It is unarguable that trustees should act in members’ best financial interests. Indeed, trustees have been obliged to do so, and have done so, for decades. As such, it is difficult to argue against a proposal to amend the best interests covenant in the SIS Act to require trustees to act in members’ best financial interests. But the government’s draft explanatory materials suggest that the proposal has a different, more political bent. It appears that members’ interests are being used as a cloak for collateral purposes.
On 26 November, the government released an exposure draft bill titled Treasury Laws Amendment (Measures for a later sitting) Bill 2020: Best Financial Interests Duty (Bill). The Bill forms part of a package of reforms called ‘Your Future, Your Super’ which, if passed, will commence on 1 July 2021.
Among other things, the Bill amends section 52(2)(c) of the SIS Act (Best Interests Covenant) by substituting the phrase ‘best financial interests’ for the phrase ‘best interests’. On the surface, the Bill does little more than insert the word ‘financial’ into the Best Interests Covenant. According to the exposure draft Explanatory Materials (Draft EM), the addition of this word makes clear that the range of interests covered by the covenant is solely financial interests, not non-financial ones.
The duty to act in members’ best financial interests has its genesis in a 1984 English decision (called Cowan v Scargill). In that case, the Court held
When the purpose of the trust is to provide financial benefits for the beneficiaries … the best interests of the beneficiaries are normally their best financial interests.
Most practitioners in the superannuation industry now regard this statement as unremarkable. And most trustees hold themselves to this standard without argument. Further, most practitioners agree that the standard requires trustees to act with members’ financial interests as a priority. As the judge in that case himself said subsequently, profit maximisation at all costsis not what the standard requires. It does not prevent trustees from taking other, non-financial interests into account as long as members and their financial interests come first. In this respect, the Bill does little more than restate an obvious and long-held view.
However, the real object of the proposed reform is revealed in the Draft EM. Here, the emphasis is on an apparent need to identify quantifiable financial benefits in order for a trustee to discharge its duty. The Draft EM states
Trustees will need to have robust quantitative and qualitative evidence to support their expenditures …
[Strategic expenditures, such as offering additional investment products, require] a business case, supported by technical analysis …. and quantifiable metrics to reflect expected financial outcomes …
[Strategic expenditures, such as expenditures on promoting awareness of a fund] which are not supported by an identifiable and quantifiable financial benefit to members, articulated in a clear business case, are unlikely to satisfy the requirements of the best financial interests obligation.
One problem with the proposed amendment is that none of the matters set out in the explanatory material about the need for quantifiable benefits follow necessarily or obviously from the simple addition of the word ‘financial’ to the Best Interests Covenant.
As mentioned, the meaning of the Best Interests Covenant (including with the addition of the word ‘financial’) has been well-understood for many years. In these circumstances (i.e., where there is little ambiguity), courts usually avoid turning to extrinsic aids like the explanatory materials to assist with interpretation. As such, we doubt whether the simple addition of the word ‘financial’ to the Best Interests Covenant could be interpreted as imposing an additional requirement for quantifiablemetrics.
The suggested need for quantifiable metrics comes with obvious practical problems, one of which is that the benefits of certain expenditures are inherently unquantifiable or, if they can be quantified, are uncertain (much like the benefits of many corporate takeovers).
The difficulties of quantification are evident in expenditures on new marketing campaigns. The Draft EM suggests that producing a “detailed analysis that shows previous campaigns delivered [an] increase in members” will assist in demonstrating that a new campaign is in the best financial interests of members. The obvious problem is that each new campaign involves a fresh and different effort with inherently unknowable results. In this context, quantifiable metrics have little, if any, meaning.
There are other problems, too, in relation to the proposed reforms. For instance, the Bill proposes to reverse the existing burden of proof in civil penalty prosecutions. Under the Bill, a trustee will be exposed to a penalty unless it positively demonstrates that it discharged its duties. Currently, for a court to impose a penalty, APRA is required demonstrate that the trustee failed in its duties, not the other way around. In its last two significant attempts (in 2006 with respect to the AXA staff fund and in 2019 with respect to IOOF), APRA failed to do just that despite claiming the failures were obvious. This suggests to us that there is good reason to protect the existing evidential burden: lifting that protection might give APRA a free kick in cases where reputations are at risk.
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