The Australian superannuation and wealth management sector has been in the spotlight over the past year as a result of the Hayne Royal Commission. The role of the Trustee and the suitability of the vertical integration model within the sole purpose test has been challenged.
Whilst governance of the industry fund sector had been the focus prior to the royal commission, the major focus of the Royal Commission was the suitability and conduct of the retail superannuation sector.
At March 2018, superannuation savings comprised assets worth about $2.6 trillion: more than 140% of Australia’s nominal gross domestic product. At June 2017, more than 14.8 million Australians had a superannuation account.
Effective governance is necessary for assessment of superannuation industry funds to fulfil the basic promise that the trustee will administer the fund in the best interests of members, and in particular, in the best financial interests of members.
Conflicts of Interest
Trustees’ Covenants with members include covenants of honesty, care, skill and diligence, as well as a covenant to perform the trustee’s duties, and exercise the trustee’s powers ‘in the best interests of the beneficiaries’. This provision in the Act is often referred to as ‘the sole purpose test’.
Of particular interest to the Royal Commission was the covenant covering conflict of interest in Section 52(1) of the SIS Act:
Where there is a conflict of interests and duties: – to give priority to the duties to and interests of the beneficiaries; – to ensure that the duties to the beneficiaries are met; – to ensure that the interests of the beneficiaries are not adversely affected; and – to comply with the prudential standards in relation to conflicts.
The Royal Commission found that some trustees had difficulty understanding when and how the best interests covenant is applied.
These difficulties were borne out of conflicts arising between the beneficiaries’ interests and the interests of the trustee or another person or entity which, whilst disclosed, were not appropriately resolved. Disclosure of conflicts of interests on its own is not enough.
If you have any questions regarding the above or the attached, please contact Warwick Spargo at [email protected].