Federal Court of Australia

Briebach v Host-Plus Pty Ltd [2023] FCA 1122

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be allowed.

2.    The determination of the Australian Financial Complaints Authority given on 24 February 2022 be set aside and, pursuant to s 1057(4) of the Corporations Act 2001 (Cth), the matter be remitted to the Australian Financial Complaints Authority to be determined again according to law.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THOMAS J:

1    The applicant appeals from a determination of Australian Financial Complaints Authority (AFCA) given on 24 February 2022 at Melbourne.

2    The AFCA affirmed the decision of the first respondent, Host-Plus Pty Limited (trustee), as trustee to debit the applicant’s accumulation account by allocation of negative earnings applicable to a deemed Balanced investment choice.

3    The applicant appeals the whole of the decision.

QUESTIONS OF LAW

4    The applicant has appealed to this Court on the following questions of law:

(a)    Whether AFCA made a determination that was contrary to the governing rules of the Fund, and in particular rr. 13.2 and 21.8 of the Trust Deed, in concluding that the [a]pplicant:

(1)    had ceased to be a member of the Fund before 5 November 2019;

(2)    was not a member of the Fund on and from 5 November 2019;

(3)    had not made an investment choice election by 5 November 2019.

(b)    Whether AFCA misconstrued the Business rules of the Fund as being part of the governing rules of the Fund in concluding that mere compliance with those Business rules precluded any further challenge to any act complying with those Business rules.

(c)    Whether AFCA overlooked or misconstrued Business rule 12.15 of the Fund as being inapplicable to the [a]pplicant.

(d)    Whether AFCA misconstrued Business rule 5.7 of the Fund in concluding that the trustee was required by Business rule 5.7 to open a new account on 19 February 2020 for the Applicant to receive the proceeds of a proceeds of an insurance policy attributable to her.

(e)    Whether AFCA misconstrued Business rule 5.7 in concluding that the [a]pplicant was a “deemed member” on and from 19 February 2020.

(f)    Whether AFCA misconstrued Business rule 20.2 in concluding that the [a]pplicant was an Accumulation product Member who had not made an investment choice selection on and from 19 February 2020.

(g)    Whether AFCA failed to, but ought to have taken into account the relevant consideration that if the trustee was required by Business rule 5.7 to open a new account for the [a]pplicant to receive the proceeds of a proceeds of an insurance policy attributable to her, that account should have been opened in sufficient time to allow the [a]pplicant to make an investment choice, if one needed making, before receipt of the proceeds of the insurance policy attributable to her.

ORDERS SOUGHT

5    The applicant sought the following orders:

1.    The appeal is allowed.

2.    The determination of the Australian Financial Complaints Authority given on 24 February 2022 be set aside, and pursuant to s 1057(4) of the Corporations Act 2001 (Cth.), the matter is remitted to the Australian Financial Complaints Authority to be determined again according to law.

BACKGROUND

6    The first respondent is the trustee of the Host-Plus Superannuation Fund (Fund).

7    The Trust Deed of the Fund allowed the trustee to formulate and give effect to one or more investment strategies (cl 11.1 of the Trust Deed). The investment strategies included the options for “Balanced” and “Stable”.

8    The applicant’s account with the trustee was established on 15 August 2003.

9    The applicant ceased work because of disability on 30 June 2011.

10    On 5 December 2011, the “Member’s Choice” of investment option was switched from “Balanced” to “Stable”.

11    The Chronology in the decision from the AFCA ([cl 3.3]), as at 17 February 2014, recorded the switch: “$19,785.97. Invested in Stable”.

12    On 17 February 2014, the applicant’s account was rolled over into a self-managed superannuation fund (SMSF).

13    On 22 May 2019, a total and permanent disablement (TPD) claim was lodged with the insurer by the trustee on behalf of the applicant.

14    On 5 November 2019 and 2 December 2019, the trustee pursued the claim with the insurer “on behalf of Member Name: Cassandra Briebach Membership No: ##” (the membership number was supplied).

15    On 21 February 2020, an insurance benefit of $300,000 was paid by the insurer to the trustee on behalf of the applicant.

16    The trustee established a new account for the applicant when it received the payment from the insurer because of the trustee’s view that the applicant did not have an active account and, in accordance with its Business rules, it was necessary to establish a new account.

17    The trustee paid the proceeds of the TPD claim into the new account on 27 February 2020. The investment was based upon the “Balanced” option because the trustee took the view that the applicant had not nominated an investment strategy and, in accordance with the Business rules, the “Balanced” option was the default investment option.

18    On 26 February 2020, the trustee sent an email to the solicitor for the applicant informing the solicitor that the applicant’s TPD claim had been admitted by the insurer and the trustee.

19    On 2 April 2020, the applicant switched the investment option of her account balance from the “Balanced” option to the “Cash” option.

20    On 15 April 2020, the trustee paid the benefit to the applicant. Due to adverse investment performance, the amount of benefit was less than the amount the trustee received.

THE AFCA DECISION

21    The AFCA described the complaint as being about the investment of proceeds of insurance following the applicant’s successful claim for a TPD benefit. The AFCA noted that the applicant asserted the trustee should have invested the insurance proceeds in cash, but instead invested the insurance proceeds in a market-linked investment option, leading to investment losses in an amount of around $30,000.

22    The AFCA recorded the trustee as having asserted that it did not breach any obligation owed to the applicant and so declined to pay any compensation for losses.

23    In a section “Issues and key findings”, the AFCA recorded its conclusion as being that the trustee correctly invested the insurance proceeds – “the trustee acted in accordance with its [B]usiness rules”. The AFCA concluded that the trustee’s decision not to compensate the applicant “is fair and reasonable in its operation in relation to the [applicant] in all the circumstances”.

24    The decision recorded (at [cl 2.2]) that the trustee’s powers to manage the Fund were set out in the Trust Deed and included powers to:

•    enrol members into the fund;

•    arrange insurance for members;

•    receive the proceeds of an insurance claim;

•    invest an account on behalf of a member; and

•    pay benefits.

25    The decision referred to the trustee’s Business rules, which were extracted at cl 3.4 of the superannuation determination.

26    The AFCA accepted, without question or any analysis, that the applicant was not a member of the Fund on 21 February 2020 when the proceeds of the insurance policy were paid to the trustee. The AFCA noted the information from the trustee, that this was because the applicant had previously withdrawn her account balance and transferred her full account balance to her SMSF on 17 February 2014.

27    Whilst this was not outlined in the determination, this may have been a reference to Business rule 5.27, which was as follows:

5.27    Automatic Closure of Zero Account Balances

Each member that has a zero balance and meets the criteria advised by the Intrust Super Trustee Office will be closed on a quarterly basis (unless cancelled by ISF).

Should contributions re-commence for a closed member AAS will create a new account.

Members are issued an AMC Exit Statement once their account has been closed.

28    As a result of the conclusion that the applicant was not a member of the Fund, the trustee took the approach that it was necessary to open a new account for the applicant to receive the payment. Reference was made to Business rule 5.7, which was as follows:

5.7    Deemed Members

In the instance where a member application form has not been received or information for a new Member is provided by their Employer, or a membership application form is incomplete, the member record will be created and the member will be considered a “deemed member”. The members account will be created using the data provided, which must at a minimum, include the Members full name and date of birth. The application received date field will be left blank.

29    The AFCA noted that, pursuant to Business rule 5.8, the trustee was obliged to send a Welcome Kit to a new member, joining the Fund without an application form, within 90 days.

30    As to investment of the funds, the AFCA referred to Business rule 20.2, which was as follows:

20.2    New Members and Member Investment Choice

The default investment option for all Accumulation product Members who do not make a selection is the “Balanced Option”.

On receipt of an application from a new member the investment choice elected on that application will be applied. If there is no election, the default investment option will be given. If the Member is joined via a contribution return, or through EmployerAccess, then they will automatically be given the default investment option.

On receipt of an application for Select/Executive new members, an investment choice must be selected, and the form signed and dated before a member account will be created.

31    The AFCA concluded that, when the member had not made an investment choice, the trustee was required to invest in the default investment option, which was the “Balanced” option.

32    In relation to investment of the applicant’s TPD benefit, the AFCA referred to Business rule 12.15, which was as follows:

[…]

Interest on insurance Proceeds

On receipt of approval from the insurer the case manager should locate the insurance proceeds allocate the monies to the members account as per the below table.

…

… Upon receipt from the Insurer, an insured TPD/Terminal Illness benefit will be credited to the member’s account in accordance with their investment choice election for their future contributions.

…

33    The AFCA concluded that the proper administration of the Fund required the trustee to establish a business rule about how it would invest TPD insurance payments it received. It was open to the trustee to establish the business rule in the way that it did. The trustee’s decision to invest insurance proceeds in accordance with the applicant’s investment decision, or the default investment option “as applied in this case”, does not breach any relevant law.

34    The AFCA concluded: “The trustee received the proceeds of the [applicant’s] TPD insurance, established an account for the [applicant] and invested the insurance proceeds in the balanced option, as required under its [B]usiness rules”.

35    The determination referred to communications with the solicitor for the applicant (on 26 February 2020). Reference was made to the trustee warning the solicitor “that the value of the benefit may fluctuate due to changes in the Fund’s interest rates” (italics in original). The AFCA concluded that: “This meant the value of the insured TPD benefit was subject to market forces”. Reference was also made to the trustee suggesting the applicant obtain advice from a financial planner.

36    The AFCA was satisfied the trustee invested the proceeds of the TPD insurance claim in accordance with its Business rules and was satisfied that the Business rules did not breach any legal obligation placed on the trustee by relevant law. The AFCA was also satisfied that the applicant had been alerted through the solicitor to the fact that the TPD insurance proceeds were subject to market fluctuations.

37    The AFCA indicated that the AFCA cannot:

•    deal with a complaint relating to the investment performance of a fund, which may be an issue in this complaint insofar as negative investment performance reduces the value of an account …

•    deal with a complaint relating to the management of a fund or scheme as a whole, which may be an issue in this complaint insofar as the trustee’s practices may apply …

DISCUSSION

38    Central to the conclusion reached by the AFCA was the proposition that the trustee’s actions were correct, if based upon its Business rules. For example:

[at cl 2.2]

The trustee correctly invested the insurance proceeds paid by the insurer following acceptance of the applicant’s application for a TPD benefit. The trustee acted in accordance with its [B]usiness rules.

[at cl 2.3]

In accordance with its [B]usiness rules, the trustee established a new account …

Also in accordance with its [B]usiness rules, the trustee invested the proceeds of the TPD claim in the default investment option, which was the balanced option.

(italics in original)

39    The AFCA discussed the significance of the Business rules. The AFCA relevantly said:

As stated in section 1.1 of this determination, AFCA cannot comment on the trustee’s practices as defined in its business rules, which is part of the management of the fund as a whole, as long as the applicable rule is not contrary to relevant law. The trustee’s practice of investing the proceeds of TPD insurance does not breach any relevant law.

40    The AFCA had not considered whether the Business rules were binding on members. The conclusion seems to be that the AFCA could rely on the Business rules as part of the management of the Fund as long the applicable rule was not contrary to a relevant law. This conclusion ignored whether the Business rules were binding on members.

Do the Business rules govern the arrangements between members and the trustee?

41    The document which governs the arrangements between members and the trustee is the Trust Deed. The terms of the Trust Deed were not in dispute. Relevant terms of the Trust Deed include:

8.1    Fund vested in Trustee

The Fund is at all times vested in the Trustee and managed by the Trustee upon the terms and subject to the trusts, powers, authorities and discretions in this Deed.

…

8.3    Composition of the Fund

The gross assets of the Fund consist of all cash, investments and other property for the time being held and received by or on account of the Trustee upon the trusts of this Deed.

9    COVENANTS

The Trustee must perform and observe the covenants, trusts conditions and obligations of this Deed as and to the extent they are included in the Deed …

10    TRUSTEE PROVISIONS

10.1    …

10.2    The Trust Fund

The Trustee holds the Fund on the trusts set out in this Deed. The Fund consists of:

(a)    Contributions; and

(b)    amounts transferred or rolled over into the Fund for a Member; and

(c)    the proceeds of Policies held by or on behalf of the Trustee for the purposes of the Fund; and

(d)    all income, gains and other accretions derived from the assets of the Fund.

…

11    INVESTMENT POWERS OF TRUSTEES

…

11.6    Beneficiary Investment Directions

(a)    The Trustee may set different investment objectives, and formulate different investment strategies to achieve those objectives, for different parts of the Fund or a sub-fund (‘Investment Portfolio’).

(b)    The Trustee may:

(i)    set different investment objectives for two or more Investment Portfolios;

(ii)    formulate an investment strategy for each Investment Portfolio;

(iii)    divide the assets of the Fund or a sub-fund between the different Investment Portfolios;

(iv)    invite Beneficiaries to nominate the Investment Portfolio, or combination of Investment Portfolios, to apply to them; and

(v)    …

(c)    …

…

21    MEMBERSHIP

…

21.5    Member bound by Deed

Each Member by virtue of his or her application is deemed to have consented to be bound by this Deed.

…

42    Vesting of funds by the trustee are upon the terms and subject to the trusts, powers, authorities and discretions in the Trust Deed. Members are bound by the terms of the Trust Deed.

43    Rules governing the arrangements (outside of the Trust Deed) would only be binding on the members if they are incorporated by a provision in the Trust Deed. For example, cll 8.1 and 21.5 could be expanded to include reference to the Business rules.

44    There is no term of the Trust Deed which incorporates or even refers to the Business rules. The Business rules are not binding upon members of the Fund.

Was the applicant a member?

45    The AFCA relied upon the provisions of cl 5.27 of the Business rules in concluding that the applicant was not a member.

46    As mentioned above, cl 5.27 provided that “[e]ach member who has a zero balance and meets the criteria advised by the Intrust Super Trustee Office will be closed on a quarterly basis (unless cancelled by ISF)”.

47    No reference was made in the AFCA determination to criteria advised by the Intrust Super Trustee Office, and no such criteria were available in the papers. No findings were made.

48    No information was before the AFCA regarding whether there was a cancellation by ISF. No findings were made.

49    In any event, the terms of the Trust Deed dealt in a different way with the circumstances under which a member ceases to be a member. Clause 21.8 of the Trust Deed was as follows:

21.8    Ceasing to be a Member

A Member ceases to be a Member of the Fund on the first of the following to occur:

(a)    the Trustee determines that the Member has been paid all of his or her Benefit from the Fund;

(b)    where the Member dies, the Trustee determines that the deceased Member’s Benefit has been paid to the deceased Member’s dependants or Legal Personal Representative;

(c)    the Trustee determines that the Member’s continued membership would cause the Fund to cease complying with the Superannuation Law; or

(d)    the Trustee determines, on reasonable grounds, that the Member should cease to be a Member.

50    There was no evidence before the AFCA that any of these events occurred. Indeed, it was submitted that none of these events occurred, and this was not disputed.

51    In those circumstances, the terms of the Trust Deed (which governs the relationship between the trustee and the member), dealing with when a member ceases to be a member, are not satisfied. The applicant never ceased to be a member.

52    Up until the payment of the insurance proceeds, each party acted in a way consistent with this conclusion.

53    As identified in the AFCA determination, the trustee’s powers included arranging insurance for members and receiving the proceeds of an insurance claim.

54    Clause 18 of the Trust Deed was as follows:

18    POLICIES OF INSURANCE

18.1    Member Policies

The Trustee may determine to effect Policies with an Insurer and may secure the Benefit of a Member by means of an individual Policy or Policies or a group Policy or Policies or partly in one and partly in another.

18.2    Member may request a specific Policy

(a)    Where a Member makes a written request to the Trustee in writing to effect a Policy of a specified type in respect of the Member, the Trustee may effect that Policy.

18.3    Trustee to effect Policy if required

If the Trustee has informed a Member that a Policy of a specified type will be effected in respect of a Member, the Trustee must effect the Policy except if the Member has requested the Trustee in writing not to effect the same.

18.4    Premiums

Any premiums for a Policy effected may, if the Trustee considers it appropriate, be debited to an Insured Member’s Accumulation Account.

55    In 2019, the trustee pursued an insurance claim “for total and permanent disablement” on behalf of the applicant. This could only be done on behalf of a member. In the claim, reference was made to the applicant as a member, and a membership number was quoted. The trustee acted on the basis that the applicant was a member.

56    When the monies were received by the trustee, they must have been received by the trustee in its capacity as trustee under the Trust Deed on behalf of its member, the applicant.

Investment choice

57    As to investment powers, the Trust Deed required the trustee from time to time to formulate and give effect to one or more investment strategies. Clause 11.1 of the Trust Deed was as follows:

11    INVESTMENT POWERS OF TRUSTEES

11.1    Investment strategy

The Trustee must from time to time formulate and give effect to one or more investment strategies having regard to the Fund’s circumstances and those investment strategies must be formulated and effected in accordance with the Superannuation Law.

…

58    The trustee may set different investment objectives and formulate different investment strategies to achieve those objectives for different parts of a Fund and may invite beneficiaries to nominate the investment portfolio or combination of investment portfolios to apply to them (cl 11.6 of the Trust Deed) as follows:

11.6    Beneficiary Investment Directions

(a)    The Trustee may set different investment objectives, and formulate different investment strategies to achieve those objectives, for different parts of the Fund or a sub-fund (‘Investment Portfolio’).

(b)    The Trustee may:

(i)    set different investment objectives for two or more Investment Portfolios;

(ii)    formulate an investment strategy for each Investment Portfolio;

(iii)    divide the assets of the Fund or a sub-fund between the different Investment Portfolios;

(iv)    invite Beneficiaries to nominate the Investment Portfolio, or combination of Investment Portfolios, to apply to them; and

(v)    …

(c)    …

59    The trustee must establish an accumulation account for each member or beneficiary and, amongst other things, credit to the accumulation account any amounts required by the Trust Deed, including proceeds of any policy attributable to the member (cll 13.1 and 13.2 of the Trust Deed) as follows:

13    ACCUMULATION ACCOUNT

13.1    Establishment

The Trustee must establish an Accumulation Account for each Member or Beneficiary.

13.2    Amounts to be credited

The Trustee must credit to the Accumulation Account any amounts required by this Deed and the Superannuation Law including:

(a)    …

(b)    positive Earnings allocated to the Account under clause 16.4;

(c)    …

(d)    proceeds of any Policy or Annuity attributable to the Member;

…

60    In this case, the trustee established the various investment options, which included “Balanced” and “Stable”. The member made a choice of option investments, which was switched from “Balanced” to “Stable” on 5 December 2011. Reference to an investment “in stable” was contained in the records on 17 February 2014.

61    The applicant did not cease to be a member because none of the events specified in cl 21.8 occurred and the member’s choice of investment option remained as “Stable”.

62    Because the applicant did not cease to be a member of the Fund, there was no need or requirement for the trustee to open a new account for the applicant to receive the insurance payment; or any need for any further application form; or for the trustee to be obliged to send a Welcome Kit to the applicant.

63    The investment choice made by the applicant on 5 December 2011 (that is, “Stable”) remained in force.

64    The investment proceeds should have been banked in accordance with the member’s nomination in place (as referred to in the investment choice in the previous paragraph).

65    Whilst not necessary, in dealing with the questions of law, the indication by the trustee to the solicitor that the value of the benefit may fluctuate “due to changes in the Fund’s interest rates” (italics omitted) does not, on its face, suggest that the TPD benefit was subject to market forces (in this case, stock market forces). Fluctuations based on interest rates would be more consistent with a cash deposit rather than share investments. The trustee’s suggestion that the applicant obtain advice from a financial planner equally does not support the conclusion apparently drawn by the AFCA.

HANDLING A TOTAL AND PERMANENT DISABLEMENT CLAIM

66    To the extent that the Business rules are promulgated as the rules upon which the trustee operated, Business rule 12.15 required that the proceeds of a TPD claim be dealt with “as per members investment option” (error in original). On the basis that the member’s option remained as “Stable”, the proceeds of the TPD claim should have been dealt with in that way.

67    Rule 12.15 of the Business rules provided:

12.15    Total and Permanent Disablement claims (TPD)

Upon application of a TPD claim, the following will occur;

An initial claim form will be issued to the member. Standard letters will be issued as appropriate seeking the following:

•    Member/Claimant Statement

•    Two treating Doctors Reports

•    Employer Statement (completed by the last employer

•    Certified copy of Photo Identification

…

AAS will submit the above information to the Insurer and contact the member as requested from by the insurer regarding outstanding information.

…

Payment Options:

…

Full payment by cheque.

Full payment by EFT (we require a copy of the Bank statement)

…

Interest on insurance Proceeds

On receipt of approval from the insurer the case manager should locate the insurance proceeds allocate the monies to the members account as per the below table.

…

The Trustee determined that from 1 October 2019 Interest will be credited at the Cash return crediting rate from the date the insured death benefit is paid by the Insurer into the members account up to the date of payment (i.e. the insurance proceeds are credited to the Cash investment option). Upon receipt from the Insurer, an insured TPD/Terminal Illness benefit will be credited to the member’s account in accordance with their investment choice election for their future contributions.

…

(errors in original)

QUESTIONS OF LAW

Questions of law (a)

68    The AFCA made a determination which was contrary to the governing rules of the Fund, including cl 21.8 of the Trust Deed, in concluding that:

(a)    the applicant had ceased to be a member of the Fund before 5 November 2019;

(b)    the applicant was not a member of the Fund as and from 5 November 2019; and

(c)    the member had not made an investment choice election by 5 November 2019.

Questions of law (b)

69    The AFCA misconstrued the Business rules of the Fund as being part of the governing rules of the Fund in concluding that mere compliance with those Business rules precluded any challenge to any act complying with the Business rules.

Questions of law (c)

70    Business rule 12.15 contemplated that the trustee should allocate the insurance proceeds to the member’s account. The rule required that an insured TPD benefit would be credited to the member’s account in accordance with the member’s investment choice election. For the reasons outlined in these reasons, this course was not followed by the trustee. The submissions made by the applicant in relation to question of law (c) indicated that the issue related to what occurred after the receipt from the insurer of the insured TPD/terminal illness benefit being credited to the member’s account in accordance with their investment choice election for their future contributions. The submission was that the applicant made an investment choice election for future contributions as being “Stable” and the Business rules required that that investment choice election be applied to the benefit when received.

71    As mentioned earlier, the Business rules do not govern the relationship. Rather, cl 13 of the Trust Deed requires the trustee to establish an accumulation account for each member or beneficiary and to credit to the accumulation account any amounts required by the Trust Deed and superannuation law, including the proceeds of any policy attributable to the member. Clause 11.6 of the Trust Deed makes provision, in relation to the setting of different investment objectives, and formulation of different investment strategies to achieve those objectives, for different parts of the Fund and makes provision that the trustee may invite beneficiaries to nominate the investment portfolio or combination of investment portfolios to apply to them.

72    As mentioned earlier, in this case, the applicant had made such a nomination with respect to an accumulation account established by the trustee for the applicant. Pursuant to the provisions of the Trust Deed, the monies should have been paid into the member’s account in accordance with the member’s investment choice nomination.

Questions of law (d)

73    For the reasons outlined earlier concerning the operation of cl 21.8 of the Trust Deed, the applicant remained a member as at 19 February 2020 and there was no requirement for the trustee to open a new account.

Questions of law (e)

74    The applicant had not ceased to be a member pursuant to the provisions of cl 21.8 of the Trust Deed. Business rule 5.7 had no application. It was incorrect to conclude that the applicant was a “deemed member” on and from 19 February 2020.

Questions of law (f)

75    The applicant had made an investment choice selection on 5 December 2011. It was incorrect to conclude that the applicant was an accumulation product member who had not made an investment choice selection on and from 19 February 2020.

Questions of law (g)

76    In view of the answers to the previous questions, it is not necessary to answer this question.

ORDERS

77    In view of the findings reached in these reasons regarding the questions of law raised by the applicant, it is appropriate that the decision be set aside and the matter be remitted to the AFCA to consider whether the decision, in its operation in relation to the complainant, or conduct, was fair and reasonable in all the circumstances as is required by s 1055 of the Corporations Act 2001 (Cth).

78    In the circumstances, I make the following orders:

1.    The appeal be allowed.

2.    The determination of the Australian Financial Complaints Authority given on 24 February 2022 be set aside and, pursuant to s 1057(4) of the Corporations Act 2001 (Cth), the matter be remitted to the Australian Financial Complaints Authority to be determined again according to law.

Associate:    

Dated:    20 September 2023