The Australian Banking and Financial System - Coursework Example

Superannuation Name Institution Introduction Superannuation is a saving program for the retirement period in Australia. Contribution towards superannuation is compulsory in the Oceania nation. Employers are expected to pay 9% of each employee’s salary to the superannuation program (Haslem, 2010). However, employees may choose to make contributions towards this program. Upon retirement, an employee enjoys the benefits of the superannuation funds. Even though superannuation funds are taxed, they receive preferential treatment during taxation to encourage people to engage in retirement savings. Superannuation is offered inform of a trust structure, where the trustees are in charge of the assets of superannuation funds of other members (Koken & Smith, 2011). Superannuation funds are continuous and are regulated differently from other forms of managed schemes of investment. In this line, these funds are regulated by the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA). Both the superannuation fund and the trustees require authorization and licensing from APRA and Australian financial services license (AFS). This paper will focus on superannuation funds, their regulation, and the shareholders. Law and Regulation of Superannuation Funds Due to the trade representations in the year 1985 in Australia, employees in industries whose employment conditions were protected by the Australian government became eligible for superannuation. Similarly in 1991, the changes in legislative rules of Australia led to the introduction of Superannuation Guarantee Change, which compelled the employers to pay a superannuation fund of 3% (Leow, Murphy, & Hooper, 2010). Currently, there are several laws, rules, and regulations that govern superannuation in Australia. For example, the SIS Act of 1993. This act defines the legislative needs for superannuation activities, for example, the rate at which the superannuation funds are taxed (ibid). There is also the Financial Services Reform Act 2002, which requires all superannuation entities and operators be registered and licensed. This act is also a guideline in the process of financial planning with regards to superannuation activities. In addition to this, APRA aims at regulating superannuation activities in Australia (Marrion, 2010). The changes that have taken place in the environment of Australian superannuation have led to the shifting of superannuation responsibilities to employees. This has led to the formation of trusts where trustees are given the management responsibilities as discussed below. Trusteeship and investment management of shareholdings The SIS act forms the basic foundation of rules and regulations governing the activities of superannuation funds. These rules cover the activities of trustees, enquiries, investments, administration, and management responsibilities (Blome, Farchinger, Franzen, Scheuenstul, Yermo, 2007). It is these rules and regulations that impose penalties on trustees who breach the terms and conditions of the superannuation fund. The operations of superannuation funds are based on the formation of trust groups where the trustees are charged with the responsibility of managing the funds. The trustees are expected to come up with strategies of investment to be implemented within the group. In the process of their registration, APRA has to confirm that the trustee being registered posses the relevant resources needed to manage the fund. These resources include human, financial, and technological resources (Abbot, 2008). In addition to these, they are also required to possess skills in risk management. According to the requirements of APRA, the institution has to authorize the registered trustees to manage the funds. In case the trustees are found to have breached their obligations, they are liable to the law. According to the SIS act, there must be a responsible entity where the trustees managing the funds report to (Iskra, 2012). In a regulated fund with many shareholders, tasks are normally delegated to other members, but the trustee is mandated with the overall responsibility over the activities of the group. As a result, all penalties for example, financial fines, and even imprisonment are directed to trustees in the event of breaching the SIS rules and regulations (Dixon, 2012). Section 56 of the SIS act gives a provision for trustees to be indemnified from fund assets; however, this right of indemnity does not apply if a trustee does not act honestly. SIS Act 1993 – General Concepts The SIS act of 1993 is aimed at regulating the various activities of superannuation (Higgs & Worthington, 2012). It dictates the amount tax that is charged on superannuation pension funds. The investment earnings, rental income, capital gains, and dividends are subjected to a tax of 15% (Higgs & Worthington, 2012). Taxes from superannuation funds are a major source of revenue for the Australian government. According to the SIS act, there must be a responsible entity referred to as trustee who manages and controls the activities of a regulated fund (Marrion, 2010). Sections 41 and 42 of SIS act of 1993 categorize funds into complying or regulated funds or Non-complying or non-regulated funds. Regulated funds are those whose trustees are elected as per section 19(2) of the act and have agreed to be bound by SIS. On the other hand, non- complying fund is not bound to SIS (Prince, 2011). In a regulated fund with many shareholders, tasks are normally delegated to other members but the trustee remains in charge of the group. Therefore, under the SIS act of 1993, there is a provision for delegation of tasks but not delegation of responsibility. On the other hand, there are trusts referred to as SMFS, which are funds with less than five members. Here, all members are trustees and are controlled by the Australian Taxes Organization (Newman, 2009). SIS Act 1993-Duties of Trustees and Investment Managers On top of coming up with the appropriate investment strategies, trusties and investment managers have critical duties within the superannuation fund. They are charged with the responsibility of acting honestly in all activities of the fund, particularly, activities related to cash. In the event that they do not comply with the requirements of management and administration of the funds or when there is a breach of a covenant, they should notify APRA, failure to which, they are liable to charges under civil penalty (Power, 2007). Instances that can lead to the imprisonment of a trustee or an investment manager include giving out of monies to borrowers who are not yet approved, if a trustee is involved in a scheme that breaches the house rules regarding the fund’s assets, and when the trustee of the investment manager braches the sole purpose test. In case one of these mistakes happens, trustees and investment managers are expected to notify the APRA at once. Failure to notify APRA attracts an imprisonment of up to of five years or a fine of up to A$ 220, 000 (Newman, 2009). They are also expected to work with a lot of prudence, especially when making investment decisions. In line with this, the trustees and fund managers are expected to keep the trustees’ and entity money separately. All the decisions made by Trustees and Investment Managers should be aimed at fulfilling the interest of their beneficiaries (Power, 2007). It is the duty of the trustees to effectively manage the assets acquired by the group. When making investment decision, the most important considerations to make are the liquidity and diversity of the investments. Trustees of the superannuation funds come up with most appropriate investment strategy, which is able to meet the requirements of the fund, particularly in line with liquidity and diversification. For better management, trustees should consider the goals and objectives in terms of returns and the risks involved (Power, 2007). SIS Act 1993 – Provisions Appling only to Regulated Superannuation Funds Section 62(1) of the SIS act of 1993 contains the provisions that are relevant to the regulated superannuation funds only. Regulated superannuation funds are under the rules and guidelines of SIS. Therefore, in a regulated fund, the trustee ensures that the available funds are safe to serve their major function to beneficiaries. Among the major functions of these funds include the provision of retirement benefit, the aged benefit, and benefit of death (Quarter, Carmichael, Ryan, 2008). The SIS act recognises in its provisions that superannuation system plays a major role as the sole source of income for retired, ill, and retrenched workers. As such, the trustees are expected to manage the funds effectively to ensure that such workers get their benefits as per the requirement. Regulation of Pension/Superannuation Funds Through the use of SIS act and APRA, the activities of superannuation funds are regulated by the law (Smith, & Koken, 2007). In the event of breaching any terms, there are penalties in place. For example, in the United States and Canada, the act imposes penalties on the various offences that are committed within superannuation funds. For example, civil liability, which is imposed when trustees breach covenants; Fault liability, which is imposed when the trustee fails to properly administer and manage funds; Strict liability, which is imposed when the trustee fails to notify APRA of any event of breaching of terms; and Civil penalty, which is imposed when the trustee contravenes the provisions in the civil penalty (Smith, & Koken, 2007). Superannuation Trustees and Investment in MIS With regards to investments, the trustees involved in the management of the superannuation funds must draft good investment strategies considering the liquidity and diversification of the investment (Tyler, 2005). For better management, trustees should consider the goals and objectives in terms of returns, risks involved, and the maturity period of the investment. The major investment strategy that is widely used by Australians is the Default Investment Strategy where funds are invested in form of different assets, namely cash, shares, and property. The fund managers must do their work diligently because there is no guarantee of governmental benefits on the investments made. To ensure effective management of investment shares, there are restrictions put in place to bar members from borrowing the investments. Corporate and Trust Structures for the Collective Ownership and Management of Shareholdings Inquiry into the Role of Institutional Investors in Australian Capital Markets Institutional investors play a major role in the improvement of infrastructure in the Australian capital markets. This is because private investors are able to finance expensive projects that the government is unlikely to afford. It is for this reason that there is great need to protect the investors. In these projects, nominated directors in superannuation funds play a major role in managing the super funds. The Managed Investments Act 1998 The managed Investment Act of 1998 was introduced in Australia to create a new structure of managing investment schemes. In line with this, single entity schemes are accountable for their own losses and liabilities (Smith & Koken, 2007). Here, there is only one sole corporate entity as opposed to the dual entity system of trustee and investment manager. This new legislation increases the protection given to the investor in the event of unexpected growth. Therefore, with regards to the managed investment scheme act of 1998, the property of a scheme may be held by the involved entity or a totally different entity (custodian). In this scenario, a single entity is responsible for protecting the assets of the scheme (Tyler, 2005). The responsible business entity should act with the interests of the scheme members at heart. In this case, the entity plays a role similar to that of a trustee in a fund, for example, the administration, management, and formulation of appropriate investment strategies. They are also answerable to regulating bodies such as APRA. References Abbot, G. (2008). Self Managed Superannuation Funds Strategy Guide. Mary Borough, VIC: McPherson Printing Group. Blome, S., Farchinger, K., Franzen, D., Scheuenstul, G., & Yermo, J. (2007). Pension Fund Regulation and Risk Management: Results from an ALM Optimization Exercise. OECD: Paris. Dixon, D. (2012). Securing your Superannuation future: How to start and run a self managed Super Fund. Milton, Qld: John Wiley & Sons. Haslem, J. A. (Ed.). (2010). Mutual Funds: Portfolio Structure, Analysis, Management and Stewardship. Hoboken, NJ: John Wiley & Sons. Higgs, H., & Worthington, A. C. (2012). Economies of Scale and Scope of Australian Superannuation (pension) funds. Journal of Pensions, 17(4), 252-259. Iskra, L. (2012). A Technical note on Australian Default Superannuation Investment Strategies. Australian Accounting, Business and Financial Journal, 6(2), 113-118. Koken, E., & Smith, B. (2011). The Superannuation Handbook 2008-09. Milton, Qld: John Wiley & Sons. Leow, J., Murphy, S., & Hooper, G. (2010). Australian Master Superannuation Guide 2010/11. Mary borough, VIC: McPherson Printing Group. Marrion, P. (2010). The Politics of Retirement Saving Taxation: A Trans-Tasman Comparison. Mary Borough, VIC: McPherson Printing Group. Newman, M. (2009). Self Managed Superannuation Funds: A Survival Guide. Milton, Qld: John Wiley & Sons. Prince, J. P. (2011). Superannuation and Taxation: A Practical guide to saving tax on your Super Or MSF. Milton, Qld: John Wiley & Sons. Power, T. (2007). Superannuation for Dummies. (2nd Ed.). Milton, Qld: Wiley Publishing Australia Pty. Quarter, J., Carmichael, I., Ryan, S. (2008). Pension at work: Socially responsible investment of union-based pension funds. London: University of Toronto Press. Smith, B., & Koken, E. (2007). The Self Managed Superannuation Fund Handbook: A Practical Guide to starting and Managing Your own fund. Milton, Qld: John Wiley & Sons. Tyler, L. A. (2005). Superannuation Made Easy. Glebe, NSW: Pascal Press. Read More