House of Representatives

Revised Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer, the Hon Stuart Robert MP)

Chapter 5 Approval to own or control an RSE licensee

Outline of chapter

5.1 Schedule 4 to this Bill amends the SIS Act to strengthen APRA's supervision and enforcement powers when a change of ownership or control of an RSE licensee takes place.

5.2 The amendments will reduce the potential for fraud against members of RSEs by requiring persons to obtain approval from APRA to own or hold a controlling stake in an RSE licensee.

5.3 The amendments provide APRA with the power to:

•

refuse authority for a change in ownership or control where it has concerns about the person seeking ownership or control;

•

give a direction to a person to relinquish control of an RSE licensee, whether control is held via the amount of shares held, or exists in practice; and

•

remove or suspend an RSE licensee where it is subject to the control of its owner.

5.4 All legislative references in this chapter are to the SIS Act unless otherwise indicated.

Context of amendments

5.5 In 2009, approximately $176 million of members' superannuation benefits were lost following the collapse of Trio Capital. In response the Australian Parliament launched a Parliamentary Joint Committee (Committee) Inquiry into the collapse of Trio Capital. In the Committee's report (released in May 2012), it recommended that APRA conduct an internal assessment of the adequacy and timeliness of its checks to monitor the ownership and control of an RSE licensee.

5.6 APRA, following its internal assessment, concluded that more powers to monitor the ownership and control of an RSE licensee were needed to ensure that RSE licensees are best placed to carry out their duties free of any influence that may not be in the best interests of the members of their fund.

5.7 Trustees of superannuation funds are required to obtain a licence before they can operate as a trustee of a registered superannuation fund.

5.8 Currently, when a person applies for an RSE licence, APRA is able to consider whether that person is suitable and would comply with RSE licensee law through the application process.

5.9 That is, in order to obtain an RSE licence, the trustee or director must comply with certain conditions, including meeting minimum standards of fitness and propriety and maintaining risk management strategies and plans governing each fund under their control.

5.10 APRA has the power to impose additional conditions upon those licences, vary or revoke the conditions or cancel the licences. RSE licences may be granted to constitutional corporations, other bodies corporate and groups of individual trustees.

5.11 While APRA assesses the suitability of persons to hold an RSE licence when an application is made, it is currently unable to consider the suitability of trustees or directors who may subsequently obtain ownership or control (including practical control) of the RSE licensee. This hinders APRA's ability to monitor whether RSE licensees continue to carry out their duties free of any influence that may not be in the best interests of beneficiaries.

5.12 This means, after an RSE licence has been granted, APRA has no ability to prevent the sale of an RSE licensee to a party which may affect the licensee's ability to comply with its obligations.

5.13 The change would make the change of ownership requirements for the superannuation industry broadly consistent with those for other industries regulated by APRA.

Summary of new law

APRA Approval

5.14 A person will be required to apply to APRA for approval to hold a controlling stake in an RSE licensee prior to them obtaining ownership of an RSE licensee. The approval process (see Diagram 5.1, below) is similar to the process required to be undertaken when a person seeks a new RSE licence.

5.15 Consistent with the Financial Sector Shareholding Act 1998 (FSSA) a controlling stake is a stake of more than 15 per cent of the RSE licensee.

5.16 A person's stake in an RSE licensee is a person's shareholding (including the shareholdings of their associates) and votes associated with that shareholding.

5.17 A decision by APRA to refuse an application for a change in ownership or control (including practical control) is merits reviewable in the Administrative Appeals Tribunal (AAT).

5.18 The holding of a controlling stake in an RSE licensee without approval is a strict liability offence, which incurs a penalty of 400 penalty units per day.

Direction to relinquish control

5.19 In the event that there has been, is, or is likely to be, interference with the ability of the RSE licensee to satisfy its obligations in respect of the fund, due to a change in ownership or control, APRA has the power to issue a direction to a person who is in control of the RSE licensee to relinquish that control.

5.20 The direction to relinquish control can occur when the person has a controlling stake, or where the person has practical control. Practical control occurs where the directors of the RSE licensee are accustomed or under an obligation, whether formal or informal, to act in accordance with the person's directions, instructions or wishes, or the person is in a position to exercise control over the RSE licensee.

5.21 Practical control can only occur where the person does not hold a stake of more than 15 per cent of the RSE licensee. As such, APRA may give a direction to relinquish control to a person that was not required to obtain approval to hold their stake in the RSE licensee.

5.22 APRA's decision to issue a direction is merits reviewable in the AAT.

5.23 A reckless or intentional failure to comply with the direction is an offence subject to 400 penalty units per day.

Suspension or removal of trustee of superannuation entity

5.24 APRA's current power to suspend or remove an RSE licensee is expanded to allow it to exercise that power if it has reason to believe that a person that owns or controls an RSE licensee is exercising, has been exercising, or is likely to exercise, that control in a way that means the RSE licensee is unable to satisfy one or more of the trustee's obligations contained in the covenants inserted by the SIS Act, or the additional obligations for RSE licensees that relate to MySuper products.

Comparison of key features of new law and current law

Detailed explanation of new law

5.25 The amendments strengthen APRA's supervision and enforcement powers when a change of ownership or control of an RSE licensee takes place.

Obligation to apply for APRA approval

5.26 The amendments insert Division 8 into Part 2A to require approval to hold a controlling stake in an RSE licensee. The provisions will apply to RSE licensees that are body corporates. [Schedule 4, item 8, section 29H]

5.27 If a person is seeking to hold a stake of more than 15 per cent in the RSE licensee, the person must apply to APRA for approval to hold a controlling stake in an RSE licensee. [Schedule 4, items 1 and 8, definition of 'controlling stake' in subsection 10(1) and subsection 29HA]

5.28 This is consistent with the concept of controlling stake in the FSSA.

5.29 A stake in an RSE licensee is a person's shareholding (including the shareholdings of their associates) and votes associated with that shareholding.

5.30 The application must be in approved form and contain the information required by the form. [Schedule 4, item 8, subsection 29HA(2)]

5.31 APRA will issue an approved form for this purpose.

5.32 If after the application is made, but before APRA decides the application, the information on the form ceases to be correct, the person must give APRA the correct information, in writing, as soon as practicable after the information ceases to be correct. Otherwise, the application is taken to not be in compliance with its requirements. [Schedule 4, item 8, subsections 29HA(3) and (4)]

5.33 APRA may request specific information relating to the application by giving a notice to the applicant. [Schedule 4 , item 8, section 29HB]

Time to decide the application

5.34 APRA must make a decision on the application within 90 days of receiving the application or, where APRA requested further information from the applicant, within 90 days of receiving all the information requested. [Schedule 4, item 8, subsection 29HC(1)]

5.35 However, APRA may extend the period by a further 30 days, as long as APRA informs the applicant in writing within 90 days of receiving the application, in this case APRA must decide the application within the extended period [Schedule 4, item 8, subsections 29HC(2) and (3)]

Approval of an application

5.36 APRA must approve the application if and only if:

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the application is in the form required and with the correct information;

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the applicant has provided all the information requested or the request has been disposed; and

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APRA has no reason to believe that the RSE licensee may be unable to satisfy one or more the trustee's obligations contained in a covenant set out in sections 52 to 53, or prescribed under section 54A, or referred to in section 29VN or 29VO, because of:

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the applicant's controlling stake in the RSE licensee; or

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the way in which that controlling stake is likely to be used.

[Schedule 4, item 8, section 29HD]

Example 5.1

Ms Hetty is seeking to make an offer to SA Adventure Pty Ltd to acquire 100 per cent of the shares in Harpoon Pty Ltd (Harpoon) (an RSE licensee). Prior to making the offer Ms Hetty seeks approval from APRA. APRA previously had concerns with Ms Hetty's ownership and management of an APRA regulated entity, including prudential compliance and meeting tax obligations. These concerns were raised with Ms Hetty at the time and not resolved. Ms Hetty subsequently sold the APRA regulated entity.

During the application process for Harpoon, Ms Hetty does not provide further information that assures APRA that the previous concerns about her ownership will not eventuate. The additional information sought was focused on the governance and the fitness and propriety of nominated persons of the entity that would operate Harpoon.

APRA's original concerns remained and APRA subsequently rejected that application for approval.

Example 5.2

SA Adventure Pty Ltd (SA Adventure) seeks APRA's approval for its planned purchase of 100 per cent of Harpoon RSE licensee Pty Ltd (Harpoon) from HLMW RSE licensee for $3 million. Harpoon holds an RSE licence and has approximately $1.5 billion under trusteeship across a number of funds.

In considering approval, APRA forms the view that SA Adventure raises significant prudential concerns, particularly around its level of financial resources to ensure the operational viability of Harpoon post-acquisition. SA Adventure was listed on the Australian Securities Exchange (ASX) with a capitalisation less than the acquisition price of Harpoon. SA Adventure had only recently become active as a financial services company after previously operating businesses in a separate industry. APRA also recognises potential issues in the fitness and proprietary of SA Adventure's managing director based on previous legal action.

APRA's significant concerns about the level of financial resources that SA Adventure would have to operate Harpoon in the best interests of beneficiaries were not able to be resolved by SA Adventure during the application process. APRA subsequently notifies SA Adventure that they do not approve its purchase of Harpoon.

5.37 Sections 52 to 52C provide the covenants to be included in the governing rules of an RSE or self-managed superannuation fund, if such covenants are not included in the governing rules of the entity. Some of these covenants relate to the directors of the RSE or self-managed superannuation fund.

5.38 The covenants include obliging trustees to act honestly, in the best interests of their beneficiaries and keep the money and assets of the entity separate from any other money and assets.

5.39 Similarly, section 53 implies a covenant into the governing rules of an approved deposit fund to require a trustee to repay an amount to a beneficiary, if a beneficiary requests the repayment and compliance with the request would not be inconsistent with the operating standards for the approved deposit fund.

5.40 Section 54A allows regulations to prescribe other covenants.

5.41 Section 29VN contains additional obligations imposed on trustees of a regulated superannuation fund in relation to MySuper product. These include obligations to promote the financial interests of beneficiaries in the fund and having up to date investment strategies for each product.

5.42 Section 29VO contains additional obligations imposed on directors of corporate trustees to exercise reasonable care and diligence for the purposes of ensuring the corporate trustee carrying out its obligations under section 29VN.

5.43 If APRA approves the applicant to hold a controlling stake in an RSE licensee, APRA must notify the applicant in writing. [Schedule 4, item 8, section 29HE]

Refusal of an application

5.44 If APRA refuses the application, APRA must take all reasonable steps to ensure that the applicant is given a notice informing it of the decision and setting the reasons for the refusal. [Schedule 4, item 8, section 29HF]

5.45 The decision to refuse to give approval is reviewable by the AAT. [Schedule 4, item 2, paragraph (dla) of definition of 'reviewable decision' in subsection 10(1)]

5.46 Where APRA does not decide on the application within 90 days (or 120 days for extensions) of receiving the application, the application is taken to be refused. [Schedule 4, item 8, subsection 29HC(4)]

Offence to hold a controlling stake without approval

5.47 Where a person holds a controlling stake in an RSE licensee without approval, the person is committing a strict liability offence with a penalty of 400 penalty units for each day in which the controlling stake is held without approval. [Schedule 4, item 9, section 29JCB]

5.48 The offence is a strict liability offence consistent with Commonwealth guidelines for drafting offences.

5.49 The requirement for a person to seek approval from APRA prior to holding a controlling stake in an RSE licensee is to allow APRA to continually ensure that RSE licensees are best placed to carry out their duties free of any influence that may not be in the best interests of the members of their fund.

5.50 A contravention of the requirement is a strict liability offence because it is necessary to ensure the integrity of the regulatory regime.

5.51 The offence is subject to an infringement notice. [Schedule 4, item 12, paragraph 223A(1)(aa)]

5.52 This is to address the situation where the person holding a controlling stake in an RSE licensee has not been aware of the requirement to obtain approval but is otherwise considered to be satisfying their fiduciary obligations.

Direction to relinquish control

5.53 APRA may direct a person to relinquish control of an RSE licensee if APRA has reason to believe that:

•

the person has a controlling stake in. or has practical control of, the RSE licensee; and

•

APRA has reason to believe that the RSE licensee has been, is or is likely to be unable to satisfy one or more the trustee's obligations contained in a covenant set out in section 52 to 53, or prescribed under section 54A, or referred to in section 29VN or 29VO, because of:

-

the person's controlling stake in or practical control of the RSE licensee; or

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the way in which that control is likely to be exercised.

[Schedule 4, item 10, subsection 131EB(1)]

5.54 These requirements are similar to the conditions for APRA to approve an application for controlling stake in the RSE licensee. The likelihood of interference with the RSE licensee's ability to fulfil its obligations, due to the person controlling the RSE licensee, is the key consideration in APRA's assessment of either approval of an application or the issue of a direction to relinquish control.

5.55 The main difference between the conditions for an approval of an application and the giving of a direction is that a direction can be given to a person's practical control over an RSE licensee who does not have a controlling stake in the RSE licensee.

5.56 A person has practical control over an RSE licensee if the person does not hold a controlling stake in the RSE licensee and:

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the directors of the RSE licensee are accustomed or under an obligation (formal or informal) to act in accordance with the directions, instructions or wishes of the person; or

•

the person, alone or together with their associates, is in a position to exercise control over the RSE licensee.

[Schedule 4, items 1 and 10, definition of 'practical control' in subsection 10(1) and section 131EC]

5.57 Practical control occurs irrespective of whether the person's directions, instructions or wishes or their position to exercise the control originate from the person alone, or together with their associates. [Schedule 4, items 1 and 10, definition of 'practical control' in subsection 10(1) and section 131EC]

5.58 APRA may also give a person a direction to relinquish control of an RSE licensee if it has reason to believe that the person has a controlling stake in the RSE licensee and:

•

the person does not have approval from APRA to hold a controlling stake; or

•

the person has approval from APRA to hold a controlling stake, but the information given in the application was false or misleading in a material particular.

[Schedule 4, item 10, subsections 131EB(2) and (3)]

5.59 To avoid doubt, a direction to relinquish control can be given to a person who holds a controlling stake in an RSE licensee even if APRA has given approval to the person to hold a controlling stake. [Schedule 4, item 10, subsection 131EB(4)]

Giving and revoking a direction

5.60 The direction must be in writing, and APRA must give the person subject to the direction a copy of the direction and a statement of APRA's reasons. [Schedule 4, item 10, subsections 131EB(5) and (6)]

5.61 APRA may revoke a direction to relinquish control of an RSE licensee in writing and a copy of the revocation must be given to the person subject to the direction. [Schedule 4, item 10, subsections 131EB(7) and (8)]

Consequences of a direction to relinquish control

5.62 Upon receiving a direction to relinquish control, the person must take necessary steps to ensure that:

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the directors of the RSE licensee are not accustomed or under an obligation (formal or informal) to act in accordance with the directions, instructions or wishes of the person (either alone or together with associates);

•

the person (either alone or together with associates) is not in a position to exercise control over the RSE licensee; and

•

the person does not hold a controlling stake in the RSE licensee.

[Schedule 4, item 10, subsection 131ED(1)]

5.63 That is, a person receiving the direction must take necessary steps so that the person does not hold a controlling stake or have practical control of the RSE licensee going forth.

5.64 The person must take those steps within 90 days of being given a copy of the direction or before the end of the longer period where APRA has given written notice allowing a longer period to comply with the direction. [Schedule 4, item 10, subsection 131ED(2)]

5.65 Intentionally or recklessly contravening the direction is an offence and results in the person being liable for 400 penalty units. [Schedule 4, item 10, subsection 131ED(3)]

AAT merit review

5.66 The decision to give a person the direction is reviewable by the AAT. [Schedule 4, item 3, paragraph(taac) of definition of 'reviewable decision' in subsection 10(1)]

Interim orders

5.67 Where the AAT has made an order to stay (or otherwise affect the operation or implementation of the decision to give the direction or part of the direction) the direction, APRA may apply to the Federal Court of Australia to seek orders that the person not exercise control until the AAT completes its review of the direction [Schedule 4, item 10, subsection 131EE(1)].

5.68 The Federal Court has the discretion to make such orders, if the court considers that it is appropriate to ensure the person does not exercise control over the RSE licensee in a way that results in the RSE licensee being unable to satisfy its obligations as trustee of the fund, during the period that the AAT orders to stay the direction. [Schedule 4, item 10, subsection 131EE(2)]

5.69 If APRA has reason to believe that the person given the direction may, during the period to comply with direction, exercise control over the RSE licensee in a way that results in the RSE licensee being unable to satisfy its obligations as trustee of the fund, then APRA may apply to the Federal Court to seek orders to deal with the conduct of the person. [Schedule 4, item 10, subsection 131EE(3)]

5.70 The Federal Court has the discretion to make such orders, if the court considers that it is appropriate to ensure the person does not exercise control over the RSE licensee in a way that results in the RSE licensee being unable to satisfy its obligations as trustee of the fund, during the period to comply with direction. [Schedule 4, item 10, subsection 131EE(4)]

Remedial orders

5.71 If the direction is in force, APRA may apply to the Federal Court to seek an order to enforce the direction. [Schedule 4, item 10, subsection 131EF(1)]

5.72 The Federal Court has the discretion to make such orders, if the court considers that it is appropriate to ensure that:

•

the directors of the RSE licensee are not accustomed or under an obligation (formal or informal) to act in accordance with the directions, instructions or wishes of the person (either alone or together with associates);

•

the person (either alone or together with associates) is not in a position to exercise control over the RSE licensee; and

•

the person does not hold a controlling stake in the RSE licensee.

[Schedule 4, item 10, subsection 131EF(2)]

5.73 That is, the Federal Court can make an order to ensure that the person does not hold a controlling stake or have practical control of the RSE licensee going forth.

5.74 However, the Federal Court may only make such orders if it is satisfied that:

•

the person holding a controlling stake in or having practical control of the RSE licensee has been, is or is likely to exercise control over the RSE licensee in a way that results in the RSE licensee being unable to satisfy its obligations as trustee of the fund;

•

the person holding a controlling stake in the RSE licensee does not have approval to do so; or

•

the person holding a controlling stake in the RSE licensee has approval from APRA, but the information given in the application was false or misleading in a material particular.

[Schedule 4, item 10, subsection 131EF(3)]

5.75 These are the same grounds on which APRA can give a person to a direction to relinquish control.

5.76 The types of orders the Federal Court may make include:

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directing the disposal of shares;

•

restraining the exercise of any rights attached to the shares;

•

prohibiting or deferring the payment of any amount due to a person in respect of shares held by the person; and

•

disregarding any exercise of rights attached to shares.

[Schedule 4, item 10, subsection 131EF(4)]

5.77 The Federal Court has the discretion to make other orders in addition to the ones listed above. [Schedule 4, item 10, subsection 131EF(5)]

5.78 The Federal Court also has the power to:

•

make an order to direct any person to do or refrain from doing a specific act for the purpose of securing compliance with any order the court has made; and

•

make an order containing ancillary or consequential provisions that the court thinks just.

[Schedule 4, item 10, subsection 131EF(6)]

5.79 Before making an order, the Federal Court may direct that the notice of APRA's application for the order be given to any person that the court thinks fit or be published in any manner that the court thinks fit. The court may also direct both actions to be taken. [Schedule 4, item 10, subsection 131EF(7)]

5.80 The Federal Court may rescind, vary or discharge the order made or suspend the operation of the order. [Schedule 4, item 10, subsection 131EF(8)]

Suspension or removal of trustee of superannuation entity

5.81 APRA may suspend or remove a trustee of a superannuation entity on largely the same grounds as those required for APRA to give a direction to a person to relinquish control.

5.82 That is, APRA may suspend or remove the RSE licensee if it has reason to believe that:

•

the person has a controlling stake in or has practical control of the RSE licensee; and

•

APRA has reason to believe that the RSE licensee has been, is or is likely to be unable to satisfy one or more the trustee's obligations contained in a covenant set out in section 52 to 53, or prescribed under section 54A, or referred to in section 29VN or 29VO, because of:

-

the person's controlling stake in or practical control of the RSE licensee; or

-

the way in which that control is likely to be exercised.

[Schedule 4, item 11, paragraph 133(1)(f)]

5.83 APRA may also suspend or remove the RSE licensee if it has reason to believe that the person has a controlling stake in the RSE licensee and the person does not have approval from APRA to hold a controlling stake. [Schedule 4, item 11, paragraph 133(1)(g)]

5.84 This is in addition to existing powers to suspend or remove an RSE licensee under section 133.

Consequential amendments

5.85 The current condition imposed on the RSE licensee to notify APRA of any change in the composition of the RSE licensee is broadened to capture the concept of control. [Schedule 4, items 5 and 6, paragraph 29E(1)(f) and subsection 29E(2)]

5.86 For the purposes of the obligation to notify APRA, any change to the composition of the RSE licensee includes when a person's stake in the RSE licensee changes. [Schedule 4, item 7, paragraph 29E(2)(a)]

5.87 A definition of stake is inserted to ensure consistency in the meaning with the concept in the FSSA. [Schedule 4, item 4, definition of 'stake' in subsection 10(1)]

Application and transitional provisions

5.88 Schedule 4 commences on the day after the Bill receives the Royal Assent.

5.89 The amendments apply to a person holding a controlling stake from commencement day. [Schedule 4, item 13]

5.90 However, if a person holds a controlling stake in an RSE licensee before that day and continues to hold a controlling stake on or after that day, the person is deemed to have approval from APRA to hold a controlling stake in the RSE licensee. This approval is deemed for the period from the commencement day until when the person no longer holds a controlling stake. [Schedule 4, item 14]

5.91 This is to ensure that the need to seek APRA approval to hold a controlling stake in an RSE licensee will only apply to persons who do not have an existing controlling stake in an RSE licensee at the date of commencement.

5.92 The offence for holding a controlling stake in an RSE licensee without approval applies only to a person that begins to hold a controlling stake on or after the day that is three months after the commencement day. [Schedule 4, item 15]

STATEMENT OF COMPATIBILITY OF HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Approval to own or control an RSE licensee

5.93 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

5.94 Schedule 4 to this Bill amends the SIS Act to strengthen APRA's supervision and enforcement powers when a change of ownership or control of an RSE licensee takes place.

Human rights implications

5.95 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

5.96 This Schedule is compatible with human rights as it does not raise any human rights issues.