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(June-2004) Lawyers emerge the winners from licensing
Introduction of the universal superannuation licensing regime later this year marks another component of the legislative platform being created that is accelerating the trend towards financial services law.
Attorney Michael Vrisakis, a partner at Blake Dawson Waldron, notes that the Financial Services Reform (FSR) Act, which took full effect in March 2004, “has done more than introduce legislative homogenisation of previously diverse financial products and services.
It has already started the process of creating a new area of legal practice — financial services law. It is, in fact, arguably the most rapidly expanding area of law, both in terms of volume of law but also volume of business”.
Vrisakis adds that while key areas of retail banking, insurance, super and funds management have been closely regulated, “the FSR legislation has woven the different legislative strands into a new tapestry. By imposing a universal licensing and disclosure regime on these products, it has set up a new regime that is more than the sum of its parts. In doing so, it has created this platform which is, in essence, a new area of law… The coincidence of the HIH collapse coupled with the reforms contemplated by the Wallis committee report, which are embodied in the FSR legislation, have given an unprecedented momentum to the growth of financial services law, coming as they do from two different but related angles — market protection via ASIC and prudential regulation viaAPRA”.
The impetus behind the legislative push is the growth of the industry and the attendant risks associated with collapse, misfeasance and mismanagement.
Vrisakis explains that what the financial services reform program does is to treat different types of investment and risk products as financial products — for example, superannuation, unit trusts, share schemes etc. “Once they are then shepherded into this legislative holding yard, they can be regulated by a common set of rules. This, in turn, creates a new set of principles that is new law. It not only creates new principles, it changes the existing legislative framework that had historically governed those products. This means that a whole swag of other legislation is swept aside.”
Vrisakis expects an evolution in both superannuation law and the Australian Prudential Regulation Authority’s(APRA) approach to its supervision of such law.
“Through case law and Tribunal decisions, the law itself is evolving towards greater focus on the “reasonableness” of trustees’ actions and decisions. In the case of the Tribunal, this is due to the central plank in its charter under its legislation; that of adjudicating on the fairness and reasonableness of trustee decisions. In the case of court decisions, a key driver has been judicial recognition of the “non-volunteer” principle; that is, that super benefits are entitlements purchased by money (in the case of personal members) or labour (in the case of employees).
“This has meant that some courts have been applying pressure on the conduct of trustees and on their decision-making processes by applying standards of reasonableness and reasonable expectation.”
Vrisakis notes that APRA is expanding its supervision and enforcement approach in at least two main areas — the general duties imposed on trustees under the SIS legislation and the more fluid areas of trustee covenants under section 52 of the Act.
“These provisions, the principle of which is the duty to act in the best interests of beneficiaries, are by definition, less prescriptive and, accordingly, much more difficult to assess and measure in terms of adherence.”
He adds that in the context of corporate funds “the duty of the trustee to act in the best interests of beneficiaries means that its decisions and decision-making process must be centred on the interests of members and divorced from the interests of the employer. APRA is already focused on this issue”.
In the context of public offer funds, two distinguishable interests are those of the members and those of the shareholders. “As single responsible entity, a trustee of a public offer fund, by definition, has two interests: that of trustee, pure and simple and that of manager. In its capacity as manager, the trustee has a pecuniary interest in the fund, in terms of its fee income. APRA is focusing on potential conflicts that might arise from restructurings or other changes to a public offer fund, which might have an impact both on the trustee, as manager, and the members.
“The second, related trend relates to APRA’s focus on fund governance more generally. In this sense, governance equates to the proper management of the fund and the attention to process. Process means the formulation and adherence to proper procedures.”
AUTHOR
Simon Segal
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