Proposed extension of SIS limitations on indemnity

December 2020
Regulatory & Governance
Board & Fund Governance
Licensing (ASIC & APRA)
Risk Management

The right of superannuation trustees (and the directors) to be indemnified from trust assets, and the ability to exempt liability, is limited under the SIS Act. Specifically, under section 56 of SIS, a provision in the governing rules is void to the extent that it purports to exempt a trustee from, or indemnify a trustee against:

  • liability for breach of trust if the trustee fails to act honestly or intentionally or recklessly fails to exercise the requisite degree of care and diligence;
  • liability for a monetary penalty under a civil penalty order, an amount payable under an infringement notice, or an administrative penalty (in all cases, liability that arises under SIS);
  • costs of undertaking a course of education, where directed in accordance with SIS.

Where such liability arises, the cost must be met from assets outside the fund, such as the trustee’s or the director’s personal assets or insurance.

The Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 includes amendments that would result in the SIS Act indemnity prohibitions being extended to prevent trust assets being used to pay criminal, civil or administrative penalties incurred in relation to a contravention of any Commonwealth law (the most obviously relevant laws other than the SIS Act being the Corporations Act and the ASIC Act).  

The Corporations Act will become particularly relevant if another proposed change, being the introduction of “superannuation trustee service” (defined as operating a registrable superannuation entity as trustee) as a new financial service covered by Chapter 7, becomes law. One of the consequences of this change will be that all activities of the trustee will be subject to the AFS licensee obligations, rather than just the activities that constitute dealing, giving financial product advice, etc.

These are significant changes.  However, the risk that a trustee or director may incur a liability for which they cannot be indemnified out of fund assets is not new.  

We should not forget that it was only in 2019 that the SIS covenants became civil penalty provisions.  The maximum monetary penalty for breaching a SIS covenant is currently $532,800.  Having regard to the breadth of the SIS covenants (eg to act honestly in all matters concerning the fund; to exercise the same degree of care, skill and diligence as a prudent superannuation trustee; to perform the trustee’s duties and exercise the trustee’s powers in the best interest of beneficiaries), the developments in 2019 were arguably as significant as the current proposals.

It is unlikely that industry lobbying will stop the most recent proposed changes.  After all, the current political climate supports calls from the regulators for more powers and bigger penalties, and it is difficult to see Parliament being swayed by any arguments that would see members bear the cost of penalties imposed on trustees and directors for breaching the law.

As always, the best protection from liability is:

  • a strong compliance and risk management culture
  • appropriate engagement with the relevant regulator(s)
  • reporting to facilitate effective oversight by the board
  • appropriate liability insurance
  • contractual arrangements that require services providers (eg administrators, promoters) to indemnify the trustee for penalties arising from the acts or omissions  of the service provider
  • obtaining professional advice, where appropriate

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