Senate

Revised Explanatory Memorandum

(Circulated by the authority of the Minister for Financial Services and Superannuation, the Hon Bill Shorten MP)

Chapter 1 - Service providers

Outline of chapter

1.1 Schedule 1 to this Bill amends the Superannuation Industry (Supervision) Act 1993 (SIS Act) to over-ride any provisions in a fund's governing rules that require the trustee to use a specified service provider, investment entity or financial product. All legislative references in this chapter are to the SIS Act unless otherwise stated.

Context of amendments

1.2 The Review was concerned that some trust deeds require a trustee to use a particular service provider, investment entity or financial product, effectively removing a trustee's discretion to ensure such arrangements are in the best interests of fund members.

1.3 The Review recommended (recommendation 2.14) that any such provisions in trust deeds should be over-ridden.

Summary of new law

1.4 The Act will be amended to over-ride any provision in the governing rules of a registrable superannuation entity (RSE) that requires the trustee to use a specified service provider, investment entity or financial product.

Comparison of key features of new law and current law

Detailed explanation of new law

1.5 This Bill amends the Act to void any provisions in a fund's governing rules that require the trustee to use a specified service provider, investment entity or financial product. [Schedule 1, item 72, subsection 58A(2)]

1.6 A provision in a fund's governing rules that specifies a service provider from whom the trustee may or must acquire a service will be void. Service providers include but are not limited to investment managers, custodians, administrators, clearing houses and professional service providers. [Schedule 1, item 72, subsection 58A(2)]

1.7 Similarly, a provision in the governing rules of the fund that specifies an entity in or through which assets of the fund may or must be invested, will be void. The entities include, but are not limited to managed investment schemes, life insurers, pooled superannuation trusts and other unit trusts and ADIs. [Schedule 1, item 72, subsection 58A(3)]

1.8 In addition, provisions in the governing rules that specify a financial product that assets of the fund may or must be invested in, purchased, or used to make payments will be void. Financial products include, but are not limited to, insurance, including tied group life insurance policies. [Schedule 1, item 72, subsection 58A(4)]

1.9 Governing rules are only void to the extent they contravene the service provider provisions. That is, to the extent the rule provides that the trustee may or must use a particular service provider or investment entity, or invest in a particular financial product and that provider, entity or product it will be void. [Schedule 1, item 72, subsection 58A(2)]

1.10 The amendments will restore a trustee's discretion to act in the best interests of members when entering into relevant arrangements.

1.11 The amendments do not require termination of contracts giving effect to arrangements required under a fund's governing rules. However, trustees will be required to determine whether the continuation of the arrangements is consistent with the obligation to act in the best interests of members. Arrangements that can be demonstrated to be in the best interests of members can continue. Arrangements determined not to be in members' best interests will not be able to continue when the current period of a relevant contract comes to an end.

1.12 If the costs of changing from the current service provider outweigh potential benefits to members then it is possible for trustees to conclude that the arrangement is in the best interests of members and no change would be required.

1.13 The changes do not limit a trustee's ability to identify generic categories of investment, for example ethical investment.

1.14 The section overrides provisions that state that the RSE licensee 'may' use a particular entity as well provisions that state the RSE licensee 'must' do so. This is to ensure that the requirements of the provision cannot be avoided through a clause that confers power to use particular named entities which might have the effect of encouraging or sanctioning the use of those entities instead of considering other options in the market.

1.15 The requirements for selecting service providers in members' best interests will be supported by prudential standards. APRA's prudential standards cover a range of topics including conflicts of interest and outsourcing. The commencement date for the prudential standards will be 1 July 2013, except where an RSE licensee seeks to enter into a new contractual arrangement that falls within the coverage of the new outsourcing, business continuity management and insurance prudential requirements. Transition provisions in these prudential standards commenced on 23 November 2012.

1.16 The amendments will not apply to self managed superannuation funds (SMSFs). [Schedule 1, item 72, subsection 58A(1)]

1.17 An exception will apply in the case where the limitation is specified by law. [Schedule 1, item 72, subsection 58A(5)]

1.18 A new section 58B is inserted into the SIS Act which will make it clear that, provided a trustee complies with all relevant Acts, legislative instruments, prudential and operational standards, governing rules and statutory covenants, the trustee may enter into service provider and investment arrangements (and undertake the preliminary dealings necessary to do so) even though this might otherwise breach general law conflict of interest prohibitions. It will not be necessary, therefore, for the trust deed to expressly authorise the trustee to engage in dealings with the related party. The words 'general law relating to conflict of interest' are intended to be construed broadly so as to cover general law relating to both trustees and directors and to cover conflicts between duties to beneficiaries and the interests of beneficiaries, on the one hand, and duties to other persons and the interests of other persons, on the other. [Schedule 1, item 72, subsection 58B]

1.19 New section 58B will commence on Royal Assent and apply in relation to things done on and after 1 July 2013. [Schedule 1, item 130]

Application and transitional provisions

1.20 The amendments will apply from 1 July 2013.