When ASIC opted to not seek the maximum penalty against AustralianSuper for the fund’s failure to automatically consolidate multiple member accounts, overcharging 90,000 members some $70 million in the process, it sparked renewed calls for an overhaul of the profit-to-member governance structure and cries of favouritism from AustralianSuper’s for-profit competitors.
Last week ASIC revealed it is suing AustralianSuper again, this time over delays in processing death benefit claims. ASIC says it will seek a (yet to be determined) pecuniary penalty against AustralianSuper in the death benefits case. The judgement in the earlier multiple-accounts case shows that the fund might again cop a lighter penalty than if it were a for-profit fund.
In the latest case, the regulator alleges that on one occasion the $365 billion super fund took 1140 days – more than three years – from the date the fund had all the information it needed to pay the claim to the day the claim was paid. In another case, 529 days elapsed between the fund requesting information from the claimant and a follow-up request being sent. In two cases it took AustralianSuper more than 200 days to send a claimant a claims pack after being notified of a claim, and in five other cases it took more than 100 days.
ASIC further alleges that even previous generations of the AustralianSuper executive ranks – including former chief executive Ian Silk – knew what was going on and, despite being “far from impressed”, acted too slowly to remedy the situation.
In the multiple-accounts case, Federal Court imposed a $27 million pecuniary penalty on AustralianSuper and laid out in painful detail how it took almost nine years for the fund to update its business rules to comply with law changes relating to merging multiple accounts, and how the interests of the trustee in protecting its revenue overrode members’ best financial interests.
Some 90,000 members were both overcharged and missed out on investment earnings for a total loss of almost $70 million. AustralianSuper has since remediated members and paid the court-imposed penalty on top of that.
But a judgement handed down on 21 February by Justice Lisa Hespe confirmed that ASIC and AustralianSuper jointly submitted that a penalty of $27 million was appropriate – which the court ultimately supported – and that, had the trustee of AustralianSuper been a for-profit entity, ASIC would have sought a greater penalty.
The judgement in that case sets out why profit-to-member trustees are treated differently from for-profit trustee businesses when it comes to determining penalties, and why it’s considered appropriate that when trustee organisations misbehave it’s not members who are left to carry the can.
Balanced deterrent
In her judgement, Justice Hespe said the interests of members in the fund had to be balanced against the deterrent effect of the penalty. The penalty imposed was small enough that it would not “cause a material detriment to members of the fund” but was large enough to “deter other superannuation fund trustees from failing to diligently discharge their duties to act in members’ best financial interests and to ensure that they provide financial services efficiently, honestly and fairly”.
The judgement predictably caused a furore among AustralianSuper’s for-profit, or retail, competitors, who sensed a playing field tilted against them. And it set off Coalition Senator Andrew Bragg on a line of questioning in a Senate Economics Legislation Committee hearing on 3 March that aimed to demonstrate what he described as a “distortion” in the regulation of super funds.
Bragg has previously said he believes the law has been circumvented by courts allowing super funds to amend trust deeds permitting the creation of reserves to pay fines incurred by trustees. It’s an issue he has been pursuing for some time. His comments echoed recent public hearings and the third interim report of the Senate Economics References Committee inquiry into improving consumer experiences, choice and outcomes in Australia’s retirement system, an inquiry that he chairs.
In the economics committee hearing Bragg said that “the reality is that when these big fines come through, the members pay, not the shareholders” of the trustee. “Clearly that’s been taken into account in this judgment,” he said.
That’s true, and the judgement handed down on 21 February notes the Corporations Act provides that in determining a penalty the court must “take into account all relevant matters”, including “in the case of a contravention by the trustee of a registrable superannuation entity, the impact that the penalty under consideration would have on the beneficiaries of the entity”.
ASIC Commissioner Sarah Court said at the senate hearing that “one of the factors that the court will take into account in determining a penalty is any benefit to the wrongdoer”.
“If the fund does not retain the benefit and it is returned to members, for example, then it’s a different scenario than if a fund, or any other company for that matter, retains the financial benefit of the wrongdoing and keeps it for its own asset base, or gives it to shareholders,” she said.
Regulatory arbitrage
So Bragg is right to say AustralianSuper was treated differently than if it were a for-profit trustee – or, in his words, that there’s a regulatory arbitrage between for-profit and profit-to-member trustees.
Other profit-to-member trustees would be treated the same way – because the law says that’s how it should be, not because ASIC as a soft spot for them. But the optics in this case aren’t assisted by the fact that ASIC and AustralianSuper jointly submitted to the court that a $27 million penalty would be appropriate.
The judgement noted that because the penalty would be paid from a reserve set up for that purpose, it would only impact members to the extent that the reserve would need to be replenished. This would “[spread] the impact of the penalty over the body of members over time”, it said.
“It is noted that if the fund had been run at a profit for shareholders and thus contributed to assets owned beneficially by either AustralianSuper or its shareholders, ASIC would have sought substantially higher penalties.”
Court told the senate hearing that the impact on members of a penalty imposed on a trustee is “but one of many factors” considered by the court.
“Every case is clearly different,” Court said.
“There’s a list set out in the in the legislation, and there’s also a lot of court-based law. The kinds of things that the court will take into account will be the size of the company involved; the nature of the misconduct; the benefit gained by the person who’s engaged in the conduct; the vulnerability of the consumers; the involvement of senior management; whether or not the conduct was deliberate.
“The courts describe the penalty as an ‘instinctive synthesis’. In my view it’s an art, not a science, but the benefit to a trustee and the impact on a member is but one of many factors that go into determining a penalty.”
Greater penalty for a for-profit trustee
Bragg referred to ASICs submission to the Federal Court that it would have sought a greater penalty were AustralianSuper not a profit-to-member fund.
“Clearly, if it was a fund that had shareholders putting capital into the fund, then it seems to me, by reading your submission to the court that you would have imposed the maximum fine of $140 million,” Bragg said.
“You’re talking about 90,000 people here who’ve been wronged, and now the members will pay the fine, but the fine would have been bigger if shareholders had put some money in – isn’t that right?”
Court noted that the penalty was imposed by the court, not by ASIC, even though the regulator and AustralianSuper made a joint submission on what the penalty should be. Court disagreed with Bragg that ASIC is inconsistent in its approach to seeking penalties against superannuation trustees.
“It’s not our position that we will treat funds differently,” she said.
“We are consistent on that. We have a very clear framework. The courts have set out over many decades, the factors that are taken into account to send deterrent signals to the market, which is the purpose of civil penalties. And we absolutely take a consistent approach to that … consistent across all funds, consistent across all entities, whether they be superannuation funds or any other entity in the market that we regulate.”
In considering ASIC’s and AustralianSuper submissions on an appropriate penalty, Justice Hespe said she had “gained little, if any substantive assistance from other cases” where wrongdoing had occurred, remediation had taken place, and a penalty was imposed.
The judgement noted actions brought by ASIC against ANZ in 2021, against Aware Super in 2022, and against BT Funds Management in 2021, from which it could be seen that “where extensive remediation has been made, the application of established principles may result in a penalty that is significantly lower than the loss remediated”.
“The outcome in other cases is otherwise of limited utility,” the judgement said.
Justice Hespe said the penalty imposed on AustralianSuper was sufficient that she was “satisfied that AustralianSuper is unlikely to engage in this contravention again”.
“The emphasis of the civil penalty in this case is on general deterrence,” she said.
“To the extent that there is a need for specific deterrence it is in conveying the message to AustralianSuper that acting in the best financial interests of members is not a slogan; it is a legal obligation and within that organisation cannot be regarded by individuals as someone else’s responsibility.”
