In brief 14 min read
Earlier this month, Justice Yates in the Federal Court made declarations that two superannuation fund trustees (one succeeded the other) had contravened sections 912A(1)(a) (efficient, honest and fair obligation) and 1041H (misleading or deceptive conduct) of the Corporations Act, and section 12DA (misleading or deceptive conduct) of the ASIC Act, among other declarations.
The trustees admitted the contraventions and agreed to the declarations being made and the only argument was about the size of the penalties. At the time no penalties attached to breaches of s912A(1)(a) or s1041H and so the penalties could only relate to the breaches of s12DA of the ASIC Act. ASIC asked for more, the trustees asked for less and, in the end, the court landed somewhere in between.
I will return to some of the reasons. First, though – the conduct.
The contraventions all related to the deduction of 'Plan Service Fees' from members' accounts during the period 8 September 2012 - 2017 (no specific date is identified). Members were divided into two categories: 'no-adviser members' and 'linked members'.
The judgment describes the first trustee's decision to change the product fees. Asset-based commissions would cease (paid from the administration fee), as would an Employer Service Fee, and the Plan Service Fee would apply.
According to the judgment, the 'product terms' provided for a Plan Service Fee to be paid to 'plan advisers'. Plan advisers were financial advisers nominated by an employer. Under the product terms the Plan Service Fee was calculated as a percentage of the account balances of the 'linked members' and deducted from those members' accounts in the fund. A Plan Service fee was not payable under the product terms in respect of a member who was a 'no-adviser member'. A member was a no-adviser member if they joined an employer plan that did not have a plan adviser. However, despite the product terms, Plan Service Fees were deducted from no-adviser members' accounts during the period and retained by the fund's administrator. It was this conduct that led to the first category of contraventions by the trustees.
Under the product terms, a linked member who ceased to be an employee of their employer was moved to the personal category of the fund. They would nevertheless continue to be a linked member for whom a Plan Service Fee was payable unless and until they notified the trustee that they no longer wished the adviser to be linked to their account. If and when they did, the product terms said that the Plan Service Fee would cease to be deducted from their account. However, members were not told that they could elect not to pay the Plan Service Fee. It was this conduct that led to the second category of contraventions by the trustees.
All of the contraventions related to the trustees' admitted failure to comply with the 'product terms'. However, it is not clear why the terms described in the judgment (and which I have summarised above) are product terms, nor why the trustees were required to comply with them.
When one is speaking about a superannuation product, product terms are usually found in the trust deed for the fund and the product disclosure statements. However, the judgment does not say where the product terms are found and what made them binding. We know they were not in the PDS, given some of the contraventions were caused by the failure to accurately describe the product terms in the PDS. There is an implication in the judgment that the product terms were merely those terms that the first trustee board approved when it decided to change the product fees. If that is the case, it does rather raise the question as to whether the product terms might have been those described in the PDS and other statements provided to members and in accordance with which the product was administered.
It can be an important point whenever a product issuer is considering whether they have engaged in misleading or deceptive conduct based on a statement in a PDS. If a trustee administers a fund in accordance with what it says it will do in the PDS (and perhaps other statements to members), is it really the case that it has been misleading or deceptive if the PDS does not accurately record what the trustee intended be done?
In that case, it is possible the fund had not been administered inconsistently with anything more than a decision of the trustee board, which was not in fact acted upon by its delegates. Nevertheless, that is the basis upon which the contraventions were admitted, and the declarations made.
The court made declarations in respect of the no-adviser members that the trustees:
- failed to do all things necessary to ensure that the financial services covered by their licences were provided efficiently, honestly and fairly in breach of s912A(1)(a) in that Plan Service Fees were deducted for no-adviser members and retained by the administrator in breach of the product terms. I assume 'in that' means 'because' here;
- engaged in conduct in relation to financial services that was misleading or deceptive or likely to mislead or deceive in breach of s1041H of the Corporations Act and s12DA of the ASIC Act in that they sent letters, welcome kits and annual statements which listed the Plan Service Fee as applying to no-adviser members' accounts, did not state that the Plan Service Fee could not be deducted for no-adviser members and represented that no-adviser members were required to pay the fee and the Trustee was entitled to deduct it when none of these things were the case (because of the product terms); and
- failed to do all things necessary to ensure that the financial services covered by their licences were provided efficiently, honestly and fairly in breach of s912A(1)(a) because they engaged in the misleading or deceptive conduct.
The court made declarations with respect to the linked members that the trustees:
- failed to do all things necessary to ensure that the financial services covered by their licences were provided efficiently, honestly and fairly in breach of s912A(a)(a) in that, among other things:
- the trustee was a party to 'Licensee Remuneration Agreements' with plan advisers in respect of the distribution of the product (the judge's words) which required a Plan Service Fee to be paid to Plan Advisers despite not requiring services to be provided to linked members when they ceased to be members of the employer plan;
- did not have in place an adequate system to enable it to form a reasonable belief that services were being provided to linked members who were no longer part of an employer plan; and
- did not inform linked members at any time that they could cease paying the Plan Service Fee after leaving the employer plan by notifying the trustee;
- issued PDSs that were defective under s1022 of the Corporations Act because they said that the Plan Service Fee continued to be payable when the member ceased to be an employer-sponsored member (which was true), but did not say the member could elect to turn off the Plan Service Fee. This failure was also misleading or deceptive conduct in breach of s1041H of the Corporations Act and s12DA of the ASIC Act;
- and again, failed to do all things necessary to ensure that the financial services covered by its licence were provided efficiently, honestly and fairly because they had engaged in misleading or deceptive conduct and because they had issued defective PDSs and so on.
And so, the trustees were found to have breached their obligations to provide financial services efficiently, honestly and fairly because of their failure to administer the fund in accordance with the product terms, because of the arrangements agreed with advisers and because of what they told and didn’t tell members. They were also found to have breached the same obligation because the same conduct meant they had breached other provisions of the Corporations Act and the ASIC Act. Now that the efficiently, honestly and fairly obligation is a civil penalty provision, on one view it might be thought that there is no need for the separate obligations not to mislead or deceive and not to give defective PDSs. Chapter 7 of the Corporations Act could be much slimmer and no less onerous – complying with the efficient, honest and fair obligation is not it seems a walk in the park.
The trustees admitted they had breached s912A(1)(a) by failing to ensure that Plan Service Fee deductions were made from members' accounts consistently with the terms of the product. While we can all agree a trustee should not breach the terms of the trust deed (although it is not clear that that is what happened here) and that they should comply with their duties to members, it is unclear why this particular conduct related to the provision of the financial services they were authorised under their financial services licences to provide.
The provision of financial services applies to a limited range of conduct and, in the case of a superannuation trustee, usually two – dealing in financial products (by issuing, sometimes varying and redeeming interests in the fund) and providing financial product advice, usually general advice. Deducting a fee (correctly or otherwise) from a member's account in the fund is not a financial service and it is unclear how the improper deduction of fees from an existing member's superannuation account means the trustee has not issued, varied or cancelled a financial product or provided financial product advice efficiently, honestly and fairly. The fact that it does not apply to all of a trustee's conduct in operating a superannuation fund is acknowledged by the Royal Commission recommendation that operating a superannuation fund become a financial service. However, to date, that is not the law.
The point is also well made when one turns to the misleading or deceptive conduct provisions in the Corporations Act and the ASIC Act. Under s1041H, a person must not engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive. This is a more expansive formulation than the obligation in s912A(1)(a). Conduct in relation to a financial product might breach the section and it would not be a stretch to say that deducting fees from a member's superannuation account (a financial product) is conduct in relation to the financial product. Having said that, that is not the basis of the court's declarations concerning this section. Instead, the court relies on the expanded definition of financial services in the section which applies where a trustee of a superannuation fund is dealing with a beneficiary or doing any act that is in any way related to the financial product or financial services. Section 12DA of the ASIC Act also contains a similarly expansive range of conduct and, again, in making the declarations, the court appears to rely on the view that the trustee was providing services in relation to a financial product.
There is no similar consideration in the judgment about what were the particular financial services the trustees failed to ensure were provided efficiently, honestly and fairly. Instead, it appears the declarations were made on the basis that: 'It is accepted that [they] are financial services licensees'.
As to the content of the duty – well, the court says: 'The parties accept that the meaning of the expression 'efficiently, honestly and fairly' as used in s912A(1) is settled.'
The view the parties and, it appears, the Judge accepted as being settled is the view that is set out in the Federal Court in Camelot Securities:
The words 'efficiently, honestly and fairly' must be read as a compendious indication meaning a person who goes about their duties efficiently having regard to the dictates of honesty and fairness, honestly having regard to the dictates of efficiency and fairness, and fairly having regard to the dictates of efficiency and honesty'.
The formulation comes from what is now a rather old decision in the Supreme Court of NSW, namely Story (1988), regarding the duties of a securities dealer. The duty has been transposed into Chapter 7 and applies to a much broader class of person represented by the full range of financial service licensees. Further, I have always found the formulation somewhat obscure – it is used to support the view that a failure to comply with one limb of the formulation (say efficiency) does not mean the licensee has failed to comply with the obligation. I have never been sure, and it seems that even if that is what it does mean, it may not in fact reflect 'settled law'.
Last year, the Full Court of the Federal Court considered the obligation and Chief Justice Allsop said:
The primary judge’s discussion of the standard of conduct expected by the terms of s912A(1)(a) … which I will not set out, was based on ASIC’s submissions and was not contested … Whilst it is a helpful exposition, I would reserve for an occasion where the matter was fully argued the question whether the phrase is compendious and, if it is, its meaning and application. In particular, I would reserve my views as to the consequences of demonstrating unfairness in the provision of financial services and any need for additional ethical failing.
And Justice O'Bryan said:
Although not the subject of argument on this appeal, I have considerable reservations about the view that the words 'efficiently, honestly and fairly' as used in s912A(1)(a) of the Act should be read compendiously in the manner suggested by Young J in Story.
His Honour went on to note that:
the ordinary meaning of the words used in s912A(1)(a) is to impose three concurrent obligations on the financial services licensee: to ensure that the financial services are provided efficiently, and are provided honestly, and are provided fairly.
And yet, more recently, Justice Beach in AGM Markets favoured Justice Young's formulation. In short, there is some way to go on the meaning of efficiently, honestly and fairly, and given there are now potentially significant penalties attaching to a breach of the obligation, a lot will turn on it.
Given the trustees had admitted the contraventions and agreed to the declarations, the only argument was about what the penalties should be for the breach of s12DA, relating to the misleading or deceptive conduct. That conduct was found in the correspondence with members. ASIC argued that each separate piece of correspondence with a member was a separate offence to which a penalty should apply. The trustees argued that they all arose from the same legal and factual elements and, therefore, that a 'course of conduct' approach should be taken. The court accepted this, although it did identify several courses of conduct related to the different categories of members and different categories of correspondence. There is no real reason provided beyond determining a penalty is a matter for the exercise of discretion by the court weighing a variety of factors.
ASIC said that the fact that trustees were superannuation trustees was relevant, with the suggestion being that a higher penalty should apply to trustees because they have obligations to members that do not apply to other financial services licensees. They also argued that the breaches of s912A(1)(a) should be taken into account in determining the penalty. The court did not accept the latter argument, and while it appeared to accept the proposition that the superannuation context was relevant, that was because a member of a fund 'was a very small cog in a very large wheel' and because of the asymmetry of knowledge, not because of any fiduciary duties.
Ultimately, the court said the contraventions were serious, but that they were not deliberate or dishonest. It noted that members had been compensated and decided the penalties were sufficient to act as a deterrent.
ASIC has been speaking for some time now about its role as a regulator of superannuation trustees, but despite arguments about whether the status of the trustees should be taken into account in determining penalties, to date it has done so only insofar as the conduct relates to their duties as a financial services licensee. The result is that trustees' obligations under the SIS Act, under the prudential standards and under the general law have largely been treated as occupying a separate universe. Commissioner Hayne said that a superannuation trustee's covenants in s52(2) of the SIS Act are 'central' to everything they do (as a trustee). And so it is in a sense rather curious to read a decision about trustees improperly deducting fees from members' superannuation accounts without any real reference to their duties to exercise care, skill and diligence and to exercise their powers and discharge their duties in the best interests of beneficiaries. In this context, efficient, honest and fair almost seems side show. But that battle has been lost.