Trustees of profit-for-member funds looking for ways to protect member savings from financial penalties imposed by regulatory actions are likely to be considering balance sheet creation, experts have said.

In addition to bulking up and in many cases creating balance sheets to serve as a capital buffer for regulatory actions, trustees and funds in the not for profit sector are also likely considering different types of indemnity insurance as well and guarantees or indemnities from third parties, the experts have said.

“A lot of people have their thinking caps on at the moment about what they’ll do,” Scott Donald, director of the Centre for law, markets and regulation at UNSW Law said in light of an amendment contained in the Hayne Royal Commission response bill to prevent super trustees from using member funds to pay penalties for a breach of the Corporations Act or other commonwealth law.

Last Thursday the Senate voted to delay the Bill amendment – released as consultation without consultation – for a year until January 2022 to allow funds time to get their houses in order.

“Trustee balance sheets are one of a number of options funds are working through,” Mark Bland, Mills Oakley Partner commented. Bland added that the amount of money trustees may need to hold is unclear at this stage and will depend on multiple factors including the nature of the fund, risk appetite and the type of insurance these funds and trustees end up securing.

Insurance policies will also be put in the spotlight as a result of the proposed changes, the experts said, some of whom provided background for this article but declined to comment on the record.

“The interesting part is this wasn’t a major change in the statute but it’s just woken people up to the fact they have this liability,” Donald said. He noted there are two types of liabilities – for trustee and for directors. He added that some solutions such as guarantees and indemnities from third parties are yet to be formulated.

One of the issues yet to be ironed out is how particular meanings under the SIS Act will be interpreted when applied across Corporations and Tax legislation, Bland noted, alluding the amendment might need to be tweaked before in comes into effect in 2022.

Equal footing

Whether new look profit-for-member trustees with balance sheets and new insurance arrangements means these funds attract the same attention for civil penalties and remediation as for-profit funds remains to be seen, a matter the experts declined to be drawn on for public comment.

In August Investment Magazine reported that regulatory programs have to-date focused on for-profit funds where shareholder capital and broader balance sheets have absorbed the impost of regulatory retorts since Hayne’s Royal Commission; ASIC’s civil proceedings against StatePlus Super’s First State Super financial planning subsidiary was highlighted as an example of where a penalty could potentially be worn by members in the fund. Separately, late last year ASIC fined HostPlus $12,600 for alleged misleading claims it offered independent advice via Industry Fund Services.

“The challenge for these funds and trustees is finding something that reflect the size of some of the penalties… It’s one thing to meet ASIC administrative penalties that can be in the 100s of dollars for minor things. But these days you have regulators that are much more inclined to throw in big numbers at banks and other financial institutions,” Donald said.

“One thing this [amendment] does is it brings greater scrutiny to disclosure of operational risk financial requirement,” Donald noted.

“There’s not been a reporting regime around ORFR and it’s impossible to tell whether members money is being used appropriately through this mechanism,” he said.

APRA’s case against IOOF for alleged misuse of contingency reserve funds was anticipated by the industry to bring more clarity to ORFR but question marks about the use of contingency funds and the protection of member interests remain.

“The interesting thing is the change to this statute was minor but what it’s done is woken people up to the fact they have this liability.

“I think it’s appropriate the industry will be given another 12 months to reorganise itself because what it could result in is a fundamental change that goes to the heart of the business model,” Donald said.

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