COMMONWEALTH OF AUSTRALIA Official Committee Hansard · Monday, 14 August 2000 SENATE— Select SFS...

COMMONWEALTH OF AUSTRALIA

Official Committee Hansard

SENATESELECT COMMITTEE ON SUPERANNUATION AND

FINANCIAL SERVICES

Reference: Financial Sector Legislation Amendment Bill (No. 1) 2000

MONDAY, 14 AUGUST 2000

CANBERRA

BY AUTHORITY OF THE SENATE

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SENATESELECT COMMITTEE ON SUPERANNUATION AND FINANCIAL SERVICES

Monday, 14 August 2000

Members: Senator Watson (Chair), Senator Sherry (Deputy Chair), Senators Allison, Chapman, Conroy,Hogg and Lightfoot

Senators in attendance: Senators Allison, Conroy, Lightfoot, Sherry and Watson

Terms of reference for the inquiry:Financial Sector Legislation Amendment Bill (No. 1) 2000

WITNESSES

BROWN, Mr Roger Heath Charles, Senior Manager, Rehabilitation and Enforcement,Australian Prudential Regulation Authority.................................................................................................. 97

CHAPMAN, Mr Keith David, General Manager, Specialised Institutions Division, AustralianPrudential Regulation Authority..................................................................................................................... 97

DIMENT, Mr David, Assistant Commissioner, Australian Taxation Office ............................................ 140

FOGARTY, Mr Christopher, General Counsel, Australian Prudential Regulation Authority ................ 97

FRENCH, Mr Steve, General Manager, Financial Institutions Division, Treasury................................. 140

LONGO, Mr Joseph Paul, National Director, Enforcement, Australian Securities andInvestments Commission.................................................................................................................................. 97

MAHER, Mr Dave, Analyst, Superannuation and Insurance Unit, Financial InstitutionsDivision, Treasury........................................................................................................................................... 140

McDONALD, Mr Geoffrey Angus, Senior Adviser, Criminal Law Reform, Attorney-General’sDepartment........................................................................................................................................................ 97

MURRAY, Mr Nigel Patrick, Director, Superannuation Legislation, Australian Taxation Office........ 140

WHITHAM, Ms Karen, Manager, Superannuation and Insurance Unit, Financial InstitutionsDivision, Treasury,.......................................................................................................................................... 140

Monday, 14 August 2000 SENATE—Select SFS 97

SUPERANNUATION AND FINANCIAL SERVICES

Committee met at 7.45 p.m.

LONGO, Mr Joseph Paul, National Director, Enforcement, Australian Securities andInvestments Commission

BROWN, Mr Roger Heath Charles, Senior Manager, Rehabilitation and Enforcement,Australian Prudential Regulation Authority

CHAPMAN, Mr Keith David, General Manager, Specialised Institutions Division,Australian Prudential Regulation Authority

FOGARTY, Mr Christopher, General Counsel, Australian Prudential RegulationAuthority

McDONALD, Mr Geoffrey Angus, Senior Adviser, Criminal Law Reform, Attorney-General’s Department

CHAIR—I declare open this public hearing of the Senate Select Committee onSuperannuation and Financial Services. On 28 June, the Senate referred the provisions of theFinancial Sector Legislation Amendment Bill (No. 1) 2000 to the committee for inquiry into theprovisions in respect of the proposed changes to the Superannuation Industry (Supervision) Act1993. The committee was required to report to the Senate on 16 August 2000 but in view of theneed to conduct this additional hearing the date of reporting has been extended to 30 August.The changes proposed in the bill relate to the enforcement powers and the offence provisions asrelate to a trustee, custodian or investment manager of a superannuation fund and to theapplication of the criminal code to the SIS Act.

The aim of tonight’s hearing is to take evidence from the regulators and some governmentofficials on the provisions of the bill. All of the witnesses who appear before the committee arealways protected by parliamentary privilege with respect to the evidence given before thecommittee. This means that they are given broad protection from action arising from what theysay and that the Senate has the power to protect them from any action which disadvantagesthem on account of the evidence given before the committee. The committee prefers to conductits hearings in public; however, if there are any matters which you wish to discuss with thecommittee in private the committee will consider your request.

Firstly, I would like to acknowledge the presence of Mr Joseph Longo from the AustralianSecurities and Investments Commission and we note an apology has been received from MrAlan Cameron. Welcome, Mr Longo. Would you like to present to the committee?

Mr Longo—Yes. I am responsible to the commission for the overall direction andcoordination of ASIC’s enforcement activities. I note that ASIC was invited to make asubmission and we filed a comprehensive submission sometime ago. I do not propose to take upthe time of the committee right now going over all of it. I do note that we have tried to addressthose aspects that are of direct relevance to ASIC. I note, however, that many of the provisionsin the bill the committee is looking at are really provisions that are driven, if you like, by theISC—or APRA as it now is—and Treasury. So we are quite happy to assist the committee withany questions it might have, but I do note that many of the provisions are really provisions that

SFS 98 SENATE—Select Monday, 14 August 2000


will be, if enacted, administered by APRA and so I just need to be conscious of the differentroles APRA and ASIC perform in this area.

CHAIR—Thank you. Do you want to speak to your presentation?

Mr Longo—There appears to be some misunderstanding about the role of the Criminal CodeAct and the role of strict liability. I note that most of these provisions that have been the subjectof controversy, particularly the strict liability offences, do not carry jail terms at all. A lot of thedrafting and thinking behind these provisions is driven by the Criminal Code Act and thereappears to be a lot of misunderstanding about that. I note that the committee will be hearinglater tonight from the Attorney-General’s Department. They are more expert than I am about theissues underlying that legislation. I see that there are concerns about—

CHAIR—What are the implications of breaches there? A lot of trustees are worried aboutbreaching a particular provision by not keeping accurate records, by not keeping them up to dateor by being late in filing returns, et cetera, aren’t they?

Senator CONROY—Or not supplying a tax file number that they have not got because theycannot mandate getting a tax file number.

CHAIR—As an enforcer, how do you view these indiscretions?

Mr Longo—All of these provisions provide an important and fundamental infrastructure toregulation, in this case, of superannuation. From an enforcement point of view, poor recordkeeping and poor compliance with some of these pretty fundamental areas can makeenforcement particularly difficult. One can have a view about the seriousness of not complyingwith some of these provisions but, from an enforcement point of view, if a pattern of poorcompliance with these provisions emerges in any industry—in this case, superannuation—itmakes the enforcement task much harder. Because there is no trail that enables us to reconstructwhat happened, it makes it very difficult when things go wrong for assets to be distributed inaccordance with the interests of members. There are a lot of good reasons for these provisionsbeing there.

CHAIR—So you are looking at a pattern rather than the strict enforcement of a legal failureto comply in a particular area because of an oversight?

Mr Longo—I think I was trying to answer your question about implications. In terms ofmaking enforcement decisions about particular provisions, I think it is a fair statement to saythat, at least at ASIC, we are not going to be using scarce resources on prosecuting people forminor breaches that do not reflect or point to some evidence of systemic poor compliance.These provisions need to be there. They are there already in many cases because they providean important regulatory infrastructure. From time to time, depending on the seriousness of thebreaches and whether they are part of a broader range of concerns the regulator might have,they can become the subject of enforcement action. But even if they do, I notice in the case ofan employer who fails to provide a tax file number, which is not one of ASIC’s provisions, themaximum penalty is, I think, 10 penalty units or, in the case of failing to keep reports for 10years, $110.



Senator CONROY—Are you offering to pay the 10 penalty points on behalf of someonewho breaches it?

Mr Longo—I think it does give an indication of what we are talking about. These areprovisions that are there to ensure that there is a proper infrastructure in place so that properstandards of compliance can be put in place.

Senator CONROY—I just got the impression that you were suggesting that 10 points wastrivial. A breach of the Criminal Code Act does disqualify you from a whole range of otherfuture occupations.

Mr Longo—I would not suggest it was trivial. I would suggest that it does offer a startingpoint for some perspective on how one should consider these provisions.

Senator CONROY—What are you disqualified from in the future if you breach criminallaw? What sort of other things?

Mr Longo—That is a very general question. You will need to be more specific with me aboutthat. Under Corporations Law, a director can only be disqualified if the offence relates todishonesty, for example. A director cannot be disqualified for—

Senator CONROY—Are there any jobs you would be disqualified from if you were foundguilty of poor record keeping in terms of not supplying a tax file number?

Mr Longo—I am not aware of any off the top of my head. Certainly in the Corporations Lawarea a director can be disqualified if he or she has been convicted of an offence involvingdishonesty.

Senator CONROY—Can you stand for parliament?

Mr Longo—I do not know. That would be something that I am sure some relevant legislationwould give the answer to. But I would be surprised if failing to file a return would disqualifyyou from being a member of parliament.

Senator SHERRY—What is the penalty unit worth at the moment, Mr Longo?

Mr Longo—I think it is $110, according to my notes. I could be corrected—I am wellassisted by a group behind me.

CHAIR—The information in your submission was very useful and it certainly shed a lotmore light on it, but there has been a concern that this really should have been in the bill’sexplanatory memorandum. Obviously you did not draw it up, but were you consulted?

Mr Longo—ASIC was involved from an early stage in contributing to the process which ledto the bill being prepared. We were aware of the proposed changes and we were supportive ofthem. I think we made some comments along the way. They were largely sponsored by APRA; I



say ‘sponsored’ because a lot of these changes have a greater impact on the work of APRA thanthey do on the work of ASIC. But certainly ASIC is very supportive of these changes.

CHAIR—No, that is not the issue. The issue is that the explanatory memorandum is a bit of aroad map.

Mr Longo—Yes, I have it here.

CHAIR—Your submission throws a lot of light on some of the concerned areas and I am justa little bit worried that perhaps they should have been in the explanatory memorandum.

Mr Longo—That is really a matter for the government.

CHAIR—It is quite possible that we may not have needed tonight’s hearing if it was in there.But that is an issue that I think perhaps all public servants really should take note of in terms ofmaking presentations to the parliament. The explanatory memorandum is a very valuabledocument, particularly for us lay people. We look forward to full, clear and accurate reportingof the reasons why it is not in that explanatory memorandum.

Mr Longo—Yes, some of the reasons are technical. I notice that there was some evidenceregarding a concern about reversal of onus of proof and matters of that kind. That is simply amisconceived view of how these provisions work. The onus never leaves the prosecution in acriminal matter. There are some misconceptions about how these provisions work. They areintended to reflect, and do reflect, as I am told, the requirements of the Criminal Code Act.

CHAIR—We know APRA has consulted some of the interested parties, but have you or yourorganisation actually been involved in this consultation process with interested parties?

Mr Longo—I am not aware of any particular level of consultation on the ASIC side. Some ofthese provisions go back years in terms of the proposal for them to become part of the SISlegislation.

CHAIR—It is just that they are new to superannuation law.

Mr Longo—I am not sure that they are entirely new. A lot of these obligations are there now.I think what might be regarded as new is—

CHAIR—Criminal penalties for many of these offences are new.

Mr Longo—I think there are penalties there now.

CHAIR—There are penalties but not criminal penalties.

Mr Longo—I think they are criminal penalties.

CHAIR—Under SIS?



Senator SHERRY—Are you saying that the penalties already apply to trustees ofsuperannuation funds?

Mr Longo—Yes.

Senator SHERRY—Why are we bothering with the bill then? Why are they in the bill ifthey are not new?

Mr Longo—There are a couple of reasons. My understanding is that what the committee isseeing with this legislation will be the beginning of a whole raft of legislation that will comethrough the parliament in the next 18 months which, at the very least, is intended to make theexisting federal law Criminal Code Act compliant. That is one of the big reasons. There appearsto be some confusion about that particular aspect of the process but—

Senator SHERRY—I am sorry, Mr Longo, but I cannot follow you.

Mr Longo—Can I go back a step?

Senator SHERRY—No, let us just get to the nub of the problem. All these otherorganisations have been complaining about these provisions for whatever reason and you aresaying that they are there at the moment.

Mr Longo—Yes, that is right.

Senator SHERRY—They apply at the moment to trustees of superannuation funds—in allcases?

Mr Longo—That is right. I might have missed some of those provisions but my colleagues—

Senator SHERRY—We can knock back the bill. What are we worrying about it for? If thelaw is in place at the moment, why have we got a bill?

Mr Longo—I will try to answer your question in a couple of parts. The first part is that thereal experts on a lot of that superannuation law and its detail are with APRA, but I will give youan ASIC view. The second part of it is that it is true that there is a lot of existing law whichseeks to achieve, in some respects, similar outcomes. It is very important to stress that thislegislation is needed, if for no other reason, to make the SIS legislation and—as will become thecase in the next 12 months—the Corporations Law and other legislation comply with theCriminal Code Act. What that means is that there are a lot of provisions in there at the momentthat are already strict liability provisions, but without this legislation a mental element will beintroduced because of the Criminal Code Act in December next year.

CHAIR—Do you think it might help if we had APRA sitting at the table with you?

Mr Longo—It would not concern me. It would be very helpful.

Senator CONROY—They do not seem to want to receive the hand pass, that is all.



CHAIR—Perhaps APRA could come to the table and be part of it because the questions doseem to overlap your responsibilities. Sorry, Mr Longo, but I thought it might help you.

Mr Longo—Frankly, it would be a more productive use of time if this approach was taken.There are some very technical reasons underlying some of these reforms and they are driven byan existing act of the federal parliament called the Criminal Code Act. But for bills of the kindthe committee is now looking at—and there will be further bills as we go forward—existingCommonwealth law will not operate as intended by the parliament without these amendments,because the Criminal Code Act will impose a new regime. That is part of the reason we havethis bill.

Senator SHERRY—When did we last consider the Criminal Code Act in the parliament?

Mr Longo—It has been successively enacted since 1995. It was last considered a few monthsago when the parliament passed a bill extending the time for its operation from March this yearto December 2001.

Senator SHERRY—Were we told when we last considered the Criminal Code Act—and itwould not have come before this committee—of the implications of that act for this type oflegislation or this type of industry?

Mr Longo—There is a further person who might want to join the table, who might be able toanswer that question: Mr McDonald from the Attorney-General’s Department, who has had along involvement in that project.

Senator CONROY—What is a ‘mental element’?

Mr Longo—It means intention or recklessness.

Senator CONROY—That is what I thought: that it was referring to intent.

Mr Longo—That is right. A classic example of a provision, certainly under the CorporationsLaw, which ought not to have, and does not have, any mental element, is being required to filean annual return. That is strict liability and a good example of a provision which, unless it isamended by December next year, will have a mental element in it because of the Criminal CodeAct.

Senator SHERRY—I just want to finish this point: you said you have had no consultation.APRA might have done.

Mr Longo—I am not saying we did or did not. This bill is largely driven out of APRA’sneeds. I am not aware of whether ASIC had any particular consultation.

Senator SHERRY—That is all I want to know. APRA and A-G’s can speak for themselves,but industry people have alleged that this came out of the blue with no consultation, that theydid not talk until after the bill was presented. I just want to know what the facts are.



CHAIR—I call for further questions in terms of the application of criminal law andsuperannuation in this bill.

Senator CONROY—Senator Sherry was asking whether or not we already have theseexisting powers. Mr Longo seemed to think that by and large we did. So I am wondering whywe are all here tonight.

Mr McDonald—I will give you a little bit of background on the Criminal Code and then leadinto that. The Criminal Code Act was enacted in 1995 after a couple of years of consultation onthe idea of having a criminal code. The main idea of a criminal code is to provide for a moreconsistent approach to determining matters like fault, strict liability and defences right acrossthe criminal law, throughout not only Commonwealth legislation but also—the aim is in thelong term—state and territory legislation.

It has had quite a history—right back to 1995. During the period 1995 to 2000, there has beenan attempt to try and update all Commonwealth offences in line with the criminal code. One ofthose tasks is to make it clear which offences are strict liability and which are not, which requireproof of intention and so on, and to try and make the law much more transparent. This processthat we are seeing now is part of that process.

It is true that there has been quite a lot of consultation about the general concept of thecriminal code applying in this way, but it does not surprise me that specific industries like thisthat would be focusing on superannuation legislation and other industries focusing on taxlegislation might find that to be news. However, the criminal code and the bill that extended thetime to complete this process were supported by all groups in the parliament, and it is quite awell-known project to the Attorney-General’s portfolio, the ministers and people involved inthat.

Senator SHERRY—Did Attorney-General’s have any specific meetings prior to thislegislation being drafted?

Mr McDonald—With industry, no.

Senator SHERRY—I just find that a bit puzzling. You say you are not surprised aboutindustry groups as though they are fairies at the bottom of the garden—fairly innocuouspeople—but we are talking about the superannuation industry which currently has an asset baseworth 60 per cent of the value of gross domestic product.

CHAIR—What about Attorney-General’s, though, if they are not the front organisation?

Mr McDonald—The Attorney-General’s Department are advising various portfolios on howthey might adjust their legislation, but at the end of the day it is the responsibility of eachportfolio to deal with the various groups. I think my colleagues in the other portfolio might beable to address the consultation side of it. I am just giving you a little bit of background to this.

In relation to these offences, Mr Longo has mentioned that there are quite a few existingoffences which already are understood where a strict liability applies, and that all we are doingwith those offences is making it clear that it does apply. If we do not make it clear it applies, Mr



Longo is correct in saying that then you would have to prove fault in relation to those offences.With some of them, especially where you are talking about a failure to lodge a return, it wouldbe very difficult to prove fault in cases like that.

Senator CONROY—That is the intent question.

Mr McDonald—Yes, that is right.

Senator CONROY—That is the main difference between—

Mr McDonald—Yes, that is right. One thing that you need to remember with strict liability isthat there are some defences that are very important, and the main one, of course, is the mistakeof fact. The criminal code outlines quite clearly how these defences work. If, for example, youdid not lodge a return on the basis that you misunderstood what date it was, that sort of thing, orthere was some intervening event which stopped you from being able to lodge it, then youwould be able to raise that as a defence and then the prosecution would have to demonstrateotherwise. So we need to keep strict liability in context. As I understand it, there are someoffences which are exactly like what I have described; that is, they are currently strict liability,and this is just part of the process of making it clear, making those offences operate in the waythey always have. I think there are some offences in this where they want to apply strict liabilityto new areas and there has probably been a little bit of confusion between the two issues.

Senator SHERRY—Do you know much about the superannuation industry structure, thetrustee structure?

Mr McDonald—I do not know an enormous amount about it, but I certainly recognise itsimportance and that there is a lot of money involved, including some of my own. That is wellappreciated. This framework that I am talking about will apply to many areas, like theenvironment, work safety, aviation regulation, the Corporations Law, right down to what we aredoing with theft, fraud and bribery and where we are bringing in new offences for that. But I doappreciate how important that industry is and many other areas of Commonwealth regulation.

Senator SHERRY—This is something to talk to APRA about. I am sure they would knowthis, but whether they appreciate it is another matter. Certainly, the vast majority of trustees Iknow are honorary trustees. They are not paid sitting fees of $10,000, $20,000, goodness knowswhat, tens of thousands of dollars a year, to sit on the board of trustees of a superannuationfund. They are generally honorary. Do you take those sorts of factors into account?

Mr McDonald—What I can say to you is that the sorts of offences that are in this bill arevery similar from a policy perspective to the sorts of offences that are regulating many otherareas and they would include people with similar responsibilities. For example, theconsiderations that come into determining whether a strict liability applies; whether it is of aregulatory nature, and these offences are of a regulatory nature; whether it is an area where, ifyou are to take the responsibility of a trustee or an office holder, you are expected to have someknowledge of the area and you are supposed to inform yourself of what the rules are—that sortof thing.



However, as I mentioned, it is not a harsh regime where, if someone makes a mistake of factor there is some intervening event, the person does not have an excuse. As you mention, it is animportant industry. It is an industry where people involved in it are expected to know the basicrequirements. I can assure you that the sorts of things that are covered in this legislation are thesorts of things that get covered elsewhere in Commonwealth legislation.

Senator CONROY—You say that the intent of previous legislation was to have this effect,but that now, by this legislation, you are absolutely crossing the t’s and dotting the i’s, so tospeak. Can you tell us the exact areas where you see that there has been some grey, if I coulduse that word?

Mr McDonald—Where you start thinking about greyness is where the maximum penaltystarts involving imprisonment. Where there is a realistic chance that if a person is going toactually go to jail as a result of an offence, the courts have interpreted provisions that do notmention intention or recklessness as implying it. So if the penalty is getting into theimprisonment area—say, 12 months imprisonment or something like that—then the warningbell goes on that perhaps the parliament implied that intention would have to be proved.However, if regulatory offences have fines, but not enormous fines, which you would find insome other areas, and the offences are expressed in a way where there is no mention of faultand, in fact, there is an implication in the way it is worded—say the wording is ‘shall not fail tolodge this return’—then the courts have taken those offences to be those of strict liability.

I suppose the problem is that, when you get in that area where imprisonment is involved,sometimes you have words there that suggest strict liability but you have imprisonment comingin and having effect. The problem with that is that, in the end, it is for the courts. What is greatabout the criminal code and what is great about this process is that there will be a very clearunderstanding right from the very beginning whether it is or whether it is not. That will, ofcourse, hand it back to you in very clear terms to make those sorts of judgments about what isappropriate and what is not. But this legislation does fit within the policy parameters for thissort of thing.

Senator CONROY—So everything below one year. Where the courts automatically deem—

Mr McDonald—Six months. If the penalty were six months imprisonment and the wordingof the provision did not have fault in it—

Senator CONROY—It may or may not fall across the line.

Mr McDonald—then we would say that that would be likely to be strict liability, becauseyou are unlikely to actually get jail if it has a maximum of six months.

Senator CONROY—When you say that judges have interpreted it, is there lots of case lawon this?

Mr McDonald—Yes.

Senator SHERRY—Involving superannuation funds?



Mr McDonald—I am not the expert on the superannuation cases; perhaps the otherdepartment might be able to assist you on that.

Mr Fogarty—We have not taken any actions against trustees which would have involvedbreaches of these provisions. So there is no case law on these provisions.

Senator SHERRY—I understand that. Let us say these provisions are approved, based onyour experience of superannuation funds you have looked at, say, in the last five years. Wouldany of them fit into the category of breaching this law if it were passed? I am not suggestingretrospective action; I am just wanting to know what number of funds we are dealing with.

Mr Chapman—As Mr Longo said, there are a couple of new penalty provisions, but if yourquestion is: how many cases would we have taken to the court if we had these powers in the lastfive years, it would certainly be less than 10, probably of the order of five or six.

Senator SHERRY—There are five or six you are referring to. How big are these funds? I donot want the names, for obvious reasons. What are we talking about? Are we talking aboutfunds with 10 members or 1,000 members, asset value and those sorts of things?

Mr Brown—Probably most of the funds concerned would have between 50 and 200members and asset size. It depends on what stage in your life cycle you are talking about,because often what excites our interest is when there are fewer assets than there were before. Onaverage, though, we would be talking about between half a million and perhaps 10 millionmaximum.

Senator SHERRY—That figure sounds a lot in isolation, but in terms of the total context ofthe industry, it is a very small number that you are giving us—millions of members, billions ofdollars of funds.

Mr Chapman—Yes, that is definitely the case. We see these additional powers as beingadvantageous to us in that we will be able to take action where we need to, regardless of the sizeof the funds concerned, but they are the fringe of the industry in that context.

Senator SHERRY—I looked through the addition to submission No. 19. There is someuseful information there, but I was trying to put it into context. This is the year details—1998-99, going back to 1995-96. For example, under 1997-98, you say:

. 31% of funds reviewed had shortcomings which would have created a potential risk to members’ interests if notrectified.

If that were a headline in the newspaper—‘31 per cent of funds had shortcomings which wouldhave created a potential risk’—immediately people would think: shock, horror; it looks prettyserious.

Mr Chapman—I think, from memory, we actually did get that headline in one of thenewspapers and that was—



Senator SHERRY—Yes. I am not sure whether it was based on this, but I do recall theheadline.

Mr Chapman—That is right. That is one of the difficulties in us trying to provide you withsummaries or with cases without being able to explain the context in which we do providethose. That 31 per cent would have been things like, for example, not having proper boardgovernance processes, or perhaps not having a contractual relationship with the custodian or theadministrator—things where there is potential that something could go wrong, which could putmoneys at risk. They are not the ones where you might have an employer of a highly itinerantwork force, such as a temporary employment agency, which basically uses the fund for theirown purposes and so on. They are the sorts of fringes where we are talking about prosecutionaction being necessary.

Senator SHERRY—As much as I appreciate that information, I would just like to know,similar to the figures you gave me earlier—and you probably cannot do it now—what is thenumber of members and the assets involved? For example, in 1998-99 you have got 24 fundsthat were made non-complying with resultant loss of their concession and tax status. I waspuzzled, looking back through the other dates you gave in previous years, about how manyfunds were made non-compliant with the resultant loss of their concessional tax status. It doesnot appear in the previous years. In 1995-96, you say:

The ISC appointed inspectors to investigate the affairs of 33 superannuation funds.

I am not sure what that means. I would have thought you would be inspecting thousands offunds. That in itself does not seem to indicate to me anything serious.

Mr Fogarty—Appointing an inspector is a significant enforcement power, so we have tomeet certain statutory criteria before we can appoint an inspector. The inspector then has quitestrong compulsive powers against the trustees. So appointing an inspector is a significant step inthe investigation of a fund; it actually lifts up the level of interest of the regulator severalnotches. Aside from meeting statutory criteria about the state of the fund, and where thereappear to be breaches of the legislation, it also involves a significant commitment of resources.It is distinct from a review process, for instance.

Senator SHERRY—Going back to that earlier question, could you give us some idea of thenumber of members, the size of these funds in terms of asset valuation in each year? It isprobably a bit difficult to do it now, but it would help put things into some sort of context.

Mr Brown—I can respond to that for you, Senator, in respect of those funds made non-complying. Because there is a culpability test before a fund can be declared non-complying—that is, all of the members of the fund must have been knowingly involved in the particularcontraventions of the SIS Act, or if they were not involved in the contravention, then any loss tothat member would be minimal—almost by definition, those are very small funds indeed. Theyare usually funds with less than five members. I recall one where there were either six or eightmembers where all were knowingly involved in a particular contravention. That means that non-compliance is not a particularly effective tool when you are talking about funds of more than avery small size.



CHAIR—It just worries me that we might be creating the impression that if people are goingto lose 80 per cent of their money from a $10 million fund, that is not as serious as $100million. In terms of those people who have lost their life savings, I think I as a parliamentarianand I hope you as a regulator would pay just as much attention because, to the members of thatfund, it is important to give them every bit of protection that they can get. They are the innocentpeople.

Mr Chapman—I agree completely, Senator. That is certainly one of the things we haveregard to. I think we have discussed in this committee before that we do try and run variousstrata of review activity in the industry and we certainly put some considerable focus on thelarger funds because if something does go wrong with those funds you have a big problem. Wealso put as much attention as we can on the smaller funds because experience says they are theones where there are more likely to be breaches such as in-house asset rules and activities likethat, or withholding of contributions by employer sponsors, et cetera, than in the larger funds.So we are very conscious of the fact that we look across all of the industry as we go; we do notonly look at the top end.

Senator SHERRY—Yes, but you do not do DIY funds now.

Mr Chapman—No, we do not do DIY funds now. After the Wallis changes these are nowthe tax office’s responsibility. That has a huge amount of logic because those funds are the onesthat Mr Brown was mentioning earlier where you do have Keith Chapman as the trustee of theKeith Chapman superannuation fund who uses that for non-superannuation purposes. The taxoffice has the skills necessary to track down those issues and take action on them. In futurestatistics, I would be absolutely amazed if you ever saw APRA making funds non-compliantbecause it would be very hard for us to do so, given the culpability test in particular.

Senator SHERRY—It is a pretty blunt instrument.

Mr Chapman—Yes. It disadvantages the members of the fund. Therefore, the members ofthe fund have to be involved.

Senator SHERRY—Often the victims.

Mr Chapman—Yes.

CHAIR—One of the submissions raised doubts about the constitutionality of the provisions.We looked at this question of constitutionality of superannuation many years ago. Can someonefrom the Attorney-General’s Department respond to that?

Mr McDonald—I am a criminal law specialist. I would not want to advise you on this.

CHAIR—Could somebody follow that up for us to give us assurance that they areconstitutionally valid?

Mr Fogarty—I cannot speak to the detail of it, but I know that it is an issue that has arisen inthe past. Of course, the superannuation legislation is premised on both the corporations powerand the pensions power. Superannuation funds have to elect and nominate whether they are



going to be a corporate fund or be regulated under the pensions power. I know that at the timethe SIS legislation was in contemplation Mr Dennis Rose, who was the then Chief GeneralCounsellor of the Attorney-General’s Department, gave advice on aspects of theconstitutionality of it and gave it the thumbs up. If we are talking about the same submission, Inotice that the submission—

CHAIR—It is raised by only one person.

Mr Fogarty—And, in fact, it was raised in a sort of throwaway way. It simply stated thatthere were doubts about the constitutionality, without going into any of the detail or suggestingwhat the basis of those doubts was.

CHAIR—The corporations powers in terms of directors’ breaches have been watered downvery considerably by what is known as the business judgment rule. Is a business judgment ruleapplicable to superannuation?

Mr Longo—Could I just have a go at responding to that? The business judgment rule hasnothing to do with these kinds of provisions. These kinds of provisions exist under theCorporations Law as well. The business judgment rule could not be called in aid as a defence tothose provisions either. I think that there is a false connection being raised between those recentamendments to the Corporations Law—introducing a business judgment rule to these kinds ofprovisions. These are provisions that very specifically impose obligations to do certain things,compliance with which is required. There is no judgment about filing an annual return or not.That is just a legal requirement that has to be complied with. The business judgment rule ismore to do with taking decisions that will affect the assets or undertaking of a company. Part ofthe reason for the rule was to provide a legal framework for directors of companies to makedecisions about the affairs of the company, knowing that if they were made in good faith and forproper purposes and within the framework the legislation sets up, if things subsequently wentwrong, a court would not hold those directors liable for a particular acquisition or decision ofour business. That raises quite separate and different issues.

Senator CONROY—It was amended in the Senate, though. It did not go through in the formthat the government wanted.

Mr Longo—I am just trying to be helpful tonight about the irrelevance of that rule to theprovisions that we are talking about this evening. The business judgment rule has far moreprofound issues in mind than the sorts of issues—

Senator CONROY—Someone was trying to keep you in the game. It is all right.

Mr Longo—Thank you very much, Senator.

CHAIR—The other question I have is that a lot of the submissions suggest that perhaps thereshould be two regimes in terms of responsibilities—a managed investment structure for publicoffer. Managed investment has a more rigorous and a more strongly defined area ofresponsibility than, they argue, should apply to people who, in many cases, are amateurslooking after some superannuation funds simply because they are not paid. Would you like tocomment on that aspect? I have a personal view that, if you are managing other people’s money



in a public sense, you should have common standards. I hope you have read the submissions. Itseems to be coming through quite strongly, so I would like your view on that—the wisdom ofhaving two types of standards, as I see it; or am I oversimplifying it?

Mr Chapman—I have read all those submissions as well. While they are interesting, they allseem to be predicated on the fact that, if you are an amateur trustee, you should not be subject tothe same sorts of provisions as if you were being paid—and as Senator Sherry said, it is $10,000or $20,000 to be a professional trustee—because you are trying to do the right thing, and if youmake a mistake you make it inadvertently and therefore you should not be penalised. Thatseems to be the general theme that flows through those comments. I must admit I personallyhave a bit of difficulty with that for the same reasons you have outlined—that people aremanaging other people’s money and, provided there is not a situation where somebody doessomething in good faith or with erroneous information and gets thrown into jail for it, whichthis legislation does not provide for, then I do not see that there should be a different standard.

One of the difficulties with even considering going down that dual standard route would bethe definition of what fund falls into what category. Of the five or six cases I indicated toSenator Sherry in which we probably would have used these powers in the last five years, Ithink all would actually have been non-public offer funds. There might be one public offer inthat situation. We might have considered using the prosecutory powers, leaving alone theenforceable undertaking issue at the moment. So it actually would not be giving us the powersin the sector of the market where we actually think we are going to need them, more thananything else.

One of the issues here is that a non-public offer fund is not simply an employer fund—it isnot only the BHP fund which has BHP employees in it—it is also a fund which no individualchooses to contribute to. So we have funds, for example, where employers get together andcontribute to a fund which has been established to accept employer contributions. If that is allthat it accepts, that fund is not public offer. In terms of any definitional exercise about whetherthat fund is run by professional trustees as a professional operation or amateur trustees for theconverse argument of member benefit, I just do not think you can define that in any reasonablesense, quite apart from the principle about whether you should have the two standards.

CHAIR—Are there, around the country at the moment, still a number of public offer fundsthat have so-called amateur trustees or unpaid trustees?

Mr Chapman—Yes. That is another issue. Even if you have the two standards, I just do notknow how you define the standards. There are a number of public offer funds, or industry funds,that pay their trustee boards.

Senator CONROY—Do you believe that some in the industry are overreacting when theysay that this is an attempt to drive honorary trustees out of the business?

Mr Chapman—I think they are definitely overreacting. Senator Watson might have been theonly one of us around the table who was actually involved when the SIS legislation wasoriginally drafted. That same reaction was raised when the SIS legislation first came intoplace—that nobody in their right mind would ever want to be a superannuation trustee becausethe duties are too onerous and the penalties are too severe. That did not happen.



Mr Chapman—A lot of people moved, but the industry went on to greater and greaterstrengths. The trustee boards, by and large, whether they be elected, appointed or ‘professional’,have attempted to do the right thing. The standards have definitely increased in the last four orfive years. All we are really looking for in terms of the provisions now is something whichgives us the tool set, if you like, across the board, whereby, if there are things going wrong, wecan take action to make sure they do not go wrong in a big way. That is, at the end of the day, asmall subset. A demonstrable effect for the industry if that small subset does something heinousis definitely going to be a very negative outcome. One of the other issues here is that a lot of theconcerns that seem to have been raised about amateur trustees—

Senator CONROY—That was somebody else’s term.

Mr Chapman—Non-professional trustees perhaps, or non-paid trustees—

Senator CONROY—Honorary would probably—

Mr Chapman—With respect to honorary trustees, it would cost them a great deal of moneyand a great deal of angst to comply with the proposed law. As Mr Longo said, there are no newpenalty provisions here. Actually, there are two; if you wish, we can cover them in some detail.Broadly speaking, there are no new penalty provisions here. If the trustees are complying withthe law now, they should already have processes in place to comply with the law now. Socomplying with the same law should actually make no difference to what they have to do tocomply with the law.

Senator CONROY—Do you think there is a place for honorary trustees?

Mr Chapman—Definitely; I do. APRA does not have a different view from mine in thatregard. I think honorary trustees have a place. I think that in some cases they might not be in theright place, but they definitely have a place in the industry and they have a place in thesuperannuation structure.

Senator CONROY—Where is the wrong place?

Mr Chapman—Some of the wrong places might be a situation where an employer has tohave equal representation on their super fund but is unable to find enough people who areinterested to do that; therefore you have to cajole—for want of a better term—individuals to goon that board. And they are not always the member representatives; sometimes it is theemployer representatives who do not want to be there and have no interest in being there. I thinkin those circumstances you face a problem because if they are not interested, they are not goingto be doing the right job. If they are interested but not expert, they will still try to do the rightthing and get the right advice. I think that is one area where there is a potential difficulty with it.

Senator CONROY—Does that problem mainly arise in the corporate area?

Mr Chapman—It mainly arises in the corporate area. It can arise in multi-employer funds,where the nominations might be made because somebody has an employer group link or a unionlink rather than necessarily having an interest in superannuation. In my view, a lot of it comesdown to the interest. If a guy in the goldmine out the back of Kalgoorlie is interested in getting



involved, then I think that person, by and large, is going to do a pretty good job as a trustee. If aguy who runs a caryard in the middle of Sydney is interested in being involved, he is going tobe a good trustee. It is these cases where you have to get somebody to make up the numberswhere the problem can arise. In this cases I think there is an argument—and this is not APRA’sposition, this is a personal view—that having professional trustees who can be employed bythose funds to take the place of either a member or an employer representative is—

Senator CONROY—Do you have that flexibility to allow that now? What would happen if afund came to you and said, ‘We’ve advertised, we’ve written to every member, we don’t haveanyone interested in coming. We don’t want to lose our tax concession status; therefore, can weappoint a professional trustee instead’?

Mr Chapman—You have the flexibility to do it but under the legislation now, broadlyspeaking, they have to be representative of one or the other—either the employer or theemployee. There is no prescribed method to get someone onto a trustee board. You can have amember election; you can have an employer nomination, a union nomination; the memberscould conceivably say, ‘We’ll get our accountant to nominate someone.’ There is no prescribedmethod of doing it, so you could get that situation. Under the current structure though, by andlarge, that person would have to be a representative of either the employer or the employee side.

CHAIR—Are you satisfied about the adequacy of training and the level of skills, particularlyfor those trustees who have oversight of hundreds of millions of dollars in Australia?

Mr Chapman—That is a very broad question.

CHAIR—It is a very relevant one under the circumstances, because this could well be thereason for the bill.

Senator CONROY—No, this bill will not make any difference, on your assessment, towhether or not they are currently trained enough, because they are all doing the right thing now.

Mr Chapman—No, I did not say they are doing it; I said they have the incentive to do theright thing and are trying to do the right thing. If you are trying to say that I said that all of themare doing nothing wrong, then I have not said that. They are attempting to do the right thing andthey have an interest in doing the right thing. And those people are more likely to do the rightthing because they have that interest in inquiring ‘What do I have to do?’

Senator CONROY—I think you said that if they are complying with the law now, then theywill be complying with the law—

Mr Chapman—Yes.

Senator CONROY—So this bill makes no change to whether or not those people arecomplying with the law?

Mr Chapman—Yes.



Senator CONROY—Therefore, they are professionally complying with the law?

Mr Chapman—Yes.

CHAIR—But that is one thing. Superannuation is an evolving industry, and there are a lot offunds, big funds, making direct investments outside the realm of a manager investing in adiversified share portfolio. While they might be, in a sense, complying, there is also thequestion of business judgment as to whether that investment is appropriate. We also have casesof trustees not being aware that if you reduce a member’s disability benefits, you should notifypeople. It is not good enough to say, ‘I’m a non-professional and that excuses me. I have adiminished responsibility simply because I am a non-professional. Hang the people who aregoing to suffer, lose $100,000 or something because they have broken a leg or lost an arm.’

Mr Chapman—Maybe that comes back to the point of whether there should be differentialpenalties. I have already said that our position is that there should be the same penaltiesregardless of where they are. This bill does not actually touch on the issues you are raisingabout investments and so on.

CHAIR—No, we were just raising this question because this notion of the diminishedresponsibility of a person who is a non-professional is coming through. I think that is a notionthe encouragement of which we have to be very careful about. Would you like to build on thatat all?

Mr Longo—I do not think anyone is suggesting this bill does that though, are they?

CHAIR—No, we are just talking about trustees’ responsibilities in the broader sense.

Mr Chapman—I think your broad question of, ‘Are we satisfied with trustee training andexpertise’—

CHAIR—And because they have done a good job in the past does not necessarily mean thatthey are equipped to handle the responsibilities of this new environment in the future.

Mr Chapman—What you say is quite correct. We have seen over the five years that the SIShas been in force an increasing use of outsourced providers for investment management,investment advice, custodianship, administration and so on. That should have produced agreater potential for professionalism in those specific areas in the industry. Again, as a generalsweeping statement, the trustees we have seen have recognised where they have shortcomingsand have either sought advice from their colleagues within the board who might have been therefor a longer period of time, or encouraged the board to get advice from outside sources to assistthem in those areas.

Trustee education has always been a tricky issue, and over the years AIST and ASFA, inparticular, have done quite a bit towards such education activity. Perhaps one of the issueswhere there might still be a weakness is in the understanding of how the generic knowledgethey might have obtained about investment decision making actually relates directly to theparticular fund that the person might be sitting on.



They might have had a good explanation in the training program teaching them how to lookat sector selection for investments, but they might not necessarily have had a direct link back to,‘How does that affect my fund, which has a majority of 30-year-olds and not many 60-year-olds?’ So perhaps that sort of link is an area that needs to be developed a bit more.

CHAIR—You are skirting around the question. The question is, are you satisfied about thelevel and adequacy of training that is given to trustees?

Senator CONROY—I would keep skirting.

Mr Chapman—Again, it is definitely a fund by fund situation.

CHAIR—But are you satisfied?

Mr Chapman—There are definitely some funds and some trustees that we believe shouldhave more training and more expertise than they have. Equally, there are some trustees who areprobably overqualified for the particular fund they have.

CHAIR—Let us quantify it.

Senator CONROY—Do you want to be the lead story or on page 3?

CHAIR—In terms of trying to quantify it, is it just a minority of funds where there is aninadequacy of training in terms of—

Senator CONROY—You do not have to let the chair lead you.

Mr Brown—Could I use my version of skirting, please, and say that in no instance that Ihave been exposed to over the last five or six years when I have had a role in rehabilitationenforcement work with regard to superannuation would I have contemplated prosecution actionagainst a fund which was in difficulty solely because of the lack of training of a trustee—

CHAIR—That was not my question.

Mr Brown—because a trustee of goodwill and of interest, as Mr Chapman said, will, oncedifficulties in the fund are drawn to their attention, engage the appropriate remedial action. Ourproblem has been where the trustee is not acting in the interest of members, where the trustee isperhaps a captive of the administrator—we see this far too often—or a captive of an employersponsor. That is when member interests are put at risk.

CHAIR—I come back to my question: are you happy about the level of training andeducation that is given to trustees of superannuation funds in this country? Is there a need toraise that bar?

Senator CONROY—There is always scope for better education.

Mr Brown—There is always scope to raise any bar; there is no doubt about that.



Senator CONROY—I just want to assist the witnesses.

Mr Chapman—I am really not trying to hedge the answer. It is just very difficult to answerin a quantified way. As Mr Brown said, there were five or six funds where we would have saidthat prosecutions would have been taken. Some of those trustees would not have been experts,but the prosecution would not have been because they did not have a clue how to do somethingand did not do it. The level of knowledge on average of trustees now is undoubtedly far higherthan it was five years ago when SIS came into force. Quite a number of funds that have a verystrict training regime for incoming trustees and that provide a very good level of support fortrustees go to ASFA or AIST courses or go to ISFA conferences or whatever. They are all goodthings.

However, the level of expertise you need to be a trustee of a large industry fund and the levelof expertise needed to be a trustee of a 10-member employer sponsored fund are fundamentallydifferent. There is no way that the person who is a trustee of a 10-member fund needs the samelevel of expertise, training and knowledge as a person who is a trustee of a large industry fund.Our experience would be that the level of knowledge of trustees is generally better at the largeend than at the small end of town in terms of their SIS responsibilities and knowledge of how tooperate a trust scheme et cetera. But at the small end, you do not necessarily need to have thatlevel of expertise. I am really not trying to hedge the answer. I just find it very difficult to workout what the answer is.

CHAIR—You have hundreds of millions of dollars invested in superannuation and so we donot want the corporate criminals of the 1980s to get into one of these laxly managedsuperannuation funds and take it for a ride.

Mr Chapman—That comes back to part of the rationale, or probably the fundamentalrationale, for the enforcement changes, which is that if you get one of those people who youthink is in the industry or is coming into the industry, you need to be able to do somethingsubstantive to make sure that they do not stay there.

CHAIR—But as part of your evaluation or your audit of superannuation funds, you makesome evaluation of trustees and their performances. My question is: what are those evaluationsrevealing? All you are saying is that, by and large and on the average, the larger funds are bettermanaged than the smaller funds.

Senator CONROY—I do not think they are better managed.

CHAIR—The smaller funds have fewer responsibilities. I am trying to quantify this in termsof looking forward because we are looking into, as I said, different investment profiles. We arelooking at perhaps some very aggressive chairmen leading the boards. These people really haveto be in a position of knowing whether they are being led or whether they should be calling forsome outside advice.

Senator CONROY—They have just got to watch a tape of this hearing.



Mr Chapman—There are a whole lot of different issues in there. My view regarding thequestion of whether there is a dominant chairman is that it does not always have to be thechairman who is dominant, in my experience.

CHAIR—That is what I am saying. I am just worried about the criminal element getting holdof someone’s money.

Mr Chapman—But a lot of those issues are actually more what I would call life skill issuesrather than technical issues. You do not need to be a technical expert about superannuation torealise that somebody on the board is dominating and making sure that they get their own waythrough the process. That is one issue that we do see. We do see domination and we do seedomination in situations where other members on the board do not feel that they are able tostand up and make a comment because ‘this person knows everything and, if I stand up andmake a comment, I am just going to look like an idiot’. We do see those sorts of issues but theyare not a huge number—they would amount to about 10 cases per year. Most of those areresolved quite amicably; some of them are resolved with board restructures; some of them areresolved with independent chairpeople being put in place.

Senator CONROY—You are more likely to see that on corporate boards, aren’t you, ratherthan superannuation trusts? You are more likely to see a dominant chairman on a corporation’sboard?

Mr Chapman—More likely, because you can get the power imbalance. If I had the financialcontroller of BHP sitting on the board, I would probably feel a bit intimidated by him as well.

Senator CONROY—An Alan Bond or a John Elliott who is always in the news.

Mr Chapman—Robert Maxwell.

Senator CONROY—Exactly.

Mr Chapman—That is a safe one, Senator—he is not Australian.

Senator LIGHTFOOT—Mr Chapman, I came in late, for which I apologise, so I regret if Iask you a question that goes over something that you have previously answered. That goes forthe rest of your colleagues at the table here tonight. Can’t you give the committee a short,succinct and unambiguous answer to the question: are the trustees good enough for the job thatthey are doing? It does not necessarily have to be a yes or no answer, although I would preferthat. Can’t you give the committee an answer?

Senator CONROY—You do not have to get involved in the government’s vicious attempt toundermine trustees of superannuation funds, Mr Chapman.

Senator LIGHTFOOT—Are they good enough for the job? If you are not going to answer itsuccinctly or unambiguously, I will move on.

Senator CONROY—Do not be badgered by Senator Lightfoot.



Mr Chapman—I find it very difficult to answer. I cannot answer yes or no.

Senator LIGHTFOOT—Let me move on then.

Mr Chapman—To answer yes or no means that every single trustee is satisfactory. I cannotanswer that.

Senator LIGHTFOOT—Let me move on, Mr Chairman. Is APRA up to scratch withrespect to its role as a regulatory authority?

Mr Chapman—My view is yes, obviously. You would not expect me to say anything else. Ibelieve that we are. I believe that we have significantly increased—not in isolation; we havedone it with the industry—the standard of behaviour in the superannuation industry in the lastfive years, as the ISC and as APRA. I think that is continuing now. You would not expect me toanswer any differently.

Senator LIGHTFOOT—I expect you to answer truthfully.

Mr Chapman—I believe I have been truthful. I think we have.

Senator LIGHTFOOT—Since 1997 you have had one criminal prosecution and one civilpenalty action. Is that correct?

Mr Fogarty—Yes.

Mr Chapman—Yes.

Senator LIGHTFOOT—How many people actually work on your team, including all areasof APRA?

Mr Chapman—APRA now has about 420 staff in total.

Senator LIGHTFOOT—It has 420 staff. And it has had one criminal prosecution and onecivil penalty action since 1997?

Mr Chapman—There are two answers to that. One is that the only indicator of our success isthe number of criminal prosecutions we undertake. The other is that we have taken all the actionthat we could have.

Senator LIGHTFOOT—Because of the weakness in the legislation?

Mr Chapman—Because of the weakness in the legislation.

Senator LIGHTFOOT—Is that a perceived weakness or have you given us some indicationof that in your submission?

Senator CONROY—They gave two examples, Ross.



Senator LIGHTFOOT—Do you think that if those examples are rectified, if the legislationincluded those examples, you would have had more prosecutions?

Mr Chapman—We definitely would have had more prosecutions.

Senator LIGHTFOOT—Can you give the committee any idea of the number that you think,in a generic sense.

Mr Chapman—We are talking about five or six. Senator Sherry asked that question earlier.Again, we come back to the point that our philosophy is built around making sure that the fundoperates for the benefit of members and the member benefits are not put at risk. It does notalways mean you need to prosecute a trustee to achieve that.

Senator LIGHTFOOT—Do you think you have been successful in preventing that?

Mr Chapman—We have definitely been successful.

Senator LIGHTFOOT—Would you have been very successful or just successful?

Mr Chapman—I think we have been very successful over the years.

Senator LIGHTFOOT—Can I just quote a few from submission No. 19. I assume that1998-99 is a fiscal year.

Mr Chapman—Yes.

Senator LIGHTFOOT—Your submission states:

1998-99

. 4 trustees were removed.

. In two cases, concern about the fund led to the freezing of fund assets.

. 24 funds were made non-complying with resultant loss of their concessional tax status.

1997-98

. 31% of funds reviewed had shortcomings which would have created a potential risk to members’ interests if notrectified.

. 4% of funds reviewed had serious shortcomings which required a closely supervised rectification program,formal investigation or enforcement action.

. In 2 cases, concerns about the fund led to the freezing of assets.

. The ISC applied for 6 warrants to search premises under SIS as part of a continuing investigation thatcommenced during 1996-97 into the affairs of 57 superannuation funds.

That is before that one single prosecution.



. The ISC issued a non-compliance notice under section 40 of the SIS Act to a fund on the basis of contraventionof the in-house asset rules.

. The ISC referred 9 breaches by a trustee, relating to acting as a trustee of a superannuation fund while adisqualified person, to the Victorian DPP.

Are you telling the committee that in all of that time, with all of those perceived and actualproblems, only one criminal prosecution and one civil penalty action was initiated by ISC andAPRA? Are you saying that that is the fault of the legislation?

Mr Chapman—No, I am saying that if we had these powers now we probably would havetaken an additional five or six prosecution actions. A lot of these powers we have now areadministrative powers—the replacement of trustees is not an action you take to court anddisqualification of auditors is not an action you take to court, for example, which I do not thinkyou actually went through in that list. A lot of the activity that we undertake is aimed atrectifying the issues. In your example there, of the 31 per cent that had shortcomings, thosetrustees would have worked with us to do something to improve the situation to try andovercome those shortcomings. For the 65 per cent that are not covered in that—we would nothave looked at all of them, but we looked at a portion—we were satisfied that there were nosignificant issues.

Senator LIGHTFOOT—Specifically, who are ‘we’, Mr Chapman?

Mr Chapman—The staff of APRA.

Senator LIGHTFOOT—With respect to a specific department in APRA? Would part of the400-odd people that work there, perhaps the Specialised Institutions Division, look at them?

Mr Chapman—Okay. We would be looking at staff of both the Specialised InstitutionsDivisions and the Diversified Institutions Divisions since the formation of APRA. I am not surewhat you are getting at with your specialist staff issue. Those people also look at generalinsurance companies, life companies, banks, credit unions and friendly societies as well.

Senator LIGHTFOOT—Okay. Mr Fogarty, did your advice that you gave to Mr Chapman,the General Manager of Specialised Institutions Division, generally, roughly, superimpose theresults of those single prosecutions, criminal prosecutions, and the one civil penalty action, ordid you recommend that further action should be taken?

Mr Fogarty—I do not quite follow the question you are asking, Senator.

Senator LIGHTFOOT—Was your advice, as the General Counsel to APRA, pretty wellfollowed by the Specialised Institutions Division, or do you have another division that—

Mr Fogarty—There are some differences between the structure of APRA and what thestructure was of the ISC. If you look at 1997-98, for instance, decisions about taking the variousforms of enforcement action there were taken in a collegiate group in which I was representedas a legal—

Senator LIGHTFOOT—How many prosecutions were there in 1997-98?



Mr Fogarty—None.

Senator LIGHTFOOT—Not even when you say ‘31% of funds reviewed had shortcomingswhich would have created a potential risk to members’ interests’? Were they all rectified and didnot require a prosecution?

Mr Fogarty—Yes, Senator, because prosecution is not the only means by which you canrectify shortcomings in funds. A lot of them—

Senator LIGHTFOOT—So they were not serious enough to consider a prosecution, MrFogarty?

Mr Fogarty—They were either not serious enough or, because of the shortcomings in theprovisions as they now stand, prosecution would not have been achievable.

Senator LIGHTFOOT—How many people do you have on your staff, Mr Fogarty?

Mr Fogarty—My office has four lawyers in it, Senator.

Senator LIGHTFOOT—Four lawyers and a—

Mr Fogarty—And an administrative assistant.

Senator LIGHTFOOT—I see.

Mr Fogarty—There is another group of lawyers who work in enforcement. There are threelawyers there.

Senator LIGHTFOOT—But they are not under your control?

Mr Fogarty—Well, in a broad sense, but they do not report directly to me.

Senator LIGHTFOOT—So you have seven lawyers plus yourself?

Mr Fogarty—No, including me.

Senator LIGHTFOOT—What about the statement, ‘4% of funds reviewed had seriousshortcomings which required a closely supervised rectification program, formal investigation orenforcement action’? This relates to 1997-98. Was there no referral to the DPP there either?

Mr Fogarty—There are quite a number of steps you can take short of enforcement. Arectification program would be, for instance, a negotiated arrangement between APRA staff, orISC staff as they were then, review staff, and the trustees, pointing out to the trustees what theshortcomings in the fund were—failure to keep accounts properly—and then getting them tounderstand what the solutions required were, giving them a program to ensure that thosesolutions occurred, and then, once they had occurred, being satisfied. There is no point, once



you have reached that rectification stage, of prosecuting, even if there were an offence that youthought you could prosecute successfully.

Senator LIGHTFOOT—Do you think you are overstaffed in terms of solicitors?

Mr Fogarty—No.

Senator LIGHTFOOT—Do you think you are understaffed?

Mr Fogarty—I do not have a view either way. The underlying assumptions in your questionmake assumptions about the way legal resources in APRA are set up. At the moment we havean Office of General Counsel, which I head, which is an in-house legal team which picks upbroad corporate issues. There is also a group of enforcement lawyers who advise theenforcement area on enforcement and rehabilitation issues. In 1997-98 we had a combined legalunit which did a range of things, including providing legal advice on enforcement actions. I amhere in my capacity as General Counsel tonight because one of the responsibilities of my officeis to advise APRA and provide APRA’s input into legislative change.

Mr Chapman—Can I make a suggestion, Senator? We have a presentation, which Mr Browngave to an in-house forum, about how the enforcement activity is now coordinated withinAPRA. We brought some copies along and the secretariat now has them, if you are interested inlooking at those. Perhaps we could discuss those issues in terms of that structure at another date,or we are happy to talk about it now, if you wish. But we do have a process. I am still not quitesure as to your issue with this one. Take the top two cases—the other dot points are actuallyspecifics where something happened. In the top two dot points, the only area where we wouldeven have—

Senator LIGHTFOOT—What year is that?

Mr Chapman—This is 1997-98—you were reading from it before. With the 31 per cent wewould not have considered formal enforcement activity. At the most, in terms of this presentbill, some of those cases would have had enforceable undertakings sought from the trustee. Thefour per cent is the only area where the formal enforcement action would have been taken orbeen considered. What we tried to do when Mr Brown gave that presentation to a differentforum was to describe the process by which that four per cent is sieved, if you like, to determinewhether some of them float to the top and you need to do something further about those issues.So talking about enforcement in terms of the 31 per cent is a little bit of a furphy in terms of thecurrent discussion.

Senator LIGHTFOOT—Well, it is your furphy then, Mr Chapman.

Mr Chapman—No, we are saying that there is 31 per cent where there were risks if thingswere not fixed. They might have been issues such as no contractual arrangement between thetrustee and the administrator. Weaknesses or issues we have seen there are things such as if theadministrator goes out of business, the trustee has no legal right to obtain the records of thefunds if there is no legal agreement in place requiring that. They might be some of the issuesthat float into that 31 per cent. We are not going to prosecute a trustee if all they do not have is asigned contract with the administrator. If they do not have a signed contract with the



administrator and with a custodian, and they have no control over investment decision makingand, dare I say it, they do not lodge their return on time, it creates an environment, as Mr Longoalluded to earlier, where everything adds up to suggesting that there is something which reallyneeds to be—

Senator LIGHTFOOT—So you would refer to those as shortcomings?

Mr Chapman—Yes.

Senator LIGHTFOOT—What about serious shortcomings then, which is stepping up thepace a bit? In your second dot point, four per cent of funds reviewed had serious shortcomings.I do not suppose you have memorised those, but could you take on notice to give the committeea synopsis on what those serious shortcomings were?

Mr Brown—Could I give an illustration? One fund comes to mind that was marketed tomultiple employer sponsors. The trustee board purported to have equal representation; it had thefacade of equal representation. In fact, it was the creature of the administrator of the fund. Therewas an administration agreement. It was extremely heavily loaded towards the administrator.The fees that were being paid were well over the market odds. There were significant penaltyclauses in the agreement inhibiting the trustee, if ever it achieved a measure of independence—

Senator LIGHTFOOT—It benefited the administrator?

Mr Brown—from cancelling the administrator. In this instance there were honorary trustees,but the arrangements were such that the administrative tasks were required to be performed bythe chairman, so matters such as signing every cheque for the fund were performed by the fundchairman for which he charged CBD professional partner rates. That is an example of a fundwhich had serious concerns from our point of view. While those characteristics are individual tothat particular fund, the sorts of circumstances which cause us alarm are far more generic thanthat. It is the fact of capture of the trustee by an administrator or by an employer sponsor and theplacing of member interests well below the interests of other parties associated with the fund.

Senator LIGHTFOOT—What steps were taken to rectify the bias towards the administratorfrom the trustee?

Mr Brown—In the particular instance a circumstance arose whereby we were able to replacethe trustee; we did that. However, given the situation in the legislation as it now stands, theformer trustees were able to set up, if you like, a Phoenix fund and remarket that fund to theemployer sponsors of the fund, which was still in existence under the guidance of a replacementtrustee.

Senator LIGHTFOOT—Mr Brown, perhaps you might be kind enough to tell thecommittee briefly how the fiduciary responsibilities differ between an honorary trustee and atrustee?

Mr Brown—The SIS prescribes, under section 52, the obligations of the trustee of any fund.Irrespective of whether it is an approved trustee able to offer a fund to the public, or anhonorary trustee, an approved trustee may have additional conditions placed upon it through its



instrument of approval, but the fundamental fiduciary obligations are the same irrespective ofwhether you are the trustee of a four-person fund, a 10-person fund or a 15,000-member fund.

Senator LIGHTFOOT—Is any honorarium paid to the honorary trustee?

Mr Brown—In the example that I gave?

Senator LIGHTFOOT—No, is there an honorarium paid to the honorary trustee?

Mr Brown—No.

Senator LIGHTFOOT—One wonders why you get any honorary trustees then if theirfiduciary responsibilities are the same as a trustee. They seem to be entering into it with all therisks but no rewards.

Senator CONROY—Public service—just like you and me.

Senator LIGHTFOOT—What prosecutions were referred to the DPP during, say, 1996 upto 1999, year ended? How many prosecutions were referred to the DPP? I am not asking howmany he recommend he would prosecute, but how many were referred to him—only the one?

Mr Brown—One to the Commonwealth Director of Public Prosecutions.

Senator LIGHTFOOT—Did any state DPPs take briefs?

Mr Brown—Yes, one other.

Senator LIGHTFOOT—In what state was that?

Mr Brown—Victoria.

Senator LIGHTFOOT—What was that? Can we classify that? Can you give us some—

Mr Brown—Yes. That one was an instance where a person had been acting, while known tobe a disqualified person, as the trustee of a superannuation fund. In that instance, the individualconcerned had departed overseas before charges were laid.

Senator LIGHTFOOT—So there were two prosecutions—one state and one federal—infour complete fiscal years?

Mr Brown—No, there were two recommendations.

Senator LIGHTFOOT—Two recommendations. Neither of those was ever prosecuted?

Mr Brown—The federal one was never prosecuted. With the state one, I believe that thecharges are still in abeyance to be reviewed if the person returns to Australia.



Senator LIGHTFOOT—With respect to the federal one, did that go to court?

Mr Brown—No, it did not, it was rejected by the Director of Public Prosecutions.

Senator LIGHTFOOT—The DPP rejected it?

Mr Chapman—Yes, on the basis that being able to prove the reckless and intentional arm ofthe provisions in the SIS legislation was effectively impossible.

Senator LIGHTFOOT—Just to sum up, between 1996 and 1999, year ended, there were nosuccessful prosecutions at all for breaches, or that APRA would have determined could havebeen breaches. Is that correct?

Mr Chapman—Yes.

Mr Brown—Yes.

Mr Fogarty—Not criminal prosecutions; we had a decision in the Federal Court a couple ofmonths ago in which the Federal Court found 18 contraventions of the civil penalty provision.

Senator LIGHTFOOT—What were the ramifications of that? Was that determinedcompletely? Has that been appealed?

Mr Fogarty—The judge reserved his decision on penalty. Submissions were heard onpenalty a couple of weeks ago, and we are awaiting a decision on penalty.

Senator LIGHTFOOT—What court was that, Mr Fogarty?

Mr Fogarty—The Federal Court.

Senator LIGHTFOOT—That was the Federal Court in Victoria?

Mr Fogarty—In South Australia. It is in that matter that the search warrants that you referredto—

Senator LIGHTFOOT—The six search warrants?

Mr Fogarty—were issued as part of that enforcement process.

Senator LIGHTFOOT—So seven lawyers managed to get one successful prosecution that isnow on appeal to the full bench of the Federal Court?

Mr Fogarty—No it is not on appeal. We have had a decision on the law, and we are awaitinga decision on the penalty to be applied for the breaches that were found to exist.

Senator LIGHTFOOT—We hope that the other 400 staff in APRA are somewhat moresuccessful than your solicitor, Mr Fogarty.



CHAIR—Witnesses have called for more guidance on who is not a fit and proper personunder the proposed amendments to section 120 of SIS. Can you expand on this? What criteriawere used and is there any appeal mechanism?

Mr Chapman—An example of where we might have used this power in the past was the onethat Mr Brown just outlined of the trustee who was replaced and then a Phoenix fund was setup.

CHAIR—We are looking for some guidance for who is not a fit and proper person.

Mr Chapman—Yes, I realise your question. I am just saying that is an example where wemight have used it.

CHAIR—Do you want to take the question on notice? I think it is going to be very useful forpeople.

Mr Chapman—No, I am quite happy to answer the question. A fit and proper person test is astandard international test for participants in the banking and insurance industry, so it is notsomething which has been dreamt up as a new one for this particular bit of legislation. There isno structured and formal international process by which that fit and proper is determined. It is asomewhat nebulous concept, obviously. It is not one where there has been a huge amount ofinternational experience in its application. We are currently working, as I am sure you know, onharmonising the number of different standards and we expect that the risk management standardfor general insurance will be released in the next couple of weeks. It will include somediscussion on this particular point in terms of the outlines of the sorts of process that insurancecompanies should go through to do this. We will be looking at applying those same sorts ofprocesses across the board for insurance companies like super funds, banks and ADIs—I knowyou are very interested in the bank issue, Senator.

Senator CONROY—I will be coming to that, don’t worry.

Mr Chapman—I know nothing about banking, before you ask me a question, Senator. Sothat process will flow through. At this stage our thinking on the general insurance side is moreone of requiring the board to implement a fit and proper person requirement as part of theirprocesses and for us to review that mechanism and to have a look at how that might work. Thiswill be a board rather than one particular individual but that fit and proper person test in a strictsense needs to apply to directors, clearly, senior management and the approved auditor. Wealready have that effectively in the legislation now because APRA has the ability to disqualifyan auditor which is equally as serious as to disqualify a director because that can remove thatauditor’s income from the superannuation system. So we already have that power in relation toauditors now.

That is the sort of process we are looking at applying now. In terms of decision making,obviously, as with any other form of action that affects individuals or, indeed, corporates, wewill be going through the process of putting a show cause letter to the individual, giving thatindividual natural justice in terms of the mechanism, as we do now with auditors if we arelooking at disqualification for auditors. That person has an ability to come back, react to that



show cause letter, and let us know that our facts are wrong or that there are extenuatingcircumstances.

I do not know what the proportion might be but a proportion of the auditors who receivethose letters do show cause why we should not proceed with the action. They are AATappellable after the event. Obviously people prefer it not to get to that stage because thatgenerally becomes a public issue, although it does not have to be. There have been some AAThearings in relation to disqualified person provisions that are currently in SIS which have beenheld in camera. There are a lot of mechanisms in there for people to appeal a decision and it isnot a decision where I can decide that one day I do not like this person because he wears brownshoes rather than black shoes, and do it. We have got to go through the proper process and weutilise the services of the legal provisions.

We would find it difficult to develop a set of guidelines now without having some experienceacross the various industries for which we are responsible. We can provide an indicative outlineof the sort of people. The sort of people would be individuals who have not been prosecuted fora breach of SIS—because that automatically makes them a disqualified person—or for a breachof the Corporations Law, but they have not been prosecuted because of a technicality. I cannotthink of any other examples off the top of my head. They are the sorts of areas where we arelooking at that power being used. Again, it would be a very small minority of cases. I can onlythink of two trustee boards, which is probably a total of six individuals, where we probablywould even have considered that in the past.

Senator CONROY—You make reference to an international standard for banking andinsurance regulators. Do you have a copy that you could give to the committee?

Mr Chapman—We can dig one up.

Senator CONROY—That would be helpful. Are you looking at expanding it from bankinginsurance into superannuation?

Mr Chapman—No. We are looking at harmonising the standards as far as we are able to doso. As I said, the draft risk management requirements for general insurance should be issued inthe next couple of weeks, and that includes a segment on fit and proper persons. A lot of peoplehad doubts about the Wallis outcome. One of the clear outcomes from the first 18 months or twoyears of APRA’s existence has been that there is a lot of commonality across industries. It is notthat everybody who runs a super fund should be of the calibre of somebody who is on theCommonwealth Bank board, but there are a lot of commonalities in terms of the processes andthe mechanisms. So we are looking at trying to extend those standards across the board. Youalready see that there is a fair bit of commonality between some of our new draft ADI bankingstandards and some of the new general insurance standards, for example, which are the first twooff the rank in terms of trying to harmonise issues.

Senator CONROY—What organisation developed this international standard?

Mr Chapman—Basel and IAIS would be my off-the-cuff answer.

Senator CONROY—Do you know who signed up to use it?



Mr Chapman—Basel is effectively compulsory for anybody who has a banking industry,because otherwise your banks just cannot operate internationally.

Senator CONROY—So Australia has signed up to it?

Mr Chapman—Yes. There is an evaluation process being done by the IMF. They are nowevaluating compliance of countries with various international standards. I face the danger ofmisleading you if I go too far with this, but they are looking at setting up international taskforces which evaluate particular countries. Mr Tregillis from ASIC has actually done onealready. Those international standards are likely to become compulsory in a practical sense.

Senator CONROY—So you use this international standard for regulation of both banks andsuper at the moment, by and large?

Mr Chapman—By and large. Did you say banking and superannuation?

Senator CONROY—Yes.

Mr Chapman—We do not have fit and proper tests in superannuation. There are nointernational standards on superannuation per se. So even though the systems in the UK, the USand here are in concept very similar, there are so many differences that there is no internationalstandard in that regard.

Senator CONROY—This standard would be used in the approval, for instance, of a bankinglicence?

Mr Chapman—The principles and the standard would be used in the application for abanking licence.

Senator CONROY—When I have asked previously whether you have a fit and properpersons test, the answer I got was: in an informal way.

Mr Chapman—It does not say that if your name is X, you are not a fit and proper person.They are principles rather than anything else.

Senator CONROY—No, that is not what I said. I have asked previously about—

Mr Chapman—These would be the sorts of standards we would have—

Senator CONROY—a fit and proper persons test. I was told by APRA—I think possibly byyourself, although my memory may be faulty there—that there was an informal test; that youhad no formal test.

Mr Chapman—These are not formal tests. These are indicative guidelines.

Senator CONROY—I thought you said it was effectively compulsory to bankinternationally?



Mr Chapman—They are a framework not a prescriptive set of requirements. We willprovide you with a copy as I may mislead you if I go too far down the track on this particularone.

Senator CONROY—I am not trying to take you anywhere in particular.

Mr Chapman—I will provide you with a copy.

Senator CONROY—I was just wondering—I am glad Senator Lightfoot is here—how MrWalker’s banking licence was going?

CHAIR—Order! Question please.

Senator CONROY—I was wondering if you saw my speech about a banking application—

CHAIR—We are running short of time.

Senator CONROY—and whether or not you followed up with the ASIC office inQueensland about Hudson Conway’s contributions to Sea World?

CHAIR—Is this a superannuation issue?

Senator CONROY—You might want to check Hansard and call up Sea World and HudsonConway and set the bloodhounds on it from there.

CHAIR—Senator Conroy, is this a superannuation issue?

Senator CONROY—Mr Longo is there. He can give you the file from the Queenslandoffice. The Queensland DPP has a big file on it.

CHAIR—Order! Have you another question before I go to Senator Allison?

Senator CONROY—No.

CHAIR—Senator Allison.

Senator ALLISON—I want to briefly go back to the question raised by Senator Watsonabout the business judgment defence and try to understand why it was that that could not beextended to trustees.

Mr Longo—Essentially, the requirements we are talking about involve no business judgmentat all. They are precise, prescriptive requirements: provide a tax file number, file an annualreturn, keep minutes. These are very specific obligations that are imposed on people who aredischarging these responsibilities. The business judgment rule is not designed to deal with thosekinds of obligations. The business judgment rule is there to deal with situations where directorsmake judgments about whether to make an acquisition or to make a particular kind ofinvestment where the assets of the company are at risk if things go wrong.



The idea of the business judgment rule is to say that, if directors act in accordance with theprinciples set forth in the business judgment rule or in the legislation now, then a court will notsecond guess the board’s judgment about the sale of that particular asset or the investment of asignificant sum of money in a new technology or a particular loan. All those kinds of decisionsinvolve true judgment and there is a discretion so you can either choose to make the loan or notor you can choose to sell the asset or not. That involves real judgment while the requirementswe are talking about here tonight are not of that kind at all. There is no choice about whetheryou file an annual return or provide a tax file number. They are prescriptive requirements thatform a fundamental part of the infrastructure that supports prudential regulation of the field weare talking about so the two subjects are quite unrelated.

Senator ALLISON—Can you give the committee an example of the difficulty in terms ofthe imposition of fault liability and the reason to move to strict liability? I am not sure I quiteunderstand what the mental element means in this debate. Can you just expand on that?

Mr Longo—As far as the criminal law generally is concerned, we have a specialist here andthe idea with mental element is that for the more serious offence the law requires someintention.

Mr McDonald—Yes.

Senator ALLISON—The mental element means either I did not realise or I did not mean todo it—

Mr Longo—For example, if I am going to be charged with something serious—if the state isgoing to put me at risk of going to jail or paying a very large fine—then, as a general principle,our law says we are not going to do that to you unless the Crown can establish, or thegovernment can establish, some mental element or some fault on your part that you intended todo that act which constituted that offence or that you were reckless. I am trespassing on myfriend’s area.

Mr McDonald—Offences are broken up roughly into physical and fault elements. A physicalelement is the thing that you do or omit to do, so failing to lodge a return would be a physicalelement. Then a fault element, if one applies to that, would be intention orrecklessness.Intention is defined in the criminal code very clearly as to what that means and it isthe same with recklessness, knowledge, and so on, and even criminal negligence. Under thecriminal code if you do not state what the fault element is then the fault element willautomatically be intention. Under that system, if you want to have no fault element for theparticular conduct then you have to state that that no fault element applies and the signal for thatis strict liability if you want to have a defence of mistake of fact. If you do not want to have adefence of mistake of fact then it is absolute liability and can be stated to be absolute liability.For example, we are just putting through at the moment new theft offences as an offence ofstealing Commonwealth property. You have to prove the person intended to do all the elementsof the offence of stealing the property but you do not have to prove that you actually knew itwas Commonwealth property. So you can isolate certain parts of the offence as somethingwhere you do not prove a fault element.



Senator ALLISON—Can you give an example within superannuation of the sorts ofproblems we are trying to fix here with this legislation?

Mr Brown—Senator, I can tell you a story. A trustee had, by my recollection, 33superannuation funds for which it acted. It was associated with an accountancy practice. It washolding itself out as a professional in the area. It had the assets of all these funds pooled into anunregulated entity and then on-invested the money. Some of the money was invested into theparent of the trustee; some of the money was invested into very illiquid assets—a part share in ashopping centre, for example. The records of the individual funds were extremely poorlymaintained. Annual returns of the various funds had not been filed. There were real questionsabout the proper valuation of the assets of these funds. Given our level of concern about thosefunds we sought the minister’s approval and froze the assets of the funds while we investigatedto see what a proper assessment of the asset valuation was.

The freezing of the assets, in our view, constituted a significant event which members wereentitled to know about under the legislation. We conveyed that view to the trustee orally and inwriting. We had an officer of the trustee acknowledge to us that this was indeed a significantevent and that the trustee did have an obligation to advise the members in the terms oflegislation as soon as practicable and in not more than 90 days. The trustee failed to notify themembers until such time, in fact, as we were perhaps stretching our legislated entitlements inseeking to convene a meeting of all of these funds. During this process the trustee resigned astrustee of the various funds.

This was an instance where we did say this conduct is outrageous. It has put member benefitsat significant risk. It was made the more outrageous by the fact that the trustee was holdingitself out in the marketplace as professional. We went to the DPP on this matter. The DPP’sadvice was, ‘You will not be able to succeed in a prosecution here.’ It was not part of the writtenadvice but the effect of the advice was that as long as the trustee can say with a modicum ofplausibility, ‘I thought I told one of my staff to do that,’ then we would fail to prove beyondreasonable doubt that the trustee had been reckless or deliberate in failing to fulfil itsobligations. That really is the nub of the difference between fault liability where we have toprove beyond reasonable doubt that there was recklessness or intent in actually carrying out anaction or failing to carry out a required action as against strict liability where it is sufficient toprove, still beyond reasonable doubt, that the trustee had done or failed to do the thing.

I might just give one other example because it is not only trustees that the fault liability andstrict liability provisions can impact on. In section 64 of the SIS Act there is an requirement onan employer sponsor, if they actually take money out of your pay, to contribute to asuperannuation fund on your behalf. They are obliged to remit that money within 28 days of theend of the month. We get probably a dozen complaints a year where money has been withdrawnfrom their salary but it has not been remitted in time. The provision is at present a fault liabilityprovision.

I had a case some three or four months ago where an employer took on, under a subsidisedscheme, a young woman who suffered a physical disability. He persuaded her to contribute overand above the superannuation guarantee amount that he was obliged to contribute. He persuadedher to contribute out of her after-tax salary to a superannuation fund. She agreed. When after



about 18 months there was no indication that the money was going where it should be going sheinquired first with her employer, then of the police. The money had not been remitted.

The view of the police was that there should be prosecution. However, they were unable toprosecute because of a technicality that they were advised of. They referred the matter to us. Welooked very seriously at prosecution in this instance. We were significantly deterred because ofthe requirement to demonstrate, again beyond reasonable doubt, that the employer’s failure toremit had been reckless or intentional. At the end of the day the thing that killed that particularline of thought was that the last potential offence had occurred some 18 months prior to usbeing advised of it. Under the law as it stands now there is a statue of limitation of 12 monthsafter the commission of an offence. So, even had we been able to prove the mental elementthere, we would have been defeated by the statute of limitations.

Senator LIGHTFOOT—If the balance of probability had applied in that case, would thathave made your job easier with respect to prosecution?

Mr Brown—To demonstrate the mental element on a balance of probability? I think theanswer is yes, but I would also be wise to defer to my legal colleagues.

Mr McDonald—In criminal offences you have to prove the elements of the offence beyondreasonable doubt, otherwise it is a civil prosecution. Just to give you an idea of how these sortsof offences fit within the criminal framework, often these forms and returns that people arerequired to provide are themselves, can themselves, be evidence in their own right. If the persondoes not put in the forms then you are not able to show whether the person is being misleadingin those forms, or deceptive. So it is important to have a workable mechanism, even thoughthese are not major offences compared to the ones that I am concerned with such as theft andfraud, to get people to put these forms in because if there is deception in the returns, that can beevidence for far more serious charges, like fraud.

Senator LIGHTFOOT—But merely not putting the form in is not a criminal act in itself, isit? That could be charged and will be determined beyond the balance of probability.

Mr McDonald—There has always been criminal offences applying to not putting in forms.Whether it is state, territory or Commonwealth law, these sorts of offences are very common.They are the sort of offence that you would find in local government, right through stategovernment and the whole range of government activity. They are criminal offences.

Senator ALLISON—Can I just pursue that a bit by asking what difference it makes understrict liability? Does the imposition of strict liability mean that it is not possible to mount adefence at all about intention—

Mr McDonald—No.

Senator ALLISON—that you cannot indicate that there was a mistake made by the staffer?

Mr McDonald—There are specific defences in the criminal code that go to the basic issues.For example, there is the defence of mistake of fact. If you consciously considered thecircumstances and made a mistake—say, you thought the return had to be in on a certain date



and, because of some illness or concern, as a result you actually made a mistake about when itwas to be put in—then that would be something that you could raise and it would be for theprosecution to show that that was not the case.

Senator ALLISON—Isn’t that the reverse onus of proof that most of the submissions talkabout?

Mr McDonald—Any defence requires the person that is accused to establish and raise theparticular defence.

Senator CONROY—But don’t you have a responsibility to prove guilt?

Mr McDonald—That is right. You can point to an issue but it is ultimately for theprosecution to prove guilt.

Mr Fogarty—To illustrate that, if you are charged with murder and you plead in yourdefence that it was self-defence, then the defendant has to raise that defence and has tointroduce some evidence pointing to the possibility of that as a defence. That is a burden ofproof they carry. But it is not usually referred to as a reversal of the onus of proof. The onus isproving the elements of the offence beyond reasonable doubt.

Mr McDonald—The ultimate.

Senator ALLISON—So do we have strict liability in cases of murder?

Mr Fogarty—No.

Mr Longo—I think that it is important to inject some perspective into these issues. We aretalking about what are among the most minor offences under the law. From an enforcementperspective, I think that a regulator would very quickly lose any credibility it has in the marketif it deployed a disproportionate amount of its resources to the prosecution of people for notproviding tax file numbers or not providing annual returns. These provisions provide anessential part of the infrastructure for a system that we all take for granted. The reality is thatthese offences are no more serious in their effect on people’s personal lives than runningthrough a red light, which is a strict liability. No-one asks you, ‘Did you intend to run throughthat red light?’ It is not a defence to say, ‘I did not intend to run through that red light’—yet todo so can attract a fine not too much different from the fines we are talking about here today.Also, you put people’s lives at risk.

I really do think that we need to step back from this and understand that, from a regulatorypoint of view, and speaking as someone who has been in this now for some years, theseprovisions are important. From an enforcement point of view, if there is poor record keeping, ifthere is poor minute taking, if people do not file their annual returns, then they are indicators ofpoor compliance with some bigger issues. The fact of the matter is that regulators have adiscretion; we have a choice. Our first strategy in matters of this kind is to educate people tocomply. We all run educational campaigns. We all support industry efforts to educate peoplewho are required to comply with these provisions. Certainly, prosecution action is reserved forthe more serious cases where there is some pattern or history where the people involved have



come to the attention of the regulators with a frequency that makes taking action not apossibility but a reality.

If people inadvertently fail to comply or if they fail to comply once, then I think it would be amost harsh regulatory response to then go off and make a reference to the DPP. We just do nothave the resources to do that. It is much better to educate and encourage compliance and toreserve prosecution action for the more serious patterns of poor compliance. I think that hasbeen the history at ASIC and, certainly from what I have heard tonight, the history at APRA. Iwould commend to the committee these changes and I would not be concerned about strictliability for failing to file an annual return.

Senator ALLISON—Mr Longo, thank you for that. The difficulty the committee has is that,with one exception, I think, the submissions made to it suggest that this is unnecessary and isheavy handed. Our problem is that it appears you did not consult with anybody in industry priorto bringing forward the legislation, so it is quite difficult for us to get to the bottom of what allthis means.

Mr Longo—There may have been a communication issue at some stage. It really isimportant that the point I have just made be made as firmly as I have made it and not to confusethat with a communication breakdown. There has not been a reversal of the onus of proof. Thereare fundamental legal obligations on trustees. These contemplated provisions exist now. Theyare supposed to be filing returns and keeping minutes now.

Senator ALLISON—Was the lack of consultation an oversight or did you not think itnecessary?

Mr Fogarty—Part of the confusion—and it was alluded to at the beginning of the hearing—arises from the fact that there is a misapprehension in the trustee community that, by applyingthe criminal code to some of these offences, we are making things that were not previouslycriminal offences into criminal offences. That is not the case. The application of the criminalcode is part of another Commonwealth policy to clarify the way in which things that are alreadyoffences are expressed in the legislation.

Senator ALLISON—I understand that. I was here when you talked about it. Are you sayingthat everybody should have expected it and that is why there was no consultation?

Mr Fogarty—Sorry, everybody should have expected what?

Senator ALLISON—That this would be applied since the criminal code was being appliedto similar pieces of legislation?

Mr Chapman—At the risk of increasing the number of people at the table, you might likeMr French to come and answer that particular question.

CHAIR—I think we will call Treasury and Taxation separately, because we are running outof time.



Mr Chapman—I will answer that question by saying that, in terms of the post-Wallisstructure, the development and putting forward of legislative amendments is properly inTreasury’s court. Mr French might like to answer that question when Treasury is up.

Senator CONROY—This is the consultation question?

Mr Chapman—Yes.

Senator CONROY—So you are saying it was not your responsibility to consult?

Mr Chapman—I am saying that, in terms of the structure that is now in place, Treasury isresponsible for the preparation and putting forward of legislation to do with super, banking,general insurance, et cetera.

Senator CONROY—Mr McDonald hand-passed it to you, I think, and you want to hand-pass it to Mr French.

Senator ALLISON—You may have already answered these questions but the AIST suggesttwo alternatives to this legislation. Were you asked to respond to those suggestions?

Mr Chapman—The ones that the AIST has put forward?

Senator ALLISON—I will just go through them quickly:

First, the Committee in consultation with the industry could consider a regime of graduated financial penalties forbreaches of SIS. Such penalties could be calculated to accord with the severity of the breach.

Mr Chapman—We have not looked at the particular proposals they put forward. On thatparticular proposal, not everybody who gets penalised gets penalised the same amount. Thereare differential penalties that depend on the severity. An example might be the consumer creditcode where it could be subject to a very severe penalty. A lot of the penalties that the courtshand down are $300 or $400. Just because there is a 50-unit penalty—I think it is—for the non-lodgment of an annual return does not mean that every non-lodger would end up being fined 50penalty units. Somebody who is late once in their life with a valid reason, whether that be amistake, forgetfulness or something, will not be fined if that is the only penalty that they have.

Senator ALLISON—Are you saying that there is already a graduated financial set of—

Mr Chapman—As I understand it, the ability is already there to fine somebody less than themaximum amount.

Senator ALLISON—Why do you think they would have suggested that?

Mr Chapman—Because they probably did not understand that that is the case.

Senator ALLISON—Is there an argument for having some guidelines to a graduated set ofpenalties?



Mr McDonald—Generally, we rely on the courts to take into account the specific cases. Ofcourse, you have a maximum penalty, and I can assure you that the courts apply a maximumpenalty only in the worst possible example of the particular offence. Certainly the criminal lawpolicy of the Commonwealth has already been to give the courts the flexibility to take intoaccount particular circumstances of the case. We have had a lot of debate about that sort of issuemore generally in recent months. It certainly is the way our criminal law policy is.

Senator ALLISON—Secondly, it was suggested that there be the ‘development andintroduction of a trustee certificate of practice, independently assessed and acceptable across theindustry and to the regulator’, which would be ‘a practical and constructive step to raisestandards of stewardship and spread high standards further throughout the industry on acontinuing basis’. Does that have some merit?

Mr Chapman—It has some merit, but I think that repeats a lot of Senator Watson’s earlierquestions about what the adequacy of current trustees is. Anything which offers the opportunityfor another valuable and useful form of trustee education is clearly positive. A question ofwhether or not you require every trustee to have such a certificate, similarly to whether yourequire every auditor to have a speciality certificate in superannuation, is a very broad policyquestion and one that I think was probably last debated in relation to auditors, rather than inrelation to trustees, where you have a significantly smaller number of practitioners.

As one of my colleagues comments, that by itself raises issues of enforceability. And whilethis sounds as though I am just trying to turn the argument around, I believe it could also act tothe detriment of the representative system because there will be people who want to be on thefund who cannot meet those certification requirements, and they do not need to because thosestandards might be too high for the particular type of fund that they are interested in being onthe board of.

Senator ALLISON—I guess we do not know until we work it out what it might be.

Mr Chapman—That is right. It certainly is a long-term objective to have some sort ofendorsement process. In the same way as the Institute of Company Directors tries to raise thestandard and keep the information flowing for company directors, that sort of process isvaluable. It is certainly not achievable in the short term in the super industry because of thelarge number of trustees and the wide range of funds which they are trustees of.

Senator CONROY—Mr French mentioned consultation. On the front page of yoursubmission, which we have called submission No. 13, it says:

APRA adopts a consultative approach in the supervision of all the industries for which it has responsibility.

Can you name one sector of the industry you consulted on this bill?

Mr Chapman—That comment is about the approach we take to supervision. It is not theapproach for legislative development. We do not develop legislation any longer, under the post-Wallis structure.



Senator CONROY—Given that you asked for this legislation, you do not feel you had anyresponsibility at all to talk to the industry about it? You completely believe it was Treasury’sresponsibility?

Mr Chapman—It is very hard for me to answer this question in isolation from whatMr French may say about the process from Treasury.

Senator CONROY—He gets right of reply!

Mr Chapman—Obviously, lots of concerns were raised. People felt that this had come as asurprise, that they had not been consulted and they were not aware of the reasons this had beenput forward. While you may legitimately say this is post the event of those concerns beenraised, we have done a roadshow with AIST and we have had discussions with ASFA.

Senator CONROY—Sure, and a lot of the resistance to this bill may fade away when youtalk to them. It may even have not arisen if you had talked to them first.

Mr Chapman—I do not want to steal Mr French’s thunder, but the view was taken, as Iunderstand it, that these amendments were specialised and technical and there was no need forsignificant industry consultation on the process.

Senator CONROY—You can take this question on notice. You mention in one of yoursubmissions that the DPP rejected the ISC’s recommendation to prosecute a trustee that hadflagrantly breached numerous rules. I am wondering if we could get, on notice, a summary ofwhich of the rules were flagrantly breached.

Mr Chapman—Mr Brown commented on those during your absence from the room. Thatwas the case you were talking about?

Mr Brown—Yes.

Mr Chapman—So they would be in Hansard.

Mr Brown—I could have produced further rules that were breached in the particularinstance, but the ones that I referred to were the most flagrant—

Senator CONROY—Okay, you covered the main ones. Are APRA regulated super fundsgenerally paying more in fees to APRA now than they were under the previous, pre-Wallisregime?

Mr Chapman—The top of the levy structure is now higher than it was previously; thebottom of the levy structure is also higher than it was previously; the percentage of assets figureis lower; and the total fee income that APRA receives from super is lower, which is obviously astatement of fact because the self-managed funds are now not contributing to our income.Again, it is a difficult one to answer. The figures will be there in our annual report, we can giveyou the details of our figures and they are in the levy discussion papers that we put out beforeChristmas.



Senator CONROY—It is just that the banks have got a cap.

Mr Chapman—Super funds have got cap as well; $45,000 is the cap on super funds. But thelevies that are charged to the industry go to fund some of ASIC’s activities, some of the ATOactivities, the SCT activities, as well as our own activities. The figures are available, but I amjust not quite sure what the detail of your question really is.

Senator SHERRY—The prudential supervision of superannuation funds as a result of thefees that are paid—is that level of supervision more or less in your view?

Mr Chapman—Than it was in the ISC days?

Senator SHERRY—Yes.

Mr Chapman—I do not think it is any different. To date, we have been operating usingeffectively the same procedures and the same processes as we did at the end of the ISC days—for want of a better terminology—and there has been no significant change in how that processworks. As part of the harmonisation exercise I was talking about earlier, we have been through aprocess of trying to work out how we can more efficiently or effectively use the cross skills wehave got from the banking supervisors, the credit union supervisors and the friendly society orlife general insurance supervisors, who now form part of our front-line team. Things willchange, but the answer to your question is that to date there has been no change in the intensityover what was there before.

Senator SHERRY—Following on from the couple of questions I was able to ask earlierabout that additional information you provided, I would like some data that I can use to makevalid comparisons from year to year in more detail, so I can see where these problems are insome greater context.

Mr Chapman—Are you talking about the specifics of the details?

Senator SHERRY—Look at the letter that you provided earlier—I referred to it earlier—theexamination of 1998-99 and then back.

Mr Chapman—Yes. Sorry, this is the number of funds—

Senator SHERRY—Yes, the number of funds investigated. We need more meaningful detailso we can see what is happening from year to year—whether the number of funds inspected hasgone down; whether the problems gone down or up; big funds; small funds; asset size; numberof funds—

Mr Chapman—We will have a look at what we can put together in that regard for you. Thenumbers are always going to be highly dynamic because there are so few of them, if that makessense. For example, in one particular case that you are aware of there were 175 replacements oftrustees because the entity was trustee for 175 separate funds—that was really only one case.

Senator SHERRY—Obviously it would have to be placed in some sort of context.



Mr Chapman—But that was really only one case.

Senator SHERRY—Yes, that is right. But 175 trustees could impact on tens of thousands ofmembers.

Mr Chapman—Yes. We will see what we can put together in that regard.

CHAIR—There being no further questions I thank you very much for your perseverance andtolerance. I now call together the representatives from both Tax and Treasury.



[10.00 p.m.]

FRENCH, Mr Steve, General Manager, Financial Institutions Division, Treasury

MAHER, Mr Dave, Analyst, Superannuation and Insurance Unit, Financial InstitutionsDivision, Treasury

WHITHAM, Ms Karen, Manager, Superannuation and Insurance Unit, FinancialInstitutions Division, Treasury,

DIMENT, Mr David, Assistant Commissioner, Australian Taxation Office

MURRAY, Mr Nigel Patrick, Director, Superannuation Legislation, Australian TaxationOffice

CHAIR—Welcome. Would you like to comment on anything that you have read in thesubmissions or matters that have been raised tonight, to clarify any issues?

Mr French—As you know, we made a written submission. Given the very detaileddiscussion tonight, I do not think any opening comments on my part would add much to thecommittee’s deliberations. I do not know whether the tax office wants to make any comments.

Mr Diment—Similarly, I think the tax office submission is full and I am happy to answer anyquestions.

CHAIR—Senator Allison, you had a question that you wished to ask Mr French aboutcompliance.

Senator ALLISON—I guess we should ask you the question about consultation and why itwas that this has been received so disastrously amongst the sector and why you did not consultwith them prior to bringing it forward.

Mr French—I think the answer was exactly as Mr Chapman put it earlier: we saw thechanges as being of a machinery nature—changes that did not substantially alter the existingschema of the SIS Act. They certainly change the level of deterrence involved. As we did notsee that the changes should have a major effect on the vast majority of diligent industryparticipants, we took the view that the changes were technical and did not require priorconsultation.

Senator ALLISON—Was it the same reason that the explanatory memorandum did not havethe sort of detail that your submission contains?

Mr French—Perhaps in hindsight the explanatory memorandum would have made similarpoints, but that is in hindsight.

CHAIR—There is no possibility of redrafting that memorandum to include the matters thatwere raised earlier in terms of the APRA submission?



Mr French—I am not quite sure what the technical requirements are. That is certainlysomething that we could take on notice and undertake to look at.

Senator ALLISON—Have you since had discussions with the superannuation sector—thosewho have made representations to the committee? Are you satisfied that you have allayed theirconcerns?

Mr French—There have been discussions with industry bodies. APRA, as they mentionedearlier, have undertaken some information sessions to explain the rationale for the changes. AsAPRA said earlier, the proposed amendments in the bill were requested by APRA. There weredeficiencies in the current act which they have identified themselves. They have, since theproposed changes have been put forward in the bill, undertaken to provide more information tothe industry also on the rationale for the changes. I am not sure whether Mr Maher would like tomake some further comments on that.

Mr Maher—I have certainly answered inquiries on the telephone, et cetera, but we have leftit to APRA to do the actual industry consultation, given that they are at the coalface, so tospeak. Now that our submission to this committee is on the public record, we would take that asan example of explanation. We do not generally go to face to face consultations with industrybodies. That would be more of a role for the regulators, we would think.

Senator ALLISON—APRA did not seem to think so. They thought it was yourresponsibility.

Mr Maher—It was in consulting on the bill in the first place but, if you mean consultation asin going out since the bill has been introduced and explaining our position to the industrybodies, no, we have not. We have left that to APRA.

Senator ALLISON—I just thought you might have done since it received such a negativeresponse.

Mr Maher—Personally, I think the response was a bit over the top and due to a lack ofunderstanding and not looking at the detail of the bill. A lot of it could have been cured by acloser examination of the measures in the bill. As I say, it did not prompt me to want to go outand consult further because there had been a negative reaction from some quarters. I was mostencouraged by bodies like IFSA who I think—

Senator SHERRY—You would be. They were the only one that agreed.

Mr Maher—I think also the consumer representative who turned up at the hearings in July inSydney did.

CHAIR—The custodians?

Senator SHERRY—A bit more mildly.

Mr Maher—Yes.



CHAIR—The custodians presented a similar view.

Mr Maher—Yes. I do not think it was totally one-way traffic. I would disagree that everyonejumped up and down about it. Certain identifiable industry bodies did. I do not know what thereason behind that was necessarily. I think a closer examination of the bill would have answereda lot of the questions and a lot of the issues that they have raised as not having been wellenough explained.

Senator SHERRY—I find that comment a bit odd, Mr Maher, because we have had thesepeople who are critical of the legislation appear before this committee on many occasions. Theyare people, I think, that attract the respect of everyone on the committee regardless of party andI certainly have not seen them overreact previously. I think on this occasion I would besurprised if they were reacting in a sort of the lowest common denominator way as you do getin some organisations.

Mr Maher—I am not criticising the organisations themselves for their reaction as such.

Senator SHERRY—You are. You just did.

Mr Maher—I think a closer examination of the bill itself might have answered some of theissues that they were raising. That is all.

Mr French—Senator, I think there have been further information sessions that APRA haveconducted so they have been seeking to explain the rationale to industry regarding what isdriving the proposed amendments.

Senator SHERRY—It puzzles me as to why they were not consulted. A number of them saidto us that this came out of the blue and was a total surprise to them. They raised a series ofconcerns. You must know this government has not had a good track record gettingsuperannuation changes through the Senate. This sort of legislation always attracts plenty ofattention so why didn’t you consult with them earlier?

Mr French—Senator, I think I said earlier that we viewed these as machinery changes andwe did not see a need for prior consultation. I am not sure there is anything more I can reallyadd.

CHAIR—Any further questions? I think we are getting pretty close to wrapping it up.

Senator SHERRY—Have you had a look at the transcript? I was not at the last hearing forpersonal reasons but have you had a look at the criticisms that were raised by the variousorganisations?

Mr French—I have read the transcript.

Senator SHERRY—Have you met with those organisations?



Mr French—I know Mr Maher has met with at least one of the representatives of one of theindustry groups.

Senator SHERRY—Who was that?

Mr Maher—I attended a meeting with Susan Ryan from AIST but that would have beenprior to the last committee hearing. At that meeting with the minister’s staff we agreed thatAPRA would put on some sessions for the AIST to explain the amendments, which they havesubsequently done in Sydney and Melbourne.

Senator SHERRY—With the improvement that you believe will come out of these changesto the supervision of superannuation funds, do you believe there will be an increase incompliance costs for funds generally?

Mr French—No, we do not, Senator.

Senator SHERRY—Why won’t there be an increase in compliance costs?

Mr French—Because the trustees should, we would hope, be complying already with theserequirements. To the extent they are not, there may be an increase in compliance costs but theyshould be meeting the requirements already.

Senator SHERRY—I understand that. If you are not meeting what is defined then there willbe an increase in compliance costs but you should be meeting what is defined.

Mr French—Correct.

Senator SHERRY—It just seems to me the concern about this issue of compliance costs ismuch deeper and broader. As I say, I read the transcript, or at least some of it, of the lasthearings when the complaints were raised from people that I respect and who are, I think, prettyreasonable in their claims. They are usually pretty well spot on. They do not always acceptthings at face value but they are people that I respect who are concerned about compliancecosts. These are funds that are doing the right thing, as are the vast majority.

Mr French—I am really mystified myself, Senator, as to the reasons for that.

Senator SHERRY—Have they given you any details of problems they see with increases incompliance costs?

Mr French—Not to my knowledge. In fact I think the committee asked some of the people atthe first hearing to give some evidence and subsequent submissions have not really seemed toproduce much additional evidence on this point.

Senator SHERRY—It is probably a hangover from the surcharge problems. They are just abit touchy, I suspect. I just wanted to understand, Ms Whitham and Mr Maher, what your exactresponsibilities are. Is it a policy recommendation? What do you do? I am sorry, I have notstruck you before and I am just interested to know what the division of labour is.



Mr French—Senator, I might explain. As Mr Chapman said earlier, APRA is responsible forthe supervision and the Treasury is responsible now post Wallis for putting forward proposalsfor legislative change. So it is in the end the Treasury’s responsibility to put forward proposalsto the ministers and government to—

Senator SHERRY—I am sorry, I am still not any clearer. Are we talking here about thestructure of the management of superannuation? What do Ms Whitham and Mr Maher do?

Mr French—In the case of these proposals, Senator, APRA raised a need for change to theSIS Act. They saw some deficiencies. We looked at that and concurred.

Senator SHERRY—Right. That is prudential regulation?

Mr French—That is correct.

Senator SHERRY—Okay. What about policy recommendations on superannuation policymore generally?

Mr French—Senator, my division is responsible for prudential supervisory issues and otherdivisions in the Treasury are responsible for superannuation policy.

Senator SHERRY—Okay. So all of the officers here are on prudential regulatory issues?

Mr French—That is correct.

Senator SHERRY—Fine, I just wanted to understand that. I was not clear.

CHAIR—We have had a submission indicating that the purpose of the legislation iseffectively to shift the burden of proof and associated costs of enforcing the relevant provisionsfrom the regulations to the trustee and, for example, the SISFA group—the Small IndependentSuperannuation Funds Association Ltd—are concerned about that aspect. I think that is a fact oflife, isn’t it?

Mr French—I think previous witnesses here tonight have explained the reasons behind thechange and there are obviously variations to the way offences might be prosecuted. I am notsure that that involves any significant change in compliance. I do not know whether Mr Maherwants to add anything to that.

Mr Maher—Again, just to reinforce what people before us said, we are not bringing incriminal liability where it did not already exist and we are not imposing new penalties or higherpenalties. We are just changing the basis on which offences are proven in some cases. And sotrustees and other participants, if they are meeting the existing requirements, should alreadyhave spent money on their compliance systems and procedures and there should not be anythingextra to spend because of these changes.

Senator SHERRY—The tax office has been administering do-it-yourself funds. Do we haveany data yet on the depth and breadth of problems in that sector?



Mr Diment—We have been administering SMSFs since June or July last year. What we areabout to do is a benchmarking compliance survey done by an independent body of researcherswhere we will set a benchmark for compliance for self-managed super funds. What we havedone to date is about 2,000 audits of funds on specific issues. We have also done about 50detailed examinations. There are different levels of audits that we undertake. We have not takenany enforcement action. For example, for the bottom of our compliance model we have spentmost of our time, effort and activity in the education and assistance of those SMSFs to do theright thing, taking the fundamental view it is people’s and trustees’ retirement money. They areresponsible so by and large they are all doing the right thing. This benchmark compliance that Ihave mentioned will provide us with a more accurate understanding of the extent of anyproblem funds. I am happy to share that with the committee when the research is available.

Senator SHERRY—What have you found to date? I have some concerns and I have askedfor some follow-up date.

Mr Diment—We have found that by and large most funds are doing the right thing. We havefound two of what we classify as serious compliance issues. They are around the usage of fundsin the super fund to support a trustee’s ongoing business—so it was the one chequebook sort ofsyndrome for the fund and business. We have also found a significant issue around the removalof, or inappropriate use of, assets by trustees who are couples if there is a marital breakdown. Inall the issues that we are finding, we are using our compliance model, which is in oursubmission, and we are working through with the trustees. We figure that it is early days for us.They need to get used to us. We need to get used to the industry. We are using our compliancemodel to assist trustees to become self-regulated. We will certainly step in where we need to godown to that level of enforced regulation.

Senator SHERRY—What is your time line for this survey approximately?

Mr Diment—The survey is going out in October this year. We will have the results beforeChristmas. That will give us a benchmark. We can look at any regional differences and targetour activities better hopefully. To reiterate, so far we have not found any serious issues. Thatstems from the fact that it is the trustees’ retirement income, their fund, and they need tosafeguard their retirement income.

CHAIR—Thank you for appearing before the committee tonight. We will be reporting to theSenate before the 20th. On behalf of the committee, I thank all witnesses who have givenevidence.

Committee adjourned at 10.17 p.m.

Monday, 14 August 2000 SENATE—References SFS 97


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