The first notices to produce documents to the Royal Commission into misconduct in the Banking, Superannuation and Financial Services Industry have already been sent to some superannuation fund trustees by Commissioner Kenneth Hayne.

We understand that the relevant notices are asking trustees to report any “misconduct” that has occurred at their fund since 1 January 2008 and any instances over the same time period when their conduct has “fallen below community standards and expectations”. Their responses have been sought by no later than 29 January 2018.

Even if you have not yet received a notice there are some things that superannuation fund trustees can do now and in the weeks after Christmas to ready themselves for a notice from the Commissioner.

1 Secure representation

We expect there will be a high demand for legal assistance, given the broad scope of the terms of the Royal Commission. You should ensure now that your preferred lawyer (and perhaps even your preferred barrister) is able to act for you and whether you need to enter into an engagement agreement with them. You should also enquire whether your lawyers will be acting for clients whose interests may conflict with your interests and if so how such conflicts will be managed.

2 Consider your insurance cover and policy obligations

Review your insurance policy to understand the scope of the Directors and Officers cover you have in place. The focus of the Royal Commission is not just on misconduct but on any conduct that falls below community standards and expectations and use of superannuation members savings in a way that may not be in the best interest of members. Consider whether you ought to notify your insurer that your fund may be within the scope of the Royal Commission’s enquiries and that accordingly a potential claim may arise. Consider too whether any costs of preparatory work (such as the activities set out in this note) may be claimable under your policy.

3 Governance structure

Consider your organisational chart. Consider particularly where your responsible managers are positioned in your organisation and their effectiveness in managing day-to-day operations and their accountability to executive managers and ultimately the board.

4 Strategic objectives and member outcomes

APRA has recently released a discussion paper called “Strengthening superannuation member outcomes” together with a suite of documents that either amend or add to existing Superannuation Prudential Standards and Guides. These include amendments to Prudential Standard SPS 220: Risk Management and the new Prudential Standard SPS 225: Outcomes Assessment, which is accompanied by the new Prudential Practice Guides 221: Strategic and Business Planning and 225: Outcomes Assessment.

All of these documents are currently in draft. However, they do provide a useful method for trustees to formalise the assessment of the outcomes provided to members, and whether future outcomes could be improved through changes to a trustee’s business operations.

You should also review your trustee business plan, having particular regard to your strategic objectives (and the budget you develop to support them) and how these feed into your desired member outcomes. Key assumptions around membership growth and expenditure should be clearly articulated, in a way that is consistent with the trustee’s strategic objectives.

5 Policies

Review your policy documents, and supporting registers and manuals. Have particular regard to issues of good governance, remuneration and incentives, conflicts and complaints handling, and how your policy documents have been applied in these circumstances. Clearly, the objective is that the policy documents are “live” – that means your staff know of the policies that are in force, and are able to effectively implement these policies, with any issues or problems being identified and escalated as necessary in accordance with the policy or to those responsible for operational implementation.

5.1 Closely consider your Governance framework

Reconsider Prudential Standard SPS510 and Prudential Practice Guide 510, and your trustee’s practices in relation to board renewal, and nomination, appointment and removal of directors.

Are relevant delegations by your board in place?

What about your skills matrix and fitness and propriety records – are they in good order and up to date? Peter Dutton has said a benefit of the financial sector royal commission will be that industry super funds will face more scrutiny, given they have “union members and whatnot on the board”, so superannuation funds are on notice that board expertise and conflicts may be under the microscope as a theme explored by the Royal Commission, and documents that explain and support proper and transparent fund governance will be valuable.

Your remuneration model should also be carefully re-examined in this context of good governance, and specifically in light of SPS 511. The remuneration policy should set out the remuneration objectives, and the structure of the remuneration arrangements, including approval of the remuneration policy by the board. Does it address how performance-based components of remuneration are designed to encourage behaviour that supports:

  • protecting the interests and meeting the reasonable expectations of beneficiaries
  • the long-term financial strength of the trustee and
  • the risk management framework of the trustee?

Have you or your Remuneration Committee sought advice from an independent remuneration consultant in relation to directors’ and officers’ remuneration? If so do you have that advice to hand?

The Australian Institute of Company Directors has other resources that you may find helpful in undertaking this work.

5.2 Closely consider your conflicts management arrangements

Consider SPS and SPG 521 when undertaking your conflicts policy review. Consider whether sufficient rigour is applied in identifying conflicts and whether a transparent approach to identifying and managing conflicts exists at all levels of the entity, both at the RSE licensee level as well as of directors, responsible managers and staff.

Have you sought legal advice in relation to any conflicts of duty or interest that are logged (or not logged) in your conflicts register? You may wish to confer with your lawyers as to whether legal professional privilege applies, and whether you may wish to claim privilege in relation to the advice.

Conflicts of interest were also considered by APRA in its thematic review in the first half of 2014. If you were one of the 37 entities reviewed by APRA at that time, you may wish to review APRA’s findings, and whether recommendations made by APRA at the time have been implemented. You may also have grounds for disclosing to the Commission, should you receive a relevant notice, that the Royal Commission’s enquiry may duplicate the work undertaken by APRA.

5.3 Closely consider your complaints handing arrangements

Complaints handling procedures have been a feature of superannuation operations since the introduction of SIS. What can you learn from a close review of the complaints that are received by the trustee? In particular, do your complaints handling mechanisms show any systemic weaknesses, or occasions when conduct has “fallen below community standards and expectations”, and if so have these been addressed over time? Can you locate the relevant documents which show how you have addressed any issues relevant to your complaints handling arrangements?

Consider whether complaints are resolved in accordance with specific procedures that are well articulated, and impartially applied.

6 Insurance

There has been much public commentary about the provision of unneeded insurance cover for superannuation fund members and the erosion of super benefits of low balance members by insurance premiums. This is likely to be a theme considered by the Royal Commission, and accordingly having documents that describe your member profile, and map your strategy in relation to the insured cover provided to low balance and other vulnerable members would be a prudent exercise to undertake now. It is likely that the trustee will have sought expert advice in relation to the design and cost of insured benefits, so locate those documents, and review any recommendations against your insurance policy terms and member experience.

Again policy review is essential. Consider your insurance management framework, and how the key pieces of your insurance offering, including insurance cover and exclusions, premiums, claims handling and claims experience fit with your member demographic and your strategic plans.

Sponsorships and other application of funds

On radio Peter Dutton said:

I think people lose a lot of their super through fees and through donations and all sorts of support for unions. So I think it’s a good opportunity in that sense to have a look at the detail and people can put all of that information forward and we can see the recommendations from the commission.”

Clearly, it’s a matter for Commissioner Hayne. Nevertheless, another likely theme for the Royal Commission will be the use of funds as donations, sponsorships and other applications such as industry association memberships.

So in preparation for a notice from the Commissioner, consider what your budget is (if any) for such activities. How are proposals for donations or prizes or other “sponsorships” assessed- is there a clear policy which is applied consistently? How is the value of the application of funds for this purpose reviewed and measured?

These new (still draft) APRA Standards and Guidance documents will require a trustee to articulate a clear view in its business plan about its target membership base and demographics, and any improvement to member outcomes it is targeting by its sponsorships or other significant expenditure, including advertising expenditure. Consequently, trustees may find the new draft APRA Standards and Guidance documents helpful in guiding the progress of work in relation to a trustee’s use of funds.

It’s quite a shopping list. And it’s Christmas.