The Productivity Commission 'Future Giving' report summarised in the preceding post considers questions about trustee companies. It states
Administration of charitable trusts
There are unique features of the administration of charitable trusts that could affect consumer choice and fee arrangements
Donors can appoint trustees to oversee and manage charitable trusts. Trustees can include individuals, public trustees or a licensed trustee companies (trustee companies that hold an Australian financial services licence issued by the Australian Securities and Investments Commission (ASIC)). Licensed trustee companies are major providers of fund management services for charitable trusts, ancillary funds and other charities. Donors may also adopt co-trustee arrangements, where trustees include both a licensed trustee company and another trustee such as a family member of the donor.
In 2012-13, the Corporations and Markets Advisory Committee (CAMAC) examined issues relating to licensed trustee companies in its report The Administration of Charitable Trusts (CAMAC report) (box 8.3). The CAMAC report’s recommendations have not been implemented and a number of submissions to this inquiry have advocated for their implementation.
In September 2012, the Parliamentary Secretary to the Treasurer, the Hon. Bernie Ripoll MP, requested CAMAC examine various matters concerning fees and replacement of trustees for those charitable trusts that are administered by licensed trustee companies. The scope of the review did not extend to charitable trusts more generally or other charities. Among its recommendations were:
• amendments to Chapter 5D of the Corporations Act to adopt ‘fair and reasonable’ requirement for all fees and costs charged by licensed trustee companies
• a standardised approach to the disclosure of services and fee schedules to help donors compare prices
• expansion of the jurisdiction of the court when dealing with allegations of excessive fees being charged to encompass all fees and costs charged to clients
• enhanced juridical procedure, via legislation, for dispute resolution for charitable trusts administered by licensed trustee companies, including whether they should be replaced as a trustee
• undertaking stewardship audits for a cross-section of charitable trusts administered by license trustee companies to increase information on the administration of charitable trusts, the findings of which could be used to inform any future regulatory change.
There has been no government response to the CAMAC report.
Although the focus of the CAMAC inquiry was on licensed trustee companies, some of the issues raised in relation to the administration of charitable trusts, including the oversight of fee arrangements and the ability to change trustees, could arise in contexts where an entity other than a licensed trustee company has been appointed a trustee of a charitable trust. For example, where an individual or a company has been appointed as the trustee of a charitable trust created through a will. To date there has been no broader review of the administration of charitable trusts, which goes beyond the role and practices of licensed trustee companies, to examine these issues more broadly and holistically.
Competition in the licenced trustee sector
High rates of market concentration increase the risk that competition will be muted. This can create situations where fees for services are higher or the quality of service is lower than would be the case if there were greater price competition. The Competition and Consumer Act 2010 (Cth) contains provisions which are enforceable by the regulator the Australian Competition and Consumer Commission (ACCC) in relation to mergers and acquisitions that have detrimental effects on competition and hence the potential to harm consumers.
The long-term nature of these structures means that for funds held in perpetuity, there is sometimes limited ability to change trustee service providers once the donor is deceased. Where a licensed trustee company has been used, the licensed trustee company is essentially ‘locked in’, although the Supreme Court is able to remove a trustee in instances where they have not acted in accordance with their obligations. This is relatively rare and requires an application to be made to the Court, which can involve significant costs.
Since the CAMAC report, the number of major licensed trustee companies has further consolidated to two major providers (Perpetual Limited and Equity Trustees), following the acquisition of the Trust Company Limited by Perpetual Limited in 2013 and the acquisition of both ANZ Trustees and Australian Executor Trustees by Equity Trustees in 2014 and 2022 respectively. In its Public Competition Assessment of the Trust Company Limited acquisition, the ACCC found there was unlikely to be ‘substantially lessening competition’ (ACCC 2013). Its reasoning included that in the market for private trust services, there was competition for trustee companies in the form of bank subsidiaries, other parties including solicitors, financial advisors and accountants and public trustees (noting their offer and focus differs). The licensed trustee companies that participated in this inquiry stated that these mergers contributed to efficiency gains, for example by building economies of scale for grant applications.
Fees charged by licensed trustee companies for the administration of charitable trusts xx
Fees charged for the administration of charitable trusts influence the level of funds available for distributing towards charitable purposes. If fees are higher, all else equal, this can reduce the amount of funds available. However, trustees also add value through their activities by ensuring that legal obligations are fulfilled, managing grant application processes and seeking to distribute funds effectively. This involves costs, which are met through fees.
The Commission heard different views on how fees are charged by licensed trustee companies and whether there are sufficient mechanisms in place to protect the interests of donors and the broader community. Fees charged by licensed trustee companies must be paid from trust income (Corporations Act 2001 (Cth) (Corporations Act), s. 601TBE(3)(a)). Licensed trustee companies argued fees charged should be brought in line with other trust structures by allowing them to be taken from either capital or income, where it does not significantly affect the capital of the trust, under section 601TBE(2) of the Corporations Act. Although not specifically referring to licensed trustee companies, Seedling Giving argued the commission-based approach to charging fees on funds under management creates a disincentive for funds to be distributed to charities. The Charitable Alliance also argued against allowing fees to be paid from capital on the basis that it would materially erode trust capital and would materially impact the ability of the trust to achieve the primary impact of the donor.
A related question is how trustee and investment services are structured, which CAMAC identified as an area that would benefit from more clarity. When administering a charitable trust, a licensed trustee company may provide both trustee services and investment management services, with the assets of all administered charitable trusts placed in a ‘common fund’ that is invested to generate a return. There is a question as to whether these services need to be delivered together and it may be appropriate for a trustee to adopt an arms-length process to decide upon the provider of investment management services. This could be the investment management arm of the licensed trustee company, or it may be another company. It is unclear what arrangements are currently used in this regard and what steps are adopted so that that value for money is provided.
A holistic examination of the oversight arrangements for charitable trusts
The CAMAC report identified issues with the administration of charitable trusts by licensed trustee companies. In the draft report, the Commission sought further information about the administration of charitable trusts by licensed companies. This included information regarding competition issues that adversely affect donors and arrangements for switching providers or charging fees, particularly for funds held in perpetuity. A number of submissions addressed this information request and it was also the subject of evidence at the public hearings.
Licensed trustee companies stated that they are focused on fulfilling the charitable purposes of the trusts they administer, as provided by the settlor of the trust, and are subject to adequate governance controls and extensive regulatory requirements . Perpetual commented that the market for trustee services ‘has likely never been more abundant’ .
The Charitable Alliance stated that charitable trusts administered by licensed trustee companies are ‘materially compromised by governance issues’ and supported the implementation of the CAMAC report’s recommendations. Morgans also supported the implementation of those recommendations, with ANZTSR asking that the ACNC be resourced to conduct audits of charitable trusts for which licensed trustee companies are the sole trustee.
Only one foundation provided a submission which commented on the fees charged to them by a licensed trustee company, which they considered ‘to be reasonable in the context of the considerable professional services to deliver to the purposes of the trust’. They did however suggest:
… an informed discussion of this subject would be beneficial for Australia, but this could only be undertaken with full transparency over services provided and fees charged by all Trustees across the sector. While the Charitable Alliance presented a substantial amount of anonymised evidence and case studies which the Alliance argued provided evidence of unreasonable fee charging by licensed trustee companies .
Since the CAMAC Review there have been significant changes to the market for trustee services, including consolidation of the licensed trustee sector, as well as major changes to the regulation of charities, including charitable trusts administered by the licensed trustee companies. The commencement of the ACNC in late 2012, just prior to the CAMAC report’s completion in May 2013, introduced new reporting requirements which increased the level of transparency applying to charities, including charitable trusts administered by licensed trustee companies.
The CAMAC report only examined issue related to charitable trusts administered by licensed trustee companies. However, many of these issues, such as those concerning fees and the replacement of trustees, could arise more broadly in relation to charitable trusts, regardless of whether they are administered by a licensed trustee company or not. It would therefore be less than optimal to recommend changes which would apply only to one category of charitable trusts with a particular type of trustee. Rather, it is important to examine oversight arrangements for the administration of charitable trusts holistically, in order to achieve consistent outcomes for all charitable trusts. In addition, there are complex legal questions, involving the interplay of state and federal laws, derived both from statute as well as equity. Appropriate caution is therefore needed when considering changes, to avoid unintended consequences.
The Commission recommended that the Australian Law Reform Commission undertake a review of charities law and regulation, which would include examining the roles and responsibilities of state and territory Attorneys-General and other relevant regulators, including in relation to oversight of charitable trusts (recommendation 7.2). Given that charitable trusts are generally regulated under state law, this review could conduct a holistic examination of relevant matters, including the adequacy of state laws in relation to regulating fees charged by all types of trustees of charitable trusts and whether the provisions about changing trustees are appropriate. As part of this, the review could consider the interaction of these laws with the regulation of licensed trustee companies by the Australian Government.
The Commission also notes that there are existing regulators who have roles monitoring various aspects of licensed trustee companies. Licensed trustee companies are governed by the Corporations Act and have regulatory obligations to ASIC and to the ACNC (as mentioned above). In addition, should evidence of any issues emerge that are a direct result of market concentration in the trustee company market in future, the ACCC is able to investigate.
