Superannuation fund trustees and their lawyers (including this one) have been grappling for years with what the covenant in section 52(2)(c) of theSuperannuation Industry (Supervision) Act 1993 (the SIS Act) means. What must a trustee do to exercise its powers and discharge its duties in the best interests of beneficiaries? And despite some very clear statements by many judges including in the High Court that the covenant is concerned with ensuring the trustee is free to exercise its powers and discharge its duties for their proper purpose (without any unauthorised conflict or profit) – the idea that the duty in fact requires trustees of superannuation funds to achieve good outcomes for beneficiaries persists.
I have seen many opinions (and may have written a few) that trot out the mantra – process not outcome – but then go on to look at the merits of the relevant proposal for beneficiaries. And this isn't stupid, it is what APRA expects as part of a proper process and it is unlikely that a decision that in fact benefits beneficiaries will be challenged. Moreover, if a decision doesn't benefit beneficiaries, it begs the question about why it was taken. Nevertheless, this kind of analysis sits uneasily with what the courts say about the content of the duty. And whenever there is a suggestion that a regulator might be conflating the trustee's obligation to exercise its powers in the best interests of beneficiaries with a duty to exercise its powers in a way that benefits beneficiaries, all the lawyers start getting very hot under the collar.
But I do wonder whether we are fighting a losing battle (and I think we are) and then I also wonder whether it matters much (and I think it might).
A losing battle?
Not so long ago lawyers and accountants had clients, doctors and dentists had patients, and tradesmen (as they mainly were) and hairdressers had customers. Now everyone has clients. Of course it would be untrue to say that with it the tradespeople and hairdressers assumed fiduciary obligations – but it is true that the fiduciary's duty to act in the best interests of their beneficiary has taken on something of a life of its own.
The debate has been most intense about the proposal to impose a duty on financial advisers to act in the best interests of their clients. (To a large degree that debate ignored the case law that said that in many cases the relationship between an adviser and their client was a fiduciary one.) Nevertheless, section 961B(1) of the Corporations Act 2001 now imposes a duty on a person who provides personal advice to a retail client to 'act in the best interests of the client in relation to the advice'. Section 961B(2) provides that the adviser will satisfy the best interests duty if they do each of the things listed in the section. They each go to the process that the adviser undertakes in providing the advice and not to the content of the advice itself and so the strong implication is that this best interests duty is also process focused, albeit in a very different way to the way the duty applies to a trustee.
Notwithstanding this, ASIC says that in testing whether an adviser has satisfied their best interests duty the adviser should ask whether the client was in a better position after receiving the advice.
Does it matter?
While that isn't the obligation imposed by the law, it is similar to the trustee of the superannuation fund who asks whether a proposal to exercise their power in a particular way will benefit the beneficiaries. In other words, it is hard to ignore the outcome even when the test goes to process and perhaps this shouldn't be a surprise since they are both intended to ensure that the person exercising the power or making the recommendation is in a position to do so. And so it might be that on one view the process versus outcome debate doesn't matter too much in the end. But what really does matter is that the best interests duty is not interpreted as a duty to obtain the best outcome.
Best interests or best outcome?
Article 27 of The European Directive on Markets in Financial Instruments (MiFID) requires investment firms in the Member States to:
take all sufficient steps to obtain, when executing orders, the best possible result for their clients taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order.
This is not a best interests duty. It is a very clearly expressed obligation to obtain the 'best possible result' for a client. However, complying with an obligation to provide a particular outcome (in this case, the 'best possible') isn't probably that onerous when the service relates to an execution service – there is not much room for the exercise of judgment or opinion. Did the provider obtain the lowest price and the most efficient service for their client?·
It is quite a different fish where the service provider - the trustee or the adviser - is required to exercise judgment and form opinions. The trustee's best interests duty should free the trustee to exercise its powers in the interests of the beneficiaries by preventing the trustee acting with a conflict of interest or obtaining an unauthorised profit; and the adviser's best interests duty should arm them with the information they need to make recommendations in their client's interests. As suggested above, the quality of the exercise of power or recommendation might well be considered after the event to ensure that no conflict existed or that no step was omitted, but the duty does not require the trustee or adviser to achieve the best possible result for their beneficiaries or client. This does not mean that the law ignores the quality of the judgment or opinion. This has always been a matter for the provider's duty of care and not the best interests duty. The quality of the judgment or the opinion is measured by the quality of the provider's peers or by their promises, not the fact that they have a duty to act in the best interests of their beneficiary or client. And here the distinction really does matter, which brings me to the punchline – section 29VN of the SIS Act.This is not a best interests duty. It is a very clearly expressed obligation to obtain the 'best possible result' for a client. However, complying with an obligation to provide a particular outcome (in this case, the 'best possible') isn't probably that onerous when the service relates to an execution service – there is not much room for the exercise of judgment or opinion. Did the provider obtain the lowest price and the most efficient service for their client?·
Duty to promote the financial interests of MySuper members
Section 29VN(a) of the SIS Act requires trustees that offer a MySuper product to promote the financial interests of members who hold a MySuper interest, in particular returns after the deduction of fees and costs. It is easily said – but really hard to know what it means. The rules of statutory interpretation say that each provision of a statute should be interpreted in a way that gives it some work to do. This means that the duty must be different to the duty to exercise the trustee's powers and discharge the trustee's duties in the best interests of beneficiaries since that duty already applies. It also can't be a duty to exercise care, skill and diligence for the same reason.
Having grappled with this question a lot recently, the best I can do is to say that the duty requires the trustee to design a MySuper product that it considers is reasonably likely to provide returns at a reasonable cost to the MySuper members. I don't think it requires the trustee to design a product that will obtain the best possible result for members (the highest return at the lowest cost). But there is a long way between reasonably likely and best possible and, in absence of guidance from the courts, trustees and their lawyers may well be floundering about in the dark trying to work out what it means and when it applies. And this is while we are still grappling with the precise meaning of the best interests duty.