Ursula Stephens (NSW, Australian Labor Party) Share this | Hansard source

I rise this evening to contribute to this debate on the appropriation bills and I really want to focus, have had the discussion earlier today about the reforms to FoFA being proposed by the government, to revisit an issue that I raised earlier today, and that is the role of the financial services industry in the administration of charitable trusts. Coincidentally, just a year ago I raised this issue in the Senate, because the administration of charitable trusts is quite fundamental to many Australian charities.

Just over a year ago the Parliamentary Secretary to the Treasurer referred the issue of regulation of certain aspects of activities of trustee companies under the Corporations Act 2001, particularly the fees they charge charitable trusts and the accountability and portability of their services. He referred those issues to the Corporations and Markets Advisory Committee, CAMAC, which is a very important advisory arm to the government of the day. It provides independent advice on issues that arise in corporations and financial markets law and practice. Corporations Law we would think is a pretty long way away from the day-to-day operations of local charities, but in this instance Corporations Law is impacting in a very real way on the invaluable work of the charitable organisations that we will rely on to build and strengthen our communities.

So the parliamentary secretary sought advice on the range of additional fees beyond those regulated under the act that are or could be charged by professional trustee companies; the effectiveness of the regulation of the new arrangements between professional trustee companies and a trust; the effectiveness of grandfathering existing fee arrangements; and what the current position is with regard to the removal and replacement of a trustee of a charitable trust, whether this position is unsatisfactory from a consumer protection perspective, and if so what, if any, reforms are necessary to address this. Finally, he encouraged the committee to bring to the attention of government any other issues that impact on the objectives of that 2001 act on the charitable purposes of trusts.

So what does that all mean? The previous government was committed to strengthening our communities by enhancing the work of charitable organisations. We have spoken many times about the opportunity and purpose of growing the culture of giving in Australia. The previous government had made very significant commitments to improving the regulatory environment in relation to philanthropy, with some very interesting consequences. An expert in philanthropy, Ms Elizabeth Cham, wrote in 2009:

Australian philanthropy has had a pervasive impact on society but it is largely invisible. Nothing illustrates this more starkly than the total absence of attention paid to, or discussion about, a landmark act that was passed by the Commonwealth parliament under which the Commonwealth assumed responsibility for the regulation of the traditional services of trustee companies.

You would be more interested if you understood that one consequence of this could be a transfer each year of potentially up to about $23 million from the amount available for grants to the not-for-profit sector into administrative fees of trustee companies. It also alters the fee structure of perpetual charity trusts. Historically, they have been charged five to six per cent of income. Under the new regime, they will be charged up to 1.056 per cent of capital. The impact on a foundation with a capital base of, say, $50 million will be a fee increase from $131,840 to $528,000. So I think that you can see the dead hand of the Financial Services Council in what has happened in this space, just as we have seen the dead hand of the Financial Services Council on the FoFA reforms.

I was very disturbed when I absorbed this information. Like many of my colleagues, I did not realise the extent of the fees that come out of the moneys left by generous dead individuals and families on the understanding that the trust or foundation would be maintained in perpetuity for the benefit of those most disadvantaged in the community. Ironically, of course, the founders are no longer there to advocate on their own behalf and most have no independent trustees to challenge fee increases. This means that trustee companies are now the sole trustees for the great majority of trusts and foundations they administer. In practice, the for-profit arm of these companies tells itself, as the sole trustee of a charitable trust, that its fees will be increased. So you can begin to understand why the government is ready to review the legislation, which has now been in operation for two years.

At the time, I for one was quite disturbed about what happened and, like most of my colleagues, did not realise the extent of the fees that come out of the moneys left by generous dead individuals and families on the understanding that the trust or foundation would be maintained in perpetuity for the benefit of those most disadvantaged in the community. Ironically, of course, the founders are no longer there to advocate on their own behalf and most have no independent trustees to challenge fee increases. This means that trustee companies are now the sole trustees for the great majority of trusts and foundations that they administer. In practice, this means that the for-profit arm of these companies tells itself that, as the sole trustee of a charitable trust, its fees will be increased. So you can begin to understand why the previous government was ready to review the legislation—which, at the time, had been in operation for two years. It has now been in operation for three.

Before I go to the report of the committee—which has yet to see the light of day—let me explain a little bit more about trustee companies and their significance for philanthropy and the not-for-profit sector. First of all, trustee companies are actually a uniquely Australian invention and, until the deregulation of the Australian financial sector in the 1980s, were somewhat old-fashioned entities established by gentlemen for gentlemen. Their initial role was to manage the assets of wealthy individuals when they travelled abroad for, very often, lengthy periods. Later, that was extended to managing deceased estates—some of which established perpetual charitable foundations. The trustee companies were seen as particularly suited for this because they had financial expertise and were perpetual organisations.

Trustee companies manage some of Australia's most valuable and significant cultural, medical and scientific awards and prizes, including the Miles Franklin Literary Award, the Patrick White Literary Award and the Ramaciotti medal for medicine. They also administer some of Australia's oldest foundations and bequests, such as the Alfred Felton Bequest established in 1904, and more recent ones like the Shane Warne Foundation.

Today, Australian trustee companies are the largest administrators of charitable trusts and foundations, usually as the sole trustee. They manage about 2,000 charitable trusts and foundations, with assets of approximately $3.3 billion—although that was at the time. In the report to CAMAC, the figures are mind-blowingly more. I will quote from the report which shows how significant these are. The report says that the organisations are:

… the sole trustee or co-trustee of some 1500 charitable trusts, with a combined capitalisation of approximately $3.4 billion. The FSC estimates that the entire charitable trust sector is valued at around $7 billion. The FSC has further indicated that (excluding charitable trusts that are PAFs—

private ancillary funds—

or PuAFs—

public ancillary funds—

administered by LTCs) LTCs, on average, distribute annual trust income amounts equivalent to 4-6% of the total capital value of the charitable trusts that they administer.

So this is a very significant sector, where the Financial Services Council has been having a significant influence for a long period of time.

The Corporations and Markets Advisory Committee, having been given that reference early in 2013, had as one of its challenges a consultation process that included calling for submissions. The committee received six submissions, including one from the Charitable Alliance, which is an alliance of concerned trustees, advisers to and stakeholders of charitable trust foundations, which provides significant financial support to communities across Australia. That submission made a series of recommendations related to reforming fees and prices, governance, transparency, portability and the issue of orphan trusts. The other submissions, with the exception of the Financial Services Council's own submission, supported the call for radical change in the interests of the charitable trust sector. Unsurprisingly, the Financial Services Council disagreed with those recommendations.

CAMAC had been due to have round table discussion, which was cancelled at the last minute because of the withdrawal of the Financial Services Council. So CAMAC then had to move to establish a new round table with interested parties and work out how this oversight could be part and parcel of the role of the new ACNC, the Australian Charities and Not-for-profits Commission.

I will go now to the report, and the recommendations of this very senior advisory body are twofold. Firstly, CAMAC recommends that:

… the ACNC implement, or co-ordinate, Stewardship audits of a cross-section of charitable trusts administered by LTCs—

that is, licensed trustee companies. The recommendation continues:

The purpose of the audits would be to obtain information on how LTCs have performed their administrative responsibilities in the context of the philanthropic and benevolent purposes of these trusts.

So the issue of stewardship audits was a very significant reform. They took up the recommendations of the submitters to the inquiry and considered the concerns that were raised across the board. The stewardship audits that were recommended included things such as, the report says:

And the CAMAC report says:

The views of donees on relevant matters should also be sought, where appropriate.

So you can see that that is a far-reaching recommendation by the advisory council to initiate this concept of stewardship audits.

As soon as those recommendations were made public, the Financial Services Council went into overdrive to do whatever it took to advocate that these changes were not implemented, despite the recognition by the Corporations and Markets Advisory Committee that this level of transparency was required for both donors and the philanthropic community to have confidence about the way in which this significant part of the charitable sector was being administered.

CAMAC proposed that:

… Stewardship audits be conducted or co-ordinated by the ACNC, with the trusts included for audit being selected by the ACNC or the party it appoints to conduct the audits.

It was anticipated that:

… participation in Stewardship audits would be on a voluntary basis.

Use by a regulator of investigative powers to conduct the audits was seen to be inappropriate, because it was not suggested that there was any deliberate evidence of improper conduct; it was about improving the processes of transparency. This was the crux of the CAMAC proposal, and, with it, came the notion that, by conducting stewardship audits, it could delay what some of the submissions were actually looking for: a more pressing and urgent regulatory reform. So CAMAC came down on the side of caution, on the side of a light-touch approach—a stewardship audit which would improve best practice of the management of these trusts and the activities of the licensed trustee companies.

Also in the CAMAC's report is a consideration of a review of a range of alternative approaches to trustee fees, which was suggested again in the submissions. CAMAC proposed that:

… fees and costs charged against a charitable trust be subject to a requirement that they be fair and reasonable—

something that all of us would think was fair and reasonable—

with an extended power of the court to deal with disputes alleging the charging of excessive fees or costs.

Well, the Financial Services Council has indicated that this was not something that they wanted to engage in. From the time of these recommendations being presented in the May 2013 report they actively began advocating and systematically campaigning for rejection of the recommendations that would see them be much more accountable and having to justify to philanthropic organisations around the fees and charges that they were charging, but also those that would make them accountable through the activities and oversight of the Australian Charities and Not-for-profits Commission. Therein lies the story about the fundamental shift to ensure that the coalition government persists in unravelling the ACMC.

Fundamentally, it is the influence of the Financial Services Council to ensure that they are not subject to greater oversight and this, for me, is a hugely important issue. It is about the gouging of fees from trustee accounts and philanthropic foundations, where there is no capacity for anyone to challenge the management of those trusts and there is no capacity for people to even shift from one trustee company to another. People may not realise that if you are subject to the public trustee—if someone's estate has been taken over by the public trustee—there is no capacity for beneficiaries of that trust to challenge the management of the trust and move it to some other organisation that might be prepared to manage the trust in a more transparent, fair and reasonable way.

We have seen the FoFA reforms and we have seen the Financial Services Council move to advocate in every way that it can for less accountability and less transparency. This issue about the administration of charitable trusts is something that will become a national shame if we do not focus on getting it right. The Corporations and Markets Advisory Committee is a professional, legal support to the government, and its advice should be adhered to.