No recourse to members’ money for super funds that err

Superannuation funds and their executives who are found to have failed in their duties under the Government’s proposed new Financial Accountability Regime (FAR) will not be able to rely on members’ funds to bail them out.

That will be one of the key bottom lines of the Government’ proposed new Financial Accountability Regime (FAR) with exposure draft reveal that superannuation fund licensees will be prohibited form using trust assets to pay a civil penalty arising from breaching an obligation under the FAR.

What is more, it is unclear the degree to which superannuation funds or other financial services businesses will be able to insure against such eventualities.

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The maximum penalties under the FAR are significant with the Financial Services Council (FSC) noting that the penalties are to be the greater of:

  1. $10.5 million (50,000 penalties units);
  2. The benefit derived/detriment avoided by the entity because of the contravention multiplied by three (where this can be determined by the court); or
  3. 10% of the annual turnover of the body corporate (capped at $525 million or 2.5 million penalty units).

Responding to a discussion paper on the new FAR, the FSC said that, “interestingly, in the case of RSE [superannuation] licensees, it is noted that RSE licensees will be prohibited from using trust assets to pay a civil penalty arising from breaching an obligation under the FAR”.

It said that provision would be made for the court to have regard to the impact of the penalty on the trustee’s superannuation fund membership.

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This is the IOOF "issue" from the RC playing out. In reading the above, when would it ever be ok to compensate from the super (members) pool? Never. Advisers can't do that and never have - so now the Management of the Funds will have to catch up to a very basic professional standard.

I don't understand who is expected to pay??? Imagine a super fund that makes a mistake and had a penalty. Lets call the fund "Australian Super Fund". They have no parent company. What entity pays the penalty, beause all invetments are ultimately member benefits?

I think they, let's say the regulators, are trying to protect say Australian Super et al from any liability should/when their investment strategies fail?

Take your time Robin. Think about it. Not sure where you went with the "Parent Company" concept. Answer: The Management Company (The Trustee of the Fund) that receives fees from the Fund would have to pay any penalties. The Trustee is a separate company from the Super Fund and the Trustee has it's own P&L and Balance Sheet.

Dear Cal, good point, and I think you are correct. I took your point and I looked at a typical "trustee company" for a typlical "Australian super fund" and found the balance sheet had a net position of $300,000,000 negative equity. Then I checked the P & L and found they had a loss for the year of $100,000,000. I guess they would struggle to pay the penalty, Or they could pt up the admin fee for the next few years and recover the money over time. I may be silly, but somehow to me that would be the same result as taking the penalty from the members accounts, afterall that is their only source of income.

It would be too long a post to explain Trust accounting, on issues such as negative equity and P&L losses for Industry (not for profit) and Retail (profit & dividends to shareholders) Funds. Suffice to say, for the big Funds in both cases, their gross fees are significant, they have annuity type earnings and they would both be quite able to pay penalties if they were levied.

thanks very much. I don't understand how you can operate with neg equity, but I tend to trust your response.

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