Over the course of the last year, the phrase “community standards and expectations” has been increasingly associated with the misconduct of financial institutions.
What may be required is a refreshed understanding of the longstanding fiduciary concepts of diligence, prudence, single-minded loyalty and ultimate accountability.
Do member expectations and community standards actually mean anything in law?
The phrase “community standards and expectations” became a catchcry emanating from the terms of reference of the current Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (RC).
It is worth noting that this phrase is not well developed in law, especially in the context of regulating the behaviours of superannuation fund trustees and their directors.
However, in the context of gathering information to inform the Commissioner, the idea of self–reporting on behaviours that may be legally permissible but (broadly speaking) unethical, sets a necessary low bar for disclosure. It is also worth bearing in mind that under the terms of reference for the RC, one of the areas for consideration was whether there was a case for law reform, based on the information assembled by the Commissioner.
The messaging to date from the Commissioner is that the case for wide ranging legal reform is not as pressing as the case for wide ranging compliance with the laws already in place.
It is thus timely to remind superannuation fund trustees that in addition to the plethora of statute based law to consider, there are also a number of general law legal principles regulating their actions.
How could such a test of community standards and expectations work for super funds?
As part of current consideration for law reform, it has been suggested that “community standards and expectations” can become the new minimum standard for financial services institutions, their directors and officers.
It is at this point that the different regulatory systems operating for banks, insurers and superannuation funds becomes relevant. The vast majority of superannuation funds are established as trusts. This is a key point of distinction between superannuation funds and other financial institutions. Banks are not set up as trusts and neither are insurers.
So if superannuation fund trustee directors are now to consider “community standards and expectations” when making decisions, what is their relevant “community”? Given that super fund trustees are required legally to act with single-minded loyalty to the interests of their own beneficiaries, it can follow that the “community” to be considered by a superannuation fund trustee is only the collective of that fund’s beneficiaries.
A more involved discussion occurs when trying to unpack “standards and expectations”, with a number of questions to consider. Are the terms “standards and expectations” interchangeable or are these terms to be read conjunctively? Are “standards and expectations” static, and are they capable of capture and measurement?
We can start with the plethora of legal requirements governing the behaviours of superannuation fund trustees and their directors and officers. Very quickly this discussion can become footed in ethical terrain, when technical compliance with black letter legal requirements is perceived to fall short of the standards and expectations ascribed to beneficiaries.
Put another way, when considered at more than just at first blush, settling the standards and expectations of a constantly changing, massive and diverse population may be a challenge for any board.
Happily, there is an easier point of reflection for superannuation fund trustees, based on the well-established standards of trustee behaviours set out by the general law.
Lessons from the Royal Commission on community standards and expectations
During the course of the hearings at the RC, counsel assisting made numerous submissions to the Commissioner regarding misconduct.
Many of these submissions have been well reported and include areas such as:
- poor and untimely disclosure of information to customers;
- poor record keeping and minute taking;
- failure to review and update key policy documents and procedures;
- failure to properly investigate breaches and to elevate these internally;
- selective and untimely disclosure of breaches to regulators;
- failure to properly remediate customers for accepted breaches;
- misunderstanding the proper role of trustees and their directors.
Regardless of whether “community standards and expectations” becomes an established legal threshold for superannuation fund trustee directors to observe, it is useful to consider each of the submissions regarding misconduct through the prism of the current general law.
Concepts such as diligence, prudence, single-minded loyalty and ultimate accountability are not just quaint notions. They already exist as the baseline legal obligations for superannuation fund trustee directors to observe. One should consider the many negative behaviours highlighted by counsel assisting the Commissioner in light of these existing and exacting general law requirements.
This article acts only as a summary of certain ideas and themes emerging from the current Royal Commission. Whilst the authors (Scott, Stanley and Lincoln) were retained and acted exclusively for a large industry super fund throughout the Royal Commission proceedings, the views expressed in this article are those of the authors exclusively.