On 24 August 2018, Counsel Assisting released closing submissions in relation to the Round 5 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services hearings on superannuation.
In the submissions, Counsel Assisting makes a number of conclusions as to the findings available to Commissioner Hayne regarding misconduct, or conduct that falls below community standards and expectations.
The evidence presented of misconduct in the superannuation industry is concerning, while Commissioner Hayne is yet to reach any findings, it appears that major shifts need to occur in approaches to governance. The AICD is reflecting on the evidence that was given, and the learnings that need to be applied. Trustees should be doing the same, and governance structures and related policies and processes will need to be reviewed carefully. We have previously spoken of the need for governance standards to lift throughout the sector, particularly given its importance to all Australians (available here).
As has been well ventilated in the media, certain of the findings said to be open to the Commissioner relate to alleged misconduct by NAB and CBA, as well as a number of corporate trustees of retail superannuation funds.
The conduct that grounds many of Counsel Assisting’s conclusions involves potential breaches of a range of laws, including the Superannuation Industry Supervision (SIS) Act and, in particular, corporate trustees’ duties to exercise the degree of care, skill and diligence a prudent superannuation trustee should exercise, and to perform their duties and exercise their powers in the best interests of members. The two key areas of concern identified by Counsel Assisting relating to culture and governance practices were: 1) the relationship between trustees, their corporate groups and financial advisers which creates difficulties in prioritising the interests of fund members; and 2) the management of conflicts of interest within retail groups.
It is important to remember that it is a matter for Commissioner Hayne to consider the evidence and submissions (including from those who may receive adverse findings) and formulate his final recommendations.
The relevant matters would then need to be litigated in court by the relevant authorities before liability is established, and the law in the area is relatively untested and complex. In particular, the AICD understands that several of the sections of the SIS Act at issue have not yet been considered by a court, and others only rarely. The closing submissions reflect Counsel Assisting’s views on the application of the laws, but conclusions will not necessarily be clear cut.
That said, there is enough on the table to demonstrate that cultural and governance practices need to improve. Counsel Assisting expressed a view that there are several governance practices that may offer explanations for misconduct seen across a range of entities, including in relation to management of conflicts of interests, and called out the development and hardening of cultures that are not compliant and lack insight.
The role of the regulators was also examined, with ASIC and APRA coming under criticism for their approach to regulation and interactions with regulated entities. In particular, there was a suggestion that neither has been an effective conduct regulator, and that there has been confusion as to their respective roles. Counsel Assisting has commented that “on the evidence, it is not clear why so little action has been taken” against corporate superannuation trustees, and that the approach of neither APRA nor ASIC has been sufficient to achieve specific or general deterrence.
Policy questions, and call for member feedback
Counsel Assisting has called for submissions on a range of policy issues. Some go to systemic or structural issues (such as the dual regulated structure), while others have a stronger governance focus (such as whether the best interests obligation should be expanded).
"The particular governance focused questions that the AICD will be closely considering are set out below. We welcome feedback from members on these questions as we formulate our response. If you would like to provide comments, please email firstname.lastname@example.org.
Appointment of directors - Is it appropriate for shareholders of RSE licensees to retain a broad discretion to appoint and remove directors? Or should there be an obligation imposed on shareholders to exercise such powers in the best interests of the members?
Conflicts - Would it be preferable to extend the obligation to act in the best interests of members of a super fund so that (a) contravention of the obligation attracts a civil penalty and (b) the obligation (and civil penalty for breach) extends to shareholders of trustees and any related bodies corporate of the trustee in respect of any conduct that will affect the interests of members of the fund? Are there any unforeseen consequences of such a legislative intervention that would make it undesirable to strengthen the SIS Act in this way?
Deterrence - What can be done to encourage the regulators to act promptly on misconduct or potential misconduct? Is the present allocation of regulatory roles appropriate to achieve specific and general deterrence from misconduct? Given that what we are fundamentally concerned with is conduct that in subtle but ongoing ways negatively affects the retirement outcomes of consumers, are either of the regulators best placed to carry the responsibility to protect consumers should the balance between them be restructured or significantly altered?"
Submissions from the public are due by 5 pm on 21 September.
Submissions will be separately called for following the insurance Royal Commission hearings, 10-21 September 2018.
By Australian Institute of Company Directors
29 August 2018