- Recent developments under the SIS Act and a new Prudential Standard (SPS 521) give priority to the interests of beneficiaries where conflicts of duties and interests arise.
- The overall effect of the changes under the SIS Act is to hold trustees to a higher standard.
- We consider some practical suggestions for ensuring compliance and managing conflicts of interests and duties .
Background and context
As the superannuation industry consolidates and conflicts of duties and interests arise more regularly, there are increased challenges for superannuation fund trustees and the board of directors of such trustees in knowing what their legal obligations are in relation to conflicts and ensuring compliance with such obligations.
The position in relation to conflicts has recently changed following amendments to the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) and the introduction of a new Prudential Standard 521 which came into effect on 1 July 2013 imposing new duties on trustees and boards trustees.
Obligations for trustees and directors
The Corporations Act 2001 (Cth) (Corporations Act) contains duties for all company directors to avoid situations in which conflicts of duties and interest can arise, although there are certain circumstances where conflicts may be authorised.
For superannuation trustees and directors on the board of superannuation trustees, there are now additional obligations under the SIS Act and the Prudential Standard 521.
Superannuation trustees and directors of trustees should avoid conflicts of duties and interests. However, where they do arise, and the trust rules and constitutional documents of the trust permit, the trustee can proceed notwithstanding the conflict, provided that it meets the additional SIS Act requirements. For example, where related party transactions are in the best interests of beneficiaries and permitted under the general law, the new provisions are not intended to limit such transactions. The requirements under the new provisions include:
- priority must be given to the beneficiaries over any other persons,
- duties to the beneficiaries must be met despite the conflict,
- beneficiaries must not be adversely affected by the conflict, and
- the trustee and board must comply with the prudential standard (521) in relation to conflicts.
Importantly, and potentially tricky to manage on a practical level, the obligations to beneficiaries of the superannuation trustee override any conflicting duty an executive officer or employee of the trustee has under the Corporations Act - which would include any other conflicting directorship that an executive officer may hold.
Prudential Standard SPS 521
Whereas the Corporations Act and SIS Act set out obligations where a conflict already exists, SPS 521 arguably expands the focus for the super industry by encompassing potential conflicts of the type that APRA considers to be common in super. SPS 521 therefore focuses on how trustees should develop appropriate processes to identify and manage actual and potential conflicts (i.e. by identifying interests and duties that may interfere with the trustee’s decision-making and activities). The Standard sets out obligations for both the trustee and the board of directors. Further, it requires trustees to consider issues that may arise from the interests and duties of ‘responsible persons’, rather than just the trustee entity and each director (see the register requirements discussed below.
Trustees should also be aware that APRA has recently updated its guidance supporting Prudential Standard 521 (see Prudential Practice Guide 521 – Conflicts of Interest). While compliance with this guidance is not mandatory, it sets out APRA’s key expectations in relation to trustees’ conflicts management procedures.
Practical guidance for managing conflicts of duties and interest
So what do superannuation trustees and directors on the boards of superannuation trustees have to actually do? We have set down some practical guidance on compliance with the requirements under the SIS Act and SPS 521:
- Conflicts management framework - A trustee must have a “conflicts management framework” in place which enables the trustee to identify all potential and actual conflicts and take action to ensure that conflicts are avoided or managed. This framework is considered to be ‘the totality of the systems, structures, policies, processes and controls’ that the trustee has in place to identify and manage conflicts. The board of the trustee has responsibility for developing and ultimately approving the conflicts management framework as well as maintaining it once it is in place.
- Conflicts management policy – In addition to the overall framework, a trustee must have a conflicts management policy which contains controls applying to all employees of the trustee. Again, the board of the trustee will have responsibility for approving the policy. Similarly, where a trustee is part of a corporate group, and the trustee utilises group policies or functions, the board must approve the use of group policies and functions and must ensure that these policies and functions give appropriate regard to the trustee’s business operations and its specific requirements. The policy must comply with the minimum standards which are set out in SPS 521.
- Record keeping standards – Key to ensuring an effective conflicts management policy is having in place proper record keeping standards, which involves recording in the minutes of board, board committee and other relevant meetings details of each conflict identified and the action taken to avoid or manage this conflict.
- Communication of conflict management procedures – A trustee’s conflict policy and procedures must be effectively communicated to the board, to management and other employees so that they understand the need to identify conflicts and the circumstances where conflicts might arise and their obligations should a conflict arise.
- Effective disclosure of relevant duties and interests prior to appointment - Appropriate appointment procedures should be put in place that require incoming responsible persons of a trustee to disclose all relevant duties (i.e. owed by a trustee to a beneficiary) and relevant interests (i.e. any interest, gift, emolument or benefit, directly or indirectly held by the trustee) prior to the person taking up the appointment.
- Set up a register of relevant duties and interests – SPS 521 requires that trustees establish and update a register of relevant duties and interests as a forum to identify potential and actual conflicts of interest. Responsibility for maintaining the register once it has been established should be allocated to a person within the organisation and directors, management and other employees should be made aware of their responsibility to report any interests that they have.
- Managing conflicts that arise – While trustees and directors of trustees should try to avoid conflicts, where a conflict arises, trustees and directors must give priority to the duties to, and interests of, beneficiaries. In addition, trustees should ensure that appropriate action is taken (i.e. proper reporting), as well as on-going evaluation of management of the conflict and provision for escalation or alternative action if required.
- Exercising functions and powers - Directors of corporate trustees should also avoid entering into any contract (or doing anything else) that would prevent or hinder the director or trustee from properly performing or exercising their functions and powers.
- Review of conflicts management framework – SPS 521 requires that a conflicts management framework should be subject to a comprehensive review by an operationally independent, appropriately trained and competent person at least every three years. In addition, the trustee must internally review its conflict management framework on an annual basis and report the results to the board. The board should give consideration to the results of such reviews and consider whether any changes are necessary to the framework to ensure its appropriateness and effectiveness.
- Be aware of the new ‘de-entrenchment’ provisions - The conflicts of interest obligations interact with the new tied service provider ‘override’ in section 58A of the SIS Act. Importantly, section 58A does not prevent a trustee from using or continuing to use an associated service provider. While this provision ‘switches off’ the general law obligations in relation to conflicts, the trustee must continue to comply with the SIS conflicts of interest covenants and Prudential Standard 521.
- Develop a strong conflicts management culture – Finally, the expectation to identify conflicts of interest and to have processes in place for handling those conflicts should be supported by a culture of openness where the requirements to disclose relevant duties and interests are understood and highlighted in the company’s policies, and the value of proactive disclosure is promoted.