Australia: Stronger Super: a new dawn for trustee governance


The question of what is adequate in terms of governance standards for trustees of superannuation funds has been the subject of considerable debate in the Australian superannuation industry for many years. For the purposes of this paper, trustee governance is taken to encompass the processes by which trustee companies, and their directors, are held to account. Further, trustee governance is viewed as a product of the rules, relationships, systems and processes within and by which authority is exercised and monitored by the trustee.

It is no surprise that the topic of trustee governance featured prominently in the findings of the recent Cooper Review and the Federal Government's subsequent response entitled "Stronger Super". A key feature of the proposed reforms is the creation of a new office of "trustee-director" which seeks to impose enhanced statutory duties for trustee-directors with additional duties for those who offer MySuper products.

This paper examines this important aspect of the Cooper Review proposals and considers whether it represents a new dawn for trustee governance in Australia's superannuation industry. It will consider a range of questions, including: whether a statutory tidy-up will place all relevant duties for trustee-directors in the one place – what about duties imposed by regulators, under the general law, or other important statutes such as state and territory trustee legislation? Will the prescriptive duties in the regulatory regime sit comfortably with the proscriptive duties for trustees under the general law? Is the position of superannuation fund trustees so unique to warrant a stand alone regime and office of trustee-director? Will the alphabet soup of recommendations actually promote better decision-making by trustees, encourage greater accountability and reduce risks for the entity, or is it likely to suffer the same shortcomings associated with the introduction of the financial services reform regime in Australia? The conclusion reached in this paper suggests the answers to these questions lie in producing "better" regulation (and to some extent, better supervision) rather than just "more" regulation.


The Cooper Review published its Final Report on 5 July 2010, in which 177 recommendations were made with the aim of reforming the governance and efficiency of superannuation entities and thereby instilling greater investor confidence.1 Among these recommendations is that there be a detailed clarification of the duties and obligations of a director of a trustee company. To that end, the Final Report recommends the creation of the statutory office of "trustee-director" and that the "duties, power and standards required of that office should be recorded clearly and cogently in one place".2 This has been given support in principle by the Federal Government.3 In order to achieve this aim, the Final Report recommends that the duties under s 52(2) of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) be expanded, and the current duties of directors under the Corporations Act 2001 (Cth) (Corporations Act) be rendered inapplicable to the office of trustee-director.

This paper discusses several possible concerns with this proposal.

First, the statutory reshuffle appears to be incomplete, as it is only removing the directors' duties under the Corporations Act, and is not removing the extensive application of the general law. Further, the various regulatory appendages concerning the financial products and services offered in the superannuation industry will still need to be complied with.

Second, the proposals involve the introduction of new regulations which are all prescriptive in nature, stated in terms of positive duties to be owed by the trustee and its directors. Prescriptive duties are problematic because they involve the creation of new obligations, rather than prohibiting a certain activity under proscriptive duties. These new duties will need to be explored in some detail, which will take many years of judicial and academic commentary, and may sit poorly with other obligations such as the proscriptive system under the general law.

Third, the general trend for the last decade has been to bring uniformity to the regulation of products and services across the financial services industry. The new recommendations place superannuation funds in a unique position, and subject it to a special regime of regulation. This move will segregate the industry in terms of expectations of trustees and their directors, which is unnecessary, and will likely bring greater, rather than lesser, inefficiency. Further, it is unlikely to sit comfortably with recent reform initiatives such as the introduction of the financial services reform regime which has been focussed on uniform regulation and a level playing field across the industry.

Finally, there is a danger that the proposed recommendations if implemented will form yet another layer of regulation that needs to be complied with. It is possible that rather than resulting in better regulation, the alphabet soup of recommendations will merely result in more regulation.

This paper is divided into two parts and organised as follows. Part A provides an overview of the current regulatory system for directors of superannuation trustee companies and a description of some interesting statistical data pertaining to the superannuation industry. Part B discusses the concerns highlighted above, with the aim of encouraging discourse which will lead to acceptable reform.

Part A

Regulatory System for Directors of Superannuation Trustee Companies

Directors are currently subject to regulation in a number of ways and their duties are sourced from a combination of legislative, general law and regulatory prescriptions.

From a legislative perspective, general duties of a director are set out in ss 180, 181, and 182 of the Corporations Act. In simple terms, s 180 requires directors to exercise their powers and discharge their duties with reasonable care and diligence; s 181 requires the exercise of powers and discharge of duties to be done in good faith in the best interests of the corporation and for a proper purpose; and s 182 prohibits improper use of position to gain personal advantage or render a detriment to the corporation.

The directors' duties will be indirectly affected by the type of activity undertaken by the company. For example, s 180 is couched in terms that require the duty to be assessed in terms of what a reasonable director would do in a "corporation in the corporation's circumstances".4 This means that what is reasonable for a director of a trustee company will be different to what is reasonable for a director of a non-trustee company, and their respective duties will vary accordingly.

It should be noted that in the current regulatory system the variation of directors' duties with the particular circumstances of the company they serve does not derogate from the doctrine of separate corporate personality.5 This applies equally in the case of directors serving a trustee company. Despite being able to take into account the interests of the various parties concerned, such as shareholders, beneficiaries or creditors, the duties owed by directors under ss 180, 181, and 182 are owed to the company and the company alone, whether acting as trustee or not.6 Though in the past it has been suggested that the directors' duties prescribed in the Corporations Act extend to include the beneficiaries in the case of the director serving a trustee company,7 the current authorities strongly oppose this extension.8

This is not to say that there is no extension in other ways of the directors' duties in the special case of a trustee company of a superannuation fund. Another important legislative source of duties for directors and trustees is the SIS Act. Under ss 52(2), (5) and 53(2)(a) of the SIS Act, certain covenants are deemed into the governing rules of a superannuation entity. These covenants require the trustees to exercise their powers honestly, and in the best interests of the beneficiaries, and also impose other obligations upon them.

The directors are required under ss 52(8), (9) and 53(2)(b) of the SIS Act to "exercise a reasonable degree of care and diligence for the purposes of ensuring" the trustee carries out its duties in the covenants deemed under s 52(2), (5) and 53(2)(a). Under s 55(1) directors must not contravene these covenants, but s 55(2) provides that a contravention is not an offence, and that the transaction carried out in breach is not rendered invalid as a result of s 55(1). An action for damages may be taken by a person who has suffered loss against a director under s 55(3), but s 57(3) provides that a director may be indemnified from the assets of the entity if the governing rules so provide. This does not apply to contraventions where the director failed to act honestly or where the director intentionally or recklessly failed to exercise the due care and diligence expected of a director.9

Superannuation interests, which are defined in the SIS Act as "beneficial interests in a superannuation fund",10 are also defined as being "financial products" under s 764A of the Corporations Act. Further, the activities carried out by a superannuation trustee company will often fall under the banner of a "financial service", and will therefore be subject to the myriad of regulations imposed on a financial services licensee under Chapter 7 of the Corporations Act relating to licensing, conduct and disclosure. Providers of financial services or financial products such as superannuation fund trustees are subject to the proscriptive obligations under Part 7.10, namely those pertaining to false or misleading statements,11 dishonest conduct,12 or misleading or deceptive conduct,13 all of which may attract civil liability under s 1041I, and are also regulated by Pt 2 Div 2 of the ASIC Act 2001 (Cth) (ASIC Act). Those entities who are subject to the ASIC Act are generally prohibited from engaging in misleading or deceptive conduct,14 or conduct that is unconscionable,15 or making false or misleading representations surrounding financial products or services.16

The complex array of obligations owed by a superannuation fund trustee under Chapter 7 of the Corporations Act are reinforced by a heavy and prescriptive dose of regulatory guides and documents issued by the key regulators in the industry: the Australian Taxation Office (ATO), the Australian Prudential Regulation Authority (APRA), and the Australian Securities and Investments Commission (ASIC).

Finally, trustees and directors are also subject to regulation in their fiduciary capacity by the equitable principles of the general law. Director and company is a recognised category of fiduciary relationship.17 This means that a director is liable to account to the company for any personal gain or benefit obtained or received by virtue or use of their position as director,18 unless full and frank disclosure is first made to the company regarding the opportunity.19 The director is also forbidden to place him or herself in a position where there exists, or is likely to exist, a personal conflict and thereby receive a benefit.20

Similarly, a trustee acts in a fiduciary capacity in respect of its beneficiaries and is also required to comply with the fundamental equitable duties which proscribe certain conduct. Like directors, trustees are liable to account for any personal gain or benefit obtained by virtue of their position as trustee, and are likewise prohibited from placing themselves in a position which conflicts, or is likely to conflict, with the duty owed to the beneficiary. The difference is that where the director owes its fiduciary duty to the company it serves, the trustee owes its fiduciary duty to the beneficiaries of the trust.

Statistical Background

Before embarking on a discussion of the proposed reforms to the governance of superannuation fund trustee companies, it is worth highlighting some of the statistics pertaining to boards of directors and trustees and the current scope of the activities undertaken by them. This will be useful in understanding the effectiveness of the current governance regime, and place the proposed reforms in perspective.

Figure 1 below has been adapted from data prepared by Shey Newitt, and commissioned by the Australian Institute of Superannuation Trustees (AIST).21 The graph shows that well over 90% of trustees surveyed believed that their board of directors was highly motivated and committed to advancing the interests of its members. This is important, as the need for directors to act "solely" for the benefit of members was identified as a key driver for reform in the Final Report (see the extract of Recommendation 2.1 of the Final Report in Annexure B of this paper).

Figure 2 below has been adapted from a study carried out by APRA based on a survey of 187 superannuation funds, which represents almost the entire population of large superannuation funds in Australia.22 The graph shows that the great majority of directors have received a tertiary education in the form of a degree or other postgraduate study.

Table 1 below is also taken from the previously mentioned study conducted by APRA.23 It shows board practices across many areas (e.g. number of directors, number of board meetings) as a function of the type of fund governed by the board.

These statistics illustrate that the superannuation industry consists of directors who are generally tertiary qualified, who are focussed on the needs of their members, and who commit themselves to the task of trusteeship through large investments of their time both inside and outside the boardroom context. It is against this backdrop that the author contends that the recommendations concerning trustee governance in the Final Report are in some ways misguided.

Part B

Proposed Statutory Changes: Less or More Confusion?

Statutory Reshuffle

Recommendation 2.1 of the Final Report proposes the creation of the new office of "trustee-director" under the SIS Act.24 The proposal states "all statutory duties" relevant to the new office will be "fully set out", and specifically mentions including those duties which would otherwise be found in the Corporations Act. The Final Report continues that "trustee-directors should not have to collate rules from multiple sources in order to understand their core duties".25 The intention of the proposal is clearly to create a position, the duties of which can be found all in the one section without reference to any other legal provisions, be they statute or general law.

While this sounds admirable and would quite possibly be beneficial were it to actually occur in practice, the proposal appears to have overlooked some significant difficulties. The most obvious issue is that the proposed amalgamation of all required duties of the trustee-director in the SIS Act appears to be incomplete. The Final Report states that there is no intention to "codify common law principles",26 and that ASIC will continue to regulate the office of trustee-director, presumably with the same power to prescribe regulatory obligations under the Corporations Act. It is proposed that the licensing requirements of financial product and financial service providers remain unchanged, and will continue to be found under Part 7.6 of the Corporations Act and Part 2A of the SIS Act. Finally, relevant State and Territory legislation will continue to apply to the trusteedirector.27

It is difficult to see how the reshuffle of directors' duties from the Corporations Act to the SIS Act will have any discernible effect on the ease with which a trustee-director can place his or her hands on the duties applicable to the position. The stated purpose of the reform, which is to create "unambiguous clarity about the duties owed by the trusteedirectors",28 seems unlikely to result without considerably more reformation to the obligations which directors of trustee companies are currently obliged to fulfil. This likely comes from the idea expressed in the Final Report that "the regulatory scheme shaping the governance of superannuation funds is unnecessarily complicated".29 Complicated, perhaps; but not unnecessarily so.

The Final Report identifies as an aspect of the complication the fact the regulatory scheme "operates at two levels: one for trustees and a second for trustee-directors".30 That statement reflects a misunderstanding of the often complex legal duality inherent in the position of the director of a trustee company. This legal duality may appear odd to the layperson, but familiar examples abound in the law such as legal and equitable title of property and the distinction of a corporation as both a legal identity and as its organs. Further, the Final Report misrepresents the obligation placed upon directors by s 52(8) of the SIS Act. It states that the section imposes the covenants upon the directors of the trustee company "as though they were the trustees personally",31 but with all due respect, this is incorrect. As discussed earlier, the directors are not obliged to fulfil the covenants, but to simply "exercise a reasonable degree of care and diligence for the purposes of ensuring" the trustee carries out the covenants.32

Also of concern is that the change of location for the duties of a trustee-director is more than a mere transplant from the Corporations Act. The Final Report has recommended a distinctly new set of duties, and although some may sound superficially similar to those in the Corporations Act, they will likely result in an entirely new set of obligations.33 Because of the extensive changes, current jurisprudence will likely apply only in a limited fashion, if at all. That means that these proposed new obligations will require fresh judicial and academic discourse to clearly define their scope, and until such time has elapsed, considerable confusion about the scope of the proposed duties is likely to remain. Recent history provides us with numerous examples of this occurring after extensive legislative change.34 The Final Report itself noted that it "is conscious of the consequences in terms of delay, cost and disruption, that legislative changes such as this cause", but continues that it considers the changes to be necessary steps towards a "more accountable and efficient trustee governance regime".35 It is difficult to see how the proposed new office of trustee-director and the duties which attach to the role would enhance accountability and efficiency in practice.

Consequences of Prescriptive Duties and Proscriptive Duties

There is also a concern that the prescriptive regime of positive duties recommended in the Final Report will be in direct conflict with the proscriptive regime of fiduciary obligations incumbent upon both directors and trustees under the general law. It is arguable that after Breen v Williams36 and Pilmer v Duke Group Ltd37 the traditional view of fiduciary obligations having a proscriptive nature is correct in Australia. This notion was first developed by Finn in 1988,38 where he argued that the content of fiduciary duties could be expressed exhaustively in two proscriptive obligations: the "no conflict rule" and the "no profit rule".39 The High Court confirmed Finn's theory in Breen and Pilmer, and in addition to recently being confirmed by Owen J in Bell, 40 the idea has received support outside of the courts.41 Though some commentators do not accept that there can be no prescriptive fiduciary obligations, particularly regarding the good faith and proper purposes duties in the director/company relationship,42 it seems a reasonable conclusion to draw that at least in general, fiduciary duties in Australia "are essentially proscriptive" in nature.43

This being the case, there is a danger that the trustee-director will be placed in a very difficult position in the event of a conflict. The prescriptive regime requires trusteedirectors "to act solely for the benefit of members",44 which includes and particularises six requirements. Recommendations 2.1(a)(iii – vi) appear to be restatements of either general law fiduciary obligations owed by trustees and directors of trustee companies under the general law, which are typically cast in proscriptive terms, or duties owed under the Corporations Act (although, as mentioned above, the precise obligations owed in the new regime would still need to be interpreted). The remaining two requirements are novel. Recommendation 2.1(a)(i) requires the trustee-directors to "avoid putting themselves in a position where their interests conflict with members' interests", and Recommendation 2.1(a)(ii) requires priority to be given to their duty to members "when that duty conflicts with the duty owed to the trustee company, its shareholders, or any other person". This is in direct opposition to the general law requirement of a director to place the interests of the company above all others. It is clear that such an inconsistency could only result in the general law not applying to directors in the special case of a superannuation trustee company, despite the apparent intention not to remove the application of the common law.45

Although the precise terminology is not used in the Final Report, the "enhanced" directors' duties under Recommendation 2.1 have the potential to amount to a statutory imposition of a fiduciary relationship between directors and members of a superannuation fund. A fiduciary relationship has never been imposed lightly by the courts. In Breen v Williams46 Gaudron and McHugh JJ quoted with approval the warning given by Sopinka J in Norberg v Wynrib, 47 saying that "fiduciary duties should not be superimposed on these common law duties simply to improve the nature or extent of the remedy". More recently the sentiment has been echoed by Finn J in ASC v AS Nominees, 48 in which his Honour considered, inter alia, whether a fiduciary duty existed between the trustee-directors and the beneficiaries of superannuation trusts. His Honour noted that the idea was "not without its critics", and was of the opinion that "protection [for the beneficiaries] can be afforded by other quite orthodox means and in a more extensive way".49

Beyond whether the imposition of the fiduciary relationship is appropriate as a remedy, it may well be completely unworkable in practice. Although the Final Report recommends removing the application of the directors' duties under Part 2D.1 of the Corporations Act, directors will still owe a fiduciary duty to their company under the general law.50 Trustee-directors will therefore owe a duty to both the beneficiaries of the trust (i.e. members of the fund) and the company to act in their best interests respectively. These duties may not always align and it is easy to envisage how they could come into direct conflict, such as when a trustee board is dealing with the distribution of a surplus, or where it is considering questions of remuneration for its directors.

Uniqueness of Superannuation Funds

The recommendations of the Cooper Review manifest a strong desire to separate the superannuation industry from the financial services industry at large and subject it to its own peculiar governance regime. This flies in the face of the policy rationale which supported the introduction of the FSR regime in 2002.51 The Cooper Review sees the superannuation industry as quite different from other parts of the industry because "it owes its existence to government policy and is underpinned by a social purpose that runs alongside many other economic and stakeholder considerations".52 While the description of the industry may be accurate, claiming that by virtue of these qualities alone the superannuation industry is sufficiently different to warrant its very own governance regime appears insufficient. The governance role assumed by directors of other prudentially regulated entities such as banks, life insurance companies, and general insurance companies are largely similar and the directors are required to satisfy the same criteria.53

As for legal differences between superannuation trusts and other bodies governed by trust law, Dal Pont identifies two distinguishing features.54 The first feature is the role of the employer in an employer-sponsored fund, where unlike the relationship between the trustees and members, which is largely equitable, the relationship between members and the employer is contractual.55 The second feature is the result of the unique statutory regulatory scheme which applies to superannuation funds, which is driven by the public interest in the preservation of such assets.

That superannuation funds at times grapple with complex legal issues which could do with clarification is not disputed. Neither is it disputed that it may be appropriate for the Federal Government to subject trustees of superannuation funds to different standards on behalf of the public. Indeed, this would accord with the significant role played by the Federal Government in terms of Australia's retirement income policy. The issue is whether these differences justify the creation of an entirely new governance regime, complete with a new office of "trustee-director" which will be grounded in statute, and could well serve to create confusion, rather than to reduce it. The author suggests that extra regulation in the form of the SIS Act is sufficient to augment the governance regime of superannuation funds to the appropriately higher level. It is unnecessary to create an entirely new system which will have to be tested and more than likely be extensively modified until it provides the industry with the heightened investor confidence and regulation envisioned by the recommendations of the Cooper Review.

Better Regulation?

It has long been a complaint that the outcomes of financial reform legislation are too often not the same as the objectives of the reformers, and that the reason for this is the failure to appreciate the "interface" between the objectives and the legislative process which achieves them.56 This may explain the enthusiastic legislative effort which has led to the arguably excessive number of regulators in the financial services arena.57 This was acknowledged in the Wallis Report in 1997,58 which recommended that "regulation should be revised and reconfigured so as to promote competition without compromising economic stability".59 The guiding principle followed was that by providing consistent regulation and regulatory treatment for financial products and services, greater competition would be generated amongst providers through lower costs and more readily understood regulatory obligations.60 The clearest manifestation of these sentiments is found in the introduction of the FSR regime in Chapter 7 of the Corporations Act following the Wallis Report.61

Obviously the management of $1.23 trillion in assets62 requires a system which has, and is seen to have, "high standards of governance" to ensure investor confidence, and clearly adequate regulation is a key factor.63 The question which needs to be considered before these reforms are implemented is whether the current proposals will achieve this objective, or merely add another confusing and frustrating layer of regulation with which directors and trustees need to comply. The problem of overregulation should not be discounted, as a cycle of counter-productive behaviour may quickly develop.64 If the regulator creates legalistic rules, or rules that are otherwise difficult to understand, there may be a breakdown in communication and cooperation. The regulatees may believe they are complying and acting responsibly, while the regulator is adamant that in fact they are not. The regulatees may interpret this to be unreasonable, and adopt a policy of bare compliance, which may lead to further resentment on both sides, and ultimately, more legalistic or confusing legislation.

Functional Regulation at the Expense of Consumer Protection

What is alarming from the point of view of this author is the blatant failure of the panellists of the Cooper Review, the Australian Parliament and regulators such as ASIC and APRA to recognise that the legislative obsession with market integrity, stability, the minimisation of systemic risk and market conduct (despite being admirable objectives), has come at the cost of effective measures for ensuring investor protection. Pearson notes that notwithstanding the explicit consumer protection obligations of ASIC, "[i]n Australian financial services regulation there is little discussion of risk to individual consumers." 65

This is to be contrasted with the position in the United Kingdom where the sole financial services industry regulator, the Financial Services Authority ("FSA"), has identified four principal risks faced by consumers. The four risks are prudential risk (the risk that an entity will fail); bad faith risk (the risk of fraud or misrepresentation, or poor financial advice); complexity risk (the risk that consumers will not understand the products they are investing in); and performance risk (the risk that an investment does not perform as expected by the consumer).66 The FSA's consumer protection function does not include a focus on performance risk. This is on the basis that the FSA believes consumers should take responsibility for their own investment decisions. A similar view is held by the Securities and Exchange Commission ("SEC") in the United States of America. The SEC states that:

[t]he world of investing is fascinating, and complex, and it can be very fruitful. But unlike the banking world, where deposits are guaranteed by the federal government, stocks, bonds and other securities can lose value. There are no guarantees. That's why investing is not a spectator sport. By far the best way for investors to protect the money they put into the securities markets is to do research and ask questions.67

The preoccupation in Australia has been a discussion about the nature and terms of the strategy to protect the consumer as opposed to the purpose of the strategy itself.68 In turn, this has produced a functional approach to regulation in Australia – that is, similar products are regulated in a similar way to improve comparability and what the Wallis Report referred to as "competitive neutrality."69 The objective was to do away with regulation according to product type and introduce uniform regulation according to product function.70 Hence the focus on strategies of uniform licensing, conduct and disclosure to address risks faced by the financial system with little (if any) regard to the risks faced by individual consumers. The delegation of responsibility for supervision of the financial services industry by regulators along functional instead of institutional lines was an important feature of the recommendations of the Wallis Report71 and seems to have strongly influenced the recommendations of the Final Report.

The Compliance Burden

Inevitably, the functional approach to regulation in Australia has produced a regulatory obsession with corporate compliance and an extremely costly regime to administer. Although difficult to measure with any degree of accuracy, one estimate of the implementation costs associated with FSR was $200 million.72 Associated with the enormous cost of implementation from the outset, FSR has left a permanent legacy with the massive growth within organisations of teams devoted to compliance with the regime. The 177 recommendations contained in the Final Report and the Government's response certainly has the capacity to generate similar concerns about hefty establishment and ongoing compliance costs associated with a new dawn for trustee governance. From a licensing perspective alone, section 912A of the Corporations Act requires a plethora of compliance arrangements to be put in place to ensure that a licensee:

  1. complies with its licence conditions;
  2. complies with the "financial services laws";73
  3. takes reasonable steps to ensure that its representatives comply with the financial services laws;
  4. has a dispute resolution system in place for retail clients; and
  5. has adequate risk management systems.74

Ironically, FSR was intended to result in efficiencies and cost savings for financial service providers. In his Second Reading Speech accompanying the introduction of the Financial Services Reform Bill 2001 (Cth), the Minister for Financial Services and Regulation at the time, Joseph Hockey, maintained that "[t]he streamlined regulatory regime proposed in the bill will reduce the compliance costs associated with carrying on a financial services business." 75 The reality a decade later is something far removed from the Minister's comments. In fact, soon after the end of the two-year transitional period between 2002 and 2004, the financial services industry was vocal in its complaints about the inordinate cost of compliance with FSR.76 The evidence which soon emerged in practice made the Minister's comments appear somewhat far-fetched and fanciful.

In the context of FSR, the Business Council of Australia in its submission to the Banks Taskforce noted that "[t]he initial licensee education and training requirements of FSRA resulted in a total transition cost of about $200 million for the 4200 Australian Financial Services Licence holders at that time. The research also showed ... [the ongoing costs] will be more than $100 million across the industry." 77

Quantifying the costs that stem from regulation is not an easy task but it should play a significant part in the Government's thinking about the Cooper Review and its proposed legislative response. The issue of costs is complicated by the fact that some compliance costs are unavoidable or would have been incurred by business anyway. The limitations of estimates of the economic costs of regulation in Australia should not, however, diminish the significance of the criticism of unreasonable regulatory costs. There are many examples in the financial services industry of an increase in business costs (owing to more regulation) being passed on consumers in the form of higher prices for goods or services. Whilst such increases are subject to the way in which those in the superannuation industry recalibrate pricing following reform initiatives, it is important to acknowledge that increases in costs do occur, and can often be readily connected to new reform initiatives which ignore or underestimate the cost to participants in the industry.

It should be remembered that one of the primary motivations of the Cooper Review in creating a new role with new duties was to clear up the perceived confusion in the trustees' obligations under s 52(2)(c) of the SIS Act. Specifically, the confusion surrounds the meaning given to "best interests of the beneficiaries", an obligation incumbent upon a superannuation fund trustee. The Cooper Review is of the view that there is "considerable uncertainty in practice about what the provision actually means".78 While it is not disputed that the phrase is slightly uncertain, as it is not defined in the SIS Act, in the author's opinion, the magnitude of the uncertainty has been grossly overstated by the Final Report. As stated by Professor Geraint W Thomas, "it is no more vague than the notion of 'prudence' or 'reasonableness' or 'unconscionable'".79 It must also be remembered that as with any fiduciary duty, "best interests" must be assessed in its context.80 With this context kept firmly in mind, and the knowledge that the incorporation of the phrase into statute was intended to be a statement of trust law,81 it seems clear that more often than not the interests of the beneficiaries in the context of a superannuation fund will simply be financial.


The recommendations of the Cooper Review may have consequences quite different to their objectives and there will be considerable scrutiny attached to the Government's legislative response following its consultation on the Stronger Super proposals. The intended regulatory reshuffle is unlikely to achieve the stated purpose of simplification and clarification, because it appears incomplete. As the existing duties are also being altered and in some cases are completely novel, extreme care should be taken to ensure that greater confusion does not result from any incongruity between the new duties and the existing duties; that there are no inconsistent duties, or if they do exist how they are to be dealt with; and most importantly, that the new duties actually prescribe a regime that will function in practice.

The historic trend of uniform regulation should be borne in mind, and the necessity of segregating the regulatory regime of the superannuation industry from the rest of the financial services industry should be considered in detail before changing a course which has been followed for over a decade under the FSR regime and the Corporations Act. Finally, the Government should be mindful of the fact that new regulation does not necessarily mean better regulation. The FSR regime and its associated cost and regulatory burdens is a tangible example in many respects of poorly targeted regulation which has overlooked other fundamental issues such as potential supervisory failures. Even though the recommendations of the Cooper Review relating to governance are clearly intended to be "better" regulation, there is a real risk that this objective will be lost in translation. If in fact it results in simply being more regulation, then at best the reformation effort will have been pointless, and at worst, it could result in a much more confusing and inefficient system of trustee governance that takes the industry backwards instead of forwards. It is accepted that the issues plaguing trustee governance are not easy to resolve, but if a new dawn is about to break over the superannuation landscape, it is preferable that it results in an adequate reappraisal of regulation and not more heartache for the industry.

Annexure A: Recommendation 2.1 of the Cooper Review

The SIS Act should be amended to create a distinct new office of 'trustee-director' with all statutory duties (including those which would otherwise be in the Corporations Act) to be fully set out in the SIS Act, along with re-focussed duties for trustees. The duties for trustee-directors should include:

  1. To act solely for the benefit of members, including and in particular:
    1. to avoid putting themselves in a position where their interests conflict with members' interests;
    2. to give priority to the duty to members when that duty conflicts with the trustee-director's duty to the trustee company, its shareholders or any other person;
    3. to avoid putting themselves in a position where their duty to any other person (such as another super fund or a service provider) conflicts with their duty to members;
    4. to avoid putting themselves in a position where their duty to any other person (other than members) conflicts with their duty to the trustee company;
    5. not to obtain any unauthorised benefit from the position of trustee or trustee-director; and
    6. not to enter into any contract, or do anything else, that would prevent the trustee from, or hinder the trustee in, properly performing or exercising the trustee's functions and powers.
  1. To act honestly.
  2. To exercise independent judgment.
  3. To exercise the degree of care, skill and diligence as an ordinary prudent person of business would exercise in dealing with the property of another for whom the person felt morally bound to provide.
  4. To have specific regard to (among other matters) the likely long term consequences of any decision, including the impact of the decision on the community and the environment and on the entity's reputation for high standards of conduct.

The duties for trustees should include:

  1. To keep the money and other assets of the entity separate from any money and assets, respectively:
    1. that are held by the trustee personally; or
    2. that are money or assets, as the case may be, of a standard employer-sponsor or an associate of a standard employer-sponsor, of the entity.
  1. To formulate and give effect to an investment strategy in respect of the fund as a whole and each investment choice option, that has regard to the whole of the circumstances of the entity including, but not limited to, the following:
    1. the risk involved in making, holding and realising, and the likely return from, the entity's investments having regard to its objectives and its expected cash flow requirements;
    2. the composition of the entity's investments as a whole, including the extent to which the investments are diverse or involve the entity in being exposed to risks from inadequate diversification;
    3. the liquidity of the entity's investments having regard to its expected cash flow requirements;
    4. the ability of the entity to discharge its existing and prospective liabilities;
    5. the expected costs of the strategy, including those at different levels of any interposed legal structures and under a variety of market conditions; and
    6. the taxation consequences of the strategy, in light of the circumstances of the fund.
  1. To formulate and give effect to an insurance strategy which includes, but is not limited to, the types of insurance to be offered and the default minimum and permissible maximum levels of cover to be offered as well as the cost and value for money to members.
  2. If there are any reserves of the entity, to formulate and to give effect to a strategy for their prudential management, consistent with the entity's investment strategy and its capacity to discharge its liabilities (whether actual or contingent) as and when they fall due.
  3. To allow a beneficiary access to any prescribed information or any prescribed documents.
  4. To act fairly between all beneficiaries of the fund and to act impartially between beneficiaries of the same class.

Annexure B: Comparison of s 52(2) with the proposed changes under the Cooper Review and Stronger Super

Current s 52(2) trustee covenants Proposed trustee and trustee-director duties

The s52(2) trustee covenants

  1. to act honestly;
  2. to exercise, in relation to all matters effecting the entity, the same degree of care, skill and diligence as an ordinary prudent person;
  3. to ensure that the trustee's duties and powers are performed and exercised in the best interests of the beneficiaries;
  4. to keep the money and other assets of the entity separate;
  5. not to do anything that would prevent the trustee from properly performing it's role;
  6. to formulate and give effect to an investment strategy having regard for:
    1. the risk and return;
    2. the composition of the entity's investments;
    3. the ability of the entity to discharge its liabilities;
  1. to formulate and to give effect to a strategy for any reserves;
  2. to allow a beneficiary access to any prescribed information.

The s 52(8) covenant by trustee's directors

A covenant by a corporate trustee referred to in s 52(2) also operates as a covenant by each of the directors of the trustee to exercise a reasonable degree of care and diligence for the purposes of ensuring that the trustee carries out the s 52(2) covenants.

The trustee's duties

  1. to keep the money and other assets of the entity separate;
  2. to formulate and give effect to an investment strategy, having regard for:
    1. the risk and the likely return;
    2. the composition of the entity's investments as a whole, including diversification;
    3. the liquidity of the entity's investments:
    4. the ability of the entity to discharge its liabilities;
    5. the expected costs of the strategy; and
    6. the taxation consequences of the strategy
  1. to formulate and give effect to an insurance strategy;
  2. to formulate and to give effect to a strategy for any reserves;
  3. to allow a beneficiary access to any prescribed information;
  4. to act fairly and impartially.

The trustee-director's duties

  1. to act solely for the benefit of members.
    1. to avoid conflict with members' interests;
    2. to give priority to the duty to members;
    3. and (iv) to avoid conflict between a duty and their duty to member;
    4. not to obtain any unauthorised benefit; and
    5. not to do anything that would prevent the trustee from properly performing its role
  1. to act honestly;
  2. to exercise independent judgment;
  3. to exercise the degree of care, skill and diligence as an ordinary prudent person of business;
  4. to have specific regard to the long term consequences of any decision.

Table 1: Comparison of s 52(2) and the proposed changes recommended under the Final Report. The proposed changes are highlighted in yellow.


1 Commonwealth of Australia, Super System Review: Final Report – Part Two: Recommendation Packages, 30
June 2010, 46 (hereinafter referred to as "the Final Report").
2 Ibid.
3 Commonwealth of Australia, Stronger Super, 30 June 2010, 23.
4 Corporations Act, s 180(1)(a).
5 Pilmer v The Duke Group Ltd (in liq) (2001) 207 CLR 165, at 178-179 per McHugh, Gummow, Hayne & Callinan JJ.
6 See for example Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 225 FLR 1, [4389]-[4390] per Owen J; ASIC v Maxwell [2006] NSWSC 1052, at [104] per Brereton J.
7 Hurley v BGH Nominees Pty Ltd (No 2) (1984) 10 ACLR 197, 205-206 per Walters J; Inge v Inge (1990) 3 ACSR 63, 70 per O'Bryan J.
8 Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 225 FLR 1, [4389]-[4390] per Owen J; ASC v AS Nominees (1995) 133 ALR 1 at 18 per Finn J; Hanrahan, P, "Directors' liability in superannuation trustee companies", 2 Journal of Equity 204, 206; R Austin, H Ford and I Ramsay, Company Directors: Principles of Law and Corporate Governance, 2006, 624.
9 SIS Act, s 57(2).
10 SIS Act, s 10.
11 Corporations Act, s 1041E.
12 Corporations Act, s 1041G.
13 Corporations Act, s 1041H.
14 ASIC Act, s 12DA.
15 ASIC Act, s 12CB.
16 ASIC Act, s 12DB.
17 Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41.
18 Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378.
19 See for example, Queensland Mines Ltd v Hudson (1978) 18 ALR 1; Industrial Development Consultants Ltd v Cooley [1972] 2 All ER 162.
20 Cook v Deeks [1916] 1 AC 554; Furs Ltd v Tomkies (1936) 54 CLR 583.
21 Shey Newitt, "Trustee board governance in the not-for-profit superannuation sector", 5 May 2009, available at . The sample provided information on 28 boards from the responses of 128 trustees, 67.6 per cent multi-employer funds, 20.6 per cent public sector funds, and 11.8 per cent corporate funds. No retail funds were present in the sample.
22 Reproduced from Australian Prudential Regulation Authority, Insight, Issue 1 2008, 5.
23 Ibid, 9.
24Recommendation 2.1 is reproduced in its entirety in Annexure A to this paper.
25 Above n1, 46.
26 Above n1, 47.
27 For example, Trustee Act 1925 (NSW), ss 14A, 14C.
28 Above n1, 46.
29 Above n1, 47.
30 Ibid.
31 Ibid.
32 SIS Act, ss 52(8), 52(9); P Hanrahan, "Directors' liability in superannuation trustee companies" 2 Journal of Equity 204, 210.
33 See Annexure A for a detailed comparison of the current provisions with those proposed by the Cooper Review.
34 Indeed, the introduction of the Financial Services Reform Act 2001 (Cth) in March 2002 with a 2 year transition period fundamentally changed the conduct, licensing and disclosure rules for financial services entities in Australia. These rules under the financial services reform (FSR) regime continue to evolve with a number of legislative refinements and there is considerable doubt about the scope of many of the FSR rules.
35 Above n1, 46.
36 (1996) 186 CLR 71.
37 (2001) 207 CLR 165.
38 P D Finn, "The Fiduciary Principle" in T G Youdan (Ed), Equity, Fiduciaries and Trusts (1989), 1.
39 These duties are well established; see for example Phipps v Boardman [1967] 2 AC 46 and Chan v Zacharia (1984) 154 CLR 178.
40 Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 225 FLR 1, [4552] per Owen J.
41 R P Austin, 'Moulding the Content of Fiduciary Duties' in A J Oakley (Ed), Trends in Contemporary Trust Law, 1996, 159; G Dempsey & A Greinke, "Proscriptive Fiduciary Duties in Australia" 25 Australian Bar Review 1, 3.
42 See for example J D Heydon, "Are the Duties of Company Directors to Exercise Skill and Care Fiduciary?" in S Degeling and J Edelman (Eds), Equity In Commercial Law, 233.
43 R C Nolan, "The Proper Purposes Doctrine and Company Directors" in The Realm of Company Law 1998, 12.
44 Above n1, 48. See also the table in Annexure B which compares the proposed changes to trustee and director duties with the current position under the SIS Act.
45 Ibid.
46 (1996) 186 CLR 71 at 110.
47 (1992) 92 DLR (4th) 449 at 481.
48 (1995) 133 ALR 1.
49 ASC v AS Nominees (1995) 133 ALR 1 at 18.
50 See for example Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 96-7 per Mason J.
51 Above n34.
52 Above n1, 44.
53 The only notable exception is for a director of a life insurance company who has an additional duty under s 48 of the Life Insurance Act 1995 (Cth). That section requires a director to give priority to the interest of policy owners over the interests of shareholders of the life insurance company.
54 G E Dal Pont, "The Amendment of Trust Deeds – A super(annuation) gloss?" 31 Australian Bar Review 1, 4.
55 See for example Dr Lisa Butler Beatty, "Structuring Super: Courting the Contract or Trusting the Trust?" 2010 A Super Odyssey, Law Council of Australia Conference, Sydney, February 2010; Michael Chaaya, "Rethinking the nature of a 'superannuation interest'" 18 Australian Superannuation Law Bulletin 1.
56 J Batten & C Kearney, "Legislating Financial Reform: The Australian Experience" 8 Australian Journal of Corporate Law 300, 300.
57 M A Adams, A Young, M Nehme, "Preliminary Review of Over-regulation in Australian Financial Services" 20 Australian Journal of Corporate Law 1, 2.
58 Wallis, S et al, Commonwealth of Australia, Financial System Inquiry: Final Report (1997).
59 I Harper, "The Wallis Report: An Overview" (1997) 30(3) Australian Economic Review 288, 288-9.
60 Ibid, 296.
61 Above n34.
62 Australian Prudential Regulation Authority, Statistics - Annual Superannuation Bulletin June 2010, 19 January 2011, 5.
63 Above n1, 44.
64 Adams, above n57, 11.
65 G Pearson, "Risk and the consumer in Australian financial services reform" (2006) 28 Sydney Law Review 99, 110.
66 Financial Services Authority, A New Regulator for the New Millennium (2000) 8-9, available at .
67 Securities and Exchange Commission, The Investor's Advocate: How the SEC Protects Investors and Maintains Market Integrity (2005), available at
68 Pearson, above n63, 111.
69 Wallis, above n57, 197-198.
70 Above n65, 109.
71 Wallis Report, above n57, 25.
72 See P Hanrahan, "Tinkering with FSR Design May Get Model Right", The Australian Financial Review, 1 June 2005, 63.
73 The term "financial services laws" is defined broadly in s 761A of the Corporations Act as a provision of Chapter 7 or of Chapter 5C, 6, 6A, 6B, 6C or 6D of the Corporations Act; or a provision of Division 2 of Part 2 of the ASIC Act; or "any other Commonwealth, State or Territory legislation that covers conduct relating to the provision of financial services ..."
74 See Corporations Act, ss 912A(1)(b), (c), (ca), (g) and (h) respectively.
75 See Joseph Hockey, Minister for Financial Services and Regulation, Parliamentary Debates, House of Representatives, 5 April 2001, 26522.
76 See, for example, J Whyte, "Compliance Costs Top $100mn", The Australian Financial Review, 10 March 2004, 49; and A Kahler, "FSR compliance cost crippling: industry", The Australian Financial Review, 11 March 2005, 71.
77 Report of the Taskforce on Reducing Regulatory Burdens on Business, Commonwealth of Australia, Rethinking Regulation (2006), 10.
78 Above n1, 47.
79 Professor Geraint W Thomas, "The duty of trustees to act in the "best interests" of their beneficiaries" (2008) 2 Journal of Equity 177, 202
80 Ibid, 188; Justice Margaret Stone, "The superannuation trustee: Are fiduciary obligations and standards appropriate?" 1 Journal of Equity 167, 180.
81 A Nolan, "The Role of the Employment Contract in Superannuation: an Analysis Focusing on Surplus Repatriation Powers Conferred on Employers" (1996) 24 ABLR 341, 342; Cth, Parliamentary Debates, House of Representatives, 27 September 1993, 1103.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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