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Submission - Regulations and ASIC policy statements made under the

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Submission - Regulations and ASIC policy statements made under the ...

Trustee Corporations

    Association of Australia

    Submission to Joint

    Committee on

    Corporations and

    Financial Services

    Financial Services

    Reform Act 2001

    July 2002

    Joint Committee on Corporations and Financial Services Review of the FSRA

    ______________________________________________________________________________________________

Introduction

    This submission recommends that Regulations should be introduced that exempt from the FSRA all “traditional” personal trustee corporation activities.

Comments

    The Association has no objection to trustee corporations being subject to appropriate regulatory oversight. Members do not expect to have any difficulty meeting the requirements for obtaining FSRA licenses for their activities in superannuation, managed funds, and financial planning. However, in working through the implementation issues, it has become apparent that FSRA licensing is not appropriate for a range of operations that could be caught by the legislation and Regulations currently issued. These are the traditional or personal trustee corporation activities, and cover:

    ? writing wills,

    ? acting as executor of deceased estates,

    ? drawing a Power of Attorney

    ? acting under a Power of Attorney,

    ? acting as guardian for minors, usually under Court order

    ? acting as a financial manager for minors and the intellectually disabled, usually under

    Court order

    ? establishing and operating the many types of personal trust, for:

    - charities

    - minors

    - the intellectually disabled

    - individuals that are intellectually capable

    - discretionary trusts with multiple beneficiaries ______________________________________________________________________________________________

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    Joint Committee on Corporations and Financial Services Review of the FSRA

    ______________________________________________________________________________________________ ? activities incidental to the writing of wills can include advice on:

    - estate planning, and

    - tax.

    Further details of the nature of trusts and the responsibilities of trustees are provided in the attachment.

    These traditional activities are governed by a range of State and Territory legislation. Unfortunately, some of these activities could be caught by FSRA because, as an incidental part of managing a beneficiary’s affairs, a financial asset could be acquired, held, or sold. We also believe that it could be incorrectly assumed that, in exercising its management duties, a trustee corporation could be deemed to be providing advice.

    We submit that these activities do not fit within the FSRA framework because there is no service provider/customer relationship in the usually understood sense.

    Rather, the arrangements are structured, for good reason, to give the trustee sole control over the affairs of a particular person, provided the trustee acts in accord with the law and the trust deed, and exercises its fiduciary responsibilities with proper judgement.

    These arrangements are necessary because:

    ? the beneficiaries lack capacity because of youth or mental disability, ? the beneficiaries are unknown or change over time, or ? the settlor particularly wants the assets managed in a way that it suspects will differ

    from the wishes of the beneficiary.

    It is because the trustee has sole control, and by law is not permitted to do other than to follow its own counsel, that it does not “provide advice” when it exercises its duties.

    If an interested party has a concern with trustee management, resolution is usually not straightforward, because each situation will require judgement about the particular nature of the fiduciary arrangement and the current and likely future circumstances of the beneficiary. For this reason, resolution usually involves the Attorney General, and/or specialist government agencies, and/or the Courts. Judgement is based on the relevant legislation, the relevant fiduciary arrangements, and centuries of case law.

    ______________________________________________________________________________________________

Trustee Corporations Association of Australia July 2002 2

    Joint Committee on Corporations and Financial Services Review of the FSRA

    ______________________________________________________________________________________________ In contrast, ASIC’s regulatory role under the FSRA is intended to handle much more straightforward arrangements, which are typically based on normal contracts in which consumers are able to make their own judgements, provided they have adequate and clear information. These arrangements do not envisage covering such situations as:

    ? activities where the beneficiary has no contractual relationship with the service

    provider,

    ? disclosure where the beneficiary is unknown, or lacks capacity, or ? dispute resolution where the beneficiary is unknown, or lacks capacity. For ASIC to seek to undertake a regulatory role covering traditional trustee activities, it would need to understand the State and Territory arrangements, and arrange for these to be codified in special purpose Regulations. This would require knowledge that ASIC does not currently possess, and judgements that do not fit within its current ambit of responsibilities.

    We submit that seeking to duplicate the current State and Territory regulatory arrangements to cover the unique characteristics of personal trustee corporation activities would be inefficient. We also believe that it will prove impractical, given the complexity of many of the processes and the judgements of the Courts that are involved in the establishment and review of many of the arrangements.

    We therefore submit that exemption from the FSRA should be given for all traditional trustee activities covered by State and Territory legislation.

    An exemption for Public Trust Offices run by State and Territory governments is provided for in the legislation, subject to Treasury issuing the appropriate Regulation. We submit that the exemption should be extended to private trustee corporations when they undertake the same activities.

    Further, such an exemption would be consistent with the exemptions granted to legal practitioners and accountants, who undertake more of these activities than do trustee corporations. The consumer protection regulatory regime that would then apply to these activities would be that currently in place and operated by the State and Territory governments. This involves: ? licensing requirements, including “fit and proper” person tests and minimum capital

    and insurance requirements,

    ______________________________________________________________________________________________

Trustee Corporations Association of Australia July 2002 3

    Joint Committee on Corporations and Financial Services Review of the FSRA

    ______________________________________________________________________________________________

    ? monitoring of statistical returns provided on a regular basis, and in many cases ? oversight by an special purpose agency, such as the Office of the Protective

    Commissioner in NSW.

    It should be noted that the Standing Committee of Attorneys General (SCAG) plans shortly to

    introduce Uniform Trustee Corporations Legislation (UTCL), which has a regulatory framework

    that is more robust than the current arrangements and is along the lines of that applied by APRA and ASIC to other parts of the financial system. The proposed new regime will address prudential elements, as well as consumer protection matters such as disclosure and dispute resolution.

    While UTCL details are still to be finalised, the enhanced regulatory framework will take account of the unique arrangements and fiduciary responsibilities associated with personal trustee

    corporation work.

    We submit that administration by the State and Territory AGs, which have the necessary

    experience in this area, is at this stage a more sensible and efficient approach than attempting to fit traditional trustee corporation activities under the FSRA administered by ASIC. While it is possible that this might change over time, at the moment we do not see that ASIC can properly frame a regulatory regime for traditional trustee corporation activities when the underlying

    legislation is in the process of being reconfigured as part of the UTCL process.

    *****

    ______________________________________________________________________________________________

Trustee Corporations Association of Australia July 2002 4

    Joint Committee on Corporations and Financial Services Review of the FSRA

    ______________________________________________________________________________________________

    Attachment

TRUSTS AND TRUSTEES

1. What are trustee corporations’ personal activities?

    These include:

? writing wills,

    ? acting as executor of deceased estates,

    ? drawing a Power of Attorney,

    ? acting under a Power of Attorney,

    ? acting as guardian for minors, usually under Court order,

    ? acting as a financial manager for minors and the intellectually disabled, usually under Court

    order,

    ? operating the many types of personal trust, for:

    - charities

    - minors

    - the intellectually disabled

    - individuals that are intellectually capable

    - discretionary trusts with multiple beneficiaries ? activities incidental to the writing of wills can include advice on:

    - estate planning, and

    - tax.

    2. What is a trust?

    A trust is an obligation, enforceable in equity, which rests on a person (the trustee) as owner of

    some specific property, to deal with that property for the benefit of another person (the

    beneficiary) or for the advancement of certain purposes.

    ______________________________________________________________________________________________

Trustee Corporations Association of Australia July 2002 1

    Joint Committee on Corporations and Financial Services Review of the FSRA ______________________________________________________________________________________________

    Trust law extends back many centuries.

    A trusts requires:

    ? assets - to be placed in the trust,

    ? one or more trustees - to administer the trust,

    ? trustee legislation and case law - to set down general trustee roles and responsibilities,

    ? a trust deed - to set down the trustee roles specific to that trust, and

    ? beneficiaries - who may be:

    - specifically identified e.g. a particular individual, or

    - identified only generally, e.g. the future winners of an award for literature.

3. What are the accountabilities and responsibilities of trustees?

3.1 Accountabilities

The trustee is required to act consistently with:

    ? the law,

    ? the trust deed, and

    ? its own judgement about what is in the best interests of beneficiaries.

    No “client” in the usually understood sense

In general, a trustee is accountable only to the law and the Court it has no “client” in the

    conventional sense, ie:

    ? the settlor, having established the trust, cannot rescind the trust and take back control.

    This is most obvious in the case where the settlor is dead, or

    ? the beneficiary, if it has differing views to the trustee, cannot require the trustee to do

    other than to follow the trustee’s own counsel.

    Thus, at law and in economic substance, once the trust is established, neither the settlor nor the

    beneficiary is the trustee’s client in the normal sense of the word. This is because the normal

    ______________________________________________________________________________________________

Trustee Corporations Association of Australia July 2002 2

    Joint Committee on Corporations and Financial Services Review of the FSRA

    ______________________________________________________________________________________________

    client functions and client rights do not exist:

    ? owning the trust assets - these are owned by the trustee,

    ? choosing the trustee - this is done by the settlor, not the beneficiary,

    ? paying the trustee payment is from trust assets and earnings, ? instructing the trustee the trustee answers to the deed, the law, and its own

    judgement,

    ? removing the trustee this can be done only with the trustee’s agreement, or by Court

    order.

    Interested parties playing an oversight role

While trustee corporations do not have clients in the normal sense of the word, for many activities

    they have interested parties that can and do conduct oversight of their activities. For example,

    with many trusts the settlor and the beneficiaries take an acute interest in the way in which the

    trustee corporation performs its role.

    No interested parties capable of playing an oversight role

However, for some activities of trustee corporations, there are no interested parties capable of

    exercising vigilant oversight. This includes activities involving minors, the intellectually disabled,

    and charitable trusts.

    For these activities, particular thought needs to be given to the appropriate form of regulation.

    3.2 Responsibilities

The responsibilities of the trustee are very onerous. If a trustee behaves inappropriately, it can be

    difficult for a settlor or beneficiary to obtain recourse.

    Thus, the law requires a trustee to act only in the best interests of the beneficiaries. If conflict of

    interest arises, no entity has a higher level of fiduciary responsibility than a trustee.

4. Do we need trusts and trustees? Why not replace trustee functions with

    normal contracts?

There is no obvious alternative to traditional trusts in the following circumstances:

    ? the beneficiaries who might be party to a contract cannot be identified. This applies ______________________________________________________________________________________________

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    Joint Committee on Corporations and Financial Services Review of the FSRA

    ______________________________________________________________________________________________

    to charitable trusts, and trusts that are designed to benefit those not yet born, ? the beneficiaries are unable to be party to a contract. This applies to minors and the

    intellectually disabled, or

    ? a settlor wants to assist beneficiaries, but does not want them to have

    decision-making power about the nature of that assistance. This applies, for example,

    to farmers who wish to ensure that the farm is not broken up, or to parents who do not

    trust the judgement of their children.

    In the corporate world, trusts are the most efficient structure for a range of activities that, in theory, might possibly be done via other structures. Examples include:

    ? superannuation

    ? responsible entities of managed funds

    ? custodians

    Trusts, therefore, are essential for some activities and the most efficient structures for others.

5. Why have trustee companies, instead of individual trustees?

    Originally, trusts were created to meet the needs of individual and families, not corporations. Originally, trustees were individuals.

    Today, most trustees continue to be individuals, including solicitors and accountants. However, it has long been recognised that individuals do not possess all of the desirable qualities of a trustee, including:

    ? expertise in:

    - financial management

    - estate planning

    - trusts

    - tax

    - law

    ______________________________________________________________________________________________

Trustee Corporations Association of Australia July 2002 4

    Joint Committee on Corporations and Financial Services Review of the FSRA

    ______________________________________________________________________________________________

    - custody

    - accounting

    - operations, and

    - administration,

    ? financial underpinnings, ie high levels of capital and insurance to provide

    compensation in the event of trustee fraud, negligence or maladministration, ? longevity ie. maintain services into perpetuity to manage long-term trusts (e.g. for

    the intellectually disabled) and perpetual trusts (e.g. for charities), and ? Credibility to settlors, ie ideally settlors would not need to undergo expensive due

    diligence to be able to feel comfortable that trustees have, and will retain, the

    qualities noted above.

    While these qualities will not be found in an individual, they can be found in a corporation. This gave rise to the establishment under Acts of Parliament of trustee corporations, to undertake traditional trustee work.

    6. Types of trustee corporations

Australia has two types of trustee corporations public and private.

    Public trustee offices have been established by each State and Territory government. They

    perform public service obligations, because they cannot refuse unprofitable tasks such as acting as executor for small intestacies, or managing the financial affairs of the intellectually incapable. Private trustees may undertake the same role as public trustees, but can exercise normal

    commercial discretion as to the focus of their business.

    *****

    ______________________________________________________________________________________________

Trustee Corporations Association of Australia July 2002 5

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