|
Proposed uniform scheme for the regulation of trustee corporations
3. The Market for Personal Trust Services
3.1. MARKETS
3.1.1. Evaluating the impact of legislative restrictions on competition requires relevant markets to be identified and an assessment of the impact of the restrictions on the market. Delineation of the relevant markets involves identifying those products which can be substituted for one another. Those products form a single market. This approach to delineating markets is the same as is reflected in section 4E of the Trade Practices Act 1974 (Commonwealth) which defines “market” as including a market for goods or services and other goods or services that are substitutable for, or competitive with, those goods or services.
Aspects of the Market
3.1.2. Below is set out a description of the market for personal trust services.
The role of trustee corporations in the market for personal trust work
3.1.3. The ability of a trustee company to act as an executor or administrator under a will or grant of administration forms a distinct market, although trustee companies frequently offer personal trust services in conjunction with other services, including financial planning and investment, superannuation and custodial services. Individuals within other businesses, including lawyers, accountants, and financial advisers, compete in the market for personal trust services with trustee companies, and may offer other services in the same way as trustee companies.
3.1.4. However, unlike trustee companies, an individual trustee cannot offer perpetual succession to a client establishing a long term trust, and many competing businesses cannot offer the financial resources of most trustee companies, because only large public companies or their subsidiaries are licensed trustee companies (apart from public trustees in each jurisdiction). Other bodies corporate, such as other companies, incorporated associations, statutory authorities, cooperatives or trade unions cannot act as a trustee of a personal trust, although they can offer other financial services. However, it is not clear whether these entities would seek to enter the market for personal trust work if they were able to do so.
3.1.5. Accordingly, the market has the following features:
- Trustee companies can act as personal trustee only because the trustee companies legislation allows them to do so;
- The corporate nature of a trustee company may confer a competitive advantage over natural persons;
- The existence of trustee companies gives greater choice to consumers;
- Trustee companies may enjoy a competitive advantage over other bodies corporate which cannot offer personal trust services.
3.1.6. While the existence of trustee companies adds to the choices of consumers, the restrictions on the types of body corporate that can act as trustee companies in turn restrict that choice.
Other services offered by trustee companies
3.1.7. Apart from personal trust and related services, trustee companies typically offer investment products, such as the offer of common funds for public investment in accordance with the Corporations Law (in managed investment schemes). Other entities operating in this aspect of the market include deposit-taking institutions.
3.1.8. It appears that the bulk of the business of trustee corporations lies in the field of investment products, rather than personal estate management. The purpose of the regulation proposed in the draft model Bill is principally to regulate the personal estate business, for the protection of the public in that market.
Special features of the market
3.1.9. Special features of the market for personal trust services need to be examined in settling any regulatory proposals, including information asymmetry and the position of clients.
Information Asymmetry
3.1.10. In a perfect market, the quality and value of services and products on sale can be critically assessed by potential purchasers. Information asymmetry arises when, by virtue of the nature of what is sold, the purchaser cannot be perfectly informed about matters such as price, function, and quality of the proposed purchase.
3.1.11. Special knowledge may be required to make an assessment of trustee services, because of their technical nature. For example, the purchaser of a will, power of attorney or trust deed is unlikely to be fully aware of the nature and complexity of the functions and responsibilities of a trustee.
3.1.12. Moreover, many of the clients of trustee corporations are adults with disabilities, children, people who are absent from the jurisdiction, or who are inexperienced in the management of assets. Indeed, one of the principal reasons that trustees, including trustee corporations, are used is to ensure that the interests of such persons are protected. One of the public benefits of the regulation of trustee corporations is the protection of consumers, and in particular, vulnerable consumers.
3.1.13. Once a trustee corporation has been selected and a trust has come into effect, the corporation can only be removed by an order made by the Supreme Court. This distinguishes personal trust services from other products offered by the financial services sector, and is a further reason for ensuring the stability of trustee corporations.
The position of clients
3.1.14. The client of a trustee corporation is often not the person who chose the trustee corporation, because a person who establishes a trust to be administered by a trustee corporation generally does so to benefit a third party. A trust may come into effect at an unpredictable later time, and may continue to operate for many years, or in perpetuity, as in the case of charitable trust. Further, the choice of trustee corporation can be made by courts or tribunals, such as, for example, in the case of an adult with a disability who lacks the capacity to manage his or her affairs.
3.1.15. An executor or settlor of a trust can select a trustee corporation and change his or her choice before the instrument comes into effect. However, once the will or trust takes effect, the clients of a trustee corporation, who are its beneficiaries, generally cannot do so. This means that the ordinary market sanction, that a dissatisfied customer can choose another supplier, operates imperfectly.
QUESTIONS
Does the above discussion correctly describe the relevant market?
Are there other features of the market relevant to competition review?
What factors add to, or reduce, competition in the market(s)?
Are there other features of the market which should be considered when evaluating the model Bill?
3.2. RESTRICTIONS ON COMPETITION
3.2.1. There are three types of restrictions on competition:
a) barriers to entering (or re-entering) markets;
b) restrictions on competition within markets; and
c) discrimination between market participants.
3.2.2. As stated above, there are currently barriers to entry to the industry, and these barriers have traditionally been used as a means of ensuring the proper administration of trusts. These barriers have in turn meant that the industry contains a relatively small number of participants, and the barriers may restrict competition within the market for personal trust services. One issue for the review is whether it is in the public interest for the criteria for entry to the industry to be changed, and how a lowering of the barriers to entry would affect the market.
Costs of Restrictions
3.2.3. The types of cost generated by restrictions contained in legislation are:
a) costs on participants within affected markets generated by complying with restrictions contained in the legislation;
b) costs associated with efficiency losses or the allocation of resources that may result from direct intervention in a market, including costs generated by restrictions on the levels of competition; and
c) costs to the public of administering the regulatory regime established by the legislation.
Compliance costs of regulation
3.2.4. The review needs to consider whether the costs of compliance with regulation by trustee corporations is outweighed by the public benefit of regulation. Compliance costs can include the factors set out below.
Fee restrictions
3.2.5. The fees charged by trustee corporations are currently regulated in most States and Territories. If restrictions were removed, either as part of deregulation or together with a new form of regulation directed to other matters, the market might permit trustee corporations to increase their fees. The capping of fees might be considered to be a compliance cost and the review considers below at Chapter 4.7 whether the public interest is served by fee regulation, in the light of the market imperfections described above.
Cost of meeting standards
3.2.6. If standards are sets as part of a licensing scheme, the costs of meeting standards would be a compliance cost, such as, for example, in meeting requirements for internal systems for risk management or accounting standards. However, industry participants may already have compliance systems in place, to comply with other legal requirements or as a matter of corporate governance.
Cost of complaint handling mechanism
3.2.7. If such a mechanism is to be compulsory, the cost of providing it will be a compliance cost.
3.2.8. The review has not identified other compliance costs, but comment is sought as to whether any exist.
Efficiency losses
3.2.9. If legislation prescribes the manner in which business is to be conducted, it may result in efficiency losses. The draft Bill provides a broad regulatory framework but does not dictate how the day-to-day business of the trustee corporation is to be conducted. Comment is sought as to whether regulation of the industry would lead to efficiency losses.
Costs of regulatory regime
3.2.10. The draft Bill contemplates that the regulatory regime will be funded from an industry levy. The main cost is expected to be the cost of prudential advice and supervision by the prudential adviser.
QUESTIONS
Are there any other costs arising from the legislation which should be considered in competition review?
In each case, how does such cost arise?
In each case, how significant is the cost in comparison with the public benefit conferred?
|
