Written by Partner Michelle Levy
APRA and ASIC issued a joint letter to all RSE licensees entitled 'Oversight of fees charged to members' superannuation accounts' in early April. The letter is in response to the so-called 'fee for no advice' issue that attracted so much attention in the Royal Commission.
'Fee for no advice' is the term used to describe cases where:
- a superannuation fund trustee pays a fee from the fund to an adviser for advice to be provided by the adviser to the member about their superannuation; but
- the adviser does not in fact provide that advice.
The legal basis for a trustee to pay an advice fee to an adviser is found in tripartite arrangements involving the trustee, the adviser and the member (the adviser's client). They involve the following legal relationships:
- a contract between an adviser and the member under which the adviser agrees to provide, usually, ongoing or regular advice to the member;
- a contract between the trustee and the adviser under which the trustee agrees to pay, usually, ongoing fees for the advice provided to the member with the consent of the member; and
- an agreement (which may or may not be a contract) between the trustee and the member under which the trustee agrees to pay the adviser for advice provided to the member about the member's superannuation account, and to apply that payment to the member's superannuation account in the fund, where the member consents to the payment.
The regulators say trustees 'must have in place strong governance, risk management and oversight processes to ensure that only authorised and appropriate fees and other charges are deducted from members' superannuation accounts.' So much is clear – a trustee that does not have such arrangements in place will breach their duty of care, skill and diligence. In Commissioner Hayne's view, they might also breach their best interests duty.
The regulators go on to say that advice fees must be 'explicitly authorised by members' and that 'best practice would be to obtain effective consumer authorisation to charge the fees on a regular basis' (the reference to consumer here suggests this is an ASIC contribution to the letter). To be clear, a superannuation fund trustee cannot pay an expense from the fund (which an advice fee must be) at the direction of the member. That would breach section 58 of the SIS Act which prohibits the trustee of a superannuation fund exercising its powers under the governing rules of the fund at the direction of another person, including a member.
The regulators say the consent of the member is needed as part of the processes adopted by the trustee to ensure the adviser is in fact providing advice to the member. However, there are other and likely more reliable ways for trustees to oversee advisers (some of which are also suggested by APRA and ASIC), and the real reason the consent of the member is needed is so that the payment of the expense is not conflicted remuneration under the Corporations Act. As you will recall, a payment by a product issuer to an advice licensee or its representative will be conflicted remuneration if the payment is reasonably likely to influence the advice. An exception applies where the 'client' (under the Corporations Act) provides the benefit (the advice fee). Of course, in the fee for no advice cases, the trustee provides the benefit because the trustee pays the advice fee. The explanatory memorandum to the bill introducing the conflicted remuneration provisions in the Corporations Act and ASIC in its regulatory guidance say a benefit is given by a client for the purposes of this exception if the benefit is given with the consent of the client. This is the reasonably flimsy basis upon which the industry relies for paying adviser service fees from superannuation funds without breaching the conflicted remuneration bans in the Corporations Act.
The regulators say in their letter that they expect a trustee's 'assurance in relation to financial advice fee deductions would include actions that are remedial: such as ensuring that members are appropriately compensated where fees are charged inappropriately'. This is entirely consistent with the trustee's duties to members. However, what the regulators go on to say in their letter about the method of compensation is questionable.
As to the 'remediation mechanism', the regulators say this:
We are aware of circumstances in which trustees have determined it appropriate not to pursue financial advisers for compensation for their members or have indicated to financial advisers that they cannot accept such payments. This can result in remediation payments being made outside of the superannuation system. APRA and ASIC consider that this practice may represent a breach of the SIS legislation, in particular payment standard requirements. Trustees should expect the regulators to take enforcement action in the event breaches are uncovered.
In my view, it can be entirely appropriate for a trustee to agree to an adviser compensating a member for a breach of the contract between the adviser and member (see the section on the arrangements above), and it is plainly not a breach of the SIS payment standards if they do.
Whether or not it is appropriate turns on whether the trustee has breached its obligations in paying the advice fee from the fund, whether the member remains a member of the fund and the practicality of the trustee pursuing the adviser.
If we accept that advice fees can be a proper expense of the fund (as Commissioner Hayne does) that can be paid consistently with the sole purpose test (as Commissioner Hayne also does) and in the best interests of beneficiaries (a question on which Commissioner Hayne appears to be less certain), the mere payment of an advice fee in circumstances where the adviser does not, in fact, provide the advice is not a breach of trust by the trustee.
The question will instead be whether the adviser failed to provide the advice despite the trustee having had in place appropriate arrangements to monitor and supervise the provision of the service. Let's assume these are our facts. The trustee paid a fee for no advice from the fund without breaching any of its obligations. In that case, the fund has suffered a loss, but the trustee has no duty to either make good the loss to the fund or to compensate the member for the loss when their benefit is paid. That is not to say the trustee can sit on its hands.
A trustee that pays money out of the fund properly (without breach of duty) for a service that is not, in fact, provided has a duty to seek to recover the money it has paid. However, the duty is not absolute – a trustee is not required to throw good money after bad.
Therefore, there may well be cases where the trustee is unable to recover any amount from an adviser (eg, they may have no assets, or they may have disappeared). In that case, the loss to both the fund and the member will go uncompensated.
There may well also be cases where the trustee can, consistently with its duties to members, agree to an adviser compensating a member directly in circumstances where, perhaps, the member has commenced proceedings directly against the adviser, or where it would be a costly and lengthy exercise for the trustee to recover the amount from the adviser. In either of these cases, the trustee should confirm the member has been fully compensated and ask the member for a release (because, as discussed further below, until such time as the member has left the fund, the actual loss lies with the fund and not the member).
The trustee's obligations are quite different where it has paid money out of the fund without exercising the degree of care, skill and diligence required by the covenant in section 52(2)(b) of the SIS Act, or in breach of any of its other obligations. A breach of section 52(2)(b) is a breach of trust (the covenants are deemed to be included in the governing rules of the fund, unless they are expressly included).
For Commissioner Hayne, a very high standard of care applies to trustees in paying adviser fees:
What the trustee should have done in the exercise of the required care, skill and diligence should be considered in the light of another and fundamental obligation of trustees. A trustee must not allow the trust fund to be dissipated in an unauthorised way. A trustee who wrongly pays away trust money, like a trustee who make an unauthorised investment, commits a breach of trust.
If the trustee did not have in place appropriate arrangements and did not monitor and supervise the provision of the advice service properly, it will have breached its obligations in paying the advice fee from the fund. A trustee that breaches its obligations under the governing rules of a fund must make good any loss to the fund and compensate any member who has suffered a loss. Its obligation to do so does not depend on whether it is able to recover any amount from the adviser.
According to the general principles of trust law, a member of a fund will not have suffered a loss until such time as their benefit is cashed or rolled over. Accordingly, a member's remedy against a trustee for breach of trust is, ordinarily, to require the trustee to make good the loss to the fund. If the member cashes or rolls over their benefit before the trustee makes good the loss to the fund, they will have suffered a loss at the time the benefit is paid (their benefit will have been calculated after the deduction of the fee paid by the trustee in breach of trust) and then, under trust law, they have a claim against the trustee for compensation. Section 55(3) of the SIS Act also gives the member a statutory claim against the trustee to recover the amount of the loss or damage caused by the trustee's breach of its covenants.
There is nothing in trust law or the SIS Act that requires the trustee to pay that compensation into the fund or to another superannuation fund (indeed, that proposition would seem to be inconsistent with the plain words in section 55(3)). The payment standards in part 6 of the SIS Regulations set out the circumstances in which a 'benefit' can be cashed, transferred or rolled over from a superannuation fund. They have nothing to say about the payment of expenses or the settlement of claims between trustees and members or third parties and members.
If APRA and ASIC were correct, trustees, insurers and other service providers will have been getting things wrong for a long time. It is commonplace for a trustee of a superannuation fund to allow a life insurer to agree to settle a claim by a member for an insured benefit initially brought against the trustee and insurer with a payment made directly by the insurer to the member. If the regulators are right in saying that the settlement of a claim by a member that might be brought against both the trustee and adviser in relation to an advice fee cannot be settled by the adviser making a payment directly to the member (or former member), there is good reason to doubt the lawfulness of the practice of settling claims for insured benefits. In my view, this is incorrect and, as is usually the case, what is right (lawful) will turn on the particular facts – especially whether the trustee has breached its obligations and whether the member continues to be a member of the fund.