The case in a nutshell
In the well-publicised decision in the IOOF case,1 Australian Prudential Regulation Authority (APRA) sought to establish that two superannuation trustees and some of their directors and other officers engaged in conduct that contravened the statutory covenants in the Superannuation Industry (Supervision) Act 1993 (SIS). APRA was aiming to obtain disqualification orders against the individuals concerned on the basis that the alleged contraventions meant that they should not be allowed to hold the positions they held.
The alleged contraventions involved decisions that were made by the trustees in various specific scenarios. The scenarios are briefly summarised below but a common theme of APRA’s case was that the trustee entities had reasonably arguable claims against third parties (including parties related to IOOF) and should have sued those parties instead of applying general or operational risk reserves within the fund to compensate members for losses caused by administrative errors. One incident involved the trustee indicating an unwillingness to proceed with a requested successor fund transfer (SFT) to a competitor fund. APRA argued that this decision was motivated by commercial considerations rather than acting in members’ best interests. The Court found that this did not take account of the fact that the trustee had identified various issues (including a potential tax liability) which it felt had to be resolved before it could agree to the transfer.
The Court dismissed APRA’s application because the evidence did not support any findings that the covenants had been contravened in the circumstances. Pleasingly, the case supports the principle that directors can rely on management and expert advice. It will also be a relief to trustees who are under pressure to report possible breaches of the law promptly that breach reports cannot be used as an admission in such cases.
The Royal Commission’s examination of a handful of carefully selected case studies suggested that misconduct involving a failure to act in the best interests of members was rife in the financial services industry. The Royal Commission Final Report concluded that the regulators were slow to act in taking superannuation trustees to task for such failures. Trustees are well aware of the need to act in members’ best interests and routinely apply this test in relation to all aspects of the fund's operations, for example when selecting investments or insurance policies. To take a specific example, how does the trustee decide whether a more expensive insurance policy that offers higher benefits or a cheaper insurance policy that offers lower benefits is in the best interests of the members as a whole? Many of these judgment calls involve weighing up competing considerations and reasonable minds may differ in their approach to such an exercise.
The IOOF case is a stark reminder that general standards of duty such as those reflected in the statutory covenants are not well suited for use by regulators to admonish those engaged in conduct which the regulator considers to be improper. The case perhaps also suggests that regulators are not always well-placed to assess the inner workings and commercial decisions made by a trustee board from a distance.
Particular challenges highlighted in the case were the complexity of the environments in which trustees typically operate and the finely balanced judgments they are often required to make. The case is a reminder of the significant barriers faced by regulators when prosecuting a trustee for a breach of a general duty, where it will be necessary to bring evidence to inform the Court of all circumstances relevant to the exercise of a discretion and clearly spell out how the trustee fell short, rather than simply relying on documents created by the trustee.
This case may cause APRA to alter its approach either by focussing on breaches of more prescriptive provisions of the law (rather than general duties based on the exercise of judgment) or using other enforcement tools such as imposing licence conditions or issuing directions to trustees.
The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2020