scrutiny of Bills Committee was that the Guide to Framing Commonwealth Offences states that strict liability should be applied only where the penalty does not include imprisonment and a fine does not exceed 60 penalty units for an individual (or 300 penalty units for a body corporate).131

Given that the proposed offence is subject to a maximum penalty of 100 penalty units applicable on each day of the contravention, the Scrutiny of Bills Committee has requested the Minister’s justification of the proposed penalty.132

Protection from liability The Bill contains a general protection from liability that would otherwise arise from any act or omission of a person who has performed in good faith and without negligence in complying with the SIS Act.133

In addition the Bill sets out a protection from liability for something done or not done in compliance with a direction given by APRA to an RSE licensee or a connected entity.134

Schedule 6—portfolio holdings disclosure Quick guide to Schedule 6

Schedule 6 to the Bill amends the Corporations Act to ensure that superannuation fund members, and others including financial analysts, have access to publicly available information about the portfolio holdings of superannuation funds.

Financial implications According to the Explanatory Memorandum to the Bill the measures in Schedule 6 will have nil financial impact.135

Key provisions Currently, section 1017BB of the Corporations Act sets out the obligations of trustees of registrable superannuation entities to make information relating to the investment of their assets publicly available on their website.

Disclosure Item 1 of Schedule 6 to the Bill repeals and replaces subsection 1017BB(1) of the Corporations Act. Proposed subsection 1017BB(1) introduces a new term—disclosable item being each investment item allocated to an investment option.136

129. SIS Act, proposed subsection 131DD(4). 130. SIS Act, proposed subsection 131DD(5). 131. AGD, A guide to framing Commonwealth offences, infringement notices and enforcement powers, op. cit., p. 23.

132. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 12, 2017, op. cit., p. 59. 133. SIS Act, proposed subsection 131FB(1). 134. SIS Act, proposed section 131FC. 135. Explanatory Memorandum, Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1)

Bill 2017, p. 5. 136. Item 3 of Schedule 6 to the Bill amends subsection 1017BB(6) of the Corporations Act by inserting the definition of investment item being an asset or a derivative; and by inserting the definition of investment option being a choice product that does not contain multiple investment options and a MySuper product (within the meaning of the SIS Act).

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The Bill imposes an obligation on the trustee, or the trustees, of a RSE to make publicly available on its website specified information about each of the entity’s investment options. This must be done no later than 90 days after each reporting day.137 The information to be disclosed is:

• sufficient information to identify each investment item allocated to the investment option at the end of the reporting day that is held by the reporting entity or an associated entity of the reporting entity; and is not an investment in an associated entity of the reporting entity

• sufficient information to identify the value, and the weighting or exposure, at the end of the reporting day of each disclosable item and

• the total value, and the total weighting or exposure, at the end of the reporting day of all disclosable items.138

The regulations may prescribe a kind of disclosable item—in which case the information to be disclosed is limited to the name of the kind of item and the total value, and the total weighting or exposure at the end of the reporting day of all items of that kind.139

Stakeholder comments Of concern to some stakeholders is that the measure will impose a significant compliance burden which ‘would predominantly be suffered in the course of producing voluminous disclosure, most of which would be of little use, meaningless and immaterial to typical members of superannuation funds’.140

Exemptions Item 2 of Schedule 6 to the Bill repeals and replaces subsections 1017BB(4) and (5) to insert the circumstances in which a trustee or the trustees are fully or partially exempt from reporting.

In addition, the Bill provides that the RSE is not required to disclose information in respect of up to five per cent of the assets attributable to each investment option—provided that those investment items are commercially sensitive and making information publicly available about those investment items would be detrimental to the interests of the entity’s members.141

Stakeholder comments The Financial Services Council (FSC) supports the inclusion of the five per cent threshold on the grounds that it ‘should be sufficient for now to protect those assets where disclosure of the fund name or holdings is not permitted as a result of confidentiality undertakings’ (for example private equity assets).142 The FSC recommended that RSE licensees could seek exemption from ASIC to provide relief (either Class Order or specific relief) in situations where the five per cent threshold has been exceeded and the RSE is under an obligation not to disclose the information.143

ASFA expressed its concern that this measure may lead to:

• the under-disclosure/non-disclosure of assets which are not commercially sensitive; and

• a large number of applications for relief to ASIC for assets whose value exceeds 5%. 144

In order to address this potential problem ASFA suggests:

• establishing principles by which trustees can exempt commercially sensitive information (e.g. directly held real estate/infrastructure assets, derivatives)

137. Corporations Act, subsection 1017BB(6) defines the term reporting day as 30 June and 31 December each year. 138. Corporations Act, proposed subsection 1017BB(1). 139. Corporations Act, proposed subsection 1017BB(1A). 140. LCA, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and

Member Outcomes in Superannuation Measures No. 1) Bill 2017, op. cit., p. 9. 141. Corporations Act, proposed subsection 1017BB(5A). 142. Financial Services Council, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, 29 September 2017, p. 13. 143. Ibid. 144. ASFA, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and

Member Outcomes in Superannuation Measures No. 1) Bill 2017, op. cit., p. 6.

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• making disclosure of commercially sensitive assets non-specific (i.e. not identifying individual assets)

• identifying the asset but not disclosing the value

which would still aid transparency in terms of asset concentration and portfolio risk. 145

Schedule 7—annual members’ meetings Quick guide to Schedule 7

The provisions of Schedule 7 to the Bill require RSE licensees to hold annual members’ meetings for the purpose of discussing the key aspects of the fund and providing members with a forum to ask questions about the fund’s performance and operations.

Financial implications According to the Explanatory Memorandum to the Bill the measures in Schedule 7 will have nil financial impact on the Government.146

However, the measure is likely to have a compliance cost to stakeholders which the Government estimates as ‘low to medium’.147 According to the Regulation Impact Statement the measure:

… would involve an overall initial cost of $8.5 million (mainly related to IT) and ongoing costs of around $13.7 million per year. The annual compliance cost impact, averaged over 10 years, is estimated at $14.6 million. These costs would be spread across 144 RSE licensees and 221 funds (around $66,000 p.a. per fund). 148

This estimate of cost has been refuted by many stakeholders as discussed below.

Key provisions Item 5 of Schedule 7 to the Bill renames existing Division 5 of Part 2B of the SIS Act and inserts proposed Subdivision A—Annual members’ meetings. The effect of the amendment is that the existing provisions of Division 5 will fall within the newly named Subdivision B of Division 5.

Requirement for annual members meeting Currently trustees of APRA-regulated funds are required to provide annual reports and periodic statements to members.149 Members are able to request information from trustees to assist in understanding benefit entitlements.150 According to the Explanatory Memorandum to the Bill:

By contrast, shareholders of public companies can engage directly with directors and executives through compulsory annual general meetings (AGMs). Shareholders also have the capacity to vote on binding resolutions. The purpose of corporate AGMs is to hold directors to account for their decisions. Members of registered managed investment schemes do not have the capacity to vote on ordinary resolutions. However, they do have the capacity to hold member meetings to vote on special and extraordinary resolutions, including removal of the responsible entity and winding-up the scheme.

151

The Bill provides that the RSE licensee of a registrable superannuation entity must hold an annual meeting of members of the entity for each year of income of the entity.152 The rationale for the requirement is, amongst

145. Ibid. 146. Explanatory Memorandum, Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, p. 6.

147. Ibid. 148. Ibid., p. 104. 149. Corporations Act, Division 3 of Part 7.9. 150. Corporations Act, section 1017C. 151. Explanatory Memorandum, Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1)

Bill 2017, p. 99. 152. SIS Act, proposed subsection 29P(1).

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other things, that it will improve engagement between members of APRA-regulated funds and their superannuation.153

High levels of disengagement mean that the capacity of fund members—the ultimate beneficiaries of superannuation—to request information from their funds, and to hold trustees accountable for their performance, is reduced. Industry, left to its own devices, has not developed a uniform mechanism for enabling members to hold trustees accountable.

154

Notice of the meeting must be given in writing and include the time and location of the annual members’ meeting, if the annual members’ meeting is to be held by electronic means—details of how the meeting can be attended electronically and the agenda of matters to be discussed at the annual members’ meeting.

The notice must be given no later than six months after the end of the year of income of the entity and at least 21 days before the meeting.155

Stakeholder comments It is this measure which has raised the most concerns amongst stakeholders. Many raised the issues of the costs and the logistics for such a meeting.156 For instance, REST Industry Super has stated:

… with almost two million members, the sheer logistics and costs of holding a physical or even electronic meeting are daunting, if not prohibitive. If this requirement is introduced alternative options for large funds should be made available. 157

According to REST the cost of convening a physical meeting for 300 people would be $2.7 million (including the cost of mailing the notice of the meeting) which would have to be paid for from the fund. Whilst a webinar is a less expensive alternative, it is not without issues. 158

AMP also cited cost as a major issue and opined that the financial impact is significantly understated in the Explanatory Memorandum which it considers to be fundamentally flawed for the following reasons:

• Venue hire for physical meetings and staff costs have been considered but there does not appear to be any costs included for the online system functionality (to cater for potentially thousands of questions and answers), event coordination and reporting that will be required for online annual members meetings. While there is an option to hold annual members meetings electronically, it does not appear that there has been any assessment of the complexity and therefore significant cost that will be involved in organising, running and reporting (including answering questions and providing minutes) these meetings online for millions of fund members.

• Venue hire cost for flexible annual members meetings has been estimated at just $6,000 for three hours. The Explanatory Memorandum estimates likely attendance as being up to 140,000 attendees. While we do not believe it is possible to determine at this stage how many members are likely to attend the annual members meetings, we know that it will cost significantly more than $6,000 to hire a venue large enough to accommodate even these 140,000 members. The AMP Ltd Annual General Meeting (AGM) venue hire cost, for example, is $500,000, which is substantially more than the $6,000 that has been estimated in the regulation impact statement.

159

The practical difficulties of holding a webinar were also raised by ASFA stating:

153. Explanatory Memorandum, Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, p. 100. 154. Ibid., p. 102. 155. SIS Act, proposed paragraph 29P(3)(d). 156. Choice, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and

Member Outcomes in Superannuation Measures No. 1) Bill 2017, op. cit., p. 7. 157. REST Industry Super, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, 5 October 2017, p. 2. 158. Ibid. 159. AMP, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and

Member Outcomes in Superannuation Measures No. 1) Bill 2017, 29 September 2017, p. 2.

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… one of our members has advised that they are unaware of a webinar system that could support more than 3,000 participants which could also mean the need for additional meetings should the response exceed that threshold. 160

Other stakeholders questioned the need for such a meeting. For instance, Mercer strongly disagreed with the premise that many superannuation members have little or no ability to ask questions about their fund.

We note that members can and do contact their superannuation funds via telephone, e-mail and letter; and that there are existing requirements for funds to respond to member inquiries and complaints.

Given the existing avenues for member inquiries, it is not clear that the benefits to members of providing annual members meetings will outweigh the costs, which we expect will be substantial. 161

Conduct of the meeting At the annual members’ meeting, the RSE licensee must give members of the registrable superannuation entity reasonable opportunities to ask questions about:

• the registrable superannuation entity

• if the RSE licensee is a body corporate—the RSE licensee and the responsible officers of the RSE licensee

• if the RSE licensee is a group of individual trustees—each of the individual trustees

• any audit of the registrable superannuation entity for the year of income of the entity

• any actuarial investigation of the registrable superannuation entity during the year of income of the entity and

• any information included with the notice of the meeting.162

Stakeholder comments The Australian Institute of Company Directors expressed some disquiet that the model for the annual members’ meeting in the Bill is unnecessarily prescriptive in contrast to the conduct of company AGMs.

It would be more appropriate for answers to be provided formally by the RSE licensee through the chair of the meeting. This more closely reflects the fact that many of the decisions taken by RSE licensees are not taken by individuals but by combinations of individuals (such as the board, management teams) and are the result of multistep processes. It would not, for instance, be appropriate to require an individual board member to disclose how they personally voted on a board resolution.

163

And further:

Under the Corporations Act, the chair of an AGM must allow a reasonable opportunity for the members as a whole at the meeting to ask questions about, or make comments on, the management of the company. This means that not all questions must be answered. In practice, the chair acts as a mediator. The chair is responsible for the general conduct of the AGM and determines who can speak, in which order, and for how long. It is also usual for members to be encouraged to send in questions ahead of the AGM. This enables the chair to deal with frequently asked questions before opening questions from the floor.

164

The Law Council of Australia also highlighted the differences between the annual members’ meeting as proposed and an AGM. ‘In contrast to an annual general meeting of shareholders in a company where business

160. AFSA, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, op. cit., p. 4. 161. Mercer, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, op. cit., p. 15. 162. SIS Act, proposed subsection 29P(5). 163. AICD, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and

Member Outcomes in Superannuation Measures No. 1) Bill 2017, op. cit., p. 3. 164. Ibid.

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is transacted and resolutions are voted upon, an annual meeting of members would effectively be a mandatory attempt to engage with members on an annual basis.’165

Obligation to attend In order to facilitate the Annual Members’ Meeting process, the Bill requires that where the RSE licensee of a registrable superannuation entity is a body corporate and appropriate notice has been given, the following persons are to attend the annual members’ meeting:

• the Chair of the board of directors of the RSE licensee, a director of the RSE licensee166 and an executive officer of the RSE licensee167

• a person who has been an auditor of a RSE for a year of income of the entity168 and

• a person who has been an actuary of a RSE for a year of income of the entity.169

In each case, a failure to attend gives rise to a maximum penalty of 50 penalty units170 unless the person has a reasonable excuse for not attending.171

If, at the annual members’ meeting any of the above persons is asked a question by a member of the registrable superannuation entity, the person must answer the question at the meeting or, if it is not reasonably practicable to do so, within one month after the meeting. A failure to comply with this requirement gives rise to a maximum

penalty of 50 penalty units.172 However the penalty does not apply where:

• the question is not relevant to an action, or failure to act, by the RSE licensee in relation to the registrable superannuation entity or one or more members of the registrable superannuation entity or the registrable superannuation entity itself173

• it would be in breach of the governing rules of the registrable superannuation entity, the SIS Act or any other law to answer the question174

• answering the question would result in detriment to the members of the registrable superannuation entity, taken as a whole175 or

• in any other circumstances prescribed by the regulations.176

Stakeholder comment The Law Council of Australia suggested that the grounds on which a trustee can decline to answer a question should be expanded.

… for example, where there is insufficient time, where questions are repetitive, vexatious, offensive or designed to ridicule or concern confidential or privileged matters (rather than relying on the exemption for questions which pose a detriment to members), or relate to persons other than the member asking the question. 177

165. LCA, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, op. cit., p. 10. 166. SIS Act, proposed subsection 29PA(6) provides that the number of directors to attend the annual general meeting is to be no less than the number of directors that would constitute a quorum for a meeting of the board of directors. 167. SIS Act, proposed subsection 29PA(1). 168. SIS Act, proposed subsection 29PA(3). 169. SIS Act, proposed subsection 29PA(4). 170. This means the maximum penalty is equivalent to $10,500. 171. SIS Act, proposed subsection 29PA(5). 172. SIS Act, proposed subsection 29PB(2) (responsible officer); proposed subsection 29PC(2) (individual trustee); proposed subsection 29PD(2)

(auditor); proposed subsection 29PE(2) (actuary) . 173. SIS Act, proposed paragraph 29PB(3)(a) (responsible officer); proposed paragraph 29PC(3)(a) (individual trustee); proposed paragraph 29PD(3)(a) (auditor); proposed subsection 29PE(3)(a) (actuary). 174. SIS Act, proposed paragraph 29PB(3)(b) (responsible officer); proposed paragraph 29PC(3)(b) (individual trustee); proposed

paragraph 29PD(3)(b) (auditor); proposed subsection 29PE(3)(b) (actuary). 175. SIS Act, proposed paragraph 29PB(3)(c) (responsible officer); proposed paragraph 29PC(3)(c) (individual trustee); proposed paragraph 29PD(3)(c) (auditor); proposed subsection 29PE(3)(c) (actuary). 176. SIS Act, proposed paragraph 29PB(3)(d) (responsible officer); proposed paragraph 29PC(3)(d) (individual trustee); proposed

paragraph 29PD(3)(d) (auditor); proposed subsection 29PE(3)(d) (actuary).

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Scrutiny of Bills Committee The Scrutiny of Bills Committee expressed its concern that the circumstances in which the above-mentioned offences will not apply are framed as exceptions, which impose an evidential burden on the defendant to raise evidence about the matter, rather than elements of the offence that the prosecution will be required to prove.

The Committee has requested the Minister’s advice as to the appropriateness of amending the Bill ‘to provide that the exceptions to the offences be included as elements of the offence, rather than as exceptions’.178 In addition the Scrutiny of Bills Committee has sought the Minister’s advice ‘as to why it is proposed to allow the regulations to prescribe other exceptions to the offence relating to the obligation to answer questions.179

Key issues If the objective of this measure is to mirror the provisions of the Corporations Act in respect of the annual general meeting held by corporations the amendments do not achieve that objective.

First, the AGM ‘plays an important role in the corporate context specifically because it is a deliberative forum; it makes decisions on key governance matters such as the appointment of directors and the auditor, adoption of financial accounts and, in listed companies, the approval of executive remuneration’.180 The annual members’ meeting required by the Bill has no such role.

Second, the Bill requires that the Chair, CEO and at least a quorum of directors attend the annual members’ meeting and answer questions put to them at the meeting. No equivalent requirement is contained in the Corporations Act for other company directors.

Third, it unclear why it is an offence if a superannuation director does not attend or answer questions. No equivalent requirement is contained in the Corporations Act for other company directors. 181 The Explanatory Memorandum is silent as to why this approach has been adopted.

It is worth noting that in the initial stages of its inquiry into the superannuation system, the Cooper Review canvassed the idea of trustees holding an annual general meeting for members of large APRA funds so that members would have a forum to exercise powers in the same way that shareholders can exercise powers with respect to directors at an AGM. However, the final report of the Cooper Review states:

While the panel was initially somewhat attracted to this concept, it has been convinced by the overwhelming weight of submissions that the structural and logistical issues inherent in the superannuation industry make it impractical and undesirable at this time to require superannuation funds to hold AGMs. 182

Schedule 8—reporting standards Quick guide to Schedule 8

The amendments in Schedule 8 to the Bill provide APRA with the authority to obtain information on expenses incurred by RSE and RSE licensees in managing or operating the RSE.

Financial implications According to the Explanatory Memorandum to the Bill the measures in Schedule 8 will have nil financial impact.183

177. LCA, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, op. cit., p. 11. 178. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 12, 2017, op. cit., p. 60. 179. Ibid., p. 61. 180. Donald (Centre for the Law, Markets and Regulation, University of New South Wales), Submission to the Senate Economics Legislation

Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, op. cit., p. 6. 181. ISA, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, op. cit., pp. 21-22. 182. Cooper Review, Chapter 2, p. 58.

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Key provisions Item 3 of Schedule 8 to the Bill amends the Financial Security (Collection of Data) Act the purpose of which is, amongst other things, to enable APRA to collect information to assist in performing its functions or exercising its powers under other laws, such as the SIS Act.184

Currently section 13 of the Financial Security (Collection of Data) Act empowers APRA to determine reporting standards that are required to be complied with.

Item 3 inserts proposed subsection 13(4D) so that a reporting standard may require an RSE licensee to provide information in relation to any money, consideration or other benefit given to another entity by the RSE licensee out of the assets of a registrable superannuation entity of the RSE licensee, including information about:

• details of the entity to which the money, consideration or other benefit is given

• the purpose for which the money, consideration or other benefit is given

• the way in which the money, consideration or other benefit is used by the entity to which it is given, and any entity with which that entity deals.

Where a reporting standard requires an RSE licensee to provide such information and the money, consideration or other benefit is given under a contract or other arrangement between the RSE licensee and the other entity (called the second party) the contract or arrangement is taken to include:

• a term requiring the RSE licensee to notify the second party that the money, consideration or benefit is given out of the assets of a registrable superannuation entity. The notification is to be made at the time the money, consideration or benefit is given or as soon as reasonably practicable after that time185 and

• a term requiring the second party, if notified by the RSE licensee, to provide the RSE licensee with the required information of which the second party is aware, as soon as reasonably practicable after being notified.186

According to the Explanatory Memorandum to the Bill:

This additional information will enable APRA to understand the full picture of how RSEs are using member contributions and will enable APRA to consider whether expenses of individual RSEs are in line with the RSE licensee's obligations under the SIS Act, including the obligation to act in the best interests of beneficiaries. 187

Key issues Of concern is that the term another entity is not defined. The effect of the amendment is that it would ‘capture an extremely broad range of transactions, and require disclosure of information which at present may be consider commercially confidential’.188

According to CSA, the proposed form of reporting ‘will increase the compliance burden and the amount of data for APRA scrutiny’. CSA would prefer to see the ‘focus of reporting on related party payments and reduced compliance required for routine small payments to non-related parties’.189

Concluding comments The Bill contains a number of measures which are highly contentious.

183. Explanatory Memorandum, Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, p. 7. 184. Financial Security (Collection of Data) Act, section 3. 185. Financial Security (Collection of Data) Act, proposed paragraph 13(4E)(c). 186. Financial Security (Collection of Data) Act, proposed paragraph 13(4E)(d). 187. Explanatory Memorandum, Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1)

Bill 2017, p. 113. 188. LCA, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017, op. cit., p. 11. 189. CSA, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (improving Accountability and

Member Outcomes in Superannuation Measures No. 1) Bill 2017, op. cit., p. 3.

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The requirement to hold an annual members’ meeting has raised significant concerns as to the cost and logistical difficulties that RSE licensees face. In addition, the imposition of civil and criminal penalties for non-attendance by board members, auditors and actuaries have no equivalent in the Corporations Act.

Further, the increased powers of APRA to issue directions—purportedly where there are prudential concerns— are significant.

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