SPEECH: MATTER OF PUBLIC INTEREST

CAMAC Review of Charitable Trusts and Foundations

Today I rise to speak on an issue that is fundamental to many Australian charities, an issue currently being canvassed by the Corporations and Markets Advisory Committee, 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 corporations law seems a long way from the day to day operations of local charities, but in this instance, corporations law is impacting in very a real way on the invaluable work of the charitable organisations 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, the accountability and portability of their services to CAMAC for consideration and advice.

He has asked CAMAC to inform Government on the impact that the 2009 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 is asked to consider what fee arrangements would be available if Trusts were able to operate on 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 (PTCs), the effectiveness of regulating ‘new’ fee 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 ; and finally he encouraged CAMAC to bring to the attention of Government any other issues that impact on the objectives of CLAFSMA or the charitable purposes of trusts.

So, what does this all 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 interesting consequences.

As Elizabeth Cham, in wrote in 2009, “

Australian philanthropy has had a pervasive impact on society, but 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 dollars from the amount available for grants to the non-profit sector into administrative fees of trustee companies.  It also alters the fee structure of perpetual charitable trusts.  Historically, they have been charged 5-6% of income, now they will be charged up to 1.056% 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 monies left by generous (dead) individuals and families on the understanding that the trust/foundation would be maintained in perpetuity for the benefit of the most disadvantaged in the community. Ironically,   the founders are no longer there to advocate on their 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.  So in practice the for profit arm of these companies tells itself as the sole trustee of the charitable trust, that its fees will be increased.

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 about Trustee Companies, and their  significance for philanthropy and the non-profit sector-

Firstly, trustee companies are 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 gentleman.

Their initial role was to manage the assets of wealthy individuals when they travelled abroad for often very lengthy periods.  Later, this 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 Awards 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 sole trustee.  They manage “about” 2,000 charitable trusts and foundations with assets of approximately $3.3 billion.  During 2008/09 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 non- profit sector, which they were established to support through charitable grants.

In the memoranda accompanying the new Act, Treasury estimated that trustee companies had approximately $510 billion under management and are therefore a significant part of the financial industry and need 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 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 web-sites 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, and as 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 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 provision”.    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%” of the trust’s assets may be charged.

For Government, the political imperative for the Act itself was the aftermath of the global financial downturn.  There was an outcry in the community and the media demanding investor protection, following huge losses by investors, sometimes losing their family homes, after the collapse of a number of high-profile companies. 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 is so miniscule.

At the same time the government was undertaking a review of the integrity of Private Prescribed Funds, (now PAFs.) the Treasury noted in discussing Prescribed Private Funds (PPFs), the public purse effectively provides a subsidy of 45 cents 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 had been able to charge a trust up to 6% of its annual income. Now, it is possible for them to charge up to 1.056% of a trust’s asset base.  The impact of this for an average NSW 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 non-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 could now attract a total management fee of about $760,000 per annum, up from $210,000.[6] These fees may not include audit fees, the cost of producing annual reports, the grant application research and in some instances financial management fees

One estimate of the total national amount lost to the community through this fee structure being introduced in NSW alone is $10 million per annum

Why, if a trust objects to such an increase in fees, would it not simply take its business elsewhere and choose another Trustee Company to manage their Trust? After all, those appointed as co-trustees to the boards of foundations and trusts are eminent, often powerful, citizens and usually prominent businessmen and women.

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 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 – a costly disincentive.   

There is another, even greater threat to the integrity of the charitable trust – which is the increasing frequency of mergers and takeovers in the financial corporate world.  The number of trustee companies has reduced from about 36 to only 10. A takeover bid by a global alternative asset manager, could have dire implications for Australian charities.  It seems although charitable trusts are being treated as property, as the assets of the Trustee companies.  I think all of us understand and would agree that charitable trusts are not the property of the Trustee Managers, but really belong to the generous benefactors and the communities they are meant to benefit.

It is therefore very timely that CAMAC has this reference before it, and is currently in consultations with not only the Professional Trustee Sector, but of course, is engaged with the nfp sector, and the work of the new ACNC.

The Committee has posted (obliquely) on its website submissions from

1. Charitable Alliance (1,560 KB)
2. Danks Trust (797 KB)
3. Financial Services Council (1,798 KB)
4. Changemakers (221 KB)
5. The Myer Foundation and Sidney Myer Fund (165 KB)
6. Myer Family Company (946 KB)
7. Community Council of Australia (519 KB)

However, I have read all the submissions , 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, advisors to and stakeholders of Charitable Trusts and Foundations (Charitable Trusts)  including Private Ancillary funds  that provide significant financial support to communities across Australia, having a corpus that in aggregate exceeds $1billion. The submission makes a series of recommendations related to reform in fees and prices, governance, transparency, portability and orphan trusts. The other submissions, with the exception of the Financial Services Council support this call for radical change, in the interests of the Charitable Trusts sector. Unsurprisingly, the Financial Services Council disagreed with those recommendations.

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 they distribute.  This again shows the value of establishing the ACNC and makes it all the more important that if there is inappropriate behaviour on behalf of some Trustee Companies that 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 services provided rather than standardised fees applied based on a one size fits all approach.’

 Clearly reform of charitable trusts is necessary and the role of the ACNC will be critical in this reform..

I understand that CAMAC was intending to hold a roundtable with interested parties today, but it has been postponed at the last minute because of the withdrawal 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 CAMAC on what is an opportunity for government to set a new, long-overdue, benchmark in accountability for charitable trusts and philanthropic organisations.

The real winner in these reforms will be increased philanthropy and stronger communities.