Commonwealth of Australia Explanatory Memoranda

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SUPERANNUATION SAFETY AMENDMENT BILL 2003

2002-2003

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES

SUPERANNUATION SAFETY AMENDMENT BILL 2003

EXPLANATORY MEMORANDUM

(Circulated by authority of the Minister for Revenue and Assistant Treasurer,
Senator the Hon Helen Coonan)

Table of Contents

Glossary

1.1 The following abbreviations and acronyms are used throughout this explanatory memorandum.

Outline

2.1 The Superannuation Safety Amendment Bill 2003 (the Bill) introduces a range of reforms that are designed to modernise and strengthen the prudential regulation of superannuation.

2.2 The reforms contained in the Bill give effect to the Government’s response to the recommendations of the Superannuation Working Group (SWG). The report of the SWG, together with the Government’s response, was released on 28 October 2002.

2.3 The Bill provides for the Australian Prudential Regulation Authority (APRA) to license trustees of those superannuation entities it regulates. The new trustee licences will be subject to conditions, including requirements for trustees to meet minimum standards of fitness and propriety and maintain risk management strategies governing the trustee’s operations and risk management plans for each fund under the trustee’s control. Different classes of licences will be able to be issued for licensees operating different classes of funds.

2.4 Transitional provisions will allow existing trustees to continue to operate under existing arrangements, but they are required to have obtained a licence by the end of the transitional period of 2 years. The reforms will provide for the orderly exit of trustees that are unable or unwilling to meet the new licensing requirements at the end of the transition period.

2.5 In addition to the licensing of trustees, the Bill facilitates the registration of superannuation entities, other than self-managed superannuation funds, that are regulated by the SIS Act. Registration aims to serve as a mechanism enabling APRA to gain important information about the superannuation entities that it regulates. This will help to enhance APRA’s capacity to supervise these entities.

2.6 New provisions are introduced requiring actuaries and auditors to report information to APRA about the activities of trustees and the operation of superannuation entities in certain circumstances.

2.7 The Bill also provides for appropriate enforcement powers, supported by penalty provisions, to underpin the new framework. Consistent with existing provisions in the SIS Act of a comparable nature, many of the penalty provisions contained in the Bill have both a fault and a strict liability component. This two-tiered regime aims to create a more robust regulatory framework and improve the enforceability of the provisions to which strict liability is attached. By facilitating more effective enforcement, the regulatory framework for superannuation will be strengthened to help ensure that superannuation entities are administered prudently and that superannuation savings of members are adequately protected.

2.8 The Bill contains a number of formal provisions giving effect to commencement of a range of Schedules which amend the Superannuation Industry (Supervision) Act 1993, to ensure a smooth transition to the new trustee licence arrangements. It is intended that the new arrangements will commence on proclamation on 1 July 2004.

Regulation Impact Statement and Financial Impact Statement

Regulation Impact Statement

Background

3.1 The superannuation industry has continued its considerable growth, with total superannuation assets rising from $231 billion in assets in September 1995, to over $517 billion in assets in December 2002, over 250,000 superannuation entities (which includes superannuation funds, approved deposit funds and pooled superannuation trusts) and over 88 per cent of workers covered. Superannuation is the second largest household asset after the family home. Maintaining public confidence in the superannuation system is critical to ensuring that private saving for retirement continues to play a key role as part of the Government’s policy to address the long-term consequences of the ageing population.

3.2 In October 2001, in response to public concerns about the prudential framework governing superannuation, the Government established the Superannuation Working Group (SWG) to undertake industry consultation on the proposals contained in the Issues Paper ‘Options for Improving the Safety of Superannuation’. The SWG received over 50 submissions, held two rounds of public consultations, released a background paper and draft recommendations, and reported to the Government with recommendations for change on 28 March 2002.

3.3 On 28 October 2002, the Government responded to the SWG’s recommendations, agreeing to the majority of their proposals to reform the prudential framework, to make it more modern and responsive to risk.

3.4 This Regulatory Impact Statement outlines the regulatory impact of the proposed amendments contained in the Superannuation Safety Amendment Bill 2003, which implements the reform package agreed to in the Government’s response to the SWG.

3.5 The superannuation regulatory framework is primarily contained in the Superannuation Industry (Supervision) Act 1993 (SIS Act). It contains retirement income, prudential and some investor protection requirements (most conduct and disclosure requirements are now contained in the Corporations Act 2001 (Corporations Act) following reforms introduced by the Financial Services Reform Act 2001 (FSRA)).

3.6 Regulatory responsibility for superannuation is divided between three regulators:

3 the Australian Securities and Investments Commission (ASIC) oversees consumer protection provisions (including disclosure and advice);

4 the Australian Taxation Office (ATO) supervises compliance with retirement income policies for around 245,000 self managed superannuation funds (or SMSFs, which are funds with fewer than five members, all of whom must be trustees); and

5 the Australian Prudential Regulation Authority (APRA), which prudentially supervises the balance of superannuation entities (over 10,000), with the exception of exempt public sector schemes, the majority of which are run by State and Territory governments.

3.7 As noted above, APRA regulates superannuation funds, approved deposit funds and pooled superannuation trusts. References in this Regulation Impact Statement to superannuation entities refer to those superannuation funds, approved deposit funds and pooled superannuation trusts supervised by APRA, unless indicated otherwise.

3.8 Superannuation operates through a trust structure - trustees must act in the best interests of beneficiaries, and must comply with trustee duties derived from equity, the trust instrument and governing rules, the SIS Act and other legislation. Trustees have primary responsibility for ensuring that superannuation savings are prudently invested and managed, fund members are given adequate information on which to base member investment choice decisions, and are kept informed of the nature and performance of the fund’s investments.

3.9 Superannuation is essentially a managed investment with special characteristics including compulsion, preservation rules that restrict access until retirement, taxation advantages and limited choice and portability. These characteristics necessitate more intense Government oversight in the form of prudential regulation. Prudential regulation does not guarantee against fund failure, but rather aims to minimise the chance of loss to fund members through failure, by ensuring trustees have appropriate expertise and risk management strategies in place. In the case of loss through fraudulent conduct or theft, Part 23 of the SIS Act provides a mechanism to compensate members for their loss, subject to certain conditions.

3.10 The prudential framework is supported by the consumer protection regime overseen by ASIC. Reforms in the FSRA require people intending to advise on superannuation matters to obtain an Australian Financial Services Licence (AFSL) from ASIC. Public-offer trustees are also required to obtain an AFSL to deal in superannuation interests, as well as obtain ‘approved trustee’ status from APRA. Non-public offer trustees (of which there are almost 2,000) are exempt from the requirement to obtain an AFSL to deal in superannuation interests, although the Government accepted the SWG’s recommendation that this exemption be reviewed.

Problem Identification

3.11 The prudential framework is under increased scrutiny after a number of recent high profile collapses, including HIH and Commercial Nominees of Australia Limited. While trustees remain primarily responsible for the effective management of the superannuation entity under their trusteeship, under a prudential regulatory framework it is imperative that a well equipped regulator with effective powers monitors superannuation savings to ensure they are prudently invested and managed. Measures to improve trustee quality, governance, accountability and transparency of fund performance are given added impetus in an era of low or negative investment returns. Following the receipt of additional resources for superannuation enforcement in 2001 (as part of an election commitment), APRA has increased its activity in this area as outlined in Table 1 below.

Table 1: APRA Enforcement Action Against Superannuation Trustees, 2001 and 2002

Source: APRA Annual Report 2002

* Includes actions such as notices issued, directions made to institutions and undertakings obtained from institutions.

3.12 The size and diversity of the industry and the increase in products being offered, many of which have differing risk profiles and characteristics, make superannuation a complex sector to supervise. Attachment A provides an overview of the superannuation industry as at December 2002.

3.13 Given the industry structure and the number of trustees that APRA is required to supervise, concerns have been raised about APRA’s capacity to adequately supervise the sector without key improvements to the regulatory framework.

3.14 Recent experience has also highlighted that there is a substantial gap between the community’s expectations about what prudential supervision should achieve and APRA’s capacity to deliver on those expectations.

3.15 The level of past loss as a result of fraudulent conduct or theft has been low. Since the inception of the SIS Act in 1993, the Government has paid out approximately $33 million in grants of financial assistance under Part 23 of the Act for losses resulting from fraud or theft. This represents less than 0.00006 per cent of current superannuation assets. However, past experience is not always a good predictor of future behaviour. There is also no data on how poor management has diminished member benefits, for example through poor investment decisions.

3.16 The Government’s 2001 Issues Paper canvassed two key issues:

3 whether the prudential and legislative framework was outdated, inhibiting APRA’s ability to identify and respond quickly and effectively to perceived difficulties in superannuation entities; and

4 the adequacy of governance, particularly trustee competence, risk management systems and disclosure.

3.17 The SIS Act was designed when compulsory superannuation was in its infancy, reflecting the Corporations Law at the time. As the industry has developed, the SIS Act has maintained a largely ‘one size fits all’ approach. Since the introduction of the SIS Act, the industry has also experienced generally quite strong investment returns, with the exception of financial years 2001-02 and 2002-03. More recent experience has suggested that the prudential and legislative framework for superannuation could be updated to reflect the changes that have occurred to other prudential regimes, including the managed investments regime governed by the Corporations Act 2001, with which the superannuation regime shares a number of common traits.

3.18 In its response to the SWG’s report, the Government noted that superannuation is the only product regulated by APRA for which it is not necessary to obtain a licence to operate (with the exception of trustees intending to engage in public offer superannuation). It noted that a trustee can establish a fund and start managing other peoples’ money without demonstrating the necessary skills or competence to do so, although APRA has powers to remove disqualified persons from certain roles in relation to a superannuation entity. Also, funds are not required to be registered with APRA prior to accepting member contributions. This is in contrast to requirements in the managed investments regime, where all schemes must be registered, and must be operated by a licensed responsible entity. The licensing of superannuation trustees and the registration of entities with APRA would provide the supervisor with a range of additional tools to enable it to intervene pro-actively to minimise the risk of failure, and to ensure improved governance standards.. Without the ability to control who enters the market, APRA can only act to protect member interests when it suspects that the entity is in difficulty, rather than undertake preventative action, by, for example, ensuring trustees are competent and have appropriate systems to operate an entity.

3.19 It has also been argued that the SIS Act is not sufficiently flexible to cope with market developments.

3.20 Operational risk is the key risk faced by superannuation entities, as investment risk is either borne by the employer-sponsor or members, depending upon whether the fund is a defined benefit fund or an accumulation fund. Key factors in addressing operational risk include governance arrangements, the probity and competence of trustees, risk management more broadly and fraud control. APRA has identified concerns with inadequate governance systems in relation to many trustees, but in particular with corporate entity trustees with less than $5 million under management. APRA’s concerns with trustees include a lack of:

3 experience and knowledge of the legislation governing superannuation;

4 monitoring of the funds’ operations; and

5 internal controls to ensure compliance with the SIS Act and the funds’ governing rules.

3.21 In turn, this may have led to inappropriate investment strategies, putting members’ benefits at greater risk.

3.22 The SWG and other reviews, including the Productivity Commission’s national competition policy review of certain superannuation legislation, found that the superannuation regulatory regime is generally effective, but in need of preventative maintenance to reflect modern prudential practices. These include providing the supervisor with a range of tools to enable it to intervene pro-actively to minimise the risk of failure, and to ensure improved governance standards. Key recommendations for reform from these reviews have included licensing of all superannuation trustees, and enhancements to current governance and disclosure requirements.

Objectives

3.23 Prudential supervision aims to minimise loss to members through institutional failure by putting in place mechanisms to minimise the risk of failure. It is imperative that the prudential regulator has appropriate tools to do this effectively. The objectives of the proposed reforms are to enhance the current prudential supervisory framework to:

3 reflect up to date supervisory practices and developments in other relevant regulatory regimes (for example, the managed investments regime);

4 enable APRA to take a more pro-active and preventative supervisory approach which is more responsive to the risk of trustees;

5 improve trustee competence and entity governance;

6 provide for the orderly exit of trustees that are unwilling or unable to meet the new licensing requirements; and

7 ensure that APRA is provided with sufficient information about the particular risks associated with defined benefit funds, and provide APRA with tools to address those risks in a timely manner.

Identification of Options

Option 1 — Amend the superannuation prudential framework

3.24 On 28 October 2002 and 30 May 2003, the Government announced a range of reforms to amend the prudential framework, designed to modernise the regime and make it more responsive to risk. The reforms would require all APRA regulated trustees to be licensed by APRA, to prepare a risk management strategy for themselves and a risk management plan for each entity that they operate, to comply with the strategies and plans set out in those documents, and to register all entities with APRA. The reforms would also enable the orderly exit of trustees that are unable or unwilling to meet the new licensing requirements at the end of the transition period. The Government also proposes to introduce other amendments beyond trustee licensing to improve the safety of superannuation, including mandating the provision of information by auditors and actuaries to the Regulator at the same time such information must be provided to the trustee, and requiring other amendments specific to the safety of defined benefit funds.

3.25 All APRA regulated trustees will be required to obtain a licence from APRA to operate a superannuation entity. Both corporations and groups of individual trustees will be able to apply for a trustee licence. Where groups of individual trustees apply for a licence as a group, they will be able to apply as a single ‘entity’ for one licence, rather than as individual trustees operating under a number of licences. This will enable the group as a whole to demonstrate the required skills to attain a class of licence collectively, rather than each individual having to meet the requirements of the conditions of the class of licence. The licence will specify the class of activity permitted, which will depend on the type of superannuation entity that the trustee seeks to operate. The proposed reforms will create two classes of licence, public offer entity licence class and non-public offer entity licence class, and will enable sub-classes of licence to be prescribed under regulations. Trustees will need to meet conditions relevant to all trustees, conditions relevant to particular classes of licence that may be specified in the SIS Act or in regulations, and conditions set by APRA in relation to individual licence holders. Capital requirements for public offer entity licence holders will be set out in the legislation, and other class-specific conditions will be prescribed in regulations.

3.26 Trustees will be required to prepare and maintain a risk management strategy (RMS) as a condition of licence. In the RMS the trustee will be required to set out reasonable measures and procedures to identify, monitor and manage risks that arise in relation to the trustee’s activities relevant to its class of licence. The trustee will be expected to keep the RMS up to date and review it at least once a year.

3.27 A licensed trustee must register with APRA any entities that the trustee intends to operate under its class of licence. The trustee will have to prepare and submit to APRA a risk management plan (RMP) for the superannuation entity, in which the trustee will be required to set out reasonable measures and procedures that the trustee is to apply to identify, manage and control the risks arising from operating the entity. In particular, the RMP will be required to address risks to the entity relating to the entity’s investment strategy, its financial position, and any outsourcing arrangements. Like the RMS, the trustee will be required to keep the RMP up to date and ensure that it is reviewed at least once a year.

3.28 The reforms will enable the orderly exit of trustees that are unable or unwilling to meet the new licensing requirements at the end of a transition period. In addition to existing powers in the SIS Act, APRA will be empowered to remove a trustee that has not gained a licence by the end of the transition period. APRA will also be able to approve arrangements to transfer all of the members’ benefits in an entity to another entity under certain conditions. This will prevent members from being penalised by losing their complying fund status if their trustee is unable or unwilling to fulfil the requirements of the new framework.

3.29 Auditors and actuaries will be required to notify the Regulator at the same time they notify the trustee that an entity has breached legislative requirements or is in an unsatisfactory financial position. A mechanism will also enable such persons to provide information to the Regulator if they consider it will assist the Regulator to perform its functions under the SIS Act or the Financial Sector (Collection of Data) Act 2001. Persons who provide information to the Regulator in good faith will not be subject to any action, claim or demand by, or any liability to, any other person in respect of the information. These amendments reflect arrangements operating in other prudentially regulated sectors, and in particular under 2001 amendments made to the Insurance Act 1973 by the General Insurance Reform Act 2001. In addition, actuaries will be required to report to the Regulator where a trustee or employer-sponsor fails to implement specified actuarial recommendations.

3.30 This option will provide that the legislation be brought forward, enacting the reforms that the Government agreed to in its response to the SWG’s report.

Option 2 — No specific action

3.31 Under this option, no new measures would be introduced. Superannuation trustees would continue to be subject to the existing legislative provisions. APRA would continue to undertake its legislative responsibilities and work with industry to increase trustee competence and compliance under the existing regime. In accordance with additional funding provided to APRA in 2001-02, APRA would also undertake increased prudential supervision of superannuation.

Impact analysis

Impact group identification

3.32 The main groups likely to be affected by the proposed new prudential framework include:

• APRA;

• ASIC;

• ATO;

• superannuation entity trustees;

• superannuation entity members;

• employer-sponsors;

• associated professionals in the superannuation industry (including auditors and actuaries); and

• the Government.

3.33 Because of the complexity and fluid nature of the superannuation industry it is difficult to accurately measure the number of trustees, members, employer-sponsors and associated professionals involved in the industry. There are currently around 2,200 superannuation entity trustees, 8 million members, and 2,000 employer-sponsors of stand-alone corporate funds. It is not possible to estimate the number of associated professionals with any accuracy.

Assessment of costs and benefits

Option 1 — Proceed with legislative amendments

Benefits

3.34 Option 1 would improve the superannuation prudential framework by updating it to reflect modern supervisory techniques and practice in similar sectors. Licensing will set new minimum entry requirements for all APRA-regulated trustees, and will enable APRA to better monitor its regulated population. Under these arrangements, APRA will be able to take preventative action to address circumstances that put members’ benefits at risk, as APRA will be able to set conditions on the licence, and may revoke a trustee’s licence under certain circumstances. It will also be an offence to be, or perform the duties of, a trustee without an appropriate class of licence issued by APRA. Trustees will need to comply with licence conditions in relation to competency and governance. Improvements in these areas will ensure that member benefits are better managed and protected. Reforms enabling the orderly exit of non-complying trustees are necessary to ensure an effective framework for the ongoing management of funds. The reforms in relation to auditors and actuaries and in respect of defined benefit schemes will ensure that the Regulator is informed early of prudential issues in relation to particular entities, and are consistent with developments in other prudential frameworks.

3.35 The reforms would ensure that the prudential framework was updated to reflect reforms in the managed investments regime. Trustees are responsible for the prudent operation of superannuation entities, and need to exercise rigour in making their own internal assessments to ensure they have appropriate risk management strategies in place to reduce the risk of failure.

Costs

3.36 Option 1 will lead to increased compliance costs associated with the reforms. This will include additional licensing fees for various classes of licence (the cost of which is to be established in regulations and the subject of a separate Regulation Impact Statement), and ongoing compliance costs. The quantum of these costs will vary between entities depending on the quality of systems and strategies they currently have in place, and will also depend upon the class of licence.

3.37 The preparation of risk management strategies and plans is likely to impose more significant compliance costs on trustees. The level of detail required will depend upon the class of licence. For example, a trustee of an employer-sponsored fund with significant functions outsourced will not be expected to demonstrate the same level of detail in its RMS and RMP as the trustee of a public offer entity. However, trustees will also benefit in implementing a risk management framework, because the identification and management of risk by trustees will assist in ongoing compliance, and reduce the costs associated with the need to implement corrective action. It is difficult to quantify these benefits.

3.38 It is also likely that the industry would experience some restructuring as trustees, unable to meet licensing conditions, cease operations. In particular, increased costs would probably reduce the number of employer-sponsors willing to establish a new fund for the benefit of their employees.

APRA

Benefits

3.39 The proposal addresses key gaps in APRA’s tool box, thereby enabling it to better manage the risk of fund failure. Requiring trustees to seek a licence to operate a superannuation entity, and establishing conditions relevant to all trustees, classes of trustees and specific trustees, will raise the minimum standards relevant to trustees. The RMS and RMP would codify risk management practices. ASIC has indicated that the similar requirement in the managed investments regime for responsible entities to prepare and maintain a compliance plan in respect of a managed investments scheme is one of the most useful tools available to it in its regulation of such schemes.

3.40 Amendments requiring auditors and actuaries to disclose information to APRA at the same time they are required to notify the trustee will have a significant positive impact upon APRA’s capacity to pre-empt potential losses.

3.41 The anticipated industry restructuring would reduce the number of trustees, easing APRA’s supervisory task. The new framework should better protect member interests, and assist APRA by reducing the number of poorly run entities and consequently the need for APRA to take enforcement action. The risk of fund failure should also be reduced.

Costs

3.42 To implement the reforms, APRA will increase its staff levels to undertake the licensing process, as well as incur technological and other overhead costs. APRA would also undertake an education campaign. The Government has decided that these costs should be offset by a licence fee, which will be set on a cost recovery basis, in accordance with Government policy as determined by the Government’s response to the Productivity Commission report ‘Cost Recovery by Government Agencies’. As per Department of Finance and Administration Cost Recovery Guidelines, a Cost Recovery Impact Statement (CRIS) will be prepared prior to the implementation of a licence fee regime. Ahead of the analysis to be conducted in preparing the CRIS, a rough preliminary estimate of additional costs to APRA is between $8-15 million.

3.43 APRA proposes that the transition period to the new arrangements, during which it will undertake to license all trustees who make an application, should be coordinated as closely as possible with its regular two-year on-site review cycle of trustees. APRA may recruit temporary staff to assist with licensing during the transition period. At the end of the two-year transition period, the supervision task should be reduced, and APRA should not need additional resources to process applications for licenses.

3.44 While there are arguments that the supervisory levy paid by funds to cover the cost of their supervision by APRA, ASIC and the ATO should be used to cover the costs of obtaining a licence, the supervisory levies apply to superannuation entities (funds and trusts) on an annual basis, whereas the application fee for a licence will be a one-off fee that will apply to the superannuation trustee. This is in accordance with current SIS Act provisions, which require trustees seeking an approval to make offers of superannuation to the public, to pay a one-off application fee to APRA for the approval. Section 353 currently provides authority for the SIS Regulations to prescribe fees in respect of any matter under the SIS Act. The proposed amendments will enable fees to be set in relation to different classes of licence.

ASIC

Benefits

3.45 Increased disclosure would assist in making trustees accountable and improving overall trustee standards. It should help reduce the need for enforcement action.

Costs

3.46 Depending on the outcome of the review of the AFSL exemption for non-public offer entities, ASIC may face the additional task of licensing up to 2,500 trustees currently exempted from the requirement.

ATO

Benefits

3.47 Reforms requiring auditors and actuaries to report to the Regulator at the same time they report certain matters to the trustee will apply to auditors and actuaries of self managed superannuation funds as well as to auditors and actuaries of APRA-regulated superannuation entities. This will mean that both APRA and the ATO will receive additional information on these matters, enabling them to take necessary pre-emptive action.

Costs

3.48 Some smaller entities currently under APRA’s jurisdiction may decide to restructure as self managed superannuation funds (SMSFs), which may result in an increased number of SMSFs under the ATO’s supervisory jurisdiction. This may lead to minor cost increases associated with the additional supervisory activity.

Superannuation Trustees

Benefits

3.49 The introduction of licensing will establish a barrier to entry to operate a superannuation entity, although not a significant barrier for those trustees that currently operate under an approval issued by APRA (required in relation to ‘public offer’ activity). The new framework is likely to result in an increase in the quality of trustees, with associated benefits to members in relation to competence and governance standards. It is also expected to reduce the chance of fund failure, thereby improving confidence in the safety of superannuation by members, and by implication, the reputation of licensed trustees. This in turn may lead to an increase in funds under their trusteeship. Trustees will also benefit in implementing a risk management framework, because the identification and management of risk by trustees will assist in ongoing compliance, and reduce the costs associated with the need to implement corrective action.

Costs

3.50 As noted above, while the new framework is likely to result in an increase in the quality of trustees, it will also likely lead to a reduction in the number of entities currently operated. Rationalisation may be more acute in particular areas of the industry. For example, the introduction of these reforms may increase the likelihood that employer-sponsors will withdraw their support for corporate funds. However, the industry would be expected to retain its large numbers and diversity, continuing to offer consumers and employers a wide choice of trustee and superannuation entity (although noting that member choice of fund in the non-public offer arena may be limited).

3.51 Trustees will need to meet the increased compliance costs associated with obtaining a licence, meeting new standards, and preparing and complying with their RMS and RMP. However, trustees already operating under best practice would already be effectively undertaking many of the governance and licensing requirements. The preparation of RMSs and RMPs will force trustees to consider and address issues before a legislative breach or regulatory intervention is necessary.

3.52 The impacts of the reforms are likely to have a disproportionate effect on certain types of entities and their trustees. Currently, certain trustees must be approved by APRA to undertake public offer superannuation. Superannuation entities with an approved trustee are unlikely to be affected as much as other entities, as trustees operating under an approval issued by APRA are already required to meet more onerous requirements. Approved trustees must hold capital and must comply with a range of conditions on their licence, and it is expected that they will maintain higher governance and compliance standards. Many public offer trustees will also have recently completed the process of transitioning to the new requirements of the AFSL, which includes a requirement to demonstrate compliance systems. For these trustees, complying with Option 1 should be relatively easier.

3.53 APRA regulates around 2,000 employer-sponsored funds, representing the largest category of entities under APRA’s regulation. Trustees of these funds are currently not required to be approved by APRA, as they are not operating public offer funds. However, these trustees must meet various rules requiring the equal representation of both employers and members. It is noted that most APRA enforcement action is directed at these types of entities.

3.54 Industry consolidation is already occurring among this group, with the number of corporate funds decreasing from 4,211 in June 1995 to 2,045 in December 2002. All corporate funds are employer-sponsored funds. There is a small number (roughly one hundred) of employer-sponsored funds that are not corporate funds. This trend is likely to continue into the future, particularly as increased compliance costs for the industry resulting from a variety of changes will challenge employer-sponsors to reconsider their commitment to provide arrangements for their employees. Retail master trusts, and other public-offer superannuation providers including industry funds, would benefit from the decline in employer-sponsored funds.

Superannuation Members

Benefits

3.55 The new framework is designed to reduce the risk of loss to superannuation members from a superannuation fund failure. Members would benefit from expected improvements in the quality of trustees and fund management. Members would also have better access to information about their fund, with increased transparency and reporting to members providing a better signal of the relative risks associated with their entity. This will increase the accountability of trustees and assist early detection of problems. Members will also have greater confidence that their retirement savings are being managed in a manner consistent with best practice.

Costs

3.56 However, improved trustee competence and fund governance may be offset by increased compliance costs, which may be passed on to members. The impact on members will vary depending upon the size of the entity, and how well it is managed. Trustees who already follow best practice could be expected to face a lower compliance burden to meet the new requirements. Anecdotal evidence from APRA is that trustees of small employer-sponsored funds will need to devote the greatest level of attention to implement new processes, and trustees of these entities are likely to pass on comparatively higher costs to their members, which may impact on members’ benefits.

Employer-sponsors

Benefits

3.57 Employer-sponsors that establish defined benefit schemes may indirectly benefit from improved quality of trustees, as this may reduce the risk of needing to make additional contributions to meet minimum funding requirements due to poor investment returns.

Costs

3.58 As a result of the increased compliance costs, some employer-sponsors, and particularly those sponsoring defined benefit superannuation schemes, may decide that it is no longer financially viable to continue to operate the scheme. These employer-sponsors may decide to close the scheme, restructure the scheme as an accumulation scheme (if it is a defined benefit scheme) or transfer the scheme to another trustee.

Associated professionals in the superannuation industry (including auditors and actuaries)

Benefits

3.59 Associated professionals in the superannuation industry will be affected by the proposed changes. The introduction of compliance requirements in the managed investments regime and in the Financial Sector Reform Act 2001 (FSRA) have resulted in a growing demand for compliance professionals to provide advice to assist financial institutions to comply with their legislative obligations. The introduction of similar reforms in the SIS Act is likely to see similar growth in relation to the proposed licensing requirements. This should lead to greater availability and flexibility of employment for associated professionals in this field.

Costs

3.60 The proposals to require auditors and actuaries to notify the Regulator at the same time they are required to notify the trustee of certain matters will also increase the compliance costs of auditors and actuaries. Under the current arrangements, auditors and actuaries must notify trustees of technical breaches of the law. The SIS Act provides that the auditor or actuary only need notify the Regulator where the auditor or actuary is either dissatisfied with action taken or proposed, or the inaction, of the trustee, to deal with such breaches. The proposals will require mandatory notification to the trustee and the Regulator. While this will increase the number of parties who must be notified of technical breaches of the law, and may have an impact on professional indemnity insurance premiums due to the strict liability attached to this obligation, the benefits to both APRA and the ATO in the form of early notification of such matters would outweigh these costs. This is because APRA and the ATO would be on notice if other ‘early warnings’ are raised in relation to these entities. While these increased costs are likely ultimately to be passed on to members in the form of additional fees charged by such professionals, the costs are expected to be minimal, reflecting the important compliance role these parties play in the industry. It would be very difficult to quantify these costs, as it would depend upon the current level of compliance in the industry.

Government

Benefits

3.61 The reforms are designed to give APRA the tools it needs to effectively implement the prudential framework. Ultimately, the new framework should decrease the chance of loss through fund failure, diminishing the call on the Government to provide financial assistance in the event of a failure, and helping to ensure that the superannuation tax concessions provided by Government achieve their objective of greater superannuation savings in retirement.

3.62 The Government would also benefit from an increase in community confidence in the superannuation system, ensuring that private savings for retirement continue to play their role as part of the Government’s strategy to address the long-term consequences of an ageing population.

3.63 The Government’s recent decisions to provide financial assistance to some failed entities under Part 23 of the SIS Act have arguably increased the expectation that it will do so in the future. This may cause superannuation trustees to act in a riskier way, putting member benefits at risk, than they would in the absence of this intervention. The proposed reforms in Option 1 would reduce the Government’s potential exposure arising from increased risk-taking by trustees.

Costs

3.64 Nil.

Option 2 — No specific action

3.65 Without any action, trustees would not incur increased compliance costs, which might be passed onto members, and APRA would continue to undertake its supervisory responsibilities (although noting that it has received increased funding in recent years to undertake more intensive supervision). However, the gaps in the regulatory framework would not be addressed, and public confidence in the regulatory framework may diminish.

APRA

Benefits

3.66 The existing regime has operated reasonably effectively since it was established in 1993. APRA has a number of tools available, including releasing industry guidance and taking proactive steps in enforcement and supervision, to ensure trustees have adequate risk management systems in place.

Costs

3.67 The existing framework does not enable APRA to tailor prudential requirements to the risk of each entity. While APRA can and does release industry guidance, such guidance is not binding. Apart from moral suasion, APRA has limited tools to prevent breaches of prudential requirements, as many of its current tools only become effective once a breach has been identified. This affects APRA’s ability to prevent members’ benefits from being put at risk. With the number of entities and trustees that exist, including trustees not subject to any entry barriers, APRA would continue to face a difficult task to ensure that operating standards are met and maintained.

ASIC

3.68 Option 2 would not require any additional disclosure measures, and would therefore not provide any additional benefit nor impose any additional costs on ASIC.

ATO

3.69 Option 2 would not require any changes to current operating requirements, and would therefore not provide any additional benefit nor impose any additional costs on the ATO.

Superannuation Trustees

Benefits

3.70 Trustees would not need to meet the compliance costs associated with obtaining a licence, meeting new standards, and preparing and complying with their RMS and RMP.

Costs

3.71 Trustees would not be required to address potential governance and operational risks which APRA is concerned are becoming increasingly prevalent. Failure of a trustee may affect the reputations of other trustees and reduce public confidence in the industry.

3.72 As noted above, employer-sponsored funds are already experiencing some consolidation, reflecting decisions by employer-sponsors to gain administrative efficiencies, and reduce costs by transferring their fund to a larger public offer fund such as a master trust. This trend would be expected to continue.

Superannuation Members

Benefits

3.73 Compliance costs associated with Option 1 would not be incurred and therefore would not be passed on to superannuation members.

Costs

3.74 Superannuation members would not benefit from an improved risk based safety regime. APRA may only become aware of concerns after an event that has already caused members to lose some of their retirement benefit. Confidence in the safety framework may be compromised, increasing anxiety and reducing retirement savings, either through lower returns or lower contributions than would be achieved if the system were reformed.

Employer-sponsors

3.75 Under Option 2, there would be no change for employer-sponsors from the current environment in which many employer-sponsors may already be considering the ongoing viability of maintaining a fund for their employees.

Associated professionals in the superannuation industry (including auditors and actuaries)

3.76 Option 2 would not require any changes to current legislative and compliance requirements, and would therefore not provide any additional benefit nor impose any additional costs on associated professionals in the superannuation industry.

Government

Benefits

3.77 Nil.

Costs

3.78 The incidence of fund failure may be higher, putting pressure on the Government to provide financial assistance to members.

3.79 The Government’s recent decisions to provide financial assistance to some failed entities under Part 23 of the SIS Act has arguably increased the expectation that it will do so in the future. This may cause superannuation trustees to act in a riskier way, putting member benefits at risk, than they would in the absence of this intervention. Increased risk-taking by trustees would not be addressed under Option 2, which may affect the Government’s exposure.

3.80 Failure to act to address identified problems could undermine confidence in superannuation safety and reduce the effectiveness of the Government’s superannuation tax concessions in encouraging superannuation savings.

Consultation

3.81 The Government released the initial Issues Paper, ‘Options for Improving the Safety of Superannuation’, on 2 October 2001. The SWG was established to consult on the Issues Paper. It undertook an open consultative process in developing its recommendations. Submissions on the Issues Paper were called for by 1 February 2002 and over 50 were received. The SWG held two rounds of consultations, in December 2001 and March 2002. The SWG released a background paper on 24 December 2001 and draft recommendations on 4 March 2002, prior to the consultation meetings. The final report was provided to the Government on 28 March 2002 with 28 recommendations.

3.82 An exposure draft of the legislation that will give effect to these reforms was released on 30 May 2003 and 17 submissions were made by 11 July 2003. Other Government agencies have been consulted throughout the process of drafting the legislation. Comments on the exposure draft of the legislation were generally supportive of the proposed regime, although the majority of participants requested that additional consultation occur on the operating standards to be developed in regulations.

3.83 Industry bodies have generally supported the desirability to improve the safety of superannuation, but have expressed mixed views about the cost-benefit of some of the recommendations. In response to increasing concern about the proposal to introduce new licensing reforms during the transition to the new AFSL requirements, on 30 May 2003, the Government announced the deferral of the commencement of the draft legislation until after March 2004. There has also been particular concern in relation to the possible duplication between RMS and RMP requirements with compliance plan requirements under the Corporations Act 2001.

3.84 Some in the industry have noted that superannuation entities are generally well managed, and that the risk to entities arises due to fluctuations in the investment market, rather than being associated with the practices of the trustee. This ignores the fact that superannuation is intended to be a long-term investment, and that many trustees now offer members investment choice (which encourages a short-term view). However, others have agreed that there is strong merit in the proposals as they are designed to circumvent losses before they happen.

Conclusion and recommended option

3.85 Option 1 meets the objectives outlined above. It implements the Government’s legislative response to the report of the SWG. It also addresses the concerns regarding the regulatory framework’s weaknesses and provides APRA with the necessary tools to minimise the risks of superannuation fund failure. It will also increase the public’s confidence regarding the competence of trustees and standards of governance. The benefits of modernising the framework, and moves to improve its consistency with similar frameworks, are balanced by increased compliance costs for trustees, which may be passed on to members.

3.86 In contrast, Option 2 does not address the objectives outlined above, and reflects the view that the current framework has generally operated effectively. However, it does not implement the Government’s response to the SWG, will not address concerns about trustee competence, nor modernise the framework to reflect changes that have happened more broadly in other areas of the financial sector. It will also not reflect the public’s expectation that reform is necessary to improve superannuation safety. This could put greater pressure on the Government to compensate members in the event of losses.

3.87 Option 1 is the preferred option.

Implementation and review

3.88 It is proposed that the legislation introducing the new regime commence after the end of the transition period for the Financial Services Reform Act 2001. Transitional provisions will apply so that trustees will have up to two years from the commencement of the licensing regime in which to transition to the new arrangements.

Financial impact statement

3.89 It is not envisaged that the Bill will have a financial impact on the operations of government. APRA is self-funded through financial sector levies. The cost of licensing applications will be met by a fee, which will be charged on a cost-recovery basis.

Attachment A

Notes on individual clauses

Clause 1: Short title

4.1 Clause 1 is a formal provision specifying the Short Title of the Bill.

Clause 2: Commencement

4.2 Sections 1 to 3 of the Bill and any other items not specified elsewhere in the Bill will commence on Royal Assent.

4.3 Schedules or Parts of Schedules will commence on the day or at the time specified in the table in clause 2. The following table clarifies the commencement times of the Schedules or Parts of Schedules:

Clause 3: Schedule(s)

4.1 This clause makes it clear that the Acts specified in the Schedules are amended or repealed as set out in the Schedules, and that the Schedules may also contain other provisions.

Schedule 1 — Licensing, registration and amalgamation

Part 1 — Amendments commencing first

Superannuation Industry (Supervision) Act 1993

Item 1

5.9 Item 1 inserts new items into the table in section 4 of the SIS Act, to reflect the introduction of two new Parts into the SIS Act — Part 2A: Licensing of trustees and groups of individual trustees and Part 2B: Registrable superannuation entities.

Item 2

5.10 This item inserts a new item into the table in section 4 of the SIS Act to reflect the introduction of a new Part into the SIS Act — Part 18: Amalgamation of funds.

Item 3

5.11 This item repeals section 5 of the SIS Act, which is the diagrammatic outline of the key concepts of the Act.

Item 4

5.12 Item 4 amends subparagraph 6(1)(a)(i), to reflect the introduction of two new Parts into the SIS Act — Part 2A: Licensing of trustees and groups of individual trustees and Part 2B: Registrable superannuation entities. The amendment gives APRA responsibility for the general administration of these Parts of the SIS Act.

Items 5, 6 and 13

5.13 Items 5, 6 and 13 amend existing definitions in subsection 10(1) of the SIS Act to reflect the introduction of two new Parts into the SIS Act — Part 2A: Licensing of trustees and Part 2B: Registrable superannuation entities.

• The definition of approved deposit fund is amended to insert a reference to licensed trustees. Part 2A provides for licensed trustees that are constitutional corporations to be trustees of approved deposit funds.

• The definition of approved guarantee is amended to give APRA the power to determine the requirements of an approved guarantee in writing and to make any such determination a disallowable instrument (see also item 17).

• The definition of a reviewable decision is amended to include certain decisions that may be made by APRA under this Bill as reviewable decisions.

Items 7 to 12 and 14 to 16

5.14 Items 7 to 12 and 14 to 16 insert new definitions into subsection 10(1) of the SIS Act. New definitions are inserted for:

• ‘class’;

• ‘financial services licensee’;

• ‘group of individual trustees’;

• ‘licensing transition period’;

• ‘public offer entity licence’;

• ‘registrable superannuation entity’(RSE);

• ‘RSE license’;

• ‘RSE licensee’; and

• ‘RSE licensee law’.

Item 17

5.7 The definition of approved guarantee is amended by inserting section 11E to give APRA the power to determine the requirements of an approved guarantee, in writing, and to make any such determination a disallowable instrument.

Items 18 and 19

5.8 Items 18 and 19 amend section 13 of the SIS Act to remove the reference to a group of two or more individual trustees. This reference is no longer required as the Bill inserts a new definition for a group of individual trustees (see Item 9). Consistent with this amendment, the heading to section 13 is also altered by omitting reference to groups of trustees.

Item 20

5.9 The Bill enables groups of individual trustees collectively to hold a single Registrable Superannuation Entity (RSE) licence, which licenses the members of the group. Item 20 inserts a new section 13A which clarifies that an RSE licence given to a group of individual trustees resides with the group (the RSE licensee) and is not affected by changes in the composition of the group. Section 13A also establishes the basic principles for how RSE licensees that are groups of individual trustees may fulfil their obligations under the SIS Act and Regulations.

5.10 While an RSE licence is given to a group of individual trustees, section 13A generally ensures that the duties and obligations of trustees in respect of regulated superannuation funds continue to reside with each of the individual members of the group. In order to reduce the compliance burden for trustees, section 13A also allows any individual trustee who is a member of a group of individual trustees to discharge any duty or obligation for all of the other members of the group. An exception to this is provided where documents must be signed by the RSE licensee, with all members of the group being required to sign these documents. Where a direction, notice or other document is given to an RSE licensee that is a group of individual trustees, section 13A provides that it is sufficient for the direction, notice or document to be given to any one member of the group. The obligation then rests with that member to appropriately inform the other members of the group of the presence of the direction, notice or document.

5.11 Section 13A is also significant in the context of the penalty provisions contained in the Bill (see Item 29). Where an RSE licensee is a group of individual trustees, the obligations and duties of the RSE licensee fall separately and individually upon each member of the group. Therefore, each member of the group is considered a principle actor and is liable for their own acts and omissions in ensuring that the RSE licensee has fully discharged its obligations and duties.

5.12 A defence is provided in subsection 13A(3) to give protection to persons who have exercised due diligence in the event that an RSE licensee does not discharge its obligations and duties. This provision is modelled on section 731 of the Corporations Act 2001.

5.13 This approach ensures that a group of individual trustees is able to obtain a single RSE licence which licenses all members of the group without compromising the enforceability of provisions that place obligations or duties upon an RSE licensee.

Item 21

5.14 This item makes it clear that where a fund ceases to be a self managed superannuation fund, this occurs at the earlier of the time when either an approved trustee or an RSE licensee is appointed to the fund, or six months after it would cease to be a self managed superannuation fund.

Item 22

5.15 This item amends subsection 17(5) to clarify that the requirement to be licensed under section 29J (see Item 29) applies to a fund that ceases to be a self managed superannuation fund at the earlier of the time that an RSE licensee is appointed, or six months after it would cease to be a self managed superannuation fund. This requirement applies even if the reason that the fund ceases to be a self managed superannuation fund is the admission of new members to the fund.

Item 23

5.16 This item amends subsection 21(2) of the SIS Act to explain the significance of the approval or licensing of trustees. It repeals the existing subsection 21(2) and substitutes a new subsection. Part 2 of the Act will operate concurrently with Part 2A that is inserted by this Bill.

5.17 The significance of the approval process is that a fund cannot be an approved deposit fund unless it is maintained by an approved trustee or an RSE licensee that is a constitutional corporation (paragraph 21(2)(a)), and the trustee of a public offer entity must not issue or offer superannuation interests in public offer entities unless the trustee is an approved trustee or an RSE licensee that is a constitutional corporation (paragraph 21(2)(b)).

5.18 A person must not be, or act as, the trustee of a superannuation fund with fewer than 5 members (other than a self managed superannuation fund) if the person is required by the SIS Act to be an approved trustee or an RSE licensee that is a constitutional corporation (paragraph 21(2)(c)). APRA may suspend the trustee of a superannuation fund with fewer than 5 members if the trustee is acting in this capacity without meeting the requirements of paragraph 21(2)(c).

Item 24

5.19 This item adds a new subsection (1A) to the SIS Act, which prevents a constitutional corporation from making an application to be an approved trustee during the licensing transition period (see Item 10). This is a transitional provision, which ensures constitutional corporations can make applications only for RSE licenses under Part 2A, rather than to be approved trustees under the existing provisions of Part 2, once the licensing transition period has commenced.

Item 25

5.20 This item provides that APRA can only approve an applicant as a trustee under Part 2 of the SIS Act if the application is made before the licensing transition period commences (see Item 10).

Item 26

5.21 This item inserts a new subsection 27(7) in the SIS Act allowing Regulations to be made defining ‘net tangible assets’ for the purposes of section 26.

Items 27 and 28

5.22 These items amend paragraph 27(b) and paragraph 27E(b) of the SIS Act respectively to ensure that a trustee approval granted under section 26 of the SIS Act, or a variation granted under sections 27B or 27C, remains in force until it is revoked, subsequently varied or the trustee becomes an RSE licensee.

Item 29

5.23 Item 29 inserts two new Parts into the SIS Act. Part 2A establishes a new regime for licensing of trustees and groups of individual trustees, while Part 2B establishes a new regime for the registration of registrable superannuation entities (see Item 12).

Part 2A — Licensing of trustees and groups of individual trustees

5.24 Division 1 of Part 2A sets out the object of Part 2A and the relationship of this Part to other provisions contained in the SIS Act.

5.25 Section 29A sets out the object of Part 2A, which is to provide for the granting of RSE licenses to trustees who are constitutional corporations, other bodies corporate and groups of individual trustees (see Item 20 for provisions concerning the conduct of groups of individual trustees who become RSE licensees).

5.26 Section 29A also outlines some of the key relationships between licensing and other key provisions of the SIS Act. Of particular importance is the relationship between licensing, election to become a regulated superannuation fund under section 19 and certain penalty provisions, most notably section 29J which is introduced in this Bill.

5.27 The interaction between these provisions is specifically designed to ensure trustees who are not trustees of superannuation entities immediately prior to the commencement of the licensing transition period (new trustees) obtain an RSE licence before making an election to have superannuation entities under their trusteeship regulated by the SIS Act. New trustees of superannuation entities who make an election to have the entity regulated under the SIS Act would immediately be in breach of section 29J if they had not previously become an RSE licensee.

5.28 Transitional provisions apply for trustees who are trustees of registrable superannuation entities immediately prior to the commencement of the licensing transition period. These trustees must obtain an RSE licence by the end of the licensing transition period in order to be able to continue to operate as trustees of these entities.

5.29 Subsection 29A(2) also outlines the importance of registering a registrable superannuation entity under Part 2B. The Bill omits an explicit provision to penalise a body corporate or a group of individual trustees that is an RSE licensee for not registering a registrable superannuation entity. However, failure to register a registrable superannuation entity may result in an RSE licensee breaching a licence condition, which may result in a possible loss of the licensee’s RSE licence. Furthermore, accepting contributions while a registrable superannuation entity is not registered may lead to an offence under section 34 of the SIS Act.

5.30 Section 29B establishes that there are to be classes of RSE licences and provides for two broad classes of licences. One class is described in subsection 29B(2) and is designed to permit holders of this class of licence to operate public offer superannuation entities. Holders of this class of licence may be required to meet additional prudential requirements (see for example section 29DA). Provision has also been made in subsection 29B(2) for Regulations to specify other registrable superannuation entities for which trustees must hold this class of licence, where this may be warranted on prudential grounds.

5.31 Subsection 29B(3) provides for a second class of RSE licence which will allow holders of this class of licence to operate registrable superannuation entities that are not covered by the licence class established under subsection 29B(2). It is intended that this class of licence would generally be given to trustees of non-public offer superannuation entities.

5.32 Section 29B also provides for other classes of RSE licences to be established by Regulations. This will allow additional RSE licence classes to be introduced for particular types of superannuation entities, where appropriate, to improve the prudential regulation of these entities. Additional classes made by Regulations may be sub-classes of the two classes established by subsections 29B(2) and 29B(3), or include one or more other classes of RSE licences.

5.33 Sections 29C to 29CC establish processes for applying for RSE licences. Section 29C establishes who may apply for RSE licences, the requirements for applications and requirements for notifying certain changes to pending applications. Provision is also made in section 29C for Regulations to establish different application fees for different RSE licence classes.

5.34 Subsections 29C(1) to 29C(3) establish who may apply for RSE licences. Constitutional corporations may apply for any class of licence, while bodies corporate that are not constitutional corporations and groups of individual trustees may not apply for a licence that allows them to be trustees of a public offer entity (for example, the class of licence provided for in subsection 29B(2)). These restrictions are consistent with the existing restrictions under Part 2 of the SIS Act which only allow constitutional corporations to gain approval to operate public offer superannuation entities.

5.35 Subsection 29C(4) sets out the requirements for an application for an RSE licence. These requirements include that it must be in the approved form, contain the information required by the approved form, be accompanied by the required application fee, an up to date copy of the risk management strategy and a signed statement that the risk management strategy complies with section 29H.

5.36 Subsection 29C(5) permits regulations to prescribe an application fee for the purposes of paragraph 29C(4)(c) to prescribe different application fees for different classes of RSE licences.

5.37 In order to ensure APRA has up to date information concerning applicants for RSE licences and their intended activities, subsections 29C(6) to 29C(8) include requirements for bodies corporate and groups of individual trustees to notify APRA of any membership changes or changes to their risk management strategy. If an applicant fails to notify APRA of any such changes, under subsection 29C(9), the application will not comply with section 29C and APRA cannot grant an RSE licence under section 29D.

5.38 Section 29CA gives APRA the power to request additional information from a body corporate or a group of individual trustees who have applied for an RSE licence. APRA must specify a reasonable time for complying with the request. Subsection 29CA(2) permits APRA to deem an application as having been withdrawn if the applicant does not provide the requested information within the specified time and does not have a reasonable excuse for not doing so. Under subsection 29C(3), APRA must take all reasonable steps to inform the applicant if it treats an application as having been withdrawn. See also section 29JE, which provides use immunity in respect of information provided under section 29CA.

5.39 Different arrangements are provided for APRA to decide applications from persons who are trustees of registrable superannuation entities at the beginning of the licensing transition period (existing trustees) and other trustees (generally new trustees).

5.40 Section 29CB establishes arrangements for deciding applications from existing trustees. Subsection 29CB(1) provides existing trustees with the option of giving APRA an advance notification of intent to apply for an RSE licence. Subsection 29CB(2) provides that APRA must decide applications for RSE licences made in the licensing transition period by bodies corporate who are existing trustees, or from groups of individual trustees with one or more members who are existing trustees, by the end of the licensing transition period. In addition, subsection 29CB(3) gives APRA the discretion to refuse to consider any further licence applications from existing trustees that are received by APRA in the last 6 months before the end of the licensing transition period. In combination, these provisions are designed to encourage existing trustees to make early applications for RSE licences and provide APRA with flexibility to manage peaks in the flow of applications, in particular towards the end of the licensing transition period.

5.41 Section 29CC establishes time periods for deciding applications received after the end of the licensing transition period and, during the licensing transition period, from bodies corporate and groups of individual trustees who are not trustees at the beginning of that period (new trustees). Generally, APRA will have 90 days to decide these applications, with the power to extend this period by a further 30 days.

Granting RSE licences

5.42 Section 29D establishes the conditions which, if met, require APRA to grant an RSE license to a body corporate or a group of individual trustees.

5.43 Subsection 29D(1) provides that APRA must grant an RSE licence to a body corporate or a group of individual trustees, if it has no reason to believe that the applicant would fail to comply with the RSE law (see Item 16) or any conditions imposed on the RSE licence, if the licence was granted. The application must comply with section 29C and be for a class of licence that the body corporate or group of individual trustees may apply for under that section. APRA must be satisfied (paragraph 29D(1)(d)) that if the applicant is a body corporate that the body corporate meets the standards prescribed under Part 3 relating to fitness and propriety for trustees of funds and RSE licensees. If the applicant is a group of individual trustees, APRA must be satisfied that the group as a whole meets the standards relating to fitness and propriety prescribed under Part 3 for RSE licensees. In addition, APRA must be satisfied that each member of the group meets the standards prescribed under Part 3 relating to fitness and propriety for trustees of funds.

5.44 Where an applicant is not a constitutional corporation, paragraph 29D(1)(f) requires APRA to be satisfied that the body corporate or group of individual trustees only intend to act as trustee for one or more superannuation funds that each have governing rules providing that the sole or primary purpose of the fund is the provision of old-age pensions.

5.45 Where the application is for a class of licence that enables a trustee that holds that class of licence to be the trustee of a public offer entity subject to any condition imposed under subsection 29EA(3), paragraph 29D(1)(g) requires APRA to be satisfied that the applicant is a constitutional corporation that meets the capital requirements under section 29DA.

5.46 Section 29DA establishes the capital requirements that must be satisfied by a constitutional corporation before being granted an RSE license or having an RSE licence varied so as to result in the constitutional corporation being required to meet capital requirements. Subsection 29DA(6) provides for Regulations to be made defining ‘net tangible assets’ for the purposes of section 29DA.

5.47 Section 29DB provides that if APRA decides to grant a body corporate or group of individual trustees an RSE licence, it must give the body corporate or group a licence specifying a unique licence number and the licence class. In the case of a licence given to a group of individual trustees, Item 20 ensures that the licence resides with the group and is not affected by changes in the composition of the group.

5.48 Section 29DC lists the types of documents which RSE licensees must ensure include the unique RSE licence number given to an RSE licensee under section 29DB. Section 29DC also allows APRA to give written approval to RSE licensees to not require them to include the licence number in a document or class of documents. An example of when this provision may be used is during the licensing transition period to allow existing trustees who become RSE licensees to run down existing stocks of stationery before including the licence number on newly printed stock.

5.49 Section 29DD establishes when an RSE licence comes into force and the circumstances in which it continues in force. These provisions are modelled on similar provisions applying to approvals given to trustees under the existing Part 2 of the SIS Act.

5.50 Section 29DE establishes arrangements for giving a notice if APRA refuses an application by a body corporate or group of individual trustees for an RSE licence.

Conditions on RSE licences

5.51 Section 29E imposes a range of conditions on RSE licences. Subsection 29E(1) lists the conditions that are imposed on all RSE licences and, if the RSE licensee is a group of individual trustees, each of the members of the group. Provision has also been made under paragraph 29E(1)(g) for other conditions to be specified in Regulations. This provision allows additional conditions to be imposed on all RSE licences in a timely manner where necessary. Additional conditions are also imposed on certain classes of RSE licensees by subsections 29E(3) to 29E(6). See also the offence provision, section 29JA.

5.52 Section 29EA gives APRA the power to impose additional conditions on a single RSE licence as long as those conditions are not inconsistent with conditions that are imposed under section 29E (subsections 29EA(1) and 29EA(2)). This ensures that APRA is able to impose conditions on individual RSE licences, in particular where there may be a specific prudential risk applying to that RSE licensee.

5.53 Subsections 29EA(3) and 29EA(4) provide for particular types of additional conditions concerning restrictions on registrable superannuation entities for which RSE licensees may act as the trustee and compliance with alternative agreed representation rules under section 92 of the SIS Act.

5.54 Subsection 29EA(5) requires APRA to consult with ASIC where the RSE licensee also holds an Australian Financial Services Licence (AFSL) and the imposition of a condition may affect the RSE licensee’s ability to provide financial services. Consultation will help to ensure consistent approaches to the regulation of RSE licensees who are also holders of an AFSL. However, failure by APRA to consult with ASIC does not invalidate any additional condition that is imposed (subsection 29EA(6)). Subsection 29EA(7) clarifies when an additional condition comes into force. In relation to section 29EA, see also the offence provision, section 29JA.

5.55 Section 29EB gives APRA the power to direct an RSE licensee to comply with a licence condition within a specified time where APRA has reasonable grounds to believe that the RSE licensee has breached the licence condition.

5.56 This power is significant, because while breaching a licence condition does not directly result in an RSE licensee committing an offence, failure to comply with an APRA direction given under section 29EB may result in the RSE licensee committing an offence under section 29JB. Section 29EB does not include a minimum timeframe for complying with a request because it is necessary to ensure APRA has some flexibility in setting timeframes that are reasonable in the circumstances, given the nature of the information that is being request and the level of prudential risk involved. APRA may also cancel an RSE licence under section 29G if an RSE licensee fails to comply with a licence condition.

Varying RSE licences

5.57 Section 29F provides for RSE licensees to apply to APRA for a variation so that it is a licence of a different class and/or for a variation or revocation of a condition that has been imposed by APRA on an RSE licence.

5.58 Section 29FA gives APRA power to request additional information in respect of an application made under section 29F. This provision ensures that APRA is able to obtain relevant information pertaining to the application. Section 29FA also provides that APRA may treat an application under section 29F as having been withdrawn if the requested information has not been provided by the RSE licensee within the time specified in the initial request and the RSE licensee does not have a reasonable excuse for not complying with the request.

5.59 Section 29FA does not include a minimum timeframe for complying with a request for additional information because it is necessary to ensure APRA has some flexibility in setting timeframes that are reasonable in the circumstances, given the nature of the information that is being requested and the level of prudential risk involved. (See also section 29JE which provides use immunity in respect of information provided under section 29FA.).

5.60 Section 29FB establishes time periods to decide applications under section 29F. Under this provision, APRA has 60 days to decide an application to vary an RSE licence, but may extend this period by a further 60 days.

5.61 Section 29FC establishes the circumstances in which APRA may vary an RSE licence on application from the licensee and processes for informing the applicant. APRA may not vary an RSE licence unless APRA is satisfied that the RSE licensee will comply with the conditions imposed on the licence, including conditions as varied, and that any varied condition is not inconsistent with conditions imposed by section 29E. Under paragraph 29FC(2)(c), APRA must also consult with ASIC in certain circumstances. Consultation will help to ensure consistent approaches to the regulation of RSE licensees who also are AFSL holders. However, failure by APRA to consult with ASIC does not invalidate any variation of conditions (subsection 29FC(3)). Subsection 29FC(4) provides that APRA is not required to vary the class of, or vary or revoke any condition of, an RSE licence in a manner other than as requested by the RSE licensee in an application under 29F.

5.62 Section 29FD provides that APRA may vary or revoke an RSE licence condition on its own initiative as long as the variation or revocation is not inconsistent with any condition imposed under section 29E and, if the RSE licensee is also the holder of an AFSL, that APRA consults with ASIC in certain circumstances. Consultation will help to ensure consistent approaches to the regulation of RSE licensees who are also AFSL holders. However, failure by APRA to consult with ASIC does not invalidate any variation or revocation under this section (subsection 29FD(3)).

5.63 Section 29FE establishes processes for APRA to notify RSE licensees of APRA’s decisions in respect of variations or revocations under sections 29FC and 29FD.

5.64 Section 29FF establishes when a variation or revocation of an RSE licence condition by APRA comes into force. The provisions in section 29FF are consistent with section 29DD, which establishes when an RSE licence comes into force and the circumstances in which it continues in force.

Cancelling RSE licences

Section 29G gives APRA the power to cancel in writing RSE licences in certain circumstances. These circumstances include where RSE licensees:

• have requested that their licences be cancelled;

• are bodies corporate and disqualified persons for the purposes of Part 15 of the SIS Act (RSE licensees who are groups of individual trustees cannot, as a group, be disqualified persons for the purposes Part 15);

• have breached, or APRA has reason to believe they will breach, a licence condition imposed on the licence; or

• failed to comply, or APRA has reason to believe they will fail to comply, with a direction by APRA under section 29EB.

5.65 With the exception of requests from the RSE licensee that their licences be cancelled and where RSE licensees are bodies corporate and disqualified persons, subsection 29G(3) requires APRA to gain the Minister’s written consent before cancelling an RSE licence. Subsection 29G(4) establishes a process for APRA to notify RSE licensees of decisions to cancel RSE licences.

5.66 Section 29GA requires APRA to consult with ASIC in certain circumstances before cancelling an RSE licence and to notify ASIC after it has cancelled an RSE licence. Consultation will help to ensure consistent approaches to the regulation of RSE licensees who are also holders of an AFSL. However, failure by APRA to consult with ASIC does not invalidate a cancellation under section 29G (subsection 29GA(3)).

5.67 Section 29GB gives APRA the power to allow an RSE licence to continue in effect in respect of specified provisions of the SIS Act and Regulations, or any other law of the Commonwealth, that is administered by APRA after the RSE licence has been cancelled under section 29G. This provision is designed to ensure persons or groups of individuals who have had their RSE licences cancelled can continue to perform certain specified duties in respect of a registrable superannuation entity, for example, processes associated with winding up a registrable superannuation entity or transferring members’ benefits under the successor fund arrangements contained in the SIS Act.

Risk management strategies

5.68 An important feature of the Bill is the requirement for RSE licensees to have a risk management strategy concerning their activities as trustees of registrable superannuation entities (see paragraph 29E(1)(c)).

5.69 Section 29H provides that a risk management strategy for an RSE licensee must set out reasonable measures and procedures that apply to identify, monitor and manage a range of risks that may arise in respect of the operations of the RSE licensee. Subsection 29H(2) sets out a range of risks that must be explicitly addressed in the risk management strategies of RSE licensees. Subsection 29H(3) establishes processes for RSE licensees to sign risk management strategies.

5.70 Subsection 29H(4) places restrictions on provisions that may be incorporated in risk management strategies by reference. This provision is designed to ensure that APRA is able to access all the provisions contained in risk management strategies, including provisions included by reference. Subsection 29H(5) permits information contained in a risk management plan for an entity of which an applicant for an RSE licence is, or proposes to be, the RSE licensee, to be reproduced in the risk management strategy.

5.71 Section 29HA establishes requirements for maintaining and regularly reviewing risk management strategies. These provisions are designed to ensure that the risk management strategies of RSE licensees are up to date and relevant to the current operations of the RSE licensee.

5.72 Section 29HB provides for modifications to be made to risk management strategies, or for risk management strategies to be repealed and replaced. This may occur at the RSE licensee’s behest or on direction from APRA (in the case of a modification only). The modified or replaced risk management strategy must comply with section 29H. Subsection 29HB(4) establishes timeframes for an RSE licensee to comply with a direction to modify a risk management strategy. Unlike other provisions concerning directions or requests from APRA contained in the Bill, this provision contains a minimum timeframe of 14 days after the direction is given to an RSE licensee by APRA.

5.73 Section 29HC establishes requirements for notifying APRA of modifications of risk management strategies or when risk management strategies are repealed and replaced. A person commits an offence of fault liability or strict liability if the person fails to notify APRA of modifications of risk management strategies or when risk management strategies are repealed and replaced. The fault liability offence carries a penalty of 50 penalty units, while the strict liability offence carries a penalty of 25 penalty units (see the Outline for further background on the offence provisions contained in the Bill).

5.74 Section 29HD gives APRA the power to request information concerning a risk management strategy via a notice given to the RSE licensee. This provision is designed to ensure that APRA is able to gain all relevant information concerning an RSE licensee’s operations and is a central aspect of the enhanced supervisory regime that is being introduced by this Bill. Section 29HD does not include a minimum timeframe for complying with a request for additional information because it is necessary to ensure APRA has some flexibility in setting timeframes that are reasonable in the circumstances, given the nature of the information that is being requested and the level of prudential risk involved.

5.75 A person commits an offence of fault liability or strict liability if the person fails to comply with a notice from APRA requesting information concerning a risk management strategy. The fault liability offence carries a penalty of 50 penalty units, while the strict liability offence carries a penalty of 25 penalty units (see the Overview for further background on the offence provisions contained in the Bill). An offence is not committed if the person has a reasonable excuse for a failure to comply with a notice from APRA. Section 29JE provides use immunity in respect of information provided under section 29HD.

Offences and self incrimination

5.76 One of the primary functions of the Bill is to require all superannuation trustees to be licensed. Section 29J is the key offence of the proposed regime that achieves this outcome. In general terms, subsection 29J(1) provides that a person must not be, or act as, a trustee of a registrable superannuation entity unless the person holds an RSE licence, or is a member of a group of individual trustees that holds an RSE licence that enables the person to be a trustee of that entity, or, during the licensing transition period, the person is an approved trustee.

5.77 Subsection 29J(1) also includes two further provisions (paragraphs 29J(1)(c) and 29J(1)(d)) which provide that a person who is, or acts as, a trustee of a registrable superannuation entity is not required to hold an RSE licence if:

• the person has been a trustee of the entity for less than 30 days and at least one other trustee of the entity was a trustee immediately before the start of the licensing transition period; or

• the person and at least one other trustee of the entity who was a trustee immediately before the start of the licensing transition period have applied for an RSE licence and the application has not been finally determined or disposed of.

5.78 These two provisions operate to require groups of individual trustees that have some members who are trustees immediately before the start of the licensing transition period and some who are not, to make an application within 30 days of the group forming and becoming trustees of a registrable superannuation entity. The purpose of these provisions is to remove any doubt as to when a group of individual trustees that has a mixture of existing trustees and new trustees must apply for an RSE licence.

5.79 The structure of subsection 29J(1) is such that trustees will be required to obtain an RSE licence before they make an election to have superannuation entities under their trusteeship regulated by the SIS Act. This is because the meaning of registrable superannuation entity given in Item 12 includes all regulated superannuation entities, and a trustee of a regulated superannuation entity would immediately be in breach of section 29J if they had not previously become an RSE licensee.

5.80 Subsection 29J(3) provides that a person commits an offence if the person fails to comply with subsection 29J(1), with a penalty of 2 years imprisonment and/or 120 penalty units.

5.81 Subsection 29J(4) provides that a person commits an offence if the person is a body corporate and is not the only trustee of a registrable superannuation entity. Under subsection 29J(5), a person commits an offence if the person fails to comply with subsection 29J(4), with a penalty of 2 years imprisonment and/or 120 penalty units. This provision is modelled on subsection 152(2A) of the SIS Act and aims to clarify existing requirements in relation to bodies corporate that are trustees of regulated superannuation funds. A reduced penalty applies in respect of section 29J because this provision applies to the conduct of all trustees, and not just those trustees that are trustees of public offer funds, as in the case of section 152.

5.82 Section 29JA introduces an offence where an RSE licensee fails to notify APRA as soon as practicable, and in any event within 14 days, after becoming aware that the RSE licensee is in breach of a condition imposed on an RSE licence under sections 29E or 29EA. The offence is a strict liability offence, which carries a penalty of 50 penalty units.

5.83 Section 29JB introduces an offence where an RSE licensee fails to comply with a direction from APRA to comply with a licence condition under section 29EB.

5.84 Section 29JC introduces an offence where an RSE licensee fails to comply with a direction from APRA to modify a risk management strategy under section 29HB. The offence is a strict liability offence, which carries a penalty of 60 penalty units.

5.85 The offences for sections 29JB and 29JC are strict liability offences, which carry a penalty of 60 penalty units. The penalties are set at this level because a direction under sections 29EB or 29HB will be targeted at minimising a specific prudential risk and failure to comply with a direction amounts to a serious offence.

5.86 Section 29JD clarifies that any contravention of sections 29J, 29JA, 29JB and 29JC does not affect the validity of a superannuation interest or any other act. This provision is designed to protect the interests of members of registrable superannuation entities where the trustee of that entity is in contravention of sections 29J, 29JA, 29JB or 29JC. This provision is based on similar provisions that are included in other Parts of the SIS Act.

5.87 Section 29JE affords protection of privilege against self-incrimination by providing use immunity to persons giving information under sections 29CA, 29FA and 29HD. Section 29JE does not extend the protection of privilege against self-incrimination to derivative use immunity because it has been APRA’s experience that these immunities make it exceptionally difficult to pursue prosecutions under the SIS Act. Given the strong growth in superannuation savings, and the increasingly important role they play in ensuring that people make adequate provision for their income in retirement, there is an overwhelming public interest in protecting the rights of fund members. Therefore it is considered that removal of these immunities is warranted in order to allow the Regulator to more effectively prosecute persons who contravene the SIS Act.

Part 2B — Registrable superannuation entities

5.88 Item 29 also inserts Part 2B, which establishes a regime for the registration of registrable superannuation entities.

5.89 Division 1 of Part 2B sets out the object of the Part. Section 29K establishes that the object of Part 2B is to provide for the registration of registrable superannuation entities. Registration of registrable superannuation entities is important as it serves as a mechanism by which APRA can gain important information about superannuation entities that it regulates, in a systematic manner. As a consequence of the registration process, APRA must receive information about registrable superannuation entities before the RSE licensee of those entities will be able to operate those entities. The provision of this information to APRA is intended to ensure that APRA has information about the superannuation entities it regulates, before those entities begin operating in the superannuation industry.

5.90 Registration of registrable superannuation entities is also significant to RSE licensees, as they may breach the licence condition imposed under paragraph 29E(1)(d) if they have not registered, or applied for the registration of, the registrable superannuation entities of which they are the RSE licensee. APRA can cancel an RSE licence if a condition of the licence is breached. The Government also intends to make operating standards concerning the acceptance of contributions to, deposits with, or the acquisition of units in registrable superannuation entities that have not been registered under Part 2B.

Applying for registration

5.91 Division 2 of Part 2B provides a process for applications to be made for the registration of registrable superannuation entities. Subsection 29L(1) provides that RSE licensees may apply to APRA for registration of registrable superannuation entities of which they are the RSE licensee. It is intended that only the RSE licensee of a registrable superannuation entity may apply to APRA for its registration. Therefore, a body corporate trustee or group of individual trustees of a registrable superannuation entity must apply for, and be granted, an RSE licence before an application for registration of the registrable superannuation entity can be submitted and determined.

5.92 Subsection 29L(2) establishes requirements for applications for the registration of registrable superannuation entities. These requirements include that the application must be in the approved form and contain such information as required by the form. Additionally, the application must be accompanied by up to date copies of the entity’s trust deed, governing rules, risk management plan and a statement signed by the RSE licensee that the risk management plan complies with section 29P. The requirements for applications of registrable superannuation entities are intended to ensure that APRA is provided with sufficient information about the fund to assist it in performing its role as prudential regulator.

5.93 Subsections 29L(3), (4) and (5) require that if the trust deed, governing rules or risk management plan of a registrable superannuation entity change after an application has been made for its registration by APRA, but before the application has been determined, the RSE licensee of the registrable superannuation entity must lodge an up to date copy of the trust deed, governing rules or risk management plan. Subsection 29L(6) provides that if these requirements are contravened, an application does not comply with section 29L. (This is significant as APRA must refuse to register a registrable superannuation entity if the application for registration does not comply with section 29L.)

5.94 Subsection 29L(7) provides that an application for registration of a registrable superannuation entity lapses if it was made by an RSE licensee and the RSE licensee ceases to be an RSE licensee before APRA has decided the application for registration or, if APRA has made a decision on the application which is the subject of a review, before the review is finalised, or otherwise disposed of. This reinforces the policy intent that only registrable superannuation entities which have an RSE licensee may be registered by APRA.

5.95 Section 29LA provides APRA with a discretion to request that an RSE licensee of a registrable superannuation entity who has made an application to register that entity provide additional information regarding the application. A failure to provide the requested information will result in a delay to APRA’s determination regarding the registration of the registrable superannuation entity.

5.96 Section 29LB establishes the period in which APRA must decide applications for registration of registrable superannuation entities. APRA must decide an application for registration of a registrable superannuation entity within 21 days of receiving the application or within 21 days of receiving information which it has requested from the RSE licensee of the registrable superannuation entity under Section 29LA. However, APRA may extend this period by a maximum of 7 days by written notice given to the RSE licensee of the registrable superannuation entity within the period in which it would otherwise have been required to decide the application for registration. It is intended that APRA should be able to extend the period only once. Section 29LB also provides that an application that APRA has not decided within the required time is deemed to have been refused by APRA.

Registration

5.97 Division 3 of Part 2B provides for the registration of registrable superannuation entities. Section 29M establishes that APRA must only register a registrable superannuation entity if the application for its registration complies with section 29L and the applicant has provided APRA with all information that the applicant was requested to provide regarding the application under section 29LA. Additionally, APRA must be satisfied that nothing in the registrable superannuation entity’s governing rules conflicts with Part 6 of the Act, which deals with provisions relating to the governing rules of superannuation entities.

5.98 Section 29MA provides for the allocation of a unique registration number and requirements for notifying the RSE licensee of a registrable superannuation entity where APRA has registered the entity under section 29M.

5.99 Section 29MB lists the types of documents on which RSE licensees must include the registration number given to a registrable superannuation entity under section 29MA. Section 29MB also allows APRA give written approval to the RSE licensees to not require them to include the registration number in a document or class of documents. An example of when this provision may be used is during the licensing transition period for registrable superannuation entities that are already in existence at the beginning of the licensing transition period, to allow them to run down existing stocks of stationery before including the registration number on newly printed stock.

5.100 Section 29MC establishes requirements for APRA to give RSE licensees a notice if APRA refuses an application to register a registrable superannuation entity.

Cancelling registration

5.101 Section 29N establishes the circumstances in which APRA must cancel the registration of a registrable superannuation entity. The circumstances in which a registration may be cancelled are where the entity has been wound up; where the entity has no beneficiaries and no assets and there are no outstanding claims against the entity for benefits or other payments; or in any other circumstances that may be prescribed by Regulations. Section 29N also establishes requirements for APRA to give RSE licensees a notice if APRA cancels the registration of a registrable superannuation entity.

Risk management plans

5.102 Section 29P provides that a risk management plan for a registrable superannuation entity must set out reasonable measures and procedures that the RSE licensee of the entity is to apply to identify, monitor and manage a range of risks that may arise in the operation of the entity. Subsection 29P(2) sets out a range of risks, which must be explicitly addressed in the risk management plans of registrable superannuation entities. Subsection 29P(3) establishes processes for RSE licensees to sign risk management plans.

5.103 Subsection 29P(4) places restrictions on provisions, which may be incorporated in risk management plans by reference. This provision is designed to ensure that both APRA and the members and employer-sponsors of registrable superannuation entities are able to access all the provisions contained in risk management plans. Subsection 29P(5) permits information contained in a risk management strategy of an RSE licensee of an entity to be reproduced in the risk management plan for the entity.

5.104 Section 29PA establishes requirements for maintaining and regularly reviewing risk management plans. These provisions are designed to ensure that the risk management plans of registrable superannuation entities are kept up to date and relevant to the current operations by the RSE licensee of the entity.

5.105 Section 29PB provides for modifications to risk management plans to be made, or for risk management plans to be repealed and replaced. This may occur at the behest of an RSE licensee of a registrable superannuation entity or on direction from APRA (in the case of a modification only). The modified or repealed and replaced risk management plan must comply with section 29P. Subsection 29PB(4) establishes timeframes for an RSE licensee to comply with a direction to modify a risk management plan.

5.106 Section 29PC establishes requirements for notifying APRA when risk management plans are modified or repealed and replaced. A person commits an offence of fault liability or strict liability if the person fails to notify APRA within 14 days of a risk management plan having been modified or repealed and replaced. The fault liability offence carries a penalty of 50 penalty units, while the strict liability offence carries a penalty of 25 penalty units (see the Outline for further background on the offence provisions contained in the Bill).

5.107 Section 29PD establishes that a member, unit holder or employer-sponsor of a registrable superannuation entity that has been registered under Part 2B may request a copy of the entity’s risk management plan from the RSE licensee of the entity. The RSE licensee must make a copy of the plan available to the member, unit holder or employer-sponsor free of charge.

5.108 Section 29PE gives APRA the power to request information concerning a risk management plan of a registrable superannuation entity that has been registered under Part 2B, via a notice given to the RSE licensee of the entity. This provision is designed to ensure that APRA is able to gain all relevant information concerning the operations of the entity and the RSE licensee of the entity and is a central aspect of the enhanced supervisory regime that is being introduced by this Bill. Section 29PE does not include a minimum timeframe for complying with a request for additional information because it is necessary to ensure APRA has some flexibility in setting timeframes that are reasonable in the circumstances, given the nature of the information that is being requested and the level of prudential risk involved.

5.109 A person commits an offence of fault liability or strict liability if the person fails to comply with a notice from APRA requesting information concerning a risk management plan. The fault liability offence carries a penalty of 50 penalty units, while the strict liability offence carries a penalty of 25 penalty units (see the Outline for further background on the offence provisions contained in the Bill). An offence is not committed if a person has a reasonable excuse for failing to comply with a notice from APRA requesting information. Section 29QB provides use immunity in respect of information provided under section 29PE.

Offences and self incrimination

5.110 Section 29Q introduces an offence where an RSE licensee of a registrable superannuation entity that has been registered under Part 2B fails to comply with a direction from APRA to modify the risk management plan of the entity under section 29PB. The offence is a strict liability offence, which carries a penalty of 60 penalty units.

5.111 Section 29QA clarifies that any contravention of section 29Q does not affect the validity of a superannuation interest or any other act. This provision is designed to protect the interests of members of registrable superannuation entities where the RSE licensee breaches section 29Q. This provision is based on similar provisions that are included in other Parts of the SIS Act.

5.112 Section 29QB affords protection of privilege against self-incrimination by providing use immunity to persons giving information under sections 29LA and 29PE. As with section 29JE, section 29QB does not extend the protection of privilege against self-incrimination to derivative use immunity.

Item 30

5.113 This item repeals the existing heading to Part 3 of the SIS Act and substitutes a new heading to reflect that the operating standards will deal with issues regarding superannuation fund trustees and RSE licensees in addition to the superannuation funds themselves.

Item 31

5.114 The amended section 30 provides that the object of Part 3 is to provide for a system of standards prescribed by regulations (operating standards) applicable to the operation of regulated superannuation funds, approved deposit funds and pooled superannuation trusts, and to trustees and RSE licensees of those funds and trusts.

Item 32

5.115 This item amends subsection 31(1) of the SIS Act to permit operating standards to be prescribed for the operation of trustees and RSE licensees of regulated superannuation funds.

Item 33

5.116 This item amends paragraph 31(2)(l) to permit operating standards to be prescribed for the management of investments, in addition to the investments themselves, of regulated superannuation funds.

Item 34

5.117 This item inserts paragraph 31(2)(ma) to permit operating standards to be prescribed for the fitness and propriety of RSE licensees and trustees of regulated superannuation funds.

Item 35

5.118 This item inserts paragraph 31(2)(pa) to permit operating standards to be prescribed for the disclosure of information by a member of a group of trustees of a regulated superannuation fund to other members of the group of trustees of that same fund.

Item 36

5.119 This item inserts paragraphs 31(2)(sa) and 31(2)(sb) to permit operating standards to be prescribed for the outsourcing arrangements relating to the operation of funds and the adequacy of resources, including human, technical and financial resources, of regulated superannuation funds.

Item 37

5.120 This item amends subsection 32(1) to permit operating standards to be prescribed for the operation of trustees and RSE licensees of approved deposit funds.

Item 38

5.121 This item inserts paragraph 32(2)(aa) to permit operating standards to be prescribed for the circumstances in which amounts may be deposited with approved deposit funds.

Item 39

5.122 This item amends paragraph 32(2)(f) to permit operating standards to be prescribed for the management of investments, in addition to the investments themselves, of approved deposit funds.

Item 40

5.123 This item inserts paragraph 32(2)(fa) to permit operating standards to be prescribed for the fitness and propriety of RSE licensees and trustees of approved deposit funds.

Item 41

5.124 This item inserts paragraphs 32(2)(la) and 31(2)(lb) to permit operating standards to be prescribed for the outsourcing arrangements and the adequacy of resources, including human, technical and financial resources, of approved deposit funds.

Item 42

5.125 This item amends subsection 33(1) to permit operating standards to be prescribed for the operation of trustees and RSE licensees of pooled superannuation trusts.

Item 43

5.126 This item inserts paragraph 33(2)(aa) to permit operating standards to be prescribed for the circumstances in which units can be acquired in pooled superannuation trusts.

Item 44

5.127 This item amends paragraph 33(2)(b) to permit operating standards to be prescribed for the management of investments, in addition to the investments themselves, of pooled superannuation trusts.

Item 45

5.128 This item inserts paragraph 33(2)(ba) to permit operating standards to be prescribed for the fitness and propriety of RSE licensees and trustees of pooled superannuation trusts.

Item 46

5.129 This item inserts paragraphs 33(2)(ja) and 31(2)(jb) to permit operating standards to be prescribed for the outsourcing arrangements and the adequacy of resources, including human, technical and financial resources, of pooled superannuation trusts.

Item 47

5.130 A new subsection 63(7A) is inserted to provide an additional rule for funds that do not comply with equal representation rules. The RSE licensee of a fund that is not a public offer fund, while subsection 63(7D) applies to the fund, must not accept any contributions made to the fund by an employer-sponsor. Given that section 63 is the primary means by which APRA enforces the equal representation rules in Part 9 of the SIS Act, the penalty for breaching this requirement is 60 penalty units. Subsection 63(7C) makes breach of this provision an offence of strict liability.

5.131 Subsection 63(7D) applies to a fund while it fails to comply with the basic equal representation rules provided for in subsection 92(4) for funds with more than 4 but fewer than 50 members, or subsection 93(4) for funds with more than 49 members.

Item 48

5.132 Subsection 63(8) is amended by inserting a reference to subsection 63(7B), which provides that a contravention of this subsection does not affect the validity of a contribution. However, where the contribution is accepted in contravention of that subsection, it must be refunded in 28 days, or the period allowed by APRA.

Item 49

5.133 This item corrects the expression in subsection 63(8) to take account of the addition of subsection 63(7B).

Item 50

5.134 This item allows a trustee to meet the alternative agreed representation rule in subsection 92(5) if the trustee is an approved trustee or an RSE licensee.

Item 51

5.135 This item is amended to recognise that the trustee may be an approved trustee or a RSE licensee. It provides that, in the case of an approved trustee, that the trustee meets the alternative representation rule in subsection 92(5) if the trustee’s approval specifies that the trustee is also approved for the purposes of this subsection. In the case of an RSE license, the trustee meets the alternative representation rule in subsection 92(5) if one of the conditions imposed on the RSE licensee’s RSE licence requires the trustee to ensure that the fund or class of funds complies with the alternative agreed representation rule.

Item 52

5.136 This item clarifies that the subsection 92(9) applies only where the trustee is an approved trustee.

Item 53

5.137 This item makes it clear that the trustee must appoint an approved auditor to give the trustee a report of both the operations of the entity and of the RSE licensee of the entity.

Item 54

5.138 This item amends subsection 113(3)(b) to recognise that a trustee may be an approved trustee or an RSE licensee during the licensing transition period. This amendment requires that the report to the trustee commissioned under subsection 113(1) must contain a written statement by the auditor as to whether the trustee and the RSE licensee (if any) have complied with the Act and the Regulations and the Financial Sector (Collection of Data) Act 2001.

Item 55

5.139 This item amends the approved form of the report that must be given to the trustee of a registrable superannuation entity that is registered under Part 2B by inserting paragraph 113(3)(c). The purpose of this new paragraph is to ensure that the approved auditor’s report considers the RSE licensee’s compliance with the following:

• the risk management plan for the entity for the current year and the capacity for compliance in the future; and

• the risk management strategy for the RSE licensee for the current activities and the capacity for compliance in the future.

Item 56

5.140 This item amends the requirement in subsection 121A(1) in relation to trustees of superannuation funds with fewer than five members (other than self managed superannuation funds). This amendment provides that the trustee of such a fund must be either an approved trustee or an RSE licensee that is a constitutional corporation. The heading to section 121A is altered to reflect this change.

Item 57

5.141 This item repeals subsection 133(1) relating to the suspension or removal of trustees. The new subsection grants the Regulator the power to remove or suspend a trustee in a number of circumstances where there are prudential risks to the fund and/or fund members.

5.142 APRA may suspend or remove a trustee that is a disqualified person within the meaning of Part 15.

5.143 APRA may suspend or remove a trustee where the conduct, or proposed conduct, of any of the trustees of the entity may result in an unsatisfactory financial position for that entity, or any other superannuation entity.

5.144 APRA may suspend or remove a trustee where the approval of that trustee has been revoked under the SIS Act, or the RSE licence of that trustee has been cancelled by APRA.

5.145 If a trustee is subject to the requirement in subsection 121A(1) to be an approved trustee or an RSE licensee that is a constitutional corporation, but fails to fulfil that obligation, the trustee may be removed or suspended.

5.146 APRA may remove or suspend a trustee where that trustee is an RSE licensee that has breached any of the conditions imposed on that RSE license under the new Part 2A of the SIS Act.

Item 58

Part 18 — Amalgamation of funds

5.147 Item 58 inserts into the SIS Act Part 18 concerning amalgamation of funds.

5.148 Section 143 describes the object of Part 18.

5.149 Part 18 is primarily designed to address circumstances where a trustee of a regulated superannuation fund or approved deposit fund has not become an RSE licensee before the end of the licensing transition period. At the end of the transition period, APRA can suspend or remove such a trustee and put in place an RSE licensee as an acting trustee. However, permanent arrangements will need to be made for the entity, and an acting trustee may not be prepared to continue in this capacity.

5.150 Part 18 facilitates the transfer of all members’ benefits in a registrable superannuation entity to another entity in certain circumstances. The arrangements contained in Part 18 operate alongside, and are designed to complement, the successor fund arrangements that are contained in the SIS Act.

5.151 Section 144 gives APRA the power to approve the transfer of all benefits of members and beneficiaries in a regulated superannuation fund or approved deposit fund (the transferor fund) to another regulated superannuation fund or approved deposit fund (the transferee fund), providing all of the trustees of the transferor fund are party to the transfer and the trustee of transferee fund is an approved trustee (if the transfer takes place during the licensing transition period) or an RSE licensee. Where the trustee of the transferee fund is an RSE licensee that is a group of individual trustees, all of the individual trustees of the transferee fund must be party to the transfer.

5.152 Section 145 establishes the processes for trustees of transferor funds and transferee funds to make an application to APRA for approval of the transfer of all benefits of members and beneficiaries between the two funds.

5.153 Section 146 establishes the circumstances in which APRA may approve a transfer between a transferor fund and a transferee fund under section 144. APRA must be satisfied that all reasonable attempts to bring about the transfer under another provision of the SIS Act (for example, under the successor fund arrangements) have failed, or the transfer would take place under a scheme for winding up or dissolving the transferor fund under section 142 of the SIS Act. Section 146 also lists factors APRA must have regard for when forming a view that the transfer is reasonable in all circumstances. APRA cannot approve a transfer without first gaining the Minister’s written consent to the transfer.

5.154 Section 147 provides that once the benefits of members and beneficiaries in a transferor fund are transferred to a transferee fund, members and beneficiaries and other persons cease respectively to have rights or contingent rights against the transferor fund. This provision is designed to ensure there is a clean break between members and beneficiaries and other persons holding contingent rights against a transferor fund once a transfer has been completed.

Item 59

5.155 This item clarifies that a trustee of a public offer entity must be an approved trustee or an RSE licensee that is a constitutional corporation in order to engage in conduct to which section 152 applies, that is, issuing, offering to issue of inviting applications for the issue of superannuation interests in a public offer entity. This item also codifies the requirement that the approved trustee or the RSE licensee must be the only trustee of that entity.

Item 60

5.156 Item 60 inserts a new section 338A which clarifies the liability of a trustee who is a member of a group of individual trustees where a trustee must ensure that a particular thing occurs. Section 338A ensures that a person is not liable for a failure to ensure that a particular thing occurs if the person has exercised due diligence. This provision is modelled on section 731 of the Corporations Act 2001.

Item 61

5.157 This item makes it clear that only the trustee of a superannuation entity that is affected by a decision of the Regulator to cancel an RSE licence may request that the Regulator reconsider that decision. Subsection 344(12) is amended to provide consistency with the amendment to the definition of ‘reviewable decision’ in subsection 10(1).

Part 2 — Amendments commencing second

Superannuation Industry (Supervision) Act 1993

Item 62

5.158 Section 4 contains a summary of the provisions of the SIS Act. This item repeals the table item that refers to the approval of trustees because Part 2 of the SIS Act, which contains the provisions relating to the approval of trustees, is repealed under Schedule 1, Part 2, Item 71 of the Bill.

Item 63

5.159 This item makes it clear that the general administration of the provisions inserted in Part 2A and 2B of the SIS Act will be conducted by the APRA. This item also removes the redundant reference to Part 2 of the SIS Act.

Item 64

5.160 This item amends the definition of approved deposit fund in subsection 10(1) to make it clear that the trustee of an approved deposit fund must be licensed under Part 2A of the SIS Act and must be a constitutional corporation.

5.161 This item removes the reference to an approved trustee, as the requirement to seek approval is being replaced by the requirement for the trustee to be licensed. This item also explicitly requires that the trustee of an approved deposit fund be a constitutional corporation, which was implied in the previous definition, as only a constitutional corporation was able to apply to be an approved trustee.

Item 65

5.162 This item repeals the definition of approved trustee in subsection 10(1) because the requirement to seek approval is being replaced by the requirement for trustees or groups of individual trustees to be licensed.

Item 66

5.163 This item removes paragraphs (ba) to (dc) of the definition of reviewable decision in subsection 10(1) as these decisions are made under provisions contained in Part 2 of the SIS Act, which is being repealed under Schedule 1, Part2, Item 71.

Items 67 and 68

5.164 These items amend paragraphs (m) and (n) of the definition of reviewable decision in subsection 10(1) to remove the redundant references to ‘a trustee’s subsection 92(5) approval’.

Item 69

5.165 This item repeals the definition of written custody requirements, in subsection 10(1) which are requirements that may apply to an approved trustee. This term is no longer used in the SIS Act because the approval of trustees is replaced by the requirement for trustees to be licensed.

Item 70

5.166 This item removes the redundant reference to an approved trustee in paragraph 17A(4)(a).

Item 71

5.167 This item repeals Part 2 of the SIS Act, which contains the provisions relating to the approval of trustees. The references to the approval of trustees are being removed because the requirement to seek approval is being replaced by the requirement for trustees or groups of individual trustees to be licensed, which will be contained in Part 2A of the SIS Act.

Item 72

5.168 This item removes the redundant reference to the licensing transition period in the subsection 29J(1).

Item 73

5.169 This item removes the redundant reference to the operation of the licensing transition period in subsection 29J(1).

Item 74

5.170 This item inserts punctuation consequential to removal of paragraphs (c) and (d) in paragraph 29J(1)(b).

Item 75

5.171 This item removes the transitional arrangements in paragraphs 29J(1)(c), (d) and (e) as the licensing transition period ends immediately before the commencement of this schedule.

Item 76

5.172 This item removes the redundant reference to an approved trustee in paragraph 92(5)(c).

Item 77

5.173 This item removes the redundant reference in paragraph 92(5)(ca) to the instrument of approval under section 26 for an approved trustee.

Item 78

5.174 This item removes the redundant provisions relating to a trustee’s approval in subsections 92(6), (7), (8) and (9).

5.175 Subsection 92(6), (7), (8) and (9) relate to APRA and the approval of an alternative agreed representation rule under subsection 92(5). This item repeals those subsections, which relate to the approval of, the attaching of conditions to, and the revocation of approval under the alternative agreed representation rule, as these issues will now be dealt under conditions attaching to the trustee’s RSE licence.

Item 79

5.176 This item repeals section 121A to remove the redundant requirement that the trustee of a superannuation fund with fewer than five members (other than a self managed superannuation fund) must be an approved trustee. The requirement to be an approved trustee has been replaced by the requirement for a trustee to be licensed.

Item 80

5.177 This item repeals paragraph 133(1)(c) as the reference to the approval of a trustee is redundant and the reference to the RSE licence is dealt with in the new paragraph.

5.178 This item repeals paragraph 133(1)(d) as the obligation in section 121A has been repealed.

5.179 The new paragraph enables the Regulator to suspend or remove a trustee that is not an RSE licensee or a member of a group of individuals that is an RSE licensee. This power enables the Regulator to prevent persons from acting as a trustee of a superannuation entity where those persons have not been licensed. The purpose of licensing is to ensure that those persons responsible for the management of superannuation funds are capable of fulfilling their legal duties, and this paragraph reinforces the Regulator’s ability to enforce the requirement to be licensed.

Item 81

5.180 A new subsection 142(9) is inserted that applies in circumstance where a fund had an approved trustee that failed to obtain an RSE licence during the licensing transition period. The subsection specifies that, in those circumstances, an instrument that formulates a scheme for winding up or dissolution of an entity is not a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901.

Item 82

5.181 This item removes the redundant reference to the approved trustee in subparagraph 144(1)(b)(i).

Item 83

5.182 This item removes the redundant reference to the approved trustee in paragraph 145(1)(a).

Item 84

5.183 This item removes the redundant reference to the approved trustee in paragraph 146(1)(d).

Item 85

5.184 This item removes the redundant reference to an approved trustee in paragraph 152(2A)(a).

Item 86

5.185 This item removes the redundant reference to paragraphs 344(12)(ba), (c) and (d) of the definition of reviewable decision, as these paragraphs were repealed under Schedule 1, Part 2, Item 65 of the Bill.

Schedule 2 — Clarification of the application of the law to groups of trustees

Superannuation Industry (Supervision) Act 1993

Items 1 — 114, 116 — 129, 131 — 146, 148 — 176, 178 — 189,
191 — 194, 196 — 205 and 207 — 372

6.1 Schedule 2 contains amendments to clarify the operation of SIS Act provisions as they apply to trustees of superannuation entities.

6.2 The existing SIS Act provisions impose obligations on ‘the trustee’; however, the trustee of a regulated superannuation fund may be either a constitutional corporation or a group of individual trustees. The purpose of these amendments is to clarify the operation of provisions of the SIS Act as they apply to trustees of superannuation entities, particularly for a trustee that is one of a group of individual trustees. The purpose is not to alter the definition of a trustee.

6.3 These amendments have introduced four new formulations to impose obligations on a trustee of a superannuation entity.

6.4 A reference to ‘a trustee’ means that one or more of the individual trustees must do something, or ensure that something is done. The references to ‘a trustee’ are used to recognise that one of a group of individual trustees is required to act. For example, where APRA seeks to give a written notice to a group of individual trustees, it is not necessary for APRA to give a written notice to each individual trustee within the group. Notice should be given to one of the trustees and it is the responsibility of the group of individual trustees to ensure that adequate systems are in place to communicate those notices to other members of the group. A reference to ‘a trustee’ is also used in relation to transactions entered into by the trustee. These amendments recognise that one or more trustees may enter an agreement or arrangement on behalf of the group of individual trustees, because the group of individual trustees does not possess capacity as a separate legal entity.

6.5 The purpose of these amendments is not to override the governing rules of the fund as to whether a particular individual trustee was empowered to carry out a particular act. Any action taken by a trustee must be taken in accordance with the terms of the governing rules and/or trust deed.

6.6 A reference to ‘each trustee’ means that each individual trustee must do something, or ensure that something is done. For example, subsection 36(1) has been amended (see Item 12), so that each trustee must ensure that annual returns are lodged with the Regulator and each individual trustee will be held responsible in the event that the annual returns are not lodged, unless the defences contained in section 338A (Schedule 1, Part 1, Item60) or the Criminal Code apply.

6.7 A reference to ‘the trustee or the trustees’ means that all of the individual trustees are under an obligation to do something on behalf of the fund and the manner in which this obligation is fulfilled should be determined in accordance with the trust deed or governing rules.

6.8 A reference to ‘the trustee or if the entity/fund has a group of individual trustees, the trustees’ has the same meaning as ‘the trustee or the trustees’, but the wording of the provision necessitates the inclusion of a link between the trustee and the superannuation entity.

6.9 These amendments do not alter the operation of offences in relation to a trustee that is a constitutional corporation or body corporate. Each of these formulations accommodates the circumstance where a fund or entity has only one trustee by imposing the obligation on that trustee, including where that trustee is a corporation.

Items 115, 130, 147, 177, 190, 195 and 206

6.10 These items remove references to ‘2 or more’ in provisions that refer to groups of 2 or more individual trustees. The purpose of these amendments is to allow for the circumstance where a group of 2 or more trustees experiences a temporary vacancy, leaving only one trustee in the group. The operation of the provisions of the SIS Act is not altered in the case of such a temporary vacancy.

Item 373

6.11 This item allows regulations to be made which are necessary or convenient to clarify how these provisions apply in relation to groups of individual trustees.

Schedule 3 — Actuaries, auditors and defined benefit funds

Part 1 — Actuaries and auditors

Retirement Savings Accounts Act 1997

Item 1

7.1 Section 66 of the RSA Act deals with the obligations of a person performing audit functions under the Act or the Regulations. The obligation to report arises where a person forms the opinion that it is likely that a contravention of this Act or the regulations may have occurred, may be occurring, or may occur in relation to the RSA provider.

7.2 This item inserts paragraph 66(1)(c) to restrict the operation of these reporting obligations to the circumstance where the contravention, or likely contravention of the Act or regulations, is of such a nature that it may affect the interests of holders of retirement savings accounts. The purpose of this amendment is to target reporting obligations to circumstances where there are prudential concerns that will have an impact on retirement savings account holders.

Item 2

7.3 This item extends the obligation to report under subsection 66(3) to require reporting to both the Regulator and the RSA provider where section 66 applies to the person. The heading is altered to reflect this change.

7.4 The item also amends subsection 66(3) to clarify that the obligation to report arises as soon as practicable after forming the opinion under subsection 66(1). It is necessary to clarify when the obligation to report arises under subsection 66(3) because a contravention of this subsection is an offence.

Item 3

7.5 This item repeals subsections 66(4), (5), (6), (7), (8) and (9) and replaces them with four new subsections, which clarify the need to tell the Regulator or the RSA provider about a matter and the consequences of failure to comply with the reporting obligations under the section.

7.6 The amended version of subsection 66(5) clarifies the conduct that leads to the offence of providing misleading information. The heading of this subsection has been amended to more aptly describe the offence by referring to misinformation.

7.7 The conduct targeted by subsection 66(5) is similar, but not equivalent to, the conduct punishable under section 137.1 of the Criminal Code, thus this item inserts a note after the subsection drawing attention to the provisions of the Criminal Code relating to general principles of criminal responsibility.

7.8 This fault liability offence retains the penalty of imprisonment for 12 months, which is consistent with the penalty that previously applied to the offence and with the penalty prescribed for a contravention of section 137.1 of the Criminal Code.

7.9 The amended version of subsection 66(6) extends the protection against liability in a civil action or civil proceeding to a person providing information under this section to the Regulator or the RSA provider. The purpose of this amendment is to recognise that the person must provide information to the Regulator and the RSA provider at the same time, and that protection from liability should be offered for the provision of this information.

7.10 This item makes it clear that a person is guilty of an offence where the person contravenes subsection 66(3). The new subsection 66(7) sets out the fault liability offence, which requires the prosecution to prove the relevant fault elements, and carries a penalty of 50 penalty units. The new subsection 66(8) sets out the strict liability offence, which does not require proof of fault elements, and carries a lesser penalty of 25 penalty units. A note is inserted after subsection 66(8) drawing attention to the provisions of the Criminal Code relating to strict liability and to the general principles of criminal responsibility. The penalty levels applied to these offences are consistent with existing penalties in the SIS Act for failure to provide information to the Regulator.

Item 4

7.11 Section 66A is inserted to encourage an auditor to provide information to the Regulator that would assist the Regulator in performing its functions. This section protects the auditor from any action, claim, demand or liability by any other person in relation to the information provided to the Regulator where that information is provided in good faith.

7.12 Section 66B makes it clear that qualified privilege against self-incrimination is conferred on those persons providing information to the Regulator under section 66. An individual cannot avoid the obligation to provide information under section 66 by claiming privilege in respect of that information. However, section 66B protects an individual who asserts privilege by providing that such information is not admissible in evidence against that individual in a criminal proceeding or a proceeding for the imposition of a penalty (‘use immunity’).

7.13 The purpose of section 66B is to provide adequate protection for the individual, whilst retaining the ability of the Regulator to obtain information and use that information to effectively prosecute persons who contravene the SIS Act.

Superannuation Industry (Supervision) Act 1993

Item 5

7.14 Section 129 of the SIS Act places obligations on a person performing audit or actuarial functions under the Act or the regulations. The obligation to report to the Regulator or the trustee arises where a person forms the opinion that it is likely that a contravention of this Act or the regulations may have occurred, may be occurring, or may occur in relation to a superannuation entity.

7.15 This item inserts paragraph (1)(c) to restrict the operation of these reporting obligations to the circumstance where the contravention, or likely contravention of the Act or regulations, is of such a nature that it may affect the interests of members or beneficiaries of the entity. The purpose of this amendment is to target reporting obligations to circumstances where there are prudential concerns that will have an impact on fund members or beneficiaries.

Item 6

7.16 This item extends the obligation under subsection 129(3) to require reporting to both the Regulator and the trustee of the entity. The heading is amended to reflect this change.

7.17 The item also amends subsection 129(3) to clarify that the obligation to report arises as soon as practicable after forming the opinion mentioned in paragraph 129(1)(a). It is necessary to clarify when the obligation to report arises under subsection 129(3) because a contravention of this subsection is an offence.

Item 7

7.18 This item repeals subsections 129(3A), (3B), (4), (5), (6) and (7) and replaces them with five new subsections (129(3A) – (6) that deal with the requirements to report in relation to compliance and the consequences of failure to comply with the reporting obligations.

Item 8

7.19 This clarifies the timing of the obligation to report by amending subsection 130(2).

Item 9

7.20 This item repeals subsections 130(2A), (2B), (3), (4), (5) and (6) and replaces them with five new subsections (130(2A) – (5)) that deal with the requirements to report in relation to solvency and the consequences of failure to comply with the reporting obligations.

Item 10

7.21 The new section 130A is inserted to encourage an auditor or actuary to provide information to the Regulator if they think that the information would assist the Regulator in performing its functions under either the SIS Act or the Financial Sector (Collection of Data) Act 2001. This section protects the auditor or actuary from any action, claim, demand or liability by any other person in relation to the information provided to the Regulator where that information is provided in good faith.

7.22 The new section 130B makes it clear that qualified privilege against self-incrimination is conferred on persons providing information to the Regulator under sections 129 and 130. An individual cannot avoid the obligation to provide information under sections 129 or 130 by claiming privilege in respect of that information. However, section 130B protects an individual who asserts privilege by providing that such information is not admissible in evidence against that individual in a criminal proceeding or a proceeding for the imposition of a penalty (‘use immunity’).

7.23 The purpose of section 130B is to provide adequate protection for the individual, whilst retaining the ability of the Regulator to obtain information and use that information to effectively prosecute persons who contravene the SIS Act.

Item 11

7.24 This item provides that the amendments contained in the Bill do not apply where a matter was reported before the commencement of Schedule 3, Part 1 of the Bill to an RSA provider under section 66 of the RSA Act, or to a trustee of a superannuation entity under sections 129 or 130.

Part 2 — Defined benefit funds

Superannuation Industry (Supervision) Act 1993

7.25 Schedule 3, Part 2 of the Bill deals with the implementation of actuarial recommendations for defined benefit funds.

Item 12

7.26 A definition of defined benefit fund is inserted in subsection 10(1) of the Act. Its meaning is given by the Superannuation Industry (Supervision) Regulations 1994. As the requirements and obligations in relation to actuarial recommendations are expressed in the Regulations, the existing definition in the Regulations is imported to ensure consistency.

Item 13

7.27 A definition of defined benefit member will be inserted in subsection 10(1). Its meaning is given by the Superannuation Industry (Supervision) Regulations 1994. As the requirements and obligations in relation to actuarial recommendations are expressed in the Regulations, the existing definition in the Regulations is imported to ensure consistency.

Item 14

7.28 The new section 130C deals with the obligations of a person performing audit or actuarial functions under the Act or the regulations and subsection 130C(1) sets out when the section applies. The section applies where the person forms the opinion that there has been a failure to implement an actuarial recommendation relating to contributions to the fund by the employer-sponsor. In order for the reporting obligation in section 130C to arise, the recommendations must have been developed in accordance with the Regulations and the trustee or employer-sponsor of the fund must have been required to implement the recommendations.

7.29 This item restricts the application of section 130C to circumstances where there are prudential concerns, namely, where the failure to implement the recommendation is of such a nature that it may affect the interests of members or beneficiaries of the fund.

7.30 The new subsection 130C(2) imposes an obligation on a person report to the Regulator and the trustee of the superannuation fund where the person forms the opinion that there has been a failure to implement actuarial recommendations. The person is required to report to the Regulator and the trustee as soon as practicable after forming that opinion.

7.31 The new subsection 130C(3) is designed to avoid duplication of reporting by providing an exception to the requirement imposed under subsection 130C(2). A person is not required to report to the Regulator if the person has been told by another person to whom this section applies that this other person has already told the Regulator and a trustee about the matter, and the person has no reason to disbelieve that other person.

7.32 The new subsection 130C(4) makes it clear that a person must not misinform another person to whom this section applies regarding the obligation to report to the Regulator and the trustee under section 130C.

7.33 The conduct targeted by subsection 130C(4) is similar, but not equivalent to, the conduct punishable under section 137.1 of the Criminal Code, thus this item inserts a note after the subsection drawing attention to the provisions of the Criminal Code relating to general principles of criminal responsibility.

7.34 The offence in subsection 130C(4) requires proof of fault and carries a maximum penalty of imprisonment for 12 months. This is consistent with the penalty that applies for similar offences in subsections 129(3B) and 130(2B) of the Bill and with the penalty prescribed for a contravention of section 137.1 of the Criminal Code.

7.35 The new subsection 130C(5) makes it clear that if a person gives information to the Regulator in accordance with section 130C, the person may not be subject to any civil action or proceeding in relation to that information.

7.36 This item provides that a person is guilty of an offence where the person contravenes subsection 130C(2). The new subsection 130C(6) sets out the fault liability offence, which requires the prosecution to prove the relevant fault elements, and carries a penalty of 50 penalty units. The new subsection 130C(7) sets out the strict liability offence, which does not require proof of fault elements, and carries a penalty of 25 penalty units. A note is inserted after subsection 130C(7) drawing attention to the provisions of the Criminal Code relating to strict liability and to the general principles of criminal responsibility. The penalty levels applied to these offences are consistent with existing penalties in the SIS Act for failure to provide information to the Regulator.

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