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

Today I rise to speak on an issue that is fundamental to many Australian charities, and that is an issue that is currently being canvassed by the Corporations and Markets Advisory Committee, CAMAC, one of the expert committees that provides independent advice to the Australian government on issues that arise in corporations and financial markets law and practice. I know that corporations law seems a long way 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 all rely on to build and strengthen our communities.

The Parliamentary Secretary to the Treasurer has referred the issue of regulation of certain aspects of the activities of trustee companies under the Corporations Act 2001, particularly the fees they charge charitable trusts and the accountability and portability of their services, to CAMAC for consideration and advice. He has asked CAMAC to inform the government on the impact that the Corporations Legislation Amendment (Financial Services Modernisation) Act 2009 has had on the quantum of fees that are or could be charged to charitable trusts and/or foundations by professional trustee companies, and the net funds available for trusts to distribute to not-for-profit organisations. In doing so CAMAC was asked to consider what arrangements would be available if trusts were able to operate in an open market.

He has also sought advice on: the range of additional fees beyond those regulated under the act that are or could be charged to trusts by professional trustee companies; the effectiveness of regulating the new arrangements between a PTC 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 has encouraged CAMAC to bring to the attention of government any other issues that impact on the objectives of that 2009 act or the charitable purposes of trusts.

What does all of that really mean? The government is committed to strengthening our communities through enhancing the work of charitable organisations and growing the culture of giving in Australia. This government has made some very significant commitments to improving the regulatory environment in relation to philanthropy, with some interesting consequences. As 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 $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. Now they will be charged up to 1.056 per cent of capital. The impact on a foundation with a capital base of $50 million will be a fee increase from $131,840 to $528,000.'

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.

Let me explain a little bit 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 gentleman, 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 also 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. During 2008-09, for example, they distributed $180 million in grants to the Australian community. Their legal and regulatory structure is therefore of vital importance to their colleague foundations in the philanthropic sector. It is also critical to the interests of the not-for-profit sector, which they were established to support through charitable grants.

In the memorandum accompanying the new act, Treasury argued that trustee companies had approximately $510 billion under management, and therefore were a significant part of the financial industry and needed to be regulated accordingly. The trustee companies welcomed the new national regulatory regime, which took effect on 6 May 2010. Under this act, the traditional services of trustee corporations, such as the administration of personal trusts and deceased estates, including acting as a trustee of a trust, applying for probate of a will or acting as an executor of a deceased estate, are deemed to be financial services. Trustee companies now need to disclose fees on their websites, and clients will have access to an ASIC-approved dispute resolution system. Hence, trustee companies are now administered by a single regulator, ASIC.

Charitable trusts form part of these traditional services, but were not specifically mentioned in the act, although the philanthropic sector and charities had fought earlier attempts by trustee companies to alter the fee structure for perpetual charitable trusts. In the entire debate, there was only one specific mention of charitable trusts. The minister said at the time:

The government is aware of the need to protect charitable trusts by regulating the fees they may be charged by trustee corporations. It is proposed to 'grandfather' the fees charged to existing charitable trusts and foundations. Thus, if the fees of the charitable trust would be increased due to the introduction of a new fee regime, the grandfathering provision would require that client to be charged as if they were still covered under the old rules.

In spite of the apparent clarity of the minister's speech, the act itself is confusing regarding the critical grandfathering provisions. For example, if a foundation's assets are included in a common fund operated by the trustee company, the old fee will not be adhered to. Instead, a fee not exceeding 1.1 per cent of the trust's assets may be charged. For government, the political imperative for the act itself was, of course, the aftermath of the global financial downturn. The government wanted to regulate margin lending, promissory notes and debentures. Trustee companies were added to the bill to take them from state regulation into Commonwealth regulation in line with the rest of the financial sector. The trustee companies may have overlooked the charitable trust part of their business because it was so miniscule.

At the same time, the government was undertaking a review of the integrity of private prescribed funds, which we now refer to as PPFs. The Treasury noted in discussing the private prescribed funds, that the public purse effectively provides a subsidy of 45c for each dollar donated to a philanthropic foundation. However, charities' loss has been the trustee companies' gain. The 2009 Act had the unforeseen consequence of enabling a massive increase in the fee that a trustee company can charge an individual trust or foundation for the administrative and financial service that the company provides. Remember, any sum removed for non-grant purposes from the pool of available money of a trust or foundation reduces the amount that can be granted to communities through charitable agencies.

Until 2010, trustee companies in New South Wales, for example, had been able to charge a trust up to six per cent of its annual income. Now, it is possible for them to charge up to 1.056 per cent of the trust's asset base. The impact of this for an average New South Wales charitable trust with a capital base of about $10 million is a hypothetical increase from $26,840 to $105,600 per annum, a loss of about $78,760 to the not-for-profit sector—or, given the latter's generally low remuneration levels, effectively one full-time salary. If we look at a larger trust, the effect is even starker. The total value of the Baxter family's two charitable trusts in March 2008 was about $76 million, which would attract a total management fee of about $760,000 per annum, up from $210,000. Those fees may not include audit fees, the cost of producing annual reports, the grant application research and, in some instances, financial management fees. Why, if a trust objects to such an increase in fees, would it not simply take its business elsewhere or choose another trustee company to manage their trust?

Unfortunately, there is a total lack of flexibility in choosing another service provider. This is one area of no choice. The notion of perpetuity is central to the legislation involving trusts, including the new law. The only way an individual trust or foundation can change its trustee company is, in fact, to mount a court case. This must be funded by the individual co-trustees, as any payment from a trust must be agreed to by all trustees, including the representative of the trustee company, which is a costly disincentive.

It is very timely that CAMAC has this reference before it, and is currently in consultations not only with the professional trustee sector, but of course, with the not-for-profit sector, and the work of the new ACNC. The committee has posted—obliquely, on its website—six submissions. I do not understand why the submissions are not clearly visible to the public on the website or why one submission was withdrawn. However, I have read them all and found the Charitable Alliance submission to be a very valuable and succinct argument for change. The Charitable Alliance is an alliance of concerned trustees—advisers to and stakeholders of charitable trust foundations—who provide significant financial support to communities across Australia, having a corpus that in aggregate exceeds $1 billion. The submission makes a series of recommendations related to reforming fees and prices, governance, transparency, portability and orphan trusts. The other submissions, with the exception of the Financial Services Council's, support this call for radical change in the interests of the charitable trusts sector. Unsurprisingly, the Financial Services Council disagreed with these recommendations.

I understand that CAMAC was intending to hold a roundtable with interested parties today but that has been postponed at the last minute because of the withdrawal yesterday of the Financial Services Council. CAMAC is now working to establish a new roundtable with interested parties, and I look forward to the recommendations of the committee on what is an opportunity for government to set a new, long overdue benchmark in accountability for charitable trust and philanthropic organisations. With the establishment of the ACNC and the requirement that all charitable organisations provide financial reports, Australians will have access to real information about charitable trusts, the amount of money they hold and the amount of money they distribute. This again shows the value of establishing the ACNC and makes it more important that, if there is inappropriate behaviour on the part of some trustee companies, it can be monitored and addressed by the ACNC. It also provides a good basis for increasing accountability and ensuring fees charged are more in line with the services provided rather than standardised fees applied with a one-size-fits-all approach. The real winner in these reforms will be increased philanthropy and stronger communities, and I look forward to the recommendations of CAMAC on this issue.