Are conflicts of interest and conflicts of duty the ‘slow fuse’ issues arising from the Cooper review? Will implementing the Cooper recommendations in relation to conflicts blow up in a way that changes the governance approaches and business relationships currently in place in the financial services industry, or will they fizzle out when commercial and practical imperatives come to the fore?
Cooper recommendation 2.16 is that APRA should develop a prudential standard that sets out particular examples of conflicts of interest and conflicts of duty to illustrate behaviour that would not be allowed in relation to all APRA regulated funds. This is to ensure that trustee-directors observe their duty of loyalty to members. Consistent with this recommendation is recommendation 2.17 that trustees, as a condition of their RSE licence, should be regulated to articulate a conflicts policy tailored to their particular business structure that addresses their role under the SIS Act and as a fiduciary. The Government intends to refer these matters to APRA for consideration.
Cooper also recommended changes directed at conflicts management where a person is a member of more than one fund trustee board. The Government has not accepted this recommendation, but rather has determined that this issue too may be considered by APRA as part of its examination into the broader issues of conflicts of interest and conflicts of duty.
What are conflicts of duty and conflicts of interest?
A ‘conflict of duty’ arises where a fiduciary has two competing fiduciary duties. This could arise, for example, where a person is a trustee director of two separate super funds, and the interests of those funds are not perfectly aligned. It may also arise where a person is a board member of a super trustee company, and of a company which provides services to the super trustee.
‘Conflict of interest’ has two limbs. It refers to the prohibition on a fiduciary being in a situation where there is a conflict between the duty owed to a beneficiary, and his or her personal interests, (or the interests of another person). It also refers to the prohibition on a fiduciary receiving any unauthorised benefit from his or her fiduciary position. The unauthorised remuneration of a trustee is an obvious example.
The final Cooper report clearly envisaged that a superannuation fund conflicts policy should significantly exceed the current requirements imposed on an AFS licensee. For example, Cooper said that the policy should require the trustee to think specifically and deliberately about any conflicts which may arise in any of its business relationships with administrators, insurers, related party investment managers, life offices, financial planning providers, along with under distribution arrangements, with proxy voting consultants and in relation to industry associations to which super funds subscribed. Not only would conflicts of interest and conflicts of duty be identified but the trustee would also set out how it proposed to deal with each actual conflict it identified, and potential conflicts which could arise.
While the recommendation stops short of not permitting any related party transactions, these recommendations have the potential to significantly impact, in particular, super funds which are members of broader financial services groups or alliances.