Amendments to laws dealing with super trustees and what they can use members’ money for, which came into effect this year, has thrown a spotlight on how they will deal with fines incurred in the administration of trusts.
According to Dr Scott Donald, associate professor at UNSW, The Government’s amendment to section 56 changed the law less than some are suggesting but it was enough to bring a long-term, nagging issue to everyone’s attention.
It’s now become apparent that every super trustee has to identify a way to deal with this problem given the vast majority don’t have a right to remuneration in their deeds which is why, Donald said, they are going to court to rectify it.
And the reason each individual trustee needs their own ruling is because of the wide variation in trustee deeds.
For super funds, there are greater protections in place than for other trusts which constrain the ability to write deeds that permit certain types of expenses to be met out of the assets of the fund. That was amended to articulate more precisely what some of those things that couldn’t be reimbursed were.
According to Donald, some trustees had been using general reserves for these kinds of expenses arguing they are separate from members’ accounts. But there is an argument, he said, that those funds are still part of the trust and are still subject to the deed of the trust.
Concerning for industry funds
“It was a concern particularly for the industry funds because if they couldn’t pay for those kinds of things out of reserves, where was the money coming from?” Donald said.
He maintained that while there was indemnity insurance which could cover trustees for a wide range of liabilities available, except for criminal acts, you had to look at firstly, if there was an excess (the money to pay that still had to be found) and secondly, if the terms of the deed specified that you were able to buy indemnity insurance in the first place, otherwise you needed to find the funds to cover the premiums.
He pointed out that the actual benefit of the insurance was being enjoyed by the trustee, not the members.
A complex issue
“It starts to get very complicated,” he said.
“What the industry funds have done is said ‘we’re in a bit of a bind here’. We don’t have any capital, which is the way you’d normally pay for these sorts of sanctions, and we know you can’t take it out of member accounts, and we accept the argument that you can’t take it out of general reserves.
“They have gone to the courts and said ‘we want a right of remuneration’ [because] most industry funds don’t have [this] written into the trust deed sufficient that they can take money out of the trust, put it on their balance sheet, build up capital that can pay for the insurance and become a buffer in case they incur these sorts of sanctions.
“Where does the buck stop? These are mutual funds, the money must come from somewhere, it’s inevitable the members will end up paying for it, this isn’t the magic pudding. The key, however, is transparency.”
Not a “war chest”
Donald said that the amounts that have been asked for by the various funds that have gone to the courts over the past few months is, on the most part, totally consistent with that objective.
But he was at pains to point out that the court rulings did not mean the funds were able to build up so-called “war chests”.
Strictly speaking, he said, it was true that the money trustees were now able to collect was outside the trust and would get taxed, but he maintained trustees would be “mad” to use money set aside for risk for anything else. The directors were now on the hook to use it prudently as per normal directors’ duties.
On the upside, Donald said, it’s now transparent where the money is coming from, there’s reporting on how much is being charged as fees and there is disclosure about the trustee assets.
Formally, he said, the reporting on what reserves were used for was virtually non-existent.
But there is a coda.
“Further complicating the issue is a new provision in the ASIC Act which [also] came into effect this year,” he said.
“The criteria that courts need to apply in determining the quantum of any sanctions [against funds by ASIC] must now regard the circumstances of the fund. This swings in the opposite direction of everything else.
“I see this as a moral hazard. Why would you go out and spend a lot of money getting insurance because you know the court is going to look at it and go ‘hey, you’ve only got a million dollars, we can only fine you a million dollars’.”