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Proposed uniform scheme for the regulation of trustee corporations
4. The Proposed Regulatory Regime, and Alternatives
4.1. SHOULD THE INDUSTRY BE REGULATED?
THE APPROACH TAKEN IN THE TRUSTEE CORPORATIONS BILL 2001
4.2. DISCUSSION - Prudential supervision , Rationale for approach taken in the Bill [</a>]
ALTERNATIVE APPROACHES
Abolition of licensing
Limited regulation
4.3 GOVERNANCE OF TRUSTEE CORPORATIONS: MANAGEMENT ISSUES
4.4. SHAREHOLDING RESTRICTIONS AND OWNERSHIP
4.5. COMMON FUNDS: INTERNAL OR EXTERNAL
4.6. PRUDENTIAL SUPERVISION
4.7. FEES AND COMMISSIONS
4.8. COMPLAINTS HANDLING
4.9. ADMINISTRATION
4.1. SHOULD THE INDUSTRY BE REGULATED?
4.1.1. This chapter considers whether trustee corporations should be regulated, and what the level of regulation should be, in the light of the characteristics of the market, the costs of compliance with regulation, and its public benefits.
4.1.2. If trustee corporations are to be licensed, the issue arises of what the requirements of obtaining and holding a licence as a trustee corporation should be. As noted above, there are currently significant barriers to entry to the trustee industry, but once a corporation is licensed, requirements are less stringent. The object of this chapter of the consultation paper is to consider what the threshold requirements and ongoing requirements of a licence to operate as a trustee corporation should be, having regard to the need to ensure prudential regulation of the industry, while protecting consumers, and minimising restrictions on competition.
THE APPROACH TAKEN IN THE TRUSTEE CORPORATIONS BILL 2001
4.1.3. The draft Bill provides in Part 7 for the regulation of trustee corporations. Corporations will have a licence issued by a Minister in a participating State or Territory (‘the home jurisdiction’): clause 70. Once the licence is issued, the trustee corporation can operate in any other participating jurisdiction, as long as it notifies the Minister of each jurisdiction in which it operates: Part 7, Division 3.
4.1.4. In order to obtain a licence, a trustee corporation will need to demonstrate that it can meet the licensing standards, and submit an application which complies with requirements set out in the standards. A prerequisite to obtaining a licence would also be the ability to demonstrate the capacity to undertake personal trust work.
4.1.5. The draft Bill provides in clause 53 for the Minister for the home jurisdiction (the jurisdiction in which the company is licensed) to regulate trustee corporations. The Bill requires the Minister to take into account the powers of other enforcement bodies, in the exercise of his or her powers. The object of this provision is to minimise the regulatory burden on the trustee corporations, by avoiding the imposition of overlapping requirements on trustee corporations. For example, it may be possible to reduce the need for trustee corporations to submit separate financial returns to the prudential regulator, by allowing them to submit financial returns in the same form as, for example, the returns required by the Australian Prudential and Regulatory Authority (APRA) for trustees of superannuation funds.
4.1.6. The Bill provides in clause 55 for the Minister to confer functions on APRA, or another person. It is envisaged that each Minister will engage an organisation with expertise in prudential supervision to advise the Minister on licensing conditions and to carry out other regulatory activities on their behalf. Jurisdictions will endeavour to ensure that only one such body is engaged on a national basis to minimise the regulatory burden, and ensure that standards are applied consistently. The draft Bill makes it clear that Ministers have a broad discretion to select an appropriate adviser. Possible advisers could be a suitable Commonwealth or State authority or accounting firms able to demonstrate knowledge of the industry and expertise in prudential issues.
4.1.7. Part 6 of the draft Bill provides for standards to be set for trustee corporations. It is envisaged that standards will be set on a uniform national basis by the Ministerial Council, which will administer the scheme. The matters which standards may cover will be similar in many respects to matters covered by prudential standards which are set in other industries, such as the banking and insurance industries. These matters include:
- professional indemnity insurance;
- financial stability;
- ownership controls;
- gearing ratios;
- borrowings;
- inter-corporation loans;
- liquidity;
- the establishment and administration of estates, trusts and common funds; and
- the setting and management of investment strategies.
4.1.8. It is anticipated that proposed standards would be publicly exposed for comment, before being made.
4.2. DISCUSSION
Prudential supervision
4.2.1. The object of prudential supervision is, broadly, to ensure the viability of industry participants and, in turn, to protect the funds of clients. Prudential supervision also assists in ensuring that clients can make informed decisions about products, by requiring detailed product disclosure, to facilitate comparison between providers. The draft Bill has been prepared having regard to the regulatory regimes applying to other financial services providers, such as banks, other deposit taking institutions, and providers of superannuation.
4.2.2. The level of prudential supervision should be commensurate with expectations of consumers of services. This means that a high level of supervision can be justified, for example, in the case of deposit taking institutions, because of the significance of banks as financial institutions for the community as a whole, and the effect on the economy of the failure of a financial institution. Similar arguments can be made for corporations which are trustees of superannuation funds. The community entrusts funds to these institutions because they are regarded as secure investments and because, in many cases, individuals have no choice.
4.2.3. Conversely, while corporations which offer managed investment schemes are subject to disclosure rules and must be public corporations with a minimum capital adequacy requirement, the prudential supervision of such schemes is less stringent. The community accepts less stringent supervision of such schemes because they are not generally regarded as being free from risk in the same way as bank deposits.
Rationale for approach taken in the Bill
4.2.4. The question of the level of prudential supervision which should apply to trustee corporations should be examined in the context of the duties of trustee corporations and the attributes of their clients. A trustee of a trust has a fiduciary responsibility to the trust. The corporation stands in the shoes of the owner of the assets and must deal with them as if they were its own. Once a trustee corporation has been chosen, the choice cannot readily be changed. Many clients of trustee corporations have disabilities or may not be well placed to make judgements about trustee services for other reasons (as discussed above).
4.2.5. Given these attributes of personal trust work, it can be argued that an integral goal of any licensing system is to protect clients from the loss of trust funds due to mismanagement by trustee companies. The effects of such collapses can result in significant losses to all trusts managed by the corporation .
4.2.6. The failure of a trustee corporation may be precipitated by the investment of trust funds in high return, high-risk financial products. As a trustee of a personal trust, a trustee corporation need not seek the agreement of beneficiaries to such investments. However, a comprehensive scheme of prudential supervision can address this risk by supervising the activities of trustee corporations in relation to personal trusts as well as other activities.
4.2.7. If trustee corporations fail, public confidence in the industry will be damaged, and fewer consumers would use trustee corporation services, even though such services may be beneficial. This would lead to trustee corporations leaving the industry, and reduce the choice available to clients, who, for example, seek to establish charitable trusts or other trusts which require a long term trustee. In this context, it can be argued that it is imperative for a prudential supervisor to have access to information about all of the activities of a trustee corporation, including its capital, debt levels, investments, and insurance.
4.2.8. The scheme for licensing and prudential supervision could mean that the content of the licensing standards for the trustee industry would be more prescriptive than the requirements currently imposed by the States and Territories. The approach taken in the draft Bill accords recognition to the national character of the trustee industry.
4.2.9. As stated above, the draft Bill would not restrict entry to the industry to corporations within the meaning of the Corporations Law, or to particular categories of body corporate. The proposed scheme would permit any corporation that could satisfy the prudential requirements for a licence to enter the industry. The lowering of barriers to entry could enhance competition in the industry.
4.2.10. There have been few failures of trustee corporations in recent years, and the level of prudential supervision envisaged by the draft Bill may not appear warranted. However, the absence of failures in the industry may be attributable to the high barriers to entry, which may have improved the viability of industry participants. If barriers are lowered, the cohesion of the industry would be affected by new entrants to the market. These corporations might choose, for example, not to join industry organisations. On one hand, the presence of a greater number and range of entities in the market for trust services could enhance competition and choice for consumers. However, in such a market, there could be a greater risk that some corporations offering trustee services would fail, placing trust assets at risk. Lower barriers to entry might therefore warrant more stringent ongoing prudential supervision.
ALTERNATIVE APPROACHES
Abolition of licensing
4.2.11. One approach is to abandon the separate regulatory regime for trustee corporations. In this case, any corporation could act as a trustee, subject to the ordinary laws governing the actions of trustees. Trustee corporations would continue to be bound by the fiduciary duties applying to all personal trustees. Such an approach would remove the barriers to entry that currently exist, and the entry of other corporations into the market could enhance competition and reduce costs to consumers. There are no barriers to any individual acting as a trustee, and this approach would place corporations on the same footing as individuals.
4.2.12. If this option were adopted, there would be no prudential supervision of the industry to promote the viability of trustee corporations. Trustee corporations would not necessarily be required to hold professional indemnity insurance and in case of loss of trust monies, recourse would be limited to the resources of the corporation. In the case of a private company, these could be minimal. There would also be no requirement for a corporation accepting personal trust work to demonstrate that its directors or officers understood the nature of the fiduciary duties of a trustee, or that it employed sufficient expertise to administer the trust. Likewise, apart from the inherent powers of the Supreme Courts in each jurisdiction, there would be no protection against overcharging and no mechanism for dealing with complaints.
4.2.13. It might be argued that in view of the small number of new estates administered by trustee corporations each year, there is little community demand for corporate personal trust services (including acting as executor, power of attorney, and in other personal trusts), and that the market for these services does not warrant a regulatory regime such as that proposed in the draft Bill. Moreover, any individual can act as a trustee and there is no need for him or her to demonstrate particular expertise or to hold a minimum level of assets or insurance. On the other hand, the fiduciary nature of the responsibilities of a trustee act as an incentive for individuals to discharge their duties properly. A similar incentive might not apply to a corporation, having limited liability.
4.2.14. There are other regulatory regimes which govern some of the functions of trustee corporations, such as the Corporations Law, the Trustee Acts of each jurisdiction, the common law and the inherent supervisory jurisdiction of the Supreme Courts of each State and Territory. Trustee corporations would continue to be subject to these other rules, even if there were no separate requirements for acting as a personal trustee.
4.2.15. In the case of adults with disabilities who lack the capacity to manage their affairs, where a trustee corporation has been appointed as financial manager, the trustee corporation would continue to be subject to supervision in the exercise of its personal trust functions. In NSW, for example, this supervision is provided by the Protective Commissioner, under the Protected Estates Act 1983. Nevertheless, while this supervision ensures that the trustee corporation complies with its duties for particular estates, it is not directed to the continuing viability of the corporation as a whole. Moreover, such supervision is likely to apply to a small proportion of the estates administered by trustee corporations.
4.2.16. Further, trustee corporations are, in many cases, also providers of superannuation or deposit taking institutions, or subsidiaries of such corporations, and are subject to the supervision of APRA in this capacity. However, such supervision is not directed to personal trust work, or to off balance sheet activities generally.
Limited regulation
4.2.17. Another alternative would be a limited regulatory regime which licensed any corporation seeking to provide trustee corporation services and simply required fee and/or service disclosure and insurance. A complaints handling mechanism could also be a licence condition. This option would reduce the barriers to entry into the personal trust market, and increase choice for consumers. Disclosure would assist consumers in making an informed choice about trustee services. However, this would not address the effects of the market imperfections outlined above, such as the difficulty facing beneficiaries who wish to remove a trustee.
4.2.18. The risks posed by permitting smaller players to enter the market could be offset by a requirement for trustee corporations to hold minimum level of professional indemnity insurance. Such requirements apply to some individual trustees, such as solicitors.
4.2.19. Other safeguards could also form part of a regime that involved less intrusive prudential supervision, including the imposition of personal liability on directors, provision for clients to apply to the Supreme Court to review fees, and for trustee corporations to provide information to clients on request.
4.2.20. Similarly, it might be argued that a requirement for a trustee corporation to hold a policy of professional indemnity insurance would be adequate to ensure that a trust is reimbursed for any losses it has suffered. This requirement would be simple to administer and would be cheaper for the industry and consumers than a more elaborate system of prudential supervision. Solicitors, for example, compete with trustee corporations for business, but are not required to comply with prudential rules before they accept trusts, although solicitors are subject to strict obligations in the maintenance of trust accounts. However, it might be argued that it would not be possible for a company to obtain insurance to cover serious mismanagement and fraud.
QUESTIONS
Is there a need for a scheme for the separate licensing and regulation of the trustee industry?
If a licensing scheme is implemented for trustee corporations, what should be barriers to entry be?
Should the current restrictions on licensing be relaxed, to permit a greater variety of industry players?
Should lower barriers to entry be coupled with stringent prudential standards, as envisaged by the scheme proposed in the Bill?
What level of prudential supervision should apply to trustee corporations? Is the model proposed in the draft Trustee Corporations Bill appropriate?
Comment is sought on alternatives to the regulatory regime proposed in the Bill.
Having regard to the need to ensure the proper prudential regulation of the industry, would it be adequate for licence conditions to be confined to a smaller number of issues, such as for example, requiring trustee corporations to hold policies of professional indemnity insurance?
Would consumers be adequately protected by these alternatives?
4.3 GOVERNANCE OF TRUSTEE CORPORATIONS: MANAGEMENT ISSUES
4.3.1. This section considers whether the trustee corporations should be subject to special rules, applying to their directors and other officers. The issues include what the duties and liabilities of directors should be, whether they should be required to have special expertise, and whether trustee corporations should be required to have a minimum number of directors.
PROVISIONS OF THE TRUSTEE CORPORATIONS BILL 2001
4.3.2. Part 7 of the draft Bill deals with the governance of trustee corporations. Clause 71 makes it a licensing requirement for a managing director of a trustee corporation to be a natural person who lives in Australia, and for a number of directors to also be natural persons who live in Australia.
4.3.3. Clause 48 provides for the directors of a trustee corporation to be jointly and severally liable for the administration of estates entrusted to the corporation, and for the proper performance of the functions of any office to which the trustee corporation is appointed or acts, during the tenure of the director. Subsection (3) also makes the officers of trustee corporations liable in some circumstances. However, section 48 should be read in conjunction with section 49, which provides for the assets of the corporation to be available if the trustee corporation is liable for a breach of its duties to the trust. These assets are available even if a director is also liable.
DISCUSSION
4.3.4. Most jurisdictions require a majority of the directors of trustee corporations to be natural persons living in Australia. The purpose of the requirement is to ensure that the corporation has a local presence, to ensure that its senior management takes responsibility for its personal trusts and to facilitate legal recourse to the assets of the director.
4.3.5. An individual trustee is personally liable for a breach of his or her fiduciary duty to the trust, and must account for losses. When trustee corporations were established by statute, the directors of trustee corporations were made personally liable to ensure that trustee corporations operated on the same footing as personal trustees, and that individuals who were responsible for the management of trustee corporations were not protected by the company structure from personal liability.
4.3.6. In favour of the approach taken in the Bill, it can be argued that the imposition of personal liability on directors helps to ensure that the board or governing body of a trustee corporation takes a direct interest in its personal trust work, and discharges its duties. In any case, the assets of a trustee corporation are available to make good any losses caused by a breach of trust or negligence by the corporation, and, if prudential standards of capital adequacy are set, these assets are likely to be adequate to cover losses. There is also nothing to prevent a corporation from providing insurance for its directors, subject to some restrictions in section 199B of the Corporations Law, or a director from arranging his or her own insurance. This means that in practice, the personal assets of a director are unlikely to be placed at risk.
ALTERNATIVES
4.3.7. It might be argued that rather than a requirement for directors to be Australian residents, the goal of ensuring that trustee corporations have a local presence would be better served by a requirement for a trustee corporation to maintain a local office as a condition of its licence. Alternatively, it might be argued that such requirements are no longer relevant, given that electronic business is growing and that, provided clients suffer no detriment, the physical location of a corporation or its directors should not matter. The most efficient and cost effective way to run a business could be, for example, to offer customer service by telephone and internet contact points, in the way that some mortgage providers operate.
4.3.8. Concerning the personal liability of directors, the alternative to the approach taken in the draft Bill is for the directors of trustee corporations to assume the same liability in relation to personal trust activities as for any other activities conducted by the trustee corporation. This approach would place trustee corporations on the same footing as other corporations. It might be argued that the function of directors should be to establish management systems to ensure that officers of the corporation are accountable for their activities, while ensuring that the corporation operates in an efficient way, and that it is not reasonable for directors to accept personal liability for the actions of the corporation. Further, given that the assets of a corporation are likely to be adequate to fully compensate any loss, and that professional indemnity and directors’ insurance can underwrite losses, the continuing need for the imposition of personal liability could be argued to be doubtful.
QUESTIONS
Should the directors of trustee corporations be required to live in Australia?
Should the directors of trustee corporations continue to bear personal responsibility for losses incurred by trusts, resulting from breaches of trust or negligence in the administration of the trust?
4.4. SHAREHOLDING RESTRICTIONS AND OWNERSHIP
4.4.1. Shareholding restrictions are included in the draft uniform Bill to ensure a spread of ownership of a trustee company, to protect the corporation from the adverse circumstances of major shareholders.
THE APPROACH TAKEN IN THE TRUSTEE CORPORATIONS BILL 2001
4.4.2. Part 8 and Schedule 2 of the draft uniform Bill contain provisions which restrict shareholdings in a trustee corporation to 15 per cent. However, the responsible Minister can allow a person to hold a higher percentage of shares. It is envisaged that an approval might be given if the person was able to demonstrate that the ability of the trustee corporation to comply with the prudential standards set down under the Act, would not be affected by the acquisition. ‘Ownership’ and ‘associate’ are broadly defined.
DISCUSSION
4.4.3. Restrictions on the acquisition of shares in trustee companies apply at present in some jurisdictions. Generally, Ministerial consent is required for share acquisitions in trustee companies above 20%. However, consent is frequently given, and many trustee companies are subsidiaries of other financial institutions, without apparent detriment to personal trust work. Other prudential requirements, such as requirements for independent decision making processes, supervision of exposures and requirements for corporations to hold professional indemnity insurance, might be regarded as a more appropriate means of ensuring the proper administration of trust assets.
4.4.4. The shareholding restriction mechanism contained in the draft uniform Bill mirrors the provisions in the Financial Sector (Shareholdings) Act 1998 which provides for the spread of ownership in Deposit Taking Financial Institutions (DTIs).
4.4.5. The Wallis Report found that a regulatory regime which ensures spread of ownership of a financial institution has a number of benefits, as outlined below:
- Spread of ownership protects institutions against undue influence by a major shareholder and creates a broad interest group in the shareholder base. The Wallis Report found that the concept had sufficient weight to justify the continued application of the spread of ownership objective as a general principle for deposit taking institutions, but that the case was weaker for insurance corporations, which were less susceptible to contagion effects.
- The Wallis Report considered a single threshold test should apply to all deposit taking institutions, and that the limit should be 15%, with exemptions for existing licence holders to be decided by APRA (even where the licence is held by an entity in the same group).
4.4.6. However, in view of the unique nature of a trustee corporation’s business and its off balance sheet activities, it may be argued that a shareholding restriction mechanism is not appropriate or even applicable to trustee corporations, because the ownership of the service provider is less relevant than its ability to provide services which conform with its fiduciary obligations to trusts. Trustee corporations do not occupy a pivotal role in the financial services sector or the broad community in the same way as deposit taking institutions, but are participants in a small industry, competing with other service providers who are not subject to similar restrictions.
ALTERNATIVES
4.4.7. It might be argued that any regulation of the trustee industry should be directed to ensuring that licensees have the requisite expertise and financial resources to offer trustee services, and that ownership restrictions are not directed to achieving such an outcome. Instead, it could be argued that requirements for the trustee corporations to comply with prudential standards, including the holding of professional indemnity insurance, should be integral components of a licensing scheme.
4.4.8. The Corporations Law and the Trade Practices Act 1974 restrict the acquisition of shares in certain corporations.
4.4.9. Chapter 6 of the Corporations Law regulates takeovers of public companies. The policy reflected in the Corporations Law is that an acquisition which allows the offeror to influence more than 20% of the voting shares in the target corporation should be subject to regulatory supervision. Once the offeror has reached the 20% threshold, further acquisition should be supervised until 90% of the target has been acquired. The object of this provision is to promote transparency in the control of public companies.
4.4.10. The pivotal statutory provision governing mergers of corporations in markets is section 50 of the Trade Practices Act 1974 (TPA). This provision prohibits mergers or acquisitions, which would have the effect, of likely effect, of substantially lessening competition in a substantial market for goods and services. The Australian Consumer and Competition Commission (ACCC) has the responsibility for implementing the policy underlying section 50 of the TPA.
4.4.11. The provisions of the Corporations Law and the Trade Practices Act promote an informed and competitive market. Consideration needs to be given to whether additional controls on trustee corporations are warranted, having regard to the size of the industry and the recent practices of Government in licensing trustee companies which are subsidiaries.
4.4.12. Finally, consideration should be given as to the implications of licensing bodies corporate which are not public companies, as trustee companies. These corporations would not be subject to the takeover provisions of the Corporations Law, and there may be stronger arguments in favour of the inclusion of ownership restrictions applying to such bodies.
What is the policy purpose for including shareholding restrictions in the draft uniform Bill?
What is the public benefit of restricting shareholding ownership?
Do restrictions on shareholding ownership reduce the accountability of the corporation board to shareholders?
Is there any difference between financial institutions which are regulated under the Financial Sector (Shareholdings) Act 1998 and trustee corporations?
Is the Corporations Law regime adequate?
Are shareholding restrictions a matter for standards?
Given the fact that some existing trustee corporations are wholly owned subsidiaries of major financial institutions, is there a need for a shareholding restriction regime?
What restrictions should apply to bodies corporate which are not companies, if they are to be permitted to offer personal trust services?
4.5. COMMON FUNDS: INTERNAL OR EXTERNAL
4.5.1. How the new legislation should deal with the establishment and operation of common trust funds by trustee corporations.
PROVISIONS OF THE TRUSTEE CORPORATIONS BILL 2001
4.5.2. Clause 36 of the draft Bill enables trustee corporations to establish common trust funds. Clause 37 provides that a common trust fund may only include money administered by the trustee corporation as executor, trustee or administrator of an estate or as an attorney under a power of attorney.
4.5.3. Clause 38 permits a trustee corporation, in accordance with the standards, to make advances from a common trust fund for any purpose relating to any estate or trust, having regard to the effect of the withdrawal of funds on the fund as a whole.
4.5.4. Clause 40 provides for standards to be made to apply to the trust funds.
DISCUSSION
4.5.5. Trustee companies are permitted to operate common funds to enable the efficient pooling and investment of moneys from estates and trusts. The Trustee companies later extended access to many common funds to public investors, and many common funds now contain a mix of estate and public money. Money in common funds must be invested prudently.
4.5.6. If investments in common funds are offered to the public, trustee corporations must comply with the managed investment scheme provisions in Chapter 5C of the Corporations Law. These provisions require managed investment schemes to be managed by a responsible entity, which must be a public corporation and hold a dealer’s licence. Each scheme must have a constitution, a compliance plan and a registered prospectus. However, trustee corporations do not have to comply with these provisions if a common fund is restricted to estate funds.
4.5.7. The draft Bill only permits common funds to be established and operated for the investment of estate funds. One view is that estate funds may be placed at some risk if they are mixed with public offer funds, because a more speculative investment strategy may be employed. Trustee corporations may also face a conflict of interest acting both as a trustee with particular responsibilities in respect of estates for some of the funds, and making decisions on behalf of public investors with possibly different interests for the remainder.
4.5.8. Common trust funds would be required to operate in accordance with the prudential standards. It is envisaged that the standards will cover matters such as the establishment of common funds, accounting requirements, valuation of common funds, distribution of income, investment restrictions, liquidity requirements and fees and charges.
ALTERNATIVES
4.5.9. An alternative approach is continue to allow trustee corporations to operate common funds which contain a mix of estate funds and funds invested by members of the public. It might be argued that estate funds are adequately protected by the prudent person rule and the provisions of State Trustee Acts, which apply to personal trusts administered by trustee corporations. In addition, the maintaining of estate funds separate from public funds will involve a reduction in investment returns if the size of estate common funds are too small to obtain the greatest benefit from investment opportunities.
QUESTIONS
What are the costs and benefits of the prohibition on mixing public funds with estate funds?
Should common funds which contain only estate funds, be subject to any requirements included in the managed investment provisions of the Corporations Law?
What prudential standards should apply to common funds?
How should existing mixed common funds be dealt with if there is a prohibition on mixing public and estate funds?
4.6. PRUDENTIAL SUPERVISION
4.6.1. This section of the paper considers the prudential arrangements proposed in the draft Bill and alternatives.
PROVISIONS IN BILL
4.6.2. The draft Bill provides for prudential supervisory functions to be exercised by Ministers in each State and Territory, or a prudential supervisor appointed on their behalf. It is envisaged that the scheme will be a uniform scheme, which is underpinned by a Ministerial agreement, and that the Ministers of each States and Territory will choose a single prudential supervisor to administer the scheme on a day to day basis. The activities of the supervisor would be overseen by Ministers and their delegates in each jurisdiction, and formal decision making would rest with Ministers or their delegates.
4.6.3. Part 6 of the draft Bill deals with standards, including prudential standards. Standards are to be made by the Minister in an agreed jurisdiction and will be automatically adopted in each participating jurisdiction. The draft Bill provides that standards may not be made except with the approval of the Ministerial Council responsible for the administration of the scheme.
4.6.4. Jurisdictions are likely to appoint a registrar or other administrator who will be responsible for the oversight of the scheme, who will report to the Minister. It is envisaged that prudential standards would be approved after advice from the prudential adviser and administrators in each jurisdiction.
4.6.5. The draft Bill provides in clause 173 for the costs of supervision to be recovered from licensed trustee corporations. The money will be paid into the Supervision Fund, established under clause 174, and the Fund will be directed toward paying the costs of the Minister, State and Territory agencies, and money which the Minister has agreed to pay to the prudential adviser, or another person for the costs of supervision under the Act.
4.6.6. Part 9 of the draft Bill provides for the supervision and inspection of trustee corporations in each jurisdiction. The provisions apply both to corporations who are operating in their ‘home’ jurisdiction, and to corporations which are licensed under corresponding laws. In this way, it is intended that the operation and enforcement of the scheme will be similar in each jurisdiction.
DISCUSSION
4.6.7. It is envisaged that the day to day administration and enforcement of the scheme will be conducted by officers of agencies in each jurisdiction, and the prudential superviser. Both the Ministerial Council and officers will meet regularly to ensure that the scheme operates in a seamless manner across State and Territory boundaries, and to ensure the consistent administration of the legislation and standards in each jurisdiction.
ALTERNATIVES
4.6.8. An alternative to the proposed scheme would be the establishment of a national scheme, similar to that applying to deposit taking institutions, insurers and providers of superannuation. However, the supervision of the conduct of personal trustees, especially in relation to charitable trusts, has traditionally been a matter for the Attorneys General of the States and has fallen within the jurisdiction of the Supreme Courts. This supervision will continue to comprise a significant part of the new scheme. For this reason, it is suggested that if a comprehensive scheme of prudential supervision of the personal trust activities of trustee corporations is proposed, its administration should remain with the States and Territories.
QUESTIONS
Are there better alternatives to the scheme of prudential supervision proposed in the Trustee Corporations Bill?
4.7. FEES AND COMMISSIONS
4.7.1. The draft uniform Bill provides that a trustee corporation can charge commissions and fees for the administration of estates, payable out of the property on which the commission or fee is payable. This section of the paper discusses whether and how those fees should be regulated.
APPROACH TAKEN IN THE TRUSTEE CORPORATIONS BILL 2001
4.7.2. Division 8 of Part 2 of the draft Bill contains provisions empowering trustee corporations to charge commissions and fees. The draft Bill would provide for a maximum capital and income commissions to be set in regulations. In addition, the draft Bill provides for trustee corporations to recover management fees for management services which are prescribed by the regulations. However, these fees are to be set by the directors of the trustee corporation, not fixed in the regulations.
4.7.3. The draft Bill also provides for trustee corporations to recover other commissions or fees either as well as or instead of the commissions to be set by the regulations, and the management fees. In addition, the trustee corporation is entitled to directors' fees obtained by its officers acting as directors of corporations in which the estate has an interest. The Bill also makes provision in subclauses 32(5) and (6) for a fee for investment of capital in the common trust fund of up to 1% per annum on the capital invested.
4.7.4. Clause 42 provides that the Court may, on its own motion or on the application of any person interested in the estate, review the commission or rate and may, on the review, reduce the commission or rate.
4.7.5. Clause 44 provides that a trustee corporation must disclose to a client, in writing, any fees that it is entitled to receive from or in relation to a client. The draft Bill provides generally that disclosure must occur at the time of execution of documents creating the trust or power under which the trustee corporation acts and within 14 days after the instruments creating the trust or power come into effect, and again on any request by the client. The clause further provides that where disclosure is to be made to a class of persons which is not closed, disclosure may be by way of newspaper advertisement.
DISCUSSION
4.7.6. At present, all jurisdictions except Western Australia impose statutory upper limits on fees which may be charged by trustee corporations. In Western Australia, there is no scale of maximum charges, but the law limits fees to the scale last published by the trustee company before the will or deed took effect. In no Australian jurisdiction are trustee companies free to charge whatever they choose at any time during the administration of the estate. However, the fees set out in State Acts are maximum fees only. Competition is still possible up to the ceiling as the law does not impose any lower limit on pricing.
4.7.7. Also, in most jurisdictions, it is possible for the testator or settlor, in committing the estate to the trustee company’s management, to agree with the trustee company for a different rate of charging from that fixed by law. However, once the instrument takes effect, the trustee company will be bound by it. It may also be possible to agree subsequently with the beneficiaries for a variation to the rate, but without their consent, either the legally limited rate or the rate set in the instrument committing the estate, will prevail.
4.7.8. State Acts generally provide for trustee companies to receive commissions on the corpus and the income from an estate, and to receive reimbursement for disbursements made in the administration or management of an estate. Trustee corporations are also entitled to a reasonable fee for work involved in the preparation and lodgment of returns associated with assessments of any duties or tax, other than probate, death, succession or estate duties. These fees would be treated as management fees, under the approach adopted in the Bill.
4.7.9. Income commissions are generally set in legislation on a sliding scale, where the percentage charged increases with the amount of income. This approach appears to reflect a view that the amount of work undertaken to administer a trust increases in proportion with its size. However, the amount of work generated by a trust is more likely to relate to other factors, such as the number of beneficiaries and the nature of the assets, and this approach would not necessarily be taken in regulations made under the Bill. The merits of different approaches to setting the structure of fees are discussed below.
4.9.10. The requirement in the draft Bill for fees to be disclosed serves two purposes. The first is to ensure consent by those who engage the services of the trustee corporation to the terms and conditions of engagement, and the second is to encourage competition. Fee disclosure is also likely to reduce complaints about fee levels and assist clients in using the complaint procedure, (as discussed below).
4.7.11. However, the requirement for fees to be disclosed may impose a significant burden on trustee corporations, because it may require the trustee corporation to supply details of its method of charging to a large number of beneficiaries, on an unpredictable number of occasions (for example, in the case of a charitable trust). It is noted that the definition of ‘client’ is not limited to beneficiaries of a trust, but includes people with contingent interests in estates.
ALTERNATIVES
Deregulation
4.7.12. One approach would be to deregulate fees completely. This would mean that there would be no restraints of any kind on the fees charged by the trustee corporation. However, the argument against this arises from the high barriers to exit from a fund.
4.7.13. As discussed earlier, in the case of a trust, the settlor or testator commonly appoints a trustee corporation to provide a service for the benefit of a third person, such as a dependent spouse or child, or the objects of a charitable cause. In the long term, it is that third person or cause which is interested in the application of the fund, and not the original testator or settlor. However, that person has had no part in the process of setting up the trust and has no ongoing control over how it is administered. In particular, he or she has little power in relation to the fees charged by the trustee. Whereas a customer who is dissatisfied with the prices charged by a bank, insurer or a firm of accountants can simply withdraw their custom and shop elsewhere, these people cannot readily do this. They may possibly have standing to apply to the Supreme Court for a review of fees, or even for the removal of the trustee, but inevitably these rights are costly and time consuming to exercise, and many may be dissuaded.
4.7.14. This means that the ordinary market sanction that dissatisfied customers will take their business away, and therefore that a business must be price-competitive to stay afloat, does not operate in the field of estate management.
4.7.15. Trustee corporations are likely to be faced with significant conflicts of interest if they have a broad discretion to vary the fees charged to a trust without scrutiny. As trustee, they must act in the interests of the trust, but as trustee corporations they have an obligation to their shareholders to maximise the profits of the corporation.
4.7.16. The problem is compounded in that, in this market, services are commonly purchased by or for the benefit of people with disabilities, or children. Such people may be unable to protect their own interests. To this extent, they are placed particularly at risk if there are no restraints on fees. The proposed requirement that fees be disclosed by trustee corporations does little to overcome the special disadvantages applying to beneficiaries who do not stand in a contractual relationship with the trustee company, as outlined earlier.
4.7.17. The justification for setting fee limits, therefore, is to counterbalance the effect of the captive market. Without it, arguably, there would be no, or negligible, market restraints on prices.
4.7.18. It is suggested that if fees were to be deregulated, a means of enhanced accountability would be necessary. Such mechanisms might include complaints handling schemes and administrative review, for example, by administrative review bodies in each State and Territory.
Partial deregulation
4.7.19. Assuming that the statutory limitation of fees is justified in the public interest, it is necessary to consider alternative models of limitation. Various alternatives exist.
Western Australian model
4.7.20. Partial deregulation can be achieved by removing any legislative constraints on the amount of the fee chargeable, or the method of calculation, but providing that the trustee company is bound by the fees agreed with the testator, for the duration of the administration of the estate. In practice, it is understood that this commonly occurs, in that the client agrees with the trustee company to a different basis of charging from that fixed by statute.
4.7.21. The Western Australian law provides a particular example of a partial deregulation approach. There are no set limits on fees. However, a trustee company must publicly advertise its rates of charging. If it wishes to increase them, it must advertise the increased rates. A settlor or testator, by appointing the trustee company, accepts the advertised rates. He or she is free to revoke the appointment and take his or her business elsewhere at any time before the will or trust comes into operation. Thereafter, however, when this choice is gone, the estate and the trustee company are both bound by the rates last advertised before the will or trust came into effect (s.18).
4.7.22. This model goes some way to integrating deregulation of fees with protection of vulnerable consumers. However, one risk may be that fee scales may be artificially inflated because of the possibility that the company may become bound by a scale of fees fixed in the present, for work to be done in the remote future. There may be a tendency to advantage very long term estates, such as charitable trusts, but disadvantage simple, short term estates.
4.7.23. Another difficulty is that, unless there is a strongly competitive market, the client may have little bargaining power and may have no choice but to accept the offered rates, even if he or she considers them excessive. It should be remembered that in some Australian jurisdictions, there may only be two or three active market participants.
Commissions
4.7.24. A commission based fee structure is unlikely to promote efficiency and is likely to promote cross subsidisation among estates, because it does not necessarily relate to work done. It may also discourage trustee companies from taking on low value estates, because they cannot recover the cost of the administration of the assets.
Hourly rates
4.7.25. A further alternative is to permit the trustee corporations to charge on an hourly basis for all services. However, it can be argued that time based costing promotes inefficiency because an hourly rate does not necessarily recognise the greater skill and efficiency of one service provider over another.
Fee for service
4.7.26. A further alternative would be a flat fee for each service performed for the estate. One difficulty with this, from the point of view of the consumer, is that he or she may not be able to predict which services the estate may require, so that the overall cost may be unpredictable. There may also be a risk of overservicing, particularly in the case of trusts such as charitable trusts where there may be no-one in a position to scrutinise the trustee. Moreover, there may be overlap between tasks, such that the charging of separate fees for each could lead to double payment.
4.7.27. On the other hand, with simpler estates where it is possible to map out the regime of management which the estate will require, a fee scale could enable settlors/testators to make detailed predictions about the overall cost, which could be beneficial.
QUESTIONS
Should the fees and commissions charged by trustee corporations be regulated, deregulated, or partly deregulated?
If fees and commissions are to be regulated in the future, what is the best method of their regulation? Should the fee structure comprise fees and commissions, or fees for service, or hourly rates?
4.8. COMPLAINTS HANDLING
4.8.1. This section of the paper discusses the need for a complaints handling regime, to cover both fees and commissions, as outlined above, and service standards.
APPROACH TAKEN IN THE TRUSTEE CORPORATIONS BILL 2001
4.8.2. The draft Bill provides in clause 6 that the inherent jurisdiction of the Supreme Court to supervise trusts and trustees is not to be affected by the Act, and confers jurisdiction on the Supreme Court to review commissions or fees which are excessive in clause 42.
4.8.3. The draft Bill also provides in Part 5 for trustee corporations to establish a code of conduct, including a procedure for the resolution of complaints made against trustee corporations in relation to fees or commissions by a client of a trustee corporation, or a person with a proper interest in the administration of the estate. The Code must be approved by the Minister, and might include, for example, an obligation to make clients aware of the existence of the procedure and of how they can access it, a set time for response to a complaint, a process of conciliation or mediation, and perhaps guidance as to the type of information which should be provided in response to complaint.
DISCUSSION
4.8.4. At present, if beneficiaries are concerned about the administration of a trust, their main recourse is to apply to the Supreme Court for the removal of a trustee, or, in the case of excessive fees, for a review of those fees. However, it may be considered that the cost and complexity of an application to the Supreme Court poses a significant barrier to ensuring that trustee corporations are accountable for their actions, and the proposed code of conduct is intended to provide a simple, accessible means of redress for people who are interested in estates administered by trustee corporation.
4.8.5. The draft Bill enables a trustee corporation to establish its own complaints handling system, or to participate in an industry scheme. If an industry scheme is established and receives Ministerial approval, the burden on individual trustee corporations would be reduced, in comparison with the cost of establishment of individual systems for each corporation.
4.8.6. Complaints management schemes are now used in a wide range of industries, including banking and telecommunications. Such schemes can act as a marketing tool for industries because they demonstrate a commitment to customer service.
4.8.7. The public benefits intended to be conferred by the proposed code of conduct are:
- a low cost and accessible means of resolving client complaints, as an alternative to Supreme Court litigation;
- a means of information exchange between the corporation and its clients, which may be useful in enhancing service delivery and educating consumers
- an incentive to the trustee corporation to conduct its business so as to minimise complaints and the attendant diversion of resources into complaint handling.
4.8.8. However, the establishment and administration of a code of conduct may increase the cost of services to all clients. A wide class of clients of the trustee company (as defined by the Bill) and other people may be able to invoke this provision. A ‘person with a proper interest’ is not defined, and may extend beyond the beneficiaries of an estate to include, for example, a charity which may be eligible to receive a distribution of a trust, or a carer or guardian of a person who has a disability and whose affairs are being managed by a trustee corporation.
4.8.9. There is potential for a large class of potential beneficiaries to access the complaints scheme, especially in relation to charitable trusts, for example, when a person who falls within an eligible class is not chosen for a distribution from a trust. On the other hand, the inclusion of a wide class of eligible people may be necessary in the case of, for example, a charitable trust, to ensure that a trustee corporation is acceptable for the administration of trusts which have no defined beneficiaries. This issue could, however be addressed if the policy provided for complaints concerning a single trust or, for example, distribution from a trust, to be dealt with together.
ALTERNATIVES
4.8.10. It might be considered that the public benefit from the establishment of a complaints management scheme is outweighed by its cost, which would be ultimately borne by the clients of trustee companies, and that the availability of a review of fees by the Supreme Court, and the ability of the Court to remove a trustee, is adequate. There may also be capacity for complaints to be dealt with by fair trading or consumer affairs agencies in each jurisdiction, or directly by the Minister who licenses the company.
4.8.11. As discussed above, a wide class of beneficiaries and other people would be able to invoke the procedures set out in the code of conduct, under the proposed provision. In order to ensure that the administration of trusts is not compromised by complaints processes, it may be appropriate for restrictions on the class of people who can invoke the processes to be included in the Bill.
4.8.12. Other alternatives to a complaints management scheme include the establishment of procedures for review of fees and services to be undertaken by an administrative tribunal in each jurisdiction, such as the Administrative Decisions Tribunal in New South Wales. Such a scheme would offer alternative remedies to clients of trustee corporations in a more accessible forum than the Supreme Court, but might not be viable in jurisdictions where no such tribunal already exists. However, matters relating to trusts have traditionally been the preserve of superior courts and it might be argued that a tribunal would lack the necessary expertise to deal with such disputes. On the other hand, a tribunal is also a relatively formal means of resolving disputes. In most circumstances, the parties would need to seek legal advice before proceeding and might require legal representation. A tribunal might not be in a position to offer the flexibility and range of outcomes which a complaints management scheme could incorporate.
QUESTIONS
Is there a need to establish a complaints handling procedure, covering the fees and commissions charged by trustee corporations and the services they provide?
What would be the costs for establishing a complaints handling procedure?
How should such a complaints handling procedure be established? By legislation or the industry?
Are there viable alternatives to a complaints management procedure? Would the interests of clients, and the public interest, be better served by alternatives?
4.9. ADMINISTRATION
4.9.1. Competition policy review requires identification of administrative burdens imposed on an industry by legislation, and the removal of any which are unjustified or unnecessary. Scrutiny is directed chiefly to routine or recurring requirements which will arise for all or most industry participants in operating as the Act requires. The more often a requirement is imposed, the greater the burden it is likely to impose on industry participants. For this reason, unusual requirements, such as requirements to provide information to a special investigator when a corporation is under investigation, may not be considered to be administrative burdens, because they will arise rarely.
4.9.2. Administrative burdens imposed by the proposed model Bill should be considered in light of the fact that trustee corporations are also subject to administrative requirements under the Corporations Law, the inherent jurisdiction of Supreme Courts, trustee laws, guardianship laws, administration and probate laws. Interactions or duplication with these other administrative burdens may also be relevant.
4.9.3. The principal administrative burden imposed by the draft Bill is the need for trustee corporations to comply with prudential standards, provide returns to the supervisor and submit to inspections and investigations conducted by the prudential adviser, or another agency, on behalf of the Minister. The cost of the administration of the scheme will be borne by the trustee corporations. It might be suggested that the burden of administrative supervision can be justified by the public benefit, in ensuring continuity in the administration of trusts through stability in the industry. However, as discussed above at chapter 4, there are alternatives to the scheme of prudential supervision proposed by the draft Bill that would involve a lesser administrative burden, and less onerous requirements may offer similar public benefits.
4.9.4. Other administrative burdens imposed by the Bill are discussed below.
4.9.5. Clause 34 of the draft Bill permits any person with a proper interest in a matter to require from a trustee corporation an account of the assets and liabilities of the estate, how it is being administered and details of its investments, distributions and expenditures. Accounts may be required as often as every three months. However, a reasonable fee may be charged for the provision of the account.
4.9.6. The purpose of the requirement is to promote accountability in the administration of trust assets. Many trusts, especially charitable trusts, may have a wide class of potential beneficiaries, and if there are no defined beneficiaries, there may be no other ready means of scrutiny of the performance of the trustee corporation.
4.9.7. A wide class of clients of the trustee company (as defined by the Bill) and other people may be able to invoke this provision. As discussed above in paragraph 4.8.8, a ‘person with a proper interest’ is not defined, and may extend beyond the beneficiaries of an estate to include, for example, a charity which may be eligible to receive a distribution of a trust, or a carer or guardian of a person who has a disability and whose affairs are being managed by a trustee corporation. Requests could be regularly received from a range of people. However, the information required to be provided is likely to be compiled in any case in the administration of the estate, and the requirement to pay for the account will discourage merely frivolous requests.
4.9.8. It is envisaged that the ability of interested people to obtain information from trustee corporations would ensure a comprehensive framework of scrutiny of trustee corporations, together with prudential supervision, the proposed code of conduct for dealing with complaints, and the ability of certain clients to invoke judicial processes as a means of obtaining redress against trustee corporations. Without such a power, in many cases, there will be no way for an interested person to obtain the information necessary to scrutinise the management of the estate.
4.9.9. Part 8 of the draft Bill sets out powers of investigation, to be exercised by the prudential adviser on behalf of the Minister, if the Minister is concerned that a trustee corporation has breached the standards or has committed an offence. Some of these powers may be exercised by the prudential adviser in the course of undertaking routine inspections and audits of trustee corporations. However, the majority of these powers do not impose any routine, ongoing obligation on trustee corporations, and it is envisaged that they would be used rarely, and only if a trustee corporation appeared to be unable to comply with its licence conditions, for example, if it was trading while insolvent.
QUESTIONS
Is the regulatory burden imposed by the draft Bill justified, having regard to the need to protect trust assets and ensure the stability of the industry?
Would different requirements protect the public interest, while minimising the regulatory burden?
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