House of Representatives

Explanatory Memorandum

Circulated By the Authority of the Minister for Human Services Minister for Financial Services, Superannuation and Corporate Law the Hon Chris Bowen Mp

Chapter 7 - Regulation impact statement - Commonwealth regulation of trustee companies

Problem

Background

Existing meaning of ' trustee company'

7.1 Prior to the passage of Commonwealth legislation to authorise trustee companies, a trustee company could be defined as a company which:

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is registered under the Corporations Act 2001 (Corporations Act);

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is authorised under one or more of the State and Territory Trustee Companies Acts; and

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undertakes two broad types of work:

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personal trustee and deceased estate administration work ('traditional activities');

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broader financial services, such as funds management and acting as responsible entities of managed investment schemes.

The first of these areas of work is the focus of this regulation impact statement (RIS).

Overview of trustee companies industry

7.2 In the past, only a natural person could undertake the duties of a personal trustee in the sense of executor or administrator under a will (known as acting as a 'personal trustee'), owing to the fiduciary responsibilities of trustees for the trust assets and their personal liability in the event of any default. Moreover, it was generally not possible to establish a long term trust, such as a charitable trust.

7.3 To rectify this situation, the States and Territories passed legislation permitting private trustee companies to enter the market for personal trustee and estate administration work. At about the same time, the States and Territories also legislated to facilitate the establishment of long term and perpetual trusts, such as charitable trusts. They also created government-controlled Public Trustees ('public trust offices').

7.4 A trustee company that is authorised under one of the State/Territory Acts is typically regulated if it undertakes one or more of the following activities:

(a) Applies for probate, and / or acts as an executor or as administrator, of a deceased estate

7.5 Probate is a certificate granted by the Probate Division of the Supreme Court in each State and Territory that the will of a deceased person has been proved as valid and registered and that authority to administer the deceased estate has been granted to the executor providing or propounding the will.

7.6 An executor/administrator is the person nominated by a deceased person in their will to administer their estate upon their death. Trustee companies are able to act as executor of a deceased's estate when the time comes or arrange for the transfer of responsibilities, where an individual is nominated in a will as the estate executor and does not wish to take on the legal responsibilities entailed.

7.7 Non-authorised corporations are excluded from the market for the provision of trustee and executor services.

(b) Acts as trustee of a trust estate

7.8 Trusts can be set up for many purposes. For example, a settlor or testator can transfer property to a trustee to be held in trust for one or more beneficiaries. This can be useful, particularly when the beneficiaries are minors or unable to handle their own finances. Another example is the charitable trust or foundation, which may be established to help relieve poverty or advance educational, medical or religious purposes.

(c) Operates a common fund

7.9 Under the general law, trustees cannot mix the funds from two or more trusts. The State and Territory Acts override this restriction by allowing trustee companies to invest funds from more than one trust in a 'common fund', to enable the efficient pooling and investment of moneys from estates and trusts. In most States, external moneys may be accepted for investment into common funds - in such cases, the trustee companies must comply with the managed investment scheme provisions of the Corporations Act.

(d) Acts under a power of attorney

7.10 Under a power of attorney, a trustee company has authority to act for a person in relation to that person's legal or financial affairs.

(e) Other functions

7.11 Trustee companies also exercise other functions under State and Territory legislation. For example, a trustee company can act as a guardian for a minor or a disabled person. A guardian has legal custody of another person and his or her property when that person is unable to manage his or her own affairs.

7.12 Solicitors, accountants, financial advisers and Public Trustees are now the main competitors of private trustee companies in the market for 'traditional' services.

Broader financial services

7.13 Trustee companies have since expanded their activities into most areas of wealth creation, management and transfer. They now offer a range of financial services, including as the administrator for superannuation funds, as trustee for debenture and note issues and as the Responsible Entity for managed funds.

Market characteristics

7.14 The trustee company industry is relatively small with approximately ten licensed private trustee companies. The majority of these trustee companies are licensed and have operations in multiple jurisdictions. Some of the smaller markets and jurisdictions only have one licensed private trustee company providing these services. In some of the larger markets, such as New South Wales, Victoria and Queensland, there are seven to eight licensed trustee companies operating.

7.15 With the exception of one licensed trustee company - Plan B Trustees Limited (Plan B), based in Western Australia - all of the trustee companies and public trust offices are members of a single industry body, the Trustee Corporations Association of Australia (TCA).

7.16 According to TCA data for 2007, private trustee companies (excluding Plan B) have approximately $510 billion of assets under management. In aggregate, Public Trustees account for approximately $13 billion of the assets under management and a large proportion of these assets are under management in personal trusts. TCA member trustee companies and State Trustees Ltd manage approximately $20 billion of assets in personal trusts.

7.17 The bulk of trustee companies business is in the field of investment products. TCA member trustee companies and State Trustees Ltd have approximately $21 billion in assets under management in superannuation funds and $403 billion of assets under management in corporate activities, such as managed funds, securitisation programs and debenture and note issues ^[4] . Based on these figures, in aggregate, personal trust business represents approximately 4 per cent of TCA member trustee companies' business ^[5] . The industry generally refers to this part of their business as 'traditional activities'.

Current regulation of trustee companies

7.18 Trustee companies are currently required to be licensed and regulated under separate legislation in each State and Territory ^[6] in which they operate. Corporations are unable to operate in a jurisdiction until the respective piece of legislation has been amended to include their business name as a trustee company under the relevant Act.

7.19 Commonwealth legislation will replace State and Territory legislation which:

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authorise or license companies to provide traditional trustee company services generally (as opposed to laws that authorise or license companies to provide a particular traditional trustee company service);

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regulate the fees that may be charged by companies for the provision of traditional trustee company services, and the disclosure of those fees;

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deal with the provision of accounts by companies in relation to traditional trustee company services that they provide;

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deal with the duties of officers or employees of companies that provide traditional trustee company services, in their capacity as officers or employees of those companies;

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regulate the voting power that people may hold in companies that provide traditional trustee company services, or that otherwise impose restrictions on the ownership or control of companies that provide traditional trustee company services;

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deal with what happens to assets and liabilities held by a company, in connection with the provision by the company of traditional trustee company services, if the company ceases to be licensed or authorised to provide such services. (There is an exception for complementary State and Territory laws that are needed to give effect to compulsory transfer determinations.)

7.20 The broader law relating to the obligations on trusts and trustees in each State and Territory ^[7] will not be part of the proposed changes; however, those Acts may require amendment where necessary.

Other current regulation of trustee companies (outside of scope)

7.21 Where trustee companies engage in other activities, such as acting as a superannuation trustee, acting as a Responsible Entity for managed funds, providing a custodial or depository service, or acting as a trustee for debenture holders, they must comply with Commonwealth legislation, including the Superannuation Industry (Supervision) Act 1993, the Managed Investments Act 1998 and the Corporations Act 2001 (Corporations Act). These Acts regulate the activity being undertaken rather than the entity.

7.22 In order to undertake funds management activities, all of the private trustee companies hold Australian financial services licences (AFSLs). As a result, they are familiar with Australian Securities and Investments Commission (ASIC) regulation and the requirements of an AFSL. Equally, those trustee companies that act as superannuation trustees are Registrable Superannuation Entity licensees (RSEs) are familiar with Australian Prudential Regulation Authority (APRA) regulation - however, four ^[8] trustee companies are not RSE licensees.

7.23 In addition to being subject to the respective trustee companies' legislation, trustee companies are subject to other State and Territory legislation when undertaking 'traditional activities'. For example, each State and Territory has a Trustee Act as well as legislation regarding wills, administration and probate. These legislative instruments, and associated common law, regulate particular activities and, as such, solicitors, accountants, financial advisers and trustee companies are subject to the requirements therein alike in providing such services.

7.24 Public trustees are subject to separate public trustee legislation in each of the jurisdictions rather than the legislation for private trustee companies. Except for State Trustees Ltd, which is a corporate entity owned by the Victorian Government, most of the Public Trustees are directly responsible to a State or Territory Government Department, such as the Department of the Attorney General or the Department of Justice, in the jurisdiction in which they operate. Since the Public Trustees are owned and operated by the respective State and Territory Governments, they do not have cross-border operations and nor do they have concerns about the compliance costs associated with seeking to operate nationally. That said, public trust offices that satisfy the criteria for licensing may opt to be bound by the legislation.

Regulatory need

7.25 The relevant State and Territory Trustee companies Acts amount to around 300 pages. This in itself is a significant burden. Moreover, the state Acts, as well as the common law relating to trusts, act to restrict competitive pressure and market discipline in the estate administration and trust management industry, particularly after the will or trust comes into effect. This market imperfection is the result of the trustee being appointed by someone other than the person(s) for whose benefit the assets will be managed by the trustee and the inability of the beneficiary to switch trustees, short of applying to the Supreme Court in cases of fraudulent conduct or administrative incompetence.

7.26 The beneficiary often has no contact with the trustee company prior to the will or trust coming into effect and after it does become operational, the beneficiary is generally unable to affect a change of the trustee company. While the main duty of a trustee is to administer the estate in accordance with the terms of the will or trust, regardless of the wishes of the beneficiary, once the will or trust comes into effect, it is the beneficiary that is ultimately interested in the proper and effective management of the estate. It is the beneficiary that bears the loss in the event of the mismanagement of the estate.

7.27 The Supreme Court is the only avenue of recourse for beneficiaries with concerns regarding the management of the trust or estate. In situations where the beneficiary has concerns relating to gross mismanagement or fraud, the Supreme Court can order that the trust assets be transferred to another trustee company. Court action is very costly and time consuming. Beneficiaries do not have access to alternative and more cost effective and timely dispute mechanisms.

7.28 Beneficiaries are exposed to significant costs/losses in the event that assets held on trust are inadequately managed by the trustee company. This concern is exacerbated by the ability of trustee companies to pool trust assets in common funds. Consumers are unlikely to be able to access the information on which to make informed decisions on how to manage this risk on their own. This applies to consumers when selecting a trustee company and it is also relevant to beneficiaries who have a legitimate interest in mitigating the risk of inadequate management of the assets held on trust for their benefit.

7.29 Generally, trustee companies consider testators/settlors to be their primary clients and only regard beneficiaries as (at best) 'secondary' clients. As a result, beneficiaries often are unable to access information on the terms agreed to by the testator/settlor. The inability of beneficiaries to readily switch trustees means that they cannot easily act on information about the management of the trust or estate. Beneficiaries should have access to sufficient information to be able to monitor the performance of the assets under management and the trustee company more generally. At a minimum, beneficiaries, or persons with a proper interest in the estate acting on their behalf, should be able to assess the performance of the trustee company in relation to the terms set out in the trust deed and to detect fraud or serious instances of administrative incompetence.

7.30 It is more difficult to ascertain the quality and service that will be provided by a trustee company rather than an individual because the personnel may change over time and it is unlikely to be clear which individuals will be performing the service or their level of expertise. This makes the procedures and risk management practices of the corporation itself important.

7.31 Trustee companies (private or public) are the only providers of estate management and personal trust services that can offer these services in perpetuity and, as such, may be viewed by individuals as having special expertise and reliability in undertaking personal trust and estate activity.

7.32 Government intervention or measures in addition to those directed at promoting competition are necessary to ensure adequate client protection for 'vulnerable' beneficiaries, such as the disabled, mentally impaired, elderly and minors, who may not have the capacity to adequately monitor their trustee's performance even if they were provided with the information to do so.

7.33 The prevalence of estate mismanagement and the extent of any resulting loss are currently not able to be quantified accurately due to the difficulty and expense of beneficiaries making a complaint. However, the concept of alternative dispute resolution is accepted by the majority of industry submissions on the Green Paper on Financial Services and Credit Reform (July 2008):

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The TCA's submission stated that trustee companies are subject to a relatively low number of legitimate customer complaints, and that many complaints prove to be simply disputes between beneficiaries. Nonetheless the submission put forward a model for an appropriate external dispute resolution scheme (which would preserve the right to take a matter to the relevant Supreme Court).

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Sandhurst Trustees' submission assumed the creation of a dispute resolution process, arguing that the trustee company needs to protect its reputation (including the right to take a matter to court) and should have the right to raise a matter directly with the dispute resolution body.

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ANZ Trustees' and Equity Trustees Limited's submissions supported alternative dispute resolution.

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Tasmanian Perpetual Trustees Limited (TPTL) submitted that there is no evidence of any systemic problems concerning the manner in which their traditional trustee business is being managed. However, TPTL has in place a form of internal dispute resolution, and it submits that any dispute which could not be resolved internally be required to be submitted to alternative dispute resolution.

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Perpetual Limited submitted that the dispute resolution process should mirror the current Corporations Act regime.

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Suncorp-Metway Ltd said: 'We agree that a more cost effective and timely External Dispute Resolution (EDR) mechanism for beneficiaries is necessary for personal trust assets. However, we would encourage this industry leveraging the existing EDR models under the newly converged Financial Ombudsman Schemes (FOS) rather than creating a new model.'

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Trust Company Limited said: 'there is no better dispute resolution system than that offered by the Supreme Courts.'

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Plan B agreed that consideration needs to be given to a suitable dispute resolution mechanism, which they believe should apply to all providers of trustee services.

7.34 Set out below is a table showing the number of complaints about members received by the TCA over the period 1995 to 2008. The figures cover matters that were deemed to be more than clarification of a trustee's role, such as a client unhappy with the trustee's service in terms of choice of investments, time taken to finalise administration of a deceased estate, or fees charged.

Table 1.1: Complaints received by TCA Secretariat

This does not include complaints that may have been made directly to a member of the relevant Attorney-General's Department/Consumer Affairs Office, or the subject of an approach to the relevant Supreme Court.

7.35 Notwithstanding the seemingly low number of complaints, 'traditional' trustee services are often provided to the most vulnerable of people (who in many cases would have difficulty asserting their rights), so it is conceivable that problems could be under-reported. Also, internal and external dispute resolution mechanisms are a common feature of financial products and services regulation under the Corporations Act.

7.36 The other main source of market failure in the financial system that normally warrants regulatory intervention is systemic risk. In relation to the management of trust and estate assets by trustee companies, as trustee companies are not part of the payments system and do not generally provide capital guaranteed funds or hold trust assets on their balance sheets, the level of systemic risk is very low. It is extremely unlikely that the failure of a trustee company would have any significant flow-on or contagion effects on the rest of the financial system or to the real economy more broadly.

7.37 The incidence of the failure of trustee companies is quite low. Since the early 1980s, only Trustees and Executors Agency Co Ltd (1983), and Burns Philip Trustee Company Ltd and its subsidiaries (1990-94) have been placed in liquidation.

7.38 One of the main outcomes of the Financial System Inquiry (Wallis Inquiry), which reported to the then Government in March 1997, was the broad acceptance of the importance of balancing financial safety regulation against efficiency and the importance of the level of intensity of financial regulation being in proportion to the risk of failure.

Current regulatory problem

7.39 Over the last decade, trustee companies have made a number of representations to all levels of government in relation to addressing the regulatory burden associated with the inconsistencies and duplicate licensing and reporting requirements in the State and Territory based regulatory framework. The variation in regulatory obligations imposed by the State and Territory governments can be seen in Table 1.1.

7.40 The Council of Australian Governments (COAG) agreed in July 2008, that the Commonwealth will assume responsibility for regulation of trustee companies. The scope of this RIS is to consider the options for a Commonwealth regulatory framework at an entity level. As noted previously, it is not within the scope of this RIS to consider other State, Territory or Commonwealth laws that apply to the various activities undertaken by trustee companies. The RIS considers the appropriate form and intensity of regulation required to achieve the objectives.

7.41 Business compliance costs and barriers to market entry are considered higher under the State and Territory based legislation than what is necessary to address the market failures. Overly prescriptive regulation on certain aspects of trustee companies operations in the State and Territory legislation were designed to address some of the market failures and to protect vulnerable consumers. These regulations cover: the ownership of trustee companies; fees (in most states there are fee caps); common funds; capital requirements; professional indemnity insurance; and directors' personal liability. The level and type of these restrictions varies between States and Territories. In some instances the law imposes quite restrictive rules, particularly in relation to prescribing fees and common fund operations. The current level of regulatory burden is not appropriately matched to the level of risk involved.

7.42 A key issue identified is that the current State and Territory licensing requirements restrict trustee companies from operating across borders. The need to obtain a licence in each individual State and Territory combined with the lack of transparency and consistency in licensing requirements creates barriers to entry and restricts competition in the marketplace. In addition, the State and Territory based licensing requirements create cost burdens for corporations that operate in more than one jurisdiction. These costs not only include the initial costs associated with obtaining licences in each jurisdiction that they wish to operate in, but also the ongoing compliance costs of meeting differing requirements, including reporting requirements, in different jurisdictions.

7.43 The current legislation is relatively antiquated and not consistent with other more modern financial sector regulation that was implemented on the basis of the Wallis Inquiry. The State and Territory based regulatory requirements are not nationally consistent and have a high level of prescription, which creates compliance and efficiency costs. Additionally, unlike licensing decisions made under Commonwealth licensing systems, the licensing arrangements for trustee companies involve political decision making rather than objective criteria. Additionally, in most jurisdictions the licensing decisions are not subject to administrative review. One industry participant has made a number of representations in relation to concerns about the restrictive nature and lack of transparency in the licensing process.

7.44 There are also concerns about the need for a more cost effective and timely alternative dispute resolution mechanism for beneficiaries to enhance the protections available for the trust assets.

7.45 There is some concern about the adequacy of current supervisory arrangements for trustee companies given the limited resourcing and expertise available for supervision in the individual jurisdictions. This is largely the result of a combination of factors, such as the small number of trustee companies in some the jurisdictions ^[9] and the States and Territories referral of power for prudential regulation and client and investor protection to the Commonwealth in 1999. A single supervisor is expected to exploit economies of scale, reduce duplication, and over time, build up a greater level of expertise. This would increase the effectiveness and efficiency of supervision of trustee companies.

Objectives of Government action

7.46 Six objectives have been identified for a Commonwealth regulatory framework to address the problems identified earlier. Options for reform will be evaluated against these objectives in the next section. The objectives are:

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Objective 1 - Enable approved corporations to operate as trustee companies and license them under Chapter 7 of the Corporations Act;

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Objective 2 - Ensure effective management and safeguarding of trust assets;

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Objective 3 - Ensure appropriate disclosure to clients about the type of services and products being offered by the trustee company;

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Objective 4 - Provide for lower cost dispute resolution, to enable beneficiaries to address issues of underperformance or incompetence and/or replace an underperforming trustee in a cost effective way, in cases where alternative dispute resolution is a viable alternative to the courts;

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Objective 5 - Modernise the regulation of trustee companies and have any regulation apply on a national basis in accordance with Recommendation 90 of the Wallis Review and the Government's policy regarding reducing regulatory burden more broadly; and

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Objective 6 - Facilitate a competitive national market for trustee companies through:

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reducing barriers to competition and competitive neutrality issues;

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reducing business compliance costs and improve efficiency of operations; and

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promoting efficient pricing of services provided by trustee companies.

Options that may achieve objectives(s)

7.47 Three options have been identified which would address the objectives of a Commonwealth regulatory framework:

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Option 1: Status quo - no additional Commonwealth regulation;

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Option 2: Consumer protection and disclosure regulation with supervision by ASIC; and

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Option 3: Prudential regulation with supervision by APRA.

7.48 Under each option, consideration is given to whether that option addresses the identified market failures and meets the above objectives.

7.49 In examining the options, it was considered important to take account of the rationale for how financial services are regulated to ensure that the level and type of regulation recommended not only addresses the market failures identified, but is balanced against efficiency considerations and is consistent with the broader approach to financial sector regulation in Australia.

Option 1: Status Quo

7.50 Trustee companies will remain able to act as trustees, executors and administrators under State and Territory laws, with powers and duties similar to those of natural persons.

7.51 Trustee companies will not be under any regulatory obligation to disclose information about the potential performance of any investment of funds under the trust. However, this type of disclosure may occur through the discussions between the testator and trustee company at the time of creation of the trust instrument.

7.52 This option would fail to deliver on the COAG commitment and would not assist beneficiaries to address issues of underperformance or incompetence and/or replace an underperforming trustee in a cost effective way. Beneficiaries will retain the ability to remove trustees where there is gross mismanagement or fraud in relation to trust assets. There will be no provision for lower cost dispute resolution to enable beneficiaries to address issues of underperformance or incompetence and/or replace an underperforming trustee in a cost effective way.

7.53 This option will retain the stratified State and Territory based regulatory system and will fail to address the current regulatory burden faced by trustee companies wishing to operate across more than one jurisdiction. Business will continue to report to each State and Territory body in which it operates, as well as ASIC under the corporation's AFSL obligations and APRA if the corporation is an RSE licensee. It will also retain regulation that is unnecessarily burdensome on a potential new entrant for addressing the market failures and risks identified.

7.54 Potential new entrants will only be allowed entry into the market if they can gain acceptance from the relevant minister in each jurisdiction. Trustee companies are only able to undertake traditional activities in a State or Territory where the name of that corporation has been added to the relevant trustee company act. The relevant jurisdiction may provide guidelines which the Government will use to determine the application for entry; however where these guidelines are available they may be highly subjective and open to political considerations. These barriers to entry will remain high.

7.55 This option will not address Objective 6, as it will not provide for a reduction in business compliance costs and will not improve the efficiency of the market operators. The fees and charges caps will continue to apply in most jurisdictions, as will: personal director's liability; restrictions on ownership; requirements on a certain number of directors to reside within the jurisdiction; and opening hours will continue to be regulated in the Northern Territory. Furthermore, it will fail to address Objective 4 as it will not allow for easier removal of trustees in cases of poor trustee performance. It will therefore fail to facilitate a more competitive market.

Option 2: Consumer protection and disclosure regulation with supervision by ASIC

7.56 In the Commonwealth regulatory framework, consumer protection and disclosure regulation is implemented by the ASIC. Consumer protection and disclosure regulation implemented by ASIC is aimed at protecting the interests of consumers of a wide range of financial services and products. It seeks to ensure that the activities of financial service providers are subject to scrutiny and accountability to the regulator for the purpose of consumer protection.

7.57 Under this option, the States and Territories would repeal their Trustee Companies Acts. The Commonwealth has the power to regulate trustee companies at an entity level, for the purposes of licensing and ongoing supervision, under various powers, including section 51 (xx), of the Constitution. Under this option, there are two different approaches that could be taken to regulate trustee companies under the Corporations Act. The Corporations Act could be amended to provide for:

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A stand alone chapter for entity level regulation of trustee companies and a licensing mechanism; or

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A separate chapter for entity level regulation of trustee companies with the licensing mechanism linked to the AFSL regime and the integration of the provision of estate administration and personal trustee management services by trustee companies into the financial services regime (Chapter 7 of the Corporations Act). This would involve defining the provision of these services as the provision of a financial service.

7.58 Under both options, a chapter conceptually similar to Chapter 5C (Managed investment schemes) could be added to the Corporations Act for the entity level regulation for trustee companies. This chapter could be included as 'Chapter 5D Trustee Companies'.

7.59 Some of the means that would be used in a client protection regime in order to address Objective 2 of ensuring effective management and safeguarding of trust assets are:

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the requirement that a trustee company be a public company or a wholly owned subsidiary of a public company;

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the requirement that the corporation holds an AFSL that covers the provision of traditional trustee company services - ASIC monitors applications for licences, enforces licence conditions and varies, suspends or cancels licences;

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provisions that allow trustee companies to pool the money from different estates in common funds. These provisions will also allow external investment into the common funds, but where there is external investment the trustee company will have to comply with Chapter 5C of the Corporations Act. The provisions on common funds will set out a number of general rules for the operation of common funds;

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provisions setting out restrictions to the fees and charges that can be charged by trustee companies in relation to the provision of personal trust and estate administration services. The provisions on fees may also include requirements relating to whether the fees can be taken from capital or income, or a combination of the two;

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in relation to charitable trusts, 'grandfathering' of fees charged to existing clients, and capping of fees charged to new clients, with a review of these arrangements after two years;

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deregulation of the fees charged to all other trusts and estates, subject to a requirement that the company's fee schedule be disclosed on the Internet and a requirement that corporations charge no more than the fees specified in their published fee schedule at the time they begin administration;

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appropriate disclosure obligations, including provision for electronic disclosure;

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a 15 per cent limit on any one person (and associates) holding voting shares in a trustee company, combined with a compulsory divestment regime to deal with breaches, and a provision allowing Ministerial consent for share acquisitions in trustee companies above the threshold;

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alignment of directors' and employees' liability with the Corporations Act;

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requirements for adequate financial resources;

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requirements for a specified level of professional indemnity insurance to support compensation arrangements for the clients of trustee companies;

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winding up provisions;

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reporting obligations;

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enforcement powers and ability to revoke the licence;

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internal and external dispute resolution provisions, and

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repeal of overlapping/inconsistent State/Territory laws.

7.60 The 'traditional' operations of trustee companies are likely to be new ground for ASIC. Although some pre-existing expertise will be relevant, significant effort would be required in terms of both developing the regulator's expertise and the standards that they would administer.

7.61 The client protection regime discussed above would directly address Objective 2 as it would ensure there are protection arrangements in place aimed at reducing the risk of inadequate management by the trustee company. It will address Objective 3 through ensuring there is adequate disclosure of information by the trustee company to the testator/settlor (and beneficiary where appropriate) in order to understand the service being offered by the corporation.

7.62 Unlike a prudential regime, a client protection regime is directly focused on the protection of assets held on trust for the beneficiary and hence more directly addresses the market failures identified. Because it is not specifically focused on the corporate health of the entity itself (except to the extent that it impacts on the management of off-balance sheet trust assets) it does not specifically seek to prevent the failure of the trustee company itself. In the event of a failure of a trustee company, common law, trust law and the relevant State or Territory Supreme Court would provide for the protection of trust assets and the mechanism for the transfer of the trust assets to another trustee.

7.63 In relation to Objective 4, it is proposed that clients would have access to an alternative dispute resolution mechanism. This could be an existing scheme such as the Financial Ombudsman Service or alternatively, a new industry-funded alternative dispute resolution body could be established.

7.64 This option would also provide for the authorisation of trustee companies (Objective 1), as well as being consistent with the Wallis recommendation referred to in Objective 5.

7.65 In relation to Objective 5, it is clear that any form of Commonwealth legislation would create a national market by creating a single approval and supervisory regime and eliminate unnecessary compliance costs and barriers to competition caused by duplication or inconsistencies in the State and Territory based requirements.

Option 3: Prudential regulation with supervision by the Australian Prudential Regulation Authority

7.66 In the Commonwealth regulatory framework, prudential regulation is implemented by APRA. Prudential regulation is generally aimed at protecting the prudential health of systemically important financial institutions, primarily for the maintenance of system stability. Prudential regulation is applied to a narrow range of financial institutions, whereas consumer protection regulation is aimed at protecting the interest of consumers in relation to the activities of financial service providers. Prudential regulation is a significant intervention into a market and implies a regulatory intensity significantly greater than that under the status quo or of client protection regulation.

7.67 Under this option, the Commonwealth would implement legislation along the lines of a 'trustee companies prudential supervision act' to provide for licensing arrangements and ongoing prudential supervision by APRA. The Commonwealth would also need to amend legislation for the purpose of levying trustee companies to fund the cost of supervision. The levy would be based on the asset pools managed by trustee companies, similar to the way in which levies are applied to other prudentially regulated entities.

7.68 Under a prudential regime, it would be the role of APRA to put in place appropriate prudential standards under the legislative framework. APRA's standards would likely cover the following:

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fit and proper requirements for directors and senior management;

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risk management systems;

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outsourcing;

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adequacy of resources; and

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capital requirements - net tangible assets.

7.69 It is worth noting that the development of a prudential regime for trustee companies would take significant time and resources to set up since there has not previously been prudential oversight of trustee companies (at either the State or Commonwealth levels of government) and APRA does not have experience in the non-financial operations of trustee companies.

7.70 A prudential regulatory regime would aim to address Objective 2 by providing for third party oversight (for example, auditor oversight) of the management processes of trustee companies. A prudential regime would not focus on empowering clients to enforce their rights in the same way that a client protection regime would. APRA would not be involved in the day-to-day interactions of trustee companies and their clients and would not undertake the role of dealing with consumer complaints.

7.71 Prudential regulation provides for intense oversight of the risk management systems and policies of the regulated entities. Standards under a prudential regime are generally more prescriptive and intrusive. This oversight is more intense than in a client protection regime as it is directed at the health of the entity itself, as distinct from directly focusing on the entity's capacity and resources to effectively manage trust assets for beneficiaries. Similarly, licensing requirements of a prudential regime may be more intense than under a client protection regime.

7.72 A key objective outlined for the regulation of trustee companies is that there are adequate protection arrangements in place regarding the quality of management of trust estates administered by trustee companies in order to protect the interests and assets of beneficiaries. While prudential supervision would provide for relatively intense scrutiny of trustee companies, given its focus, it may not provide as many protections for beneficiaries and testators in relation to Objective 2 compared to a regime focused on client protection.

7.73 Commonwealth legislation could authorise trustee companies as per Objective 1. As noted above in relation to Objective 5, any form of Commonwealth legislation would create a national market and eliminate the unnecessary compliance costs and barriers to competition caused by duplication or inconsistencies in State and Territory based requirements.

7.74 This option would address Objective 6, however in a less satisfactory manner than Option 2 as the compliance costs, barriers to competition and the competitive neutrality issues associated with prudential regulation would be significantly greater than for a client protection regime. These costs are primarily associated with the increased regulatory intensity of a prudential regime. In addition, trustee companies would also be expected to cover the costs associated with the role of the prudential regulator itself, which would be passed on to industry through levies. Such costs would include a significant start-up cost for developing the prudential standards and significant ongoing costs. Likewise, given there would continue to be licensing requirements, which are likely to be more difficult to satisfy than under a client protection regime, there would be some barriers to competition. However, improvements in the licensing processes compared to the existing systems, including improved transparency, are expected to provide reductions in other barriers to competition.

7.75 The significant costs identified would need to be weighed against the benefits, which as already noted, may not match the benefits desired as effectively as a client protection regime. It should also be noted that as lawyers and other individuals who offer personal trust services are not subject to prudential oversight, the imposition of significant compliance costs would have implications for competitive neutrality. It has also been noted that most of trustee companies' business is now in the field of funds management rather than 'traditional activities'. Since there is no prudential oversight of other Responsible Entities for managed funds, there would also be a significant competitive neutrality issues if trustee companies were prudentially regulated at an entity level.

7.76 In regard to Objective 4, it has been noted that the Commonwealth prudential regulator does not handle disputes or have experience in dealing with client protection issues. The dispute handling procedures proposed under Option 2 above (the use of an existing complaints scheme to hear all complaints or a new industry-funded body) could be put in place separate from the prudential regime.

7.77 In relation to Objective 5, Commonwealth prudential legislation could provide for a modern, uniform national regime, in accordance with the Wallis Inquiry recommendation, which would remove some of the current administrative burdens. However, a prudential regime may create other unnecessary burdens on business, which would not be consistent with best practice regulation in relation to minimising the regulatory burden.

Table 1.2: Comparison of current State and Territory regulatory obligations and Commonwealth proposals

Impact analysis

7.78 When considering the form of regulation that should be introduced by the Commonwealth, it is important to consider the compliance costs and implications for competitive neutrality.

7.79 The change from State and Territory regulation to Commonwealth regulation will affect the private trustee companies that are currently licensed to operate in each State and Territory and State Trustees Limited, the Victorian public trustee (11 trustee companies in total). Other groups that may be affected are settlors/testators and beneficiaries, including charities which are recipients for charitable trusts, and 'vulnerable' beneficiaries including the disabled, minors, family beneficiaries and mentally impaired people. Competitors to trustee companies in the traditional business activities (public trustees, lawyers, accounting firms etc) also have the potential to be affected by these changes. State and Territory governments and the Commonwealth regulator, either ASIC or APRA, will also be affected by these changes.

7.80 The new compliance costs of either option needs to be compared against the compliance costs trustee companies currently face under Option I. In October 2007, ANZ Trustees Limited provided compliance cost data to the Commonwealth Attorney-General's Department. Under the existing State and Territory legislation, ANZ Trustees' compliance costs are $1,749,000 per annum. They estimated that approximately 20 per cent of the compliance costs could be attributed to the differences in legislation and duplication of reporting requirements. Therefore the move to Commonwealth regulation has the potential to save trustee companies approximately 20 per cent in compliance costs.

Option 1: Status Quo

7.81 The adoption of this option will obviously have the least impact on the market for estate administration and trust management. As this option will not achieve a national licensing scheme, there will be no improvements in the licensing processes.

7.82 The costs for Option 1 can be broken into three main elements:

•

start up/ transitional costs;

•

ongoing compliance costs; and

•

ongoing supervision costs.

Start up / transitional costs

7.83 The retention of the State and Territory entity level regulation of trustee companies will have no transitional cost implications for the market participants. Trustee companies have developed their business models with the current regulatory framework in mind, and will be able to continue to function under this option.

7.84 New market entrants in any jurisdiction will continue to face high start up costs due to the subjective nature of the stated authorisation guidelines (if any) which take into account political considerations. The lack of transparency around this process ensures high costs to potential entrants who are unable to effectively determine if they may be licensed or not.

7.85 Each separate State and Territory government will retain the power, and commensurate cost liability, for the licensing of new market entrants. The South Australian Office of Consumer and Business Affairs have quantified the cost for the licensing process for each new application for entry at between $7,000 and $10,000.

Ongoing compliance costs

7.86 Trustee companies that maintain a market presence in more than one jurisdiction/market will continue to face high compliance costs attributable to the differences in legislation and duplication of reporting requirements. As stated above, ANZ Trustees have estimated that approximately 20 per cent of its $1.749 million compliance costs could be attributed to these differences.

Ongoing supervision costs

7.87 Each separate State and Territory will continue to incur negligible costs for the regulation of these corporations. Ongoing regulatory oversight by the States and Territories consists of the review of the submitted quarterly, biannual or annual reports. The cost of this has been quantified as one policy officer working on these issues for one day per annum. This task has been outsourced by the New South Wales government to a consultant with the cost charged back to the trustee company. The Western Australian government charges a fee to the trustee companies in its jurisdiction that cover any cost of supervision.

Benefits for trustee companies

7.88 This option will have no transitional costs for market participants in contrast to the alternative options. Trustee companies will retain their current level of market power in each separate market, as the high barriers to entry will remain. Current market participants will continue to be subject to a low level of ongoing regulatory scrutiny.

7.89 Affected parties will retain the option of action against a trustee company where there is fraud or gross mismanagement of trust assets. However, affected parties will remain devoid of alternatives to the Supreme Court where the trustee is performing poorly, though not fraudulently.

Benefits for consumers

7.90 In jurisdictions other than Western Australia and the Australian Capital Territory, the fees able to be charged by trustee companies will continue to be capped. This will provide a default position that will provide a level of certainty to consumers at risk of being more severely overcharged for these services. However, it should be noted that consumers in all jurisdictions are able to negotiate for either higher or lower fees than the capped amount. The default benefit that a fee cap provides to consumers is expected to be of less value than the deregulated approach, with increased national competition, proposed under Option 2.

7.91 Trustee companies will continue to be required to provide a low level of disclosure to settlors/testators as provided for by the common law. This disclosure will not be as effective or beneficial to settlors/testators as that proposed under Option 2.

Option 2: Consumer protection model administered by ASIC

7.92 This is the Government's preferred option. It would provide that the traditional functions of trustee companies (administering charitable and other trusts, obtaining probate, acting as the executor of a deceased estate or under power of attorney) are deemed to be financial services for the purposes of the Corporations Act. It is intended that both settlors/testators and beneficiaries would be 'retail clients' of trustee companies for the purposes of section 761G of the Corporations Act.

7.93 It would also provide that authorised trustee companies are:

•

required to be an Australian registered public company or a wholly owned subsidiary of a public company;

•

regulated by ASIC;

•

required to hold an AFSL with an appropriate authorisation to carry out 'traditional' trustee companies services;

•

subject to the consumer protection, licensing and conduct requirements of the Corporations Act and the ASIC Act;

•

to the extent appropriate, subject to the disclosure requirements of the Corporations Act;

•

(unlike under the State/Territory model) required to have suitable internal and external dispute resolution arrangements;

•

in relation to charitable trusts, subject to fee regulation, in the form of 'grandfathering' of fees charged to existing clients, and capping of fees charged to new clients, with a review of these arrangements after two years;

•

in relation to non-charitable trusts and estates, subject to deregulation of the fees they can charge, subject to a requirement that the company's fee schedule be disclosed on the Internet and that corporations charge no more than the fees specified in their published fee schedule at the time they begin administration of the trust/estate;

•

subject to director and employee liability arrangements that are consistent with the obligations in place for other corporations under the Corporations Act;

•

subject to a $5 million capital adequacy requirement;

•

subject to a cap of 15 per cent on the shareholding of any single shareholder and associates, together with a divestment regime and a Ministerial discretion to consent to share acquisitions above the cap (for example, for wholly owned subsidiaries); and

•

permitted to hold common funds, which are able to continue to attract external investment.

7.94 While there will be compliance costs associated with a client protection regime, for example reporting requirements and requirements for financial resources, these would be considered to be relatively minimal, especially when compared to those associated with a prudential regime (see Option 3). Likewise, given there would still be authorisation/licensing requirements, some restrictions to entry and barriers to competition would remain. However, the creation of a national licensing scheme and the other improvements in the licensing processes, including objective criteria and improved transparency, is expected to minimise such costs.

7.95 The costs for Option 2 can be broken into three main elements:

•

start up/ transitional costs;

•

ongoing compliance costs; and

•

ongoing supervision costs.

Start up / transitional costs

7.96 Under Option 2, trustee companies will have to either apply to ASIC for a trustee company licence or apply to ASIC for a modification of their AFSL. The current cost to modify AFSL conditions is $230 for an online application and $270 for a paper application. The cost of a separate trustee company licence is likely to be similar to the cost of an AFSL. The current cost to apply for a corporate AFSL is $270 for an online application or $540 for a paper application ^[11] . Therefore, it is estimated that the total maximum cost for applications for trustee company licence would be approximately 11*$540 = $5,940.

7.97 Current market participants will be required to apply for an alteration to their current AFSL to include the ability to act as an authorised trustee company. Trustee companies may incur implicit costs in order to comply with the ASIC licensing conditions, such as meeting adequate financial resources and professional indemnity insurance requirements. While the exact costs cannot be quantified, it is expected that the costs will not be significant as most trustee companies already meet most of these requirements as part of their compliance with AFSL requirements and complying with APRA requirements to act as a superannuation trustee.

7.98 New entrants may incur significant costs to gain an AFSL, however this cost is expected to be lower than the entry cost under Option 1 as the licensing requirements are certain; are not subject to the same political considerations; and will provide national access.

7.99 The Commonwealth Government will incur the cost of ASIC developing and implementing the new trustee company licence. As noted previously, the non-financial operations of trustee companies are new ground for ASIC. This means that although some pre-existing expertise will be relevant, significant effort would be required to develop the regulator's expertise in this area. This implies that there would be significant set-up costs and time taken for implementing this regime. ASIC has provided an estimate of $2.2 million across the first four years of new Commonwealth regulation.

Ongoing compliance costs

7.100 Trustee companies will incur significant costs to comply with the reporting requirements and to maintain their compliance frameworks. However, trustee companies currently incur significant costs to comply with the State and Territory regimes. The Commonwealth regime will streamline most of the trustee companies' reporting and compliance requirements, thereby reducing the overall regulatory burden and compliance cost of trustee companies that operate in more than one jurisdiction. However, the consumer protection regime is likely to be more intense than that currently applying to trustee companies under the State and Territory regimes. So overall there is likely to be minimal net change to trustee companies' compliance costs from the status quo.

7.101 Trustee companies will be required to have appropriate internal dispute resolution mechanisms and to be a member of an ASIC approved external dispute resolution (EDR) Scheme. The EDR Scheme will either be a new scheme set up specifically for the 'traditional activities', or will be an existing scheme that can extend its coverage to include the 'traditional activities'. The scheme will be industry funded, with the costs likely to be covered by membership fees.

7.102 It is difficult to estimate the exact cost of the scheme, as this will depend on the number of complaints received. Membership fees for the former Financial Industry Complaints Service (FICS), now the Investments, Life Insurance and Superannuation division of the Financial Ombudsman Service can be used as a guide. In October 2007, Public Trustee NSW advised the Commonwealth Attorney-General's department its annual cost of membership to FICS was $5,735. Therefore, it is estimated that the total maximum cost for EDR Scheme for trustee companies would be approximately 11*$5,735 = $63,085 per year.

7.103 Trustee companies will be required to submit an annual audited financial statement to ASIC. As part of this process, the licensee must lodge an auditor's report with ASIC demonstrating that they continue to meet their obligations under their AFSL.

Ongoing supervision costs

7.104 The Commonwealth Government will incur ongoing costs for ASIC to supervise trustee companies. ASIC has provided an estimate for their ongoing supervision costs of $1 million per annum.

7.105 ASIC will have the power to conduct surveillance visits on trustee companies to ensure that the corporation continues to fulfil it's obligations under the AFSL.

Benefits for trustee companies

7.106 Trustee companies will benefit from streamlined reporting requirements and only answering to one supervisor for 'traditional activities'. The national regulatory requirements will reduce the complexity of each trustee companies' compliance monitoring arrangements and make compliance training easier and less complex. This will reduce the trustee companies' risk of a compliance breach. Trustee companies that are not currently licensed in each State and Territory will benefit from a national licensing scheme, which will allow them to potential grow their operations.

7.107 Industry claim they will be disadvantaged by the consumer protection requirements, as their main competitors will not have to comply with them. However, trustee companies already comply with the complex State and Territory requirements and the AFSL requirements. The trustee company licence requirements will not be significantly different from the AFSL requirements and will be more streamlined than the status quo. In addition, the consumer protection measures will be a selling point to new clients as their competitors do not offer these additional protections.

7.108 Directors of trustee companies will not be subject to personal liability where they satisfy the relevant provisions of the Corporations Act. In particular:

•

Under Chapter 2M, subsection 180(1), a director or other officer of a company must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise, taking into account the particular circumstances of the corporation and the office and responsibilities of the officer.

•

Under subsection 180(2), the so-called statutory 'business judgment' rule, a director or other officer of a corporation who makes a business judgment is taken to meet the requirements of the statutory duty of care and diligence in subsection 180(1), and the equivalent duties at common law and in equity, in respect of the judgment if they satisfy certain criteria.

•

Under section 197, a person who is a director of a company when it incurs a liability while acting, or purporting to act, as a trustee, is liable to discharge the whole or part of the liability if the company:

-

has not, and cannot, discharge the liability or that part of it; and

-

is not entitled to be fully indemnified against the liability out of trust assets solely because of one or more specified circumstances.

•

In addition, the duties of officers and employees of registered schemes (see sections 601FD and 601FE) should be extended to apply to officers and employees of trustee companies to ensure appropriate fiduciary duties are owed.

7.109 This will bring the obligations on these directors in line with other parts of their businesses.

7.110 Consistent with the application of the AFS licensing regime, there should be a direct obligation on trustee companies to have adequate compensation arrangements.

Benefits for consumers

7.111 The creation of a national market is likely to increase competition in the 'traditional services' market. Consumers will benefit from this through improved service, possible reduction in price, and possibly new products. Consumers will also benefit from enhanced consumer protection, which include disclosure requirements and an external dispute resolution scheme. This will enable beneficiaries to better monitor how the trust assets are managed and give beneficiaries an avenue to have their complaints addressed that is not available to them under the status quo. This option will attempt to overcome some of the current common law barriers to competition by assisting consumers to better overcome the information asymmetry present in the status quo and allow for easier movement of estates among trustee companies.

7.112 In contrast to the status quo, the introduction of an ASIC licensing regime to these entities will minimise the risk of ineffective management of trust assets as trustee companies will be required to ensure that each corporation can:

•

demonstrate organisational competence (competence of responsible managers) to provide trustee services;

•

ensure representatives of these corporations are competent and adequately trained to provide those services; and

•

ensure that the business has adequate technological and human resources in place to comply with their legal obligations.

These measures will also address the risk to the consumer of being unable to determine what the quality of personnel may be at the point of the execution of the estate.

7.113 In respect of the grandfathering of the fees charged to charitable trusts that are existing clients, it is expected that this will benefit the trusts because they will not have to deal with sudden increases in fees resulting from the new regime. While there may be some detriment to the corporations because they may be unable to change their fees to reflect their costs, the grandfathering will be reviewed after two years. In respect of the capping of the fees charged to charitable trusts that are new clients, again this should benefit the clients as their fees will be similar to the mid range charged in the States and Territories, while equally any detriment to the corporations will be a factor in the review to take place after two years.

7.114 In respect of the deregulation of fees charged to all other trusts and estates, trustee companies may be more likely to take on trusts that previously would have been completely unprofitable due to fee caps. It is expected that this will lead to increased competition, but also better service as corporations are able to price fee structures in a manner that provides an incentive for increased performance. Any detriment to clients will be mitigated by the requirement that fees cannot be any higher than those set out in the published fee schedule at the time the estate is committed for administration.

7.115 It is considered that, on balance, the 15 per cent limit on any one person (and associates) holding voting shares in a trustee company will benefit clients and not lead to any greater burden on trustee companies. The disadvantages of ownership limits are that they can lead to companies being unduly restricted in raising further capital, and they can also have the effect of insulating management from normal competitive pressures. The benefit of ownership restrictions is that they ensure a broad spread of shareholdings, protecting the corporation from the adverse circumstances of major shareholders. The legislative restrictions on the acquisition of voting shares in trustee companies which apply in some jurisdictions are shown below in Table 1.3. There is no trustee company at present which would breach the 15 per cent maximum equity holding.

Table 1.3: Ownership restrictions

7.116 The 15 per cent limit aligns with a similar requirement for 'financial sector companies' under the Financial Sector (Shareholdings) Act 1998 (which includes any authorised deposit-taking institution as defined in the Banking Act 1959, or a holding company of such a company). It also aligns with a 15 per cent limit under Division 1 of Part 7.4 of the Corporations Act on bodies corporate, together with their holding companies, that hold an Australian market licence or an Australian clearing and settlement licence, and that is considered to be of national significance to Australia. Such a body is known as a 'widely held market body'. The most important example is the Australian Securities Exchange (ASX).

7.117 Generally, Ministerial consent is required for share acquisitions in trustee companies above the threshold limit. However, consent is frequently given, and many trustee companies are subsidiaries of other financial institutions, without apparent detriment to personal trust work.

7.118 The compulsory divestment regime to deal with breaches is expected to be required infrequently, and will require some resources to administer on the part of ASIC.

7.119 It is expected that the increased consumer protection measures, disclosure requirements and access to EDR will have an indirect, but positive impact on families.

Option 3: Prudential regulation administered by APRA

7.120 While a prudential regulatory regime would create a national market and eliminate the unnecessary compliance costs and barriers to competition resulting from the State and Territory based regimes, the compliance costs and the competitive neutrality issues associated with prudential regulation would be significantly greater than for a consumer protection and disclosure regime.

7.121 Prudential regulation of trustee companies raises significant competitive neutrality issues because the main competitors of trustee companies in the personal trust and estate administration market, such as public trustees, lawyers, and accountants, are not subject to prudential regulation. Prudential regulation of trustee companies at entity level would also have competitive neutrality implications in relation to their main competitors in the funds management business and their other main corporate activities, which are not subject to prudential regulation.

7.122 The costs for Option 3 can also be broken into three elements:

•

start up/transitional costs;

•

ongoing compliance costs; and

•

ongoing supervision costs.

Start up / transitional costs

7.123 Under Option 3, trustee companies would have to apply to APRA for a trustee company licence. As discussed previously, this licence is likely to be based on the Superannuation trustee scheme and is likely to have similar costs. The current APRA licensing fee is $68,200. Therefore, it is estimated that the total maximum cost for applications for a trustee company licence would be approximately 11*$68,200 = $750,200.

7.124 There would be various other implicit costs for trustee companies to comply with the prudential standards as specified by APRA. It is envisioned that the prudential standards would be similar to those applying to superannuation trustees. These include risk management, adequacy of resources, capital adequacy requirements, governance, and fit and proper criteria. While the exact costs cannot be quantified, it is expected that the costs will not be significant for trustee companies that are already RSE licensees. Seven trustee companies currently hold RSE licenses; however for trustee companies that do not hold RSE licenses, there could be significant costs to meet the prudential standards.

7.125 At a future date APRA may introduce other prudential standards affecting the operations of trustee companies. Additional prudential standards would be subject to a new RIS process. Prudential standards made by APRA are legislative instruments and are therefore subject to parliamentary scrutiny.

7.126 As noted previously, the non-financial operations of trustee companies would be new ground for APRA. This means that although some pre-existing expertise will be relevant, significant effort would be required to develop the regulator's expertise in this area. This implies that there would be significant set-up costs and time taken for implementing this regime. APRA estimates that it would cost approximately $750,000 to develop and implement the new trustee company licence regime. This cost would be borne by industry and collected through the annual levy process in the first year of APRA supervision.

Ongoing compliance costs

7.127 Trustee companies would incur significant costs to comply with the reporting requirements and to maintain their compliance framework. However, trustee companies currently incur significant costs to comply with the State and Territory regimes. The Commonwealth regime would streamline most of the trustee companies reporting and compliance requirements, thereby reducing the overall regulatory burden and compliance costs of trustee companies that operate in more than one jurisdiction.

7.128 However, the prudential regulation would be significantly more intense than the status quo. Overall there is likely to be a net increase in trustee companies' compliance costs from the status quo. This is because the prudential regulation regime of trustee companies would be based on the prudential standards applying to superannuation trustees. These standards are more onerous in relation to the financial affairs and management of the corporation than the status quo. For example, persons of responsibility in trustee companies, such as directors, senior management and accountants, do not have to satisfy 'fit and proper' requirements under the status quo, except when applying for a licence in Queensland. Trustee companies also do not have to comply with external risk management standards or are required to have detailed risk management strategies under the status quo. Both 'fit and proper' and risk management requirements would be part of the prudential standards that trustee companies would have to satisfy when applying for a licence and on an ongoing basis under prudential supervision by APRA.

7.129 Ongoing prudential supervision would also be more intense on trustee companies than the current supervision by States and Territories. Prudential supervision would involve regular on-site inspections by APRA, supported by investigation and enforcement powers, while the status quo does not.

Ongoing supervision costs

7.130 There would be ongoing costs for APRA to supervise trustee companies and administrate the licensing scheme. APRA estimates their ongoing costs in relation to trustee companies would be between $1 million and $1.5 million per year. APRA costs would be met by the trustee companies through industry levies. The levies could be calculated and collected using the same mechanism currently used for other financial sector levies.

Benefits for trustee companies

7.131 Similar to Option 2, trustee companies would benefit from streamlined reporting requirements and only answering to one supervisor for 'traditional activities'. However, prudential regulation and supervision is likely to be more intense than the current regulation and supervision trustee companies comply with. This is likely to offset any benefit trustee companies receive from national, streamlined regulation. Therefore, Option 3 is likely to increase the overall regulatory burden on trustee companies.

7.132 Trustee companies that are not currently licensed in each State and Territory would benefit from a national licensing scheme, which would allow them to potentially grow their operations without increased regulatory cost. However, given the intense prudential standards attached to the licensing under APRA, some trustee companies that are currently State/Territory licensed may not be granted/retain their licence under this option.

7.133 Given the prudential standards would establish more detailed requirements than the status quo, including in relation to matters that are not currently subject to regulation by most states and Territories, there is no guarantee that all the trustee companies would be able to comply with these standards. Before granting/ renewing trustee company licenses, APRA would have to undertake a thorough assessment of each trustee company's operations and the fitness and propriety of their responsible persons to ensure the corporations meet all the prudential standards.

Benefits for consumers

7.134 The creation of a national market is likely to increase competition in the 'traditional services' market. Consumers will benefit from this through improved service, possible reduction in price, and possibly new products.

7.135 In contrast to Option 2, this option would not address the problem of ineffective management and safeguarding of trust assets. This option would also fail to assist consumers to gain greater disclosure of the products and services that a trustee company may be providing. However, consumers can be more confident that the business in which they are contracting as trustee would remain viable as an entity. Consumers under this option would also gain from an increased regulatory focus on risk management systems.

Consultation

7.136 The main consultation document for the Commonwealth regulation of trustee companies is the Financial Services and Credit Reform Green Paper, which was released on 3 June 2008. Over 15 written submissions were received in response to the Green Paper in relation to the Commonwealth regulation of trustee companies. A list of the entities that provided those submissions is as follows:

•

ANZ Trustees Limited;

•

Australasian Compliance Institute;

•

Australian Wealth Management Limited;

•

Australian Shareholders' Association;

•

Corporate Super Association;

•

Equity Trustees Limited;

•

Financial Planning Association of Australia;

•

Grant Thornton Australia Limited;

•

Investment and Financial Services Association;

•

National Australia Bank Group;

•

Perpetual Limited;

•

Philanthropy Australia Inc;

•

Plan B Group Holdings Limited;

•

Sandhurst Trustees Limited;

•

Suncorp-Metway Limited;

•

Tasmanian Perpetual Trustees Limited;

•

Trust Company Limited;

•

Trustee Corporations Association of Australia; and

•

Westpac Banking Corporation.

7.137 Treasury has also undertaken face-to-face consultation with industry and other key stakeholders, including State and Territory Government officials, Philanthropy Australia and other stakeholders from the charitable trust sector. Treasury has also consulted with both ASIC and APRA in relation to their potential role.

7.138 The consultation process has revealed strong support from all stakeholders for the implementation of Commonwealth regulation of trustee companies. The face-to-face consultations, with both industry and the stakeholders in the charitable trust sector, and the large majority of written submissions have provided strong support for consumer protection and disclosure regulation with supervision by ASIC.

7.139 One of the biggest issues raised in consultation relates to the management fees and commissions that trustee companies are able to charge in relation to trust and estate management. All State and Territory legislation, except Western Australia and the Australian Capital Territory, prescribe fee caps and some restrict the source of income that the fee can be taken from. The Western Australia/Australian Capital Territory legislation model is a deregulation of fees, whereby trustee companies set a maximum fee through publishing a schedule of fees. Trustee companies are then able to change the schedule of fees as often as they like and can negotiate different fees with individual consumers. Once the trust arrangements commence the fees are locked in at the last published schedule of fees, unless otherwise specified in the trust deed.

7.140 Industry is very supportive of the Commonwealth regulation adopting this model (which will apply to all non-charitable trusts and estates). Industry claims that the current level of fees they are allowed to charge is unprofitable for the management of smaller trusts. Industry argues that in order to provide better service and more disclosure and transparency, they need to be able to charge adequately for their services.

7.141 Stakeholders from the charitable trust sector can see the potential benefits of a deregulation of fees for new clients. However, they are concerned that if fee caps are removed, trustee companies will take advantage of charitable trusts' inability to exercise market discipline and charge exorbitant fees on trusts that are already under management. Some charitable trusts currently under trustee company management do not have any fees prescribed in the trust deeds, so the trustee company can charge the maximum fee allowable under the existing legislation. Any increase in fees means less money is available for distribution to charity. Treasury is cognisant of the potential impact of removing fee caps and will seek to provide protection to trusts already under management through transitional arrangements.

7.142 Another significant issue raised in consultation was the issue of who are clients of trustee companies. Trustee companies have two types of clients:

•

primary clients are testators or settlors, who appoint the trustee company and put in place the terms and conditions of the will or trust; and

•

secondary clients are beneficiaries, who receive distributions when the trust arrangements commence.

7.143 Trustee companies raised concerns about disclosure and dispute resolution schemes applying to both client groups. They argue that the provision of relevant information to persons with a proper interest has always been a core duty of trustee companies under common law and does not need to be included in commonwealth regulation.

7.144 In some cases, the State and Territory Supreme Courts will have appointed a trustee company to manage the affairs of an individual when that individual does not have capacity to manage their own affairs, such as with minors or individuals with disabilities. In these cases, there is no primary client and the secondary client is often incapable of monitoring a trustee company's performance and management, even if they were provided with adequate information to do so. To cover these types of case, Treasury proposes to extend the consumer protection requirements to cover 'persons with a proper interest in the estate'. Industry request that, in order to protect against frivolous or mischievous requests for information, a reasonably tight definition of 'persons with a proper interest in the estate' is adopted in regards to who is entitled to obtain information on individual estates and trust under administration/ management.

7.145 Although industry was supportive for an external dispute resolution scheme to apply to their 'traditional activities' clients, they raised concerns about the scope of coverage and outcomes that could be achieved. Many trustee companies expressed the view that the decision to remove a trustee should remain with the Supreme Court.

Conclusion and recommended option

7.146 The Government considers that, on balance, the benefits of Option 2, consumer protection and disclosure regulation of trustee companies with supervision by ASIC, exceed the expected costs of implementation. The Government considers Option 2 preferable to the alternative Option 3, prudential regulation with supervision by APRA, because:

•

Option 2 addresses the main problem areas, whereas Option 3 would provide an unnecessary level of regulation (because the trustee companies hold the trust assets off balance sheet); and

•

the initial and ongoing costs would be less.

7.147 The manner in which Option 2 satisfies the objectives stated above can be briefly summarised as follows.

Objective 1

7.148 Enable approved corporations to operate as trustee companies and licence them under Chapter 7 of the Corporations Act.

Achieved by

7.149 Amending the Corporations Act (and the ASIC Act) to provide that: certain activities typically undertaken by trustee companies, such as acting as the executor/administrator of deceased estates, administering charitable trusts and foundations, managing common funds, and acting as a manager or guardian, are deemed to be 'financial services'; and trustee companies which hold an AFSL are authorised to provide such services, and must comply with the obligations of financial services licensees and any conditions imposed by ASIC. This option is optimal as it involves taking the best features of the State/Territory regimes and applying them in one single consumer protection law.

Objective 2

7.150 Ensure effective management and safeguarding of trust assets.

Achieved by

7.151 Amending the Corporations Act (and the ASIC Act) to ensure that trust property is clearly identified and held separately from property of the trustee company; enforcing the general obligations of AFSL holders, such as the requirements regarding adequate resources, competence and training, and any conditions imposed by ASIC; and preserving any relevant trust law and equitable remedies under State and Territory laws. This option is preferred to Option 3, as it provides the appropriate level of protection for trust assets.

Objective 3

7.152 Ensure appropriate disclosure to clients about the type of services and products being offered by the trustee company.

Achieved by

7.153 Ensuring that the trustee companies are subject to the relevant disclosure provisions of the Corporations Act, such as the Financial Services Guide (FSG), Statement of Advice and periodic statements provisions, and permitting electronic disclosure, so that settlors/testators and beneficiaries are informed both initially and periodically about the performance of trustee companies and trust assets.

Objective 4

7.154 Provide for lower cost dispute resolution, to enable beneficiaries to address issues of underperformance or incompetence and/or replace an underperforming trustee in a cost effective way, in cases where alternative dispute resolution is a viable alternative to the courts.

Achieved by

7.155 Requiring trustee companies to have appropriate internal and external (non-judicial) dispute resolution mechanisms for settlors/executors and beneficiaries, so that the need to approach a court is minimised.

Objective 5

7.156 Modernise the regulation of trustee companies and have any regulation apply on a national basis in accordance with Recommendation 90 of the Wallis Review and the Government's policy regarding reducing regulatory burden more broadly.

Achieved by

7.157 Replacing the current State and territory laws, with their overlapping and inconsistent rules, with uniform national legislation under the Corporations Act, and ensuring that the national law is up-to-date, for example in relation to directors' and officers' liability.

Objective 6

7.158 Facilitate a competitive national market for trustee companies.

Achieved by

7.159 Introducing a single national law for trustee companies under the Corporations Act and a single national regulator. This is expected to create a national market in which there are reduced barriers to competition (for example, the ability of beneficiaries to protect their interest in the estate by switching trustees) and fewer competitive neutrality issues (while noting that most public trustees will fall outside the new regime) and also reduced business compliance costs and improves efficiency of operations. It is also expected that the new approach to fees will promote efficient pricing of services provided by trustee companies.

Implementation and review

7.160 The first phase of the project will be accomplished by:

•

drafting appropriate provisions for inclusion in the Corporations Act;

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asking ASIC to amend its applicable guidance (or produce new guidance) to accompany the legislation.

7.161 In the second phase, ASIC will devote appropriate resources to regulating trustee companies, including licensing, developing guidance and monitoring compliance.

7.162 The Government wishes to review the fee regime for charitable trusts and foundations for both existing and new clients after two years.

7.163 Further, it is expected that this option will be reviewed in its entirety under the Government's five-yearly review requirements. It is not proposed to include either a sunset clause or an automatic review clause.

7.164 The indicators against which success of the regime could be measured against include the extent to which:

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the current overlapping/conflicting regulatory framework is replaced by a single, consistent set of rules that reduces business compliance costs and improves efficiency of operations, consistent with adequate regulation;

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trust assets are appropriately managed and protected;

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effective disclosure is made to clients (settlors/testators and beneficiaries) both initially and on an ongoing basis about the performance of trustee companies and trust assets;

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clients can access lower cost, quicker dispute resolution, to enable them to address issues of underperformance or incompetence and/or replace an underperforming trustee in a cost effective way;

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fees and charges reflect efficient pricing of services provided by trustee companies, while providing protection in particular to charitable trusts, deceased estates and disadvantaged persons; and

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internal and EDR mechanisms deal with complaints from clients.