Written by Senior Regulatory Counsel Michael Mathieson and Partner Michelle Levy
The interim report of the Financial System Inquiry (FSI) asks whether directors in different parts of the financial system should have different duties.
The FSI is referring to the differences between the duties of directors of banks, insurers and superannuation trustees. For some of these institutions, but not others, the directors are subject to duties which focus on the interests of 'APRA beneficiaries', these being depositors (in relation to a bank), policyholders (in relation to a general or life insurer) and fund beneficiaries (in relation to an APRA-regulated superannuation fund).
At one end of the spectrum, a bank director has no duty to prefer the interests of depositors over the interests of the bank. At the other end, a superannuation trustee director must perform their duties and exercise their powers in the best interests of fund beneficiaries. Where there is a conflict, they must give priority to the beneficiaries and ensure that their interests are not adversely affected by the conflict. In between, life insurance company directors are subject to a duty of priority while general insurance company directors are not. Further details of these differences are set out in the table at the end of this article.
In our view, a director's primary duty should be to the institution itself irrespective of whether they are directors of an APRA-regulated institution (and we would add to this, a responsible entity). The duties owed by the institution to APRA beneficiaries (or scheme members) is a separate question. The point is that directors should not themselves have such duties.
The differences came about, in part, because the provisions for each kind of regulated institution were drafted at different times in different policy contexts – 1959 (for banks), 1973 (for general insurers), 1995 (for life insurers), 1993 and 2012 (for superannuation trustees) and 1998 (for responsible entities). The nature of the legal relationship between the regulated institution and the APRA beneficiary (or scheme member) has also been relevant – for example, superannuation funds and registered schemes are invariably trusts, where the concept of the best interests of the beneficiaries has been central, while life policies are contracts and so the duty of priority was developed.
The FSI asks whether these differences are justified. We suggest this is the wrong question. It implies that banks should have duties to act in the best interests of depositors and give them priority and that the same duties should apply to their directors. We suggest the right question is whether imposing these sorts of duties on directors makes a difference which justifies the difficulties that doing so causes.
Going by the reported court cases, these duties have made little, if any, difference to the people they are intended to benefit. There have been no cases which have turned on the duties of priority imposed on life companies and their directors notwithstanding that the duties have formed part of the law for nearly 20 years. There has only been one case which has featured any real consideration of the best interests and priority duties imposed on responsible entity directors – the 'Prime Trust' case (Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (Receivers and Managers appointed) (in liquidation) (Controllers appointed) (No 3)  FCA 1342) – and it is telling that, while the court found the directors had contravened those duties, it also found that they had contravened other duties.
These duties create tensions and conflicts for individual directors that they are not in a position to resolve. On the one hand, the director is meant to act in the interests of the regulated institution while, on the other, the director has a duty which turns on the interests of someone who stands in a fiduciary or creditor relationship with that institution.
The general law says that when a person would otherwise owe duties to act in the interests of two other people, and those duties conflict, the person must not act – and yet we have statutes that create a very similar kind of tension, if not conflict, and leave it to the director to try to serve two different masters relying on the uncertain concept of priority. In other words, the statutes force individuals to do what the general law, which embodies a lot of wisdom about the realities of human nature and relationships, accepts they cannot do and should not be asked to do.
The following table sets out details of the differences between the duties of directors of banks, insurers and superannuation trustees:
|ADI||No specific duty to prefer the interests of depositors. Instead, it is APRA's duty to exercise its powers and functions 'for the protection of the depositors of the several ADIs'.||No specific duty to prefer the interests of depositors over the interests of the company. Just the standard Corporations Act duties owed to the company.|
|General insurers||No specific duty to prefer the interests of policyholders.||No specific duty to prefer the interests of policyholders over the interests of the company. The Insurance Act says that the Act meets its objective by 'imposing primary responsibility for protecting the interests of policyholders on the directors and senior management of general insurers’ but it does not in fact do this.|
|Life insurers'||In the investment, administration and management of the assets of a statutory fund, a life company must give priority to the interests of owners and prospective owners of policies referable to the fund.||A duty to take reasonable care, and use due diligence, to see that, in the investment, administration and management of the assets of a statutory fund, the life company gives priority to the interests of owners and prospective owners of policies referable to the fund.|
|Superannuation trustees||A duty to perform the trustee's duties and exercise the trustee's powers in the best interests of the fund beneficiaries; and, where there is a conflict, to give priority to the duties to, and interests of, the beneficiaries over the duties to, and interests of, others, and to ensure that the interests of the beneficiaries are not adversely affected by the conflict.||A duty to perform the director's duties and exercise the director's powers in the best interests of the fund beneficiaries; and, where there is a conflict, to give priority to the duties to, and interests of, the beneficiaries over the duties to, and interests of, others, and to ensure that the interests of the beneficiaries are not adversely affected by the conflict.|
|Responsible entities*||A duty to act in the best interests of scheme members and, if there is a conflict between the members' interests and the RE's interests, to give priority to members' interests.||A duty to act in the best interests of scheme members and, if there is a conflict between the members' interests and the RE's interests, to give priority to members' interests.|
*Although responsible entities are not regulated by APRA we have included them in this table because they provide an interesting comparison.