Written by Partner Simum Soljo and Senior Associate Jack Power
In our article on competing class actions dated 20 August 2018, we made the fairly obvious observation that the Royal Commission would inevitably prove to be a hot bed for class actions. And in years to come, we will undoubtedly look back on the Royal Commission as a watershed moment in class action history, which, just like the GFC, spawned multiple large and long-running class actions.
That modest prediction is proving more and more likely as time goes by. In particular, Slater & Gordon, which has been one of the most active of the plaintiff class action firms, has recently begun to seek registrations of interest for an unspecified number of class actions (with the first being filed against Colonial First State on Wednesday) relating to issues that arose during the Royal Commission's examination of superannuation (ie Round 5) under the branding 'Get Your Super Back'. Slater & Gordon has suggested that one-third of the adult population might benefit from these class actions.
To date, this program launched by Slater & Gordon does not contain much detail about precisely what form the superannuation class actions will take (other than they will relate to issues that arose in Round 5), but with two exceptions discussed below. In general, the thrust of the allegations in the class action brought against Colonial First State and the one foreshadowed against AMP's trustees is that the trustees breached their duties to prioritise the interests of members over their own or those of related parties.
A superannuation trustee's decision to purchase products or services from a related party has always carried some legal risk for trustees, but those risks have multiplied exponentially given this is one key example of 'vertical integration', which has proven to be one of the practices in financial services that has attracted the most attention and criticism from the Royal Commission.
While the practice of obtaining products and services from related parties is ubiquitous in the superannuation industry and has often brought legitimate and material benefits to members, there is nonetheless an inherent tension between this practice and the role of superannuation trustees as trustees.
As a starting point, trustees have a range of duties at general law, including to avoid conflicts of interest. Such obligations are reinforced by legislation, as well as by a wide range of prudential standards and guidelines issued by APRA, especially in the context of their engaging with related parties. As such, trustees have a number of things to consider when entering these kind of arrangements, and naturally the more detailed and onerous these obligations are, the greater the chance that a trustee will not comply and that its conduct will give rise to an actionable breach.
In this vein, the first class action that Slater & Gordon has commenced (last Wednesday in the Federal Court) is against Colonial First State in relation to its decision to place its members' cash investments with Commonwealth Bank. Slater & Gordon will allege that the rates of return on cash were uncompetitive.
The class action will likely seek to recover the difference between the returns received and those that would have been received had Colonial First State obtained what is alleged would have been a more competitive rate of return for members on their cash investments.
The second class action will likely be against AMP's trustees for the charging of what are alleged to have been excessive administration fees. One issue that attracted a lot of attention during Round 5 of the hearings was that some members of AMP's funds who had 100% of their super in cash investments actually received negative returns due in part to the size of the administration fee they were charged.
This class action will seek to recover the difference between fees paid, and the fees that would have been paid had the trustee complied with its duties to obtain appropriate administration fees for members.
Of course, as alluded to above, each of these two class actions are the manifestation of one of the fundamental ongoing themes in the Royal Commission, being whether such examples of vertical integration in fact serves to further the interests of clients/customers, or whether this structure creates conflicts that are adverse to the interests of clients/customers.
However, there were other examples of issues arising from the conflicts associated with vertical integration in the superannuation industry that were covered during Round 5 of the hearings, so a relevant question is why are these likely to be the first class actions commenced.
The 'cash rate' class action against Colonial First State was likely appealing for two reasons:
First, a significant proportion of the public would hold cash investments as one component of their super investments (although additional factors would need to be satisfied for an individual to be a member of the class action, this presents a wide pool to start from). As a result, the number of group members, and thus any potential amount to be recovered, whether through settlement or in compensation awarded by the Court, is likely to be large.
Second, from the perspective of those that are unlikely to be familiar with the complexities that superannuation trustees face when having to determine the investments that will serve their members' interests, it might seem that there is only one relevant question in deciding which entity a superannuation trustee should entrust with its members' cash investments – which one offers the best rate of return? More specifically, cash investments are likely to be viewed somewhat differently from other forms of investments in that they do not attract any real investment risk (whereas when making other investment decisions trustees will generally need to balance the size of potential returns against increasing risk).
However, such a view is probably simplistic. In our experience the truth is likely to be that the circumstances faced by the superannuation trustee are much more complicated. For example, the tax position and fee structure of the product in which the cash investment sat will be relevant, as will a range of other considerations, such as whether any fees were deducted directly from the interest obtained thus reducing the apparent rate of return. Further, in many cases the cash investment might be one component of the product offered which also includes multiple other asset allocations (such as equities, property etc.) and the rates of return on cash would need to be viewed in that wider context.
Ultimately, what factors were relevant to a trustee's decision and what the trustee's motivations were in reaching a final position will be crucial to establishing whether it may have breached its legal duties and thus the prospects of success for any class action.
It is also significant that Counsel Assisting stated in its closing submissions to Round 5 that it was open to the Commission to find that both Colonial First State and AMP's trustees had breached their legal obligations in relation to the matters that are now likely to be the subject of these two class actions (in the case of the high administration fees charged by AMP's trustees, potential claimants also likely viewed their recent decision to reduce the administration fees going forward as tacit acknowledgment that the original size of the fee was unreasonably high).
Considering the number of occasions on which Counsel Assisting stated in those submissions that it was open to the Commission to make findings of misconduct, it is very unlikely that the two class actions above will be the only ones to emerge out of Round 5 of the hearings. Indeed, the closing submissions of Counsel Assisting (and any subsequent reports from the Commissioner) are likely to be viewed by potential claimants as somewhat of a class actions menu from which they can place their order in the months (and potentially years) to come – the only real barrier being where members have already been compensated as a result of internal remediation programs.
There promises to continue to be frequent and substantial developments in this area, and as always we will do our best to keep you up to date.