Levy warns of dual duties for super funds providing advice

19 March 2024
| By Keith Ford |
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In a submission to the Senate economics references committee inquiry into improving consumer experiences, choice, and outcomes in Australia’s retirement system, Quality of Advice Review (QAR) lead Michelle Levy said that super funds could be constrained by their role as trustees when it comes to providing advice.

“Superannuation funds are not legal entities – they are trusts. A superannuation fund cannot do anything. Only their trustees can,” Levy said.

“This is a very important point which is I think lost when we refer to superannuation funds in the same way that we refer to banks and insurers. A trust is a very good vehicle for investing and keeping safe custody of other people’s money – it is not I think a very good vehicle for conducting a financial services business and that is what trustees increasingly are being asked to do and are increasingly doing.”

The reality of a trustee providing personal advice, she said, is that it must hold an Australian Financial Services Licence with an authorisation to provide personal advice in addition to its RSE licence.

“In providing that advice, the trustee has duties under the Corporations Act to the individual member which are separate from (and sometimes in conflict with) the duties it has to members under the SIS Act,” she said.

“[Financial services royal commissioner Kenneth] Hayne recommended that a trustee not be able to have a duty to act in the interests of another person, other than a duty that arises in the course of performing the RSE licensee’s duties, or exercising the RSE licensee’s powers, as a trustee of a registrable superannuation entity. The restriction is subject to an exception for providing personal advice.”

This exception, Levy explained, suggests that a trustee does not act as trustee of the fund when it provides personal advice, including to a member.

“I do not think this is a fanciful proposition,” she said.

“But it has not been considered by a court and I do not even think it has been considered closely by trustees or regulators.

“Given the retirement income covenant requires a trustee to provide help and guidance to its members, given that the government thinks that should include personal advice and given that many trustees want to and do give their members personal advice as they enter retirement, this is an important question to resolve.”

If trustees are, in fact, acting as trustees during the provision of personal advice, Levy said they can pay the costs of providing that advice from the fund, regardless of whether fees are paid by members.

“It also means that other liabilities trustees incur in connection with providing personal advice to members can be paid from the fund,” she said.

Levy explained that this again arises when super fund members make complaints to AFCA about the advice the trustee has given.

“I suspect (without knowing) that the costs of resolving those complaints, including compensation where that is required, are met from funds on the basis of the trustee’s belief that it is acting as trustee and is entitled to rely on its right of indemnity,” she said.

“There have also been large-scale remediations undertaken by trustees of retail funds, but to my knowledge these costs have not been met from the funds. This may not be an option for funds which do not have shareholders who are able to assume a trustee’s liabilities. In that case, compensation might have to be paid from the fund or the losses will go uncompensated.” 

The issue has not been considered by a court, Levy added.

“In my view, the question of when a trustee is acting as trustee and when it is entitled to be indemnified from fund assets should be clarified in legislation, but even the policy question is difficult – should trustees be indemnified from fund assets if they provide poor or unlawful advice?” she said.

In addition to the concerns around the provision of personal advice, she said that as things stand, trustees are also “poorly equipped to provide help and guidance to retirees”.

“A key point is that the more that is required of trustees, the more likely it is that they will make mistakes and incur liabilities. Again, this is not because they are incompetent, but rather because it follows from operating a complex business which is no longer only about investing assets,” Levy said.

“The scale of those liabilities also increases with the scale of the funds. And to return to my point earlier, these risks are ultimately borne by the members because superannuation funds are trusts and because their trustees are not financial institutions with significant capital and access to shareholder funds.”


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