Edition 52 > February 2019

Allens Unravelled

Welcome

Dear clients and colleagues

The Government's decision to delay the release of Commissioner Hayne's report may mean that you are at something of a loose end this weekend because, like us, you were looking forward to getting home tonight with a heavy volume or two from Commissioner Hayne under your arm. Happily, you can enjoy the first edition of Unravelled for 2019 instead.

Commissioner Hayne was asked, among other things, to inquire into whether any conduct of financial services entities may have breached the law (although in many more words) or may have fallen below community standards and expectations. Now, while it is clear that the Commissioner is extremely well placed to form a view about conduct that may have breached the law, as my colleague Michael Mathieson has observed many times, and once or twice in Unravelled, it is far from clear that he is similarly well placed to make any judgment about when conduct may have breached community standards or expectations. And this is not just a comment based on our own expectations of a former High Court judge's spot in the community.

I have two reservations about this part of the Commission's work. First, everything I see and read suggests that there is no single community and no universal set of standards and expectations. In his evidence in Round 7 at the Commission, APRA's Chair, Wayne Byres, was asked about culture at the major banks. He said that there 'isn't actually some monolithic culture', but rather that there are 'divisional cultures' depending on the 'line of business' and 'geography' (I think that is an actuary's way of referring to where someone works). I suspect Australia is a bit like the banks – there are divisional communities depending on lines of business and geography, among many other things. In any event, and second, why are community standards or expectations an appropriate benchmark?

Community standards and expectations are, it seems, taking the place of the somewhat infamous 'man on the Clapham omnibus', as to whom Lord Reed had this to say (in a decision of the UK Supreme Court):

The Clapham omnibus has many passengers. The most venerable is the reasonable man, who was born during the reign of Victoria but remains in vigorous health. Amongst the other passengers are the right-thinking member of society, familiar from the law of defamation, the officious bystander, the reasonable parent, the reasonable landlord, and the fair-minded and informed observer, all of whom have had season tickets for many years.

Well, this reasonable and fair-minded lawyer worries that trying to determine what the community expects, or, for that matter, what the reasonable person expects, will be a matter of speculation in most cases and irrelevant in many others, perhaps chief among them a superannuation trustee's duties.

The Productivity Commission in its recent report on superannuation said that: 'it has become evident that funds do not always act in the best interests of their members. It would appear that this reflects not only trustee misconduct but a lack of clarity around what is expected of trustees under the best interests duty in legislation'. The Commission then said that: 'the best interests duty should really be about achieving what an informed member might reasonably expect.' I agree that there is lots of confusion about 'what is [required (is that the same as expected?)] of trustees under the best interests duty in legislation', but I am genuinely puzzled by why it has or should have anything much to do with a member's expectations, reasonable or otherwise.

Just before Christmas, the High Court handed down its decision in the Prime Trust case. The court held that a number of the directors breached their duty of care and their duty to act in the best interests of members when they approved the lodgment with ASIC of an amendment to the constitution of a registered scheme that provided for a very handsome fee to be paid to the trustee (owned by one of the directors) on the listing of the trust. As to the best interests duty, this is what the High Court had to say: 'It is a duty to act in the best interests of the members rather than to secure the best outcome for members'. It is this last point that seems to create so much concern and alarm. It shouldn't.

The point of the best interests duty is to put the fiduciary (the trustee and the director) in a position where they are able to exercise the powers that have been entrusted to them for the benefit of their beneficiaries without the temptation of a personal interest or the difficulty of a competing duty. The Royal Commission has very publicly demonstrated that a person who has a conflict of interest or a conflict of duties is not best placed to do that. In my view, strict compliance with the best interests duty would go a very long way to improving outcomes for members. But that does not mean that the law relies solely on the best interests duty to protect beneficiaries. Superannuation trustees, like all professional trustees, have a duty to act with care, skill and diligence in the administration, management and investment of a superannuation fund. This is not a duty to be sneezed at, and it is far from clear that superannuation fund members would be better served by a duty to meet a reasonable member's expectations.

Now, before you finish your weekend reading with John Morgan's and Michael Mathieson's short pieces, I would like to briefly return to Mr Byres. This is what a member of the Administrative Appeals Tribunal had to say in 2004 in a case dealing with the authorisation of a superannuation trustee:

'The evidence of Byres was in my view generally worthy of credit. He appears to be an honest and able young man whose career is moving upwards. But his comprehension of the law was suspect.'

Well, I think we can all agree that Mr Byres has proved himself to be very able and his career did indeed move upwards. As to his comprehension of the law, he is not a lawyer. And this, I think, points to one of the difficulties APRA has in supervising superannuation trustees. As Mr Byres' evidence at the Commission makes very plain – APRA is a prudential regulator – it monitors and assesses risk, and, until recently at least, the risk was chiefly financial risk. This makes a great deal of sense for banks and insurers – I suspect it doesn't work so well for superannuation. Next Monday, we will know what Commissioner Hayne thinks about that question.

We will be back with our coverage of the Royal Commission's final report next week. Until then, I hope you enjoy your weekend.

Kind regards

Michelle Levy

In this edition Relevant sectors

Productivity Commission's report on superannuation – an odd mix of recommendations

Written by Senior Regulatory Counsel Michael Mathieson

Before we are crushed by a heavy tome on Monday afternoon, I would like to say something about the recommendations in another heavy tome – the Productivity Commission's report on superannuation. The recommendations are an odd mix. Read more...

   

Relevant sectors  Relevant sectors
Relevant sectors  Relevant sectors

The future age of AI

Written by Consultant John Morgan

We will be able to cease speculation on what is in or not in the Final Report of the Financial Services Royal Commission on Monday evening (or after whatever time it takes to read and digest!). Read more...

   

Relevant sectors  Relevant sectors  Relevant sectors  Relevant sectors  Relevant sectors
Relevant sectors  Relevant sectors  Relevant sectors  Relevant sectors  Relevant sectors

 
 

 

Meet the team
Geoff Sanders

Geoff Sanders
Melbourne

Marc Kemp

Marc Kemp
Sydney

Penny Nikoloudis

Penny Nikoloudis
Melbourne

Christopher Kerrigan

Christopher Kerrigan
Sydney

Jo Ottaway

Jo Ottaway
Melbourne

Belinda Thompson

Belinda Thompson
Melbourne

Simun Soljo

Simun Soljo
Sydney

 

Meet the team
Michelle Levy

Michelle Levy
Super and Wealth
Sydney

Geoff Sanders

Geoff Sanders
Super and Wealth
Melbourne

Michael Mathieson

Michael Mathieson
Super and Wealth
Sydney

Marc Kemp

Marc Kemp
Funds
Sydney

Penny Nikoloudis

Penny Nikoloudis
Funds
Sydney

Karla Fraser

Karla Fraser
Banking
Brisbane

James Darcy

James Darcy
Banking
Melbourne

Belinda Thompson

Belinda Thompson
Regulatory investigations
Melbourne

Malcolm Stephens

Malcolm Stephens
Funds
Sydney