Insurance is where the "rubber meets the road" with Section 56 amendment

The Section 56 amendment to the Superannuation Industry (Supervision) Act 1996 not only has implications for trustees’ use of reserves but also the purchase of trustee indemnity insurance.

Appearing before a House of Representatives Economics Committee public hearing, University of New South Wales (UNSW) director of the Centre for Law, Markets and Regulation, Professor Scott Donald, said ensuring trustee accountability was very important but insurance implications was where the “rubber meets the road”.

“We ought not to impugn trustees for innocent mistakes, nor ought we to go looking for accountability when none is owed,” he said.

“The trust structure was chosen as the legal basis for the superannuation industry, in large part because of the way that it focused responsibility and accountability on the office of trustee, and Section 56 and the recent amendments play a really important role in that.”

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As part of the committee’s review into the four major banks and superannuation sector, Donald’s expert opinion was sought following several super funds seeking Section 56 legal advice to set up member fund reserves to pay for trustee fines – an issue that would particularly threaten industry super funds who do not have parent companies to pay a fine.

Committee chair, Jason Falinski, asked Donald whether creating an indemnity insurance market for penalties risked creating a moral hazard in the way a fund exercises its duties if it was protected against losses by the insurer.

In reply to Falinksi’s question, Donald said the key question must be who pays for the insurance.

“One of the concerns that I and others have had for some time is that prohibiting fund’s trustees from using member’s assets to meet sanctions would be undermined if you then allowed them to use member funds to fund insurance that would pay out on those liabilities,” Donald said.

“I want to stress, the law in this area is very complicated and it's not at all clear that the outcomes that you might want would be achieved in all situations, and I think it'd be worthwhile getting some clarity in that space to ensure that that doesn't happen.”

Donald said insurance could be provided to the trustee of super funds as well as its directors, but excesses would have to be paid.

“It’s also the case that criminal sanctions of certain types can’t be insured against,” he said.

“And so there are some residual types of liabilities that directors could face that insurance wouldn’t satisfy entirely and so that’s one of the reasons to have some capital in the trustee that can assist in appropriate circumstances, not all circumstances… to meet some of those liabilities.”