House of Representatives

Revised Explanatory Memorandum

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

Chapter 10 Superannuation trustees not to incentivise employers

Outline of chapter

10.1 Schedule 9 to this Bill allow civil and criminal penalties to be imposed on the trustee of a superannuation fund who uses goods or services to influence employers to nominate the superannuation fund as the default fund or influence employers to encourage their employees to nominate the fund as their choice of fund (no treating of employers).

10.2 All legislative references in this Chapter are to the SIS Act unless otherwise indicated.

Context of amendments

10.3 Recommendation 3.6 of the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry recommended that section 68A should be amended to prohibit trustees of a superannuation fund and their associates (including relatives) from providing goods or services to an employer (or 'treating' an employer) where the action may reasonably influence the employer to nominate the fund as a default fund or having one or more of their employees apply or agree to become a member of the fund. It was recommended that the provision should be enforced by ASIC as a civil penalty provision. Recommendation 3.6 was adopted in the Government's response to the Royal Commission.

10.4 Evidence was given to the Commission which showed that some large funds were spending significant amounts to maintain or establish good relationships with employers who are responsible for nominating the default fund for their employees. The Report highlighted the deficiencies in the current application of section 68A which prohibits funds from providing goods or services to employers on the condition that an employee will apply to become a member of the fund. This sets the bar for connecting the actions of the fund to the result of the employee joining the fund too high.

Summary of new law

10.5 Schedule 9 to this Bill allow civil and criminal penalties to be imposed on the trustee of a superannuation fund who uses goods or services to influence employers to nominate the superannuation fund as the default fund or influence employers to encourage their employees to nominate the fund as their choice of fund (no treating of employers).

Comparison of key features of new law and current law

Detailed explanation of new law

10.6 Schedule 9 to the Bill allow civil and criminal penalties to be imposed on the trustee of a superannuation fund who uses goods or services to influence employers to nominate the superannuation fund as the default fund or influence employers to encourage their employees to nominate the fund as their choice of fund (no treating of employers). The amendments also specify that the obligation not to contravene this obligation is a civil penalty provision. [Schedule 9, items 3, 4, 6 and 7, sections 68A (heading), subsections 68A(1) and (4A), paragraphs 193(caa) and (cab)]

10.7 Schedule 9 to the Bill gives effect to Recommendation 3.6 to the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

10.8 The amendments place obligations on the trustee of a superannuation fund or its associates prohibiting them from:

•

providing goods or services (or at particular prices) to the employer or their associates; or

•

give discounts, allowances, rebates or credits in providing goods or services to the employer or their associates,

if that relevant action could reasonably be expected to influence the choice of fund for which the employer contributes superannuation for its employees or influences the employer to encourage their employees to stay with the fund or become a member of the fund.

10.9 This test lowers the bar for connecting the actions of the funds by using an objective or 'reasonableness' test to determine the intended effect of that action on the employer.

10.10 Similar obligations are also imposed on the trustee or its associates for refusing to provide goods or services to employers or their associates because it is reasonable to conclude that the refusal was done because the employer has not chosen the fund as the default fund or the employer has not encouraged their employees to stay with or become a member of the fund. [Schedule 9, item 5, section 68A(3)]

10.11 Listing these additional obligations as civil penalty provisions means that a failure to comply with them can result in civil or criminal penalties under Part 21.

10.12 When a contravention of a civil penalty provision occurs ASIC can apply to the Court for a civil penalty order as ASIC has the general administration of section 68A. [Schedule 9, items 1 and 2, subparagraphs 6(1)(a)(ix) and 6(1)(c)(iv)]

10.13 If the Court finds that a trustee has contravened one of these civil penalty provisions, the Court must declare that they have contravened the provision, and may fine the trustee up to 2,000 penalty units.

Application and transitional provisions

10.14 The amendments apply in relation to the provision of goods or services, or the refusal to provide goods or services that occur on or after the day this Schedule commences. [Schedule 9, item 8]

STATEMENT OF COMPATIBILITY OF HUMAN RIGHTS

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

Superannuation trustees not to incentivise employers

10.15 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

10.16 Schedule 9 to this Bill allow civil and criminal penalties to be imposed on the trustee of a superannuation fund who uses goods or services to influence employers to nominate the superannuation fund as the default fund or influence employers to encourage their employees to nominate the fund as their choice of fund.

Human rights implications

10.17 This Schedule is compatible with applicable human rights.

10.18 In forming this view, consideration has been given as to whether the imposition of a civil penalty for a violation of either a trustees or directors duties in proceedings under Part 21 of the SIS Act would involve the 'determination of a criminal charge' within the meaning of article 14 of the International Covenant on Civil and Political Rights (ICCPR) and, if so, whether the application of the rules of evidence and of the procedure applicable in civil proceedings would be inconsistent with that article.

10.19 Article 14 of the ICCPR contains the right to a fair trial and fair hearing, and minimum guarantees in the determination of a criminal charge.

10.20 The civil penalty should not be considered 'criminal' for the purposes of human rights law because there is a clear demarcation between what constitutes a civil and a criminal penalty under Part 21 of the SIS Act; no term of imprisonment is available as an alternative to the monetary penalty; and the courts can tailor the amount of the monetary penalty to the circumstances of the case.

10.21 The civil penalty regime in the SIS Act consists of two distinct elements.

10.22 Firstly, the Regulator may seek a civil penalty order from the Federal Court of Australia (FCA) declaring that the person has contravened a provision and imposing a monetary penalty of up to 2,000 penalty units. ^[18] The court may also or alternatively order a person to pay compensation where they are satisfied that a superannuation fund has suffered loss or damage as a result of the contravention. ^[19] An application for a civil penalty order is a civil proceeding, ^[20] and the parties are required to comply with the civil rules of evidence and procedure.

10.23 In civil proceedings, the law provides for specific relief from liability for contravention of a civil penalty provision where a person acted honestly and having regard to all of the circumstances of the case it appears to the court that the person ought to be excused for the contravention. ^[21]

10.24 Secondly, contravention of a civil penalty provision may constitute an offence, which is punishable on conviction by imprisonment, only where a person contravenes dishonestly, intending to gain, whether directly or indirectly, an advantage for a person, or intending to deceive or defraud someone. The prosecution of an offence is a separate criminal proceeding conducted by the Commonwealth Director of Public Prosecutions. The FCA does not have jurisdiction with respect to a proceeding for an offence. A person guilty of an offence may be imprisoned for not longer than five years.

10.25 There is therefore a clear demarcation between what constitutes a civil and a criminal penalty under Part 21 of the SIS Act.

10.26 As to purpose, Australian case law indicates that a civil penalty for a contravention should be sufficiently high to demonstrate the importance of not contravening the relevant part of the SIS Act, but not so high as to be oppressive. ^[22] The law specifically states that the court is not to make a civil penalty order unless it is satisfied that the contravention is a serious one. ^[23] Consideration of the deterrent or compensatory purpose of the penalty applies differently in the Australian context as a civil penalty order is enforceable as a judgment of the FCA, ^[24] and no term of imprisonment may apply as an alternative.

10.27 Further, in the Australian context the amount of loss or damage caused (and any compensation that might already have been paid) has also been recognised as a relevant factor to consider when determining the amount of a civil penalty. ^[25]

10.28 Part 21 of the SIS Act specifies a maximum penalty amount of 2,000 penalty units which encompasses all types of superannuation funds in the industry. Whilst the maximum penalty amount applies to all contraventions in relation to all types of superannuation funds, a court will determine the appropriate amount of any monetary penalty.

10.29 The case law to date indicates that the higher end monetary penalty orders, for example over $50,000, have only been applied in very serious circumstances and where multiple contraventions of the SIS Act have occurred. The FCA has found that multiple contraventions may be properly seen as one contravening course of conduct, ^[26] and therefore the maximum potential penalty is not multiplied in the case of several contraventions.

10.30 Although the maximum penalty of 2,000 penalty units (currently $420,000) may seem significant, the maximum penalty is considered appropriate in this circumstance.

10.31 Most members of superannuation funds are required by law to participate in the superannuation system and a trustee relationship between the fund and the members exist. Directors of corporate trustees are therefore in a unique position to ensure the trustee acts in the best interest of the members.

10.32 The maximum penalty of $420,000 is considered appropriate to provide sufficient deterrence to directors to not breach their obligations to ensure the corporate trustee acts in the best interest of the members of a superannuation fund.

10.33 Following the analysis above, the civil penalty provisions do not involve the 'determination of a criminal charge' within the meaning of article 14 of the ICCPR, and consequently the Amendments to Schedule 3 does not engage any human rights.

Conclusion

10.34 This Schedule is compatible with applicable human rights.