APRA’s discussion paper Strengthening Financial Resilience in Superannuation was triggered by the Financial Sector Reform (Royal Commission Response) Act 2020, which extends existing prohibitions in the Superannuation Industry (Supervision) Act 1993 that prevent registrable superannuation entity (RSE) licensees using trust assets, by way of indemnification, to pay an increased number of specified penalties incurred for contravening a Commonwealth law. The amendments commenced on 1 January 2022.
The discussion paper considers the options RSE licensees have for fee charging to build a financial contingency reserve on the trustee balance sheet.
While some RSE licensees have a fee charging power in their trust deeds, other RSE licensees who did not applied to the Courts in 2021 for advice and direction regarding amending their trust deeds to enable the charging of risk reserve fees.
APRA says it actively sought involvement in the majority of the Court cases to ensure that the Courts were fully appraised of all relevant legal matters, including the new best financial interests duty, the context of the amended provisions and principles of prudent practice. APRA’s submissions also emphasised the importance of ensuring that the impact on best financial interests of members was appropriately contemplated by the Courts in giving their advice, particularly in the context of setting fees. APRA was also concerned to ensure that trustees explained in each case the other alternatives that had been explored and why they were not taken forward.
Based on the facts of the applications, their analysis of the wording of amended provisions and the relevant legal precedent, the Courts concluded that the charging of a fee of this nature is not inconsistent with the amendments to section 56(2) and section 57(2) of the SIS Act. For example, see Re QSuper Board  QSC 276 , NGS Super  NSWSC 1694 and AustralianSuper Pty Ltd v McMillan  SASC 147.
“To be clear as to the significance of this issue, without the ability to build and maintain a risk reserve an otherwise well run and well performing trustee could be rendered insolvent by a minor operational administrative error, such as submitting data one day late, resulting in a maximum penalty of $11,100. The disorderly failure of an otherwise sound and sustainable RSE licensee would be likely to be severely detrimental to members as it would likely impose material costs and create significant operational risks.”
APRA’s discussion paper sets out fee design principles to inform the RSE licensee’s decisions and for consideration of these principles to be supported by appropriate documentary evidence.
The key principles are:
“• Setting a fee: An RSE licensee would ensure that the level of a fee was appropriate and proportionate, and regularly reviewed. In the event that an RSE licensee is building a financial contingency reserve by way of charging a fee, APRA expects the reserve generated would not be excessive, and expects that the purpose of the fee and level of this reserve would be transparent, evidence-based and aligned with the stated purpose of the reserve.
• Legal duties: An RSE licensee must be satisfied that the proposed exercise of their powers to:
(i) amend their trust deed in order to introduce a power to charge a trustee fee; and/or
(ii) exercise such a power, is in the best financial interests of beneficiaries.
• Evidence of purpose: When seeking a new trustee fee power, or using an existing power for the first time, an RSE licensee will document how the power is to be used, and that proposed use of the fee power is to be approved by the Board. When implementing a new fee to members, or revising an existing fee to members, an RSE licensee will document the need for the fee and why a fee is appropriate giving regard to current reserve levels.
• Tax implications: Prior to deciding to charge a fee, an RSE licensee would investigate, understand and take into account the tax consequences of the fee design and capital management.
• Prudent management: An RSE licensee will raise and manage fee revenue prudently and transparently, including in respect of its subsequent disbursement and its management as trustee capital. For a financial contingency reserve at the trustee company level, an RSE licensee would have safeguards in place to ensure prudent management of the capital generated for that purpose. This would, at a minimum, include a capital management plan which would restrict the permitted use of this capital.
• Other avenues: Prior to charging a trustee fee (or using RSE licensee capital generated from such a fee for contingency events), APRA expects that an RSE licensee would have diligently explored and exhausted all other avenues for raising or using financial resources. Full details of alternative avenues pursued for building or using financial resources should be clearly evidenced and actively challenged by the Board.”
If you found this article helpful, then subscribe to our news emails to keep up to date and look at our video courses for in-depth training. Use the search box at the top right of this page or the categories list on the right hand side of this page to check for other articles on the same or related matters.
Author: David Jacobson
Principal, Bright Corporate Law
About David Jacobson
The information contained in this article is not legal advice. It is not to be relied upon as a full statement of the law. You should seek professional advice for your specific needs and circumstances before acting or relying on any of the content.