Summary

  • On 24 June 2013 the Stronger Super (Service Providers and other Governance Measures) Bill 2013 was passed by both Houses of Parliament and is now law.
  • We consider the changes that came into effect on 1 July 2013 and the impact of these changes on trustees using particular service providers or investments based on specifications in their fund’s governing rules.

Background

On 24 June 2013 the Stronger Super (Service Providers and other Governance Measures) Bill 2013 was passed by both Houses of Parliament and is now law.

This includes a much-debated reform that effectively overrides any super fund rule ‘entrenching’ the trustee’s use of a specified service provider, investment entity or financial product.

Timing and impact

The changes came into effect on 1 July 2013 and will impact trustees using particular service providers or investments based on specifications in their fund’s governing rules.

Summary of the changes

Under the new section 58A of the Superannuation Industry (Supervision) Act 1993 (SIS Act), a provision in the governing rules of a regulated super fund is now void to the extent that it specifies:

  • a person (including indirectly) from whom the trustee ‘may or must’ acquire a service,
  • an entity (including indirectly) in or through which assets of the fund ‘may or must’ be invested, or
  • a financial product that the trustee ‘may or must’ invest in, purchase or use to make payments with assets of the fund.

Basis for the reforms

Concerns regarding tied or ‘entrenched’ service provider arrangements were raised by the Cooper Review in 2010. In particular, trust deed provisions requiring a trustee to deal with certain entities were seen as preventing the trustee from properly considering the interests of beneficiaries. Following the Cooper Review’s recommendations, the Government released an exposure draft of the de-entrenchment provisions in October 2012.

Industry criticism

Industry participants raised the following concerns regarding the initial drafting:

  • Voiding effect too broad: the initial provisions would have voided the whole of any fund rule with an entrenching effect, even if the rule also covered other matters.
  • ‘May or must’ language too broad: enabling provisions stating that a trustee ‘may’ deal with certain entities and financial products should not be voided, as they do not prevent the trustee from undertaking the proper consideration of beneficiaries’ interests.

Government response

In response, the draft provision was amended so as to void a fund rule only ‘to the extent that’ it would have an entrenching effect (leaving other aspects of the rule in operation).

However, the words ‘may or must’ have been retained. As a result, a fund rule that simply permits the use of a particular entity or financial product is now void (as well as any rule requiring the use of such an entity or product).

On this issue, the Government has maintained its position that such enabling rules could ‘encourage or sanction’ the use of specified entities rather than prompting trustees to consider other options in the market.

Key legal issue for trustees

Without an express clause permitting a trustee to act where it may have a conflict, for example, by contracting with related entities, the trustee’s general law fiduciary duties would preclude it from doing so. 

While this would ordinarily be addressed by an enabling provision in the trust deed, section 58A now renders such a provision void.

As discussed below, section 58B of the SIS Act has now been introduced with the intention of filling this ‘gap’ for trustees.

Treatment of conflicts – s 58B

To preserve a trustee’s ability to deal with related entities or otherwise act in the presence of a conflict, the new section 58B effectively ‘switches off’ certain well-established fiduciary obligations.

This section provides that the ‘general law relating to conflicts of interest’ does not apply to the extent that it would prevent the trustee from dealing with a specified entity or financial product. 

Issues for trustees and directors

The words ‘general law relating to conflicts of interest’ in section 58B are not defined. The Explanatory Memorandum indicates that they ‘are intended to be construed broadly so as to cover the general law relating to both trustees and directors’ and to cover conflicts involving both beneficiaries and other persons.

Arguably, this does more than simply preserve a trustee’s ability to deal with a related entity. For example, individual directors may need to re-evaluate their position at general law where they are called on to make decisions involving entities or investments in respect of which they have outside interests or duties. 

Key take away

Despite the potential for confusion introduced by section 58B, the key point for trustees is that they will have the ability to seek services from, or investments through, a related entity, provided that these dealings meet all other legal requirements.

Next steps

Trustees should:

  • Review their fund’s governing rules to identify any ‘entrenching’ clauses that will be affected by the new section 58A.
  • Consider each clause referring to a specific service provider, investment entity or product type, including where a provider is specified indirectly (for example, ‘a related body corporate that is a provider of administrative services’).
  • Remember that the SIS Act definition of ‘governing rules’ is broad and covers more than just the trust deed. Consider whether service agreements or other documents include affected provisions.
  • Assess any relevant fund arrangements to determine whether their continuation is consistent with the best interests of beneficiaries. If not, the arrangement cannot be renewed when the current term comes to an end.
  • Ensure that processes for the selection of material service providers  and investments are consistent with supporting obligations set out in APRA’s Super Prudential Standards (see SPS 231 - Outsourcing and SPS 530 – Investment Governance).