House of Representatives

Revised Explanatory Memorandum

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

Chapter 4 Penalties for contravening covenants

Outline of chapter

4.1 Schedule 3 to this Bill amends the SIS Act to allow civil and criminal penalties to be imposed on trustees of superannuation funds and directors of corporate trustees who fail to execute their responsibilities to act in the interests of member beneficiaries, or who use their position to further their own interests to the detriment of member beneficiaries.

4.2 All legislative references in this Chapter are to the SIS Act unless otherwise stated.

Context of amendments

4.3 Recommendation 13 of the Final Report of the FSI dated 7 December 2014 was to align the penalty regime for directors of trustees set out in the SIS Act with the penalty regime applying to directors of responsible entities of managed investment schemes. The Recommendation was adopted in the Government's response to the Inquiry.

4.4 Recommendation 3.7 of the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry dated 4 February 2019 recommended that the breach of the trustee's covenants set out in section 52 or the breach of the directors covenants set out in section 52A should be enforceable by action for civil penalties. Recommendation 3.7 was adopted in the Government's response to the Royal Commission.

4.5 The Corporations Act sets out the duties that an officer of a responsible entity has in relation to a registered scheme. A contravention of these duties may result in the application of a civil penalty with possible civil and criminal consequences. In broad terms these duties are:

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to act honestly and exercise a reasonable degree of care and diligence;

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to act in the best interests of the scheme's members;

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to prioritise the interests of the scheme's members over the interests of the responsible entity;

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not to make use of information acquired though being an officer to gain an improper advantage, or to cause detriment to the members of the scheme; and

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to take reasonable steps to comply with the Corporations Act, the conditions imposed by the responsible entity's financial services licence, as well as the scheme's constitution and compliance plan.

General obligation on directors and trustees

4.6 The SIS Act contains similar provisions related to the governing rules of superannuation entities, with sections 52 and 52A setting out covenants that apply to each trustee of a superannuation entity or director of a corporate trustee of a superannuation entity. These obligations are incorporated into the governing rules of a superannuation entity by subsections and 52(2) and 52A(2) to the extent they are not already included in those governing rules.

4.7 In broad terms these obligations require each director to act in the best interests of member beneficiaries, and to prioritise those member beneficiaries' interests over those of any other person in the event of a conflict.

4.8 Under existing law, a contravention of the governing rules of a superannuation entity is not an offence, and does not affect the validity of a transaction. This means a contravention does not result in a civil or criminal penalty. However, a contravention can give rise to a claim for loss or damages by the affected member.

Summary of new law

4.9 These amendments ensure that a trustee or director of an RSE licensee can be subject to civil penalties if they breach the general trustee or director covenants.

4.10 The amendments achieve this by specifying that a contravention of those duties or covenants is a contravention of a civil penalty provision for the purposes of Part 21. This means directors may be liable for fines up to 2,400 penalty units (currently $504,000), and for serious breaches, imprisonment up to five years.

Comparison of key features of new law and current law

Detailed explanation of new law

4.11 The amendments in Schedule 3 allow civil and criminal penalties to be imposed on trustees of superannuation funds and directors of corporate trustees of superannuation funds who fail to execute their responsibilities to act in the interests of member beneficiaries, or who use their position to further their own interests to the detriment of member beneficiaries.

4.12 To achieve this outcome, the amendments introduce a specific obligation not to contravene the general covenants that apply to the trustee of a superannuation entity or the director of a corporate trustee. The amendment also specifies that the obligation not to contravene these covenants is a civil penalty provision. . [Schedule 3, item 1, section 54B]

4.13 The relevant obligations are those contained in section 52 which require each trustee to act in the best interests of its beneficiaries, and to prioritise those beneficiaries' interests over those of any other person in the event of a conflict. Similar obligations are required for each director of the corporate trustee of a superannuation fund to act in the best interests of its members which are set out in section 52A.

4.14 For example, there may be an action taken that results in the failure to comply with a section 52 covenant by a corporate trustee of a superannuation fund. Equally, that action will also likely result in the directors of corporate trustee breaching a section 52A covenant for an individual director. This situation would give rise to two separate actions being available to the regulator under the civil penalty provisions under the new paragraphs 193(aa) and 193(ab).

4.15 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. In this respect, it is not the initial breach of the covenant or obligation that gives rise to penalties - it is the breach of the separate obligations introduced by these amendments not to contravene the related covenants and obligations. [Schedule 3, item 6, paragraph 193(aa) and (ab)]

4.16 When a contravention of a civil penalty provision occurs APRA can apply to the Court for a civil penalty order.

4.17 If the Court finds that a trustee or director has contravened one of these civil penalty provisions, the Court must declare that they have contravened the provision. For serious contraventions, amendments made by the Senate to this Schedule that were tabled by the Opposition allow for a Court to fine the trustee or director up to 2,400 penalty units. [Schedule 3, items 6A, subsection 196(3)]

4.18 This increases the penalties from 2,000 penalty units to 2,400 penalty units and ensures that trustees and directors that contravene their obligations are held to account.

4.19 In addition, serious breaches of the director's duties (such as those involving intentional or fraudulent contraventions) may constitute a criminal offence punishable by up to 5 years imprisonment.

4.20 The consequences for failing to comply with the new obligation not to contravene the general directors duties apply in addition to any consequences that may already apply for contravening the actual duties under section 55 (which is about giving rise to a claim for loss or damages). [Schedule 3, items 2 to 5, section 55]

4.21 Consistent with other obligations under the SIS Act, a contravention of these additional obligations does not result in the invalidity of a transaction.

4.22 The amendment clarifies that trustees and directors must not contravene other covenants outside of sections 52 and 52A, such as those prescribed by legislation under section 54A. However, the breach of these other covenants does not result in the possible application of the civil penalty provisions. [Schedule 3, item 1, section 54C]

Application and transitional provisions

4.23 The amendment applies in relation to contraventions occurring on or after commencement of this Schedule. [Schedule 3, item 7]

STATEMENT OF COMPATIBILITY OF HUMAN RIGHTS

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

Trustee and director penalties

4.24 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

4.25 Schedule 3 to this Bill amends the SIS Act to allow the imposition of civil and criminal penalties on trustees or directors of RSE licensees who fail to execute their responsibilities to act in the best interests of member beneficiaries, or who use their position to further their own interests to the detriment of member beneficiaries.

4.26 This is achieved by specifying that a contravention of a trustee or director's duties is a contravention of a civil penalty provision for the purposes of Part 21 of the SIS Act.

Human rights implications

4.27 This Schedule is compatible with applicable human rights.

4.28 In forming this view, consideration has been given as to whether the imposition of a civil penalty for a violation of a 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.

4.29 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.

4.30 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.

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

4.32 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. ^[1] 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. ^[2] An application for a civil penalty order is a civil proceeding, ^[3] and the parties are required to comply with the civil rules of evidence and procedure.

4.33 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. ^[4]

4.34 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.

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

4.36 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. ^[5] 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. ^[6] 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, ^[7] and no term of imprisonment may apply as an alternative.

4.37 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. ^[8]

4.38 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.

4.39 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 ^[9] , and therefore the maximum potential penalty is not multiplied in the case of several contraventions.

4.40 Although the maximum penalty of 2,400 penalty units (currently $510,000) may seem significant, the maximum penalty is considered appropriate in this circumstance.

4.41 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. Trustees and directors of corporate trustees are therefore in a unique position to ensure the trustee acts in the best interest of the members.

4.42 The maximum penalty of $510,000 is considered appropriate to provide sufficient deterrence to directors to not breach their obligations to ensure the trustee and corporate trustee acts in the best interest of the members of a superannuation fund.

4.43 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 that Schedule 3 to this Bill does not engage any human rights.

Conclusion

4.44 This Schedule is compatible with applicable human rights.