Kayler-Thomson v Colonial First State Investments Limited

BEACH J: 1 In this representative proceeding, the respondents seek security for costs pursuant to s 56 of the Federal Court of Australia Act 1976 (Cth) and r 19.01 of the Federal Court Rules 2011 (Cth). 2 On 9 September 2019, I ordered that security for costs be provided in the amount of $1,960,000 for work up to and including the discovery then contemplated; this was not opposed. The respondents now seek a further tranche of security in the sum of $2,317,743. This is said to be justified by developments including the filing of a second further amended statement of claim and the joinder of Avanteos Investments Limited (Avanteos) as the third respondent. 3 As to the form of further security, the respondents seek security by way of a bank guarantee or some other acceptable form. The first tranche of security was provided by deeds of indemnity from the insurers for Augusta Ventures Limited (Augusta) and by paying an amount into Court. Augusta is a commercial litigation funder who is not located in the jurisdiction. 4 The applicants have brought claims as representatives of beneficiaries of three superannuation funds against Colonial First State Investments Limited (Colonial), the first respondent, and Avanteos, who are the trustees. The applicants claim that Colonial and Avanteos as trustees of the funds failed to negotiate the best available interest rates and terms for investments of many billions of dollars in cash and term deposits. It is alleged that they invested the funds with the second respondent, their parent company, Commonwealth Bank of Australia (CBA), at interest rates lower than those available in the market for equivalent investments. The applicants allege that the investments were made for the purpose of making profits for Colonial, Avanteos and CBA, through the sharing of the margin made by CBA on those investments. 5 The applicants say that by reason of such conduct and the quantum of funds under management, the estimated losses suffered by the beneficiaries of the superannuation trusts is substantial, as are the estimated profits made by the respondents. The applicants estimate that if they are successful in respect of their claims on behalf of group members, the quantum of an account of profits or equitable compensation may be several hundreds of millions of dollars. 6 The applicants oppose any order and say that I should decline to order further security having regard, inter-alia, to: (a) the applicants' strong prospects of success on their claims, and the consequent unlikelihood of the applicants being ordered to pay the respondents' costs; (b) the nature of the proceeding, which involves claims made by beneficiaries against their trustees, in relation in essence to wages held on trust pursuant to the relevant statutory superannuation regime; and (c) the present undertaking given to the Court by Augusta to pay any adverse costs order which I might make against the applicants, it not being in doubt that the applicants personally could not meet any such order. 7 The applicants also take issue with the quantum of security sought. 8 Now it is not in doubt that my discretion is broad and unfettered, with the only limitation being that the relevant power must be exercised judicially. But various factors are relevant to consider in the exercise of my discretion in the present matter including: (a) the strength and bona fides of the applicants' claim for relief; (b) the nature of the causes of action; (c) the characteristics of the group members; and (d) whether there is a third party who stands to benefit from the litigation such as an external funder. 9 Further, in the context of a representative proceeding, the character of the claims being pursued by the applicants and group members and the public interest associated with the litigation may be factors bearing upon the exercise of my discretion (Augusta Ventures Limited v Mt Arthur Coal Pty Limited (2020) 384 ALR 340 at [136] and [142] per White J). 10 Let me turn to the first matter addressed by the parties.

Strength of the applicants' claims for relief 11 It is not in doubt that I am entitled to go beyond the usual neutrality of merits position and to take into account the strength of the applicants' claims where there is material from which some realistic assessment can be made. But is this such a case? 12 In Hells Angels Motorcycle Corporation (Australia) Pty Ltd v Redbubble Ltd [2016] FCA 530, Greenwood J said (at [34]): It may very well be, however, that a case might come along in which the causes of action are demonstrated as having very serious prospects of success indeed and in such a case, it would be wrong in principle, to simply treat the prospects of success as a neutral factor. Doing so would be inconsistent with the scope of the broadly-based unfettered statutory discretion. The discretion must be sufficiently flexible so as to take into account cases where the pleading, taken together with "material from which some assessment can be made", demonstrates a strong likelihood of success on the part of the applicant/claimant in the principal proceedings. That might be especially so in cases where the best the respondent can do is say we simply don't know the facts and therefore cannot admit the facts asserted by the applicant and thus no affirmative case is asserted against what appears to be a robust claim. 13 But whether the present case fits that bill is another question. The applicants have prayed in aid Hells Angels, but their use of this authority is problematic as I will later explain. 14 The applicants say that I can confidently and comfortably reach the view on the pleadings that the applicants' claims have such merit as to materially reduce the likelihood that a costs order will ultimately be made against them. 15 In this context, the applicants say that the defence does no more in substance than put the applicants to proof. It is said that the respondents do not advance an affirmative case, and nor do they assert a factual basis meeting the claims made against them. Moreover, the applicants say that the claims do not involve complex issues of fact and law and that although there is a good deal of factual detail pleaded by the applicants, due to the large number of products and options in issue, the nub of the claims is simple. The applicants assert that Colonial and Avanteos sought to advance the interests of their parent company, CBA, rather than the interests of members of the various superannuation funds. Further, such conduct allowed Colonial and Avanteos to take a benefit for themselves. 16 Let me turn then to the detail of how the applicants put their case on the merits.

The parties and the investments 17 The first applicant is a member of the Colonial First State FirstChoice Superannuation Fund (FirstChoice Fund). He is the representative party of the Colonial group members, who are current and former members of the FirstChoice Fund and current and former members of the Commonwealth Essential Super (Essential Fund), who have or had units or rights in specified investment options within those funds. 18 The second applicant is a former member of the Avanteos Superannuation Fund. He is the representative party of the Avanteos group members, being current and former members of the Avanteos Superannuation Trust (Avanteos Fund). 19 Colonial is the trustee of the FirstChoice Fund and the Essential Fund. Avanteos is the trustee of the Avanteos Fund. Colonial and Avanteos operate as part of the business referred to as the "Colonial First State" business. As I have mentioned, CBA is their parent company. 20 The claims against Colonial in relation to the FirstChoice Fund concern investment options referred to as FirstRate Saver and FirstRate Term Deposits. The investment strategy for FirstRate Saver was to invest in a bank deposit product offered by CBA. All of the assets allocated to FirstRate Saver were invested by Colonial in the form of cash deposits with CBA. The investment strategy for FirstRate Term Deposits was to invest in fixed rate term deposit products offered by CBA. Where members had requested that specified funds be invested in a FirstRate Term Deposit, Colonial invested those funds in a term deposit with CBA for the specified term. 21 The claims against Colonial in relation to the Essential Fund concern the investment option referred to as Essential Cash Deposit, and the investment options referred to as Diversified Options. The investment strategy for the Essential Cash Deposit was to invest in CBA bank deposit products. All of the assets allocated to the Essential Cash Deposit were invested in the form of cash deposits with CBA. Further, a portion of the assets allocated to each of the Diversified Options were invested in cash investments, by way of investment in a registered scheme titled the Commonwealth Essential Super Cash Fund (Cash Fund), for which Colonial was the responsible entity. All of the assets held in the Cash Fund were invested by Colonial in the form of cash deposits with CBA. 22 The claims against Avanteos concern a Pooled Cash Account, which comprised all of the funds from notional cash accounts which each member of the Avanteos Fund was required to maintain. Since November 2014, all of the assets held in the Pooled Cash Account have been invested by Avanteos in the form of cash deposits with CBA. Prior to November 2014, an amount ranging between 75% and 80% of the assets held in the Pooled Cash Account were invested by Avanteos in the form of cash deposits with CBA, with the balance invested with another approved deposit taking institution (ADI).

Allegations against Colonial, Avanteos and CBA 23 The applicants allege that the interest rates paid on the funds invested in the FirstRate Saver, FirstRate Term Deposits, Essential Cash Deposit and Cash Fund were set by Colonial and CBA, and the interest rates applicable to the investment of the Pooled Cash Account funds with CBA were set by Avanteos and CBA. 24 The applicants say that the rate of interest paid by CBA in respect of the cash investments and term deposits was lower than the rate which would have applied if Colonial or Avanteos were dealing with CBA at arm's length in the same circumstances. It is said that the rates of interest were lower than rates obtainable in the market from other ADIs with equivalent credit ratings as CBA, and lower than the rates offered by CBA on other investments made by Colonial. 25 The applicants also say that the funds invested in the FirstRate Saver and the Cash Fund should not have been entirely at call. It is said that a lesser proportion of the Pooled Cash Account should have been invested at call, in circumstances where higher interest rates were available for other forms of investments. It is said that in place of the at call investments, other forms of investments which attracted higher interest rates should have been made, such as rolling deposits, floating rate deposits, and term deposits. 26 The applicants allege that CBA paid Colonial all or part of the margin made by CBA on the investments in the FirstRate Saver, FirstRate Term Deposits, Essential Cash Deposits and Cash Fund, which Colonial then retained for its own benefit. They also say that CBA paid Avanteos part of the margin made by CBA on the investment of funds from the Pooled Cash Account, which Avanteos retained for its own benefit. The applicants say that it was therefore in the interests of Colonial and Avanteos to invest the funds at lower rates, allowing CBA to make a higher margin which it shared with Colonial and Avanteos. 27 By their conduct, the applicants say that Colonial and Avanteos contravened the covenants taken to be contained in the applicable trust deeds by operation of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act), and that they have each contravened their duties as trustees imposed by law. They also say that Colonial contravened its duties as a responsible entity in relation to the investments of the Cash Fund. It is said that the covenants and duties that were contravened included obligations to act in the best interests of the beneficiaries, obligations to act with care and skill, obligations to avoid and manage conflicts between the interests of beneficiaries and the trustees' or third parties' interests, and obligations to avoid obtaining a profit for themselves or a third party. The applicants also allege that Colonial and Avanteos each contravened the SIS Act provisions prohibiting investments other than on arm's length terms. 28 As for CBA, the applicants allege that it was involved in Colonial's and Avanteos' contraventions of the SIS Act. Further, by CBA's receipt of the funds invested, the applicants say that CBA received trust property which it knew was paid in breach of each of Colonial's and Avanteos' obligations as trustees. 29 The applicants say that Colonial's and Avanteos' conduct has caused them and group members loss and damage, by the investments earning less interest, the value of accounts being reduced, and the amounts members having received or expecting to receive being reduced. 30 The applicants seek against Colonial and Avanteos an account of profits, alternatively compensation under the SIS Act and the Corporations Act 2001 (Cth), alternatively equitable compensation either by payments to members or by the restoration of relevant amounts to the funds that I have identified. 31 As against CBA, the applicants say that by reason of CBA's knowing receipt of trust property, CBA is liable to account as a constructive trustee for profits on the investments it has received and their traceable proceeds. The applicants also seek compensation from CBA under the SIS Act and the Corporations Act. In respect of CBA's involvement in Colonial's and Avanteos' contraventions of the SIS Act, the applicants seek orders for loss and damage pursuant to ss 55(3) and 315(11) of the SIS Act; in respect of CBA's involvement in Colonial's contraventions of its responsible entity duties, the applicants seek orders for loss and damage suffered pursuant to s 1325 of the Corporations Act. 32 Now as for the respondents' defence to these allegations and claims, the applicants say that little is offered up. But I would say upfront that I disagree with such a characterisation of what is now the second further amended defence. 33 The applicants say that in answer to the detailed allegations made against Colonial and Avanteos as trustees, the substantive response in the defence is to be found in only two paragraphs ([32] and [33]). In my view that is not a balanced assessment. According to the applicants, the matters in those paragraphs may be summarised as follows. 34 Colonial and Avanteos accept that the interest rates set on the investments were not as a result of arm's length dealings between the trustees and CBA. But they say that this fact was to members' benefit, contending that Colonial and Avanteos in fact had a greater ability to influence the interest rate applicable to the investments than would have applied had they been dealing with CBA at arm's length. Colonial and Avanteos say that the interest rates set were at least as favourable to, or more favourable to, members, and therefore less favourable to CBA, than would be the case had the parties been dealing with each other at arm's length. 35 But the applicants say that the respondents' own contentions about the interest rates Colonial and Avanteos obtained do not make good these allegations. 36 Colonial pleads that the interest rates payable on the relevant investments were: (a) higher than interest rates offered to retail customers making deposits in an equivalent at call deposit product offered by CBA outside superannuation; (b) competitive with interest rates on similar at call deposit products offered by other ADIs with an equivalent credit rating outside superannuation; (c) generally competitive with interest rates offered to members of other superannuation funds investing in at call deposits with an ADI with equivalent credit ratings. 37 But the applicants say that the interest rates which could and should have been obtained by Colonial and Avanteos on behalf of their superannuation members were not the interest rates which an individual retail investor could have obtained by investing his or her funds. The applicants contend that appropriate comparators were the interest rates which a large institutional investor in Colonial's or Avanteos' position could have obtained in the market when investing a substantial pool of its members' funds. They further contend that a professional trustee investing superannuation funds with its parent company had to do more than obtain interest rates on the funds that were "generally competitive" with other superannuation funds. 38 The applicants say that the remainder of these key paragraphs of the defence otherwise: (a) allege that the interest rates payable on the relevant investments were published on Colonial's and CBA's websites; (b) refer to the fact that alternative cash and term deposit investment options were available to their members; (c) refer to the fact that the investments were not subject to administration fees; and (d) in respect of FirstRate Term Deposits, place reliance on the costs and time which would have been involved for Colonial to make available term deposits offered by other ADIs. 39 The applicants submit that these matters do not advance Colonial's and Avanteos' position, and do not meet a case of breach of trust in connection with the investment of members' funds. But whether that is so is clearly a matter for trial. Moreover, even accepting for the moment the applicants' summary of these paragraphs, which I will not set out and should really refer to [32] to [34C] (running to 10 pages of a 47 page defence), that does not assist me to show that I should take a position other than one of neutrality on the merits. Further, one must also bear in mind that the defence has been certified by the solicitor for the respondents that the factual and legal material available to him justifies each and every plea including the denials. 40 The applicants say that nothing is said in the defence to the effect that Colonial and Avanteos sought to negotiate for the best available rates for the cash and term deposit investments, or that Colonial and Avanteos sought to invest the cash investments on the best available terms. 41 Further, they say that nothing is said about how Colonial and Avanteos managed the inherent conflicts between their own interests and the interests of their parent CBA in dealing with investments of the superannuation funds and their duties to the beneficiaries of the funds. 42 Accordingly, the applicants say that if one accepts that the correct comparator is not an individual retail depositor but a large professional superannuation trustee, then a careful review of the defence reveals that the respondents are essentially just putting the applicants to their proof and nothing more. They then go on to say that this proceeding presents the scenario envisaged in Hells Angels, namely, a robust claim with no affirmative defence. 43 The applicants contend that the pleadings are sufficient for me to reach this view. But in any case, they say that the respondents' discovery to date demonstrates the problems in the respondents' conduct and that their defence is not strong. 44 I will turn to the other material in a moment. But I should say as to the above matters that the respondents have pleaded relevant denials. Further, they are not required to plead their evidence in support of the denials. Further, what is also readily apparent is that the respondents' defence is of a different type to that discussed in Hells Angels.

Other evidence 45 Let me deal briefly with some of the other material identified by the applicants sourced from the respondents' discovery. 46 First, the applicants say that at the heart of the respondents' wrongdoing is the arrangement between the parties regarding the margin made by CBA on Colonial's and Avanteos' investments with CBA of members' funds. 47 They say that the discovered documents show that CBA benefited from the cash deposits and investments which Colonial and Avanteos made with CBA on behalf of superannuation fund members. CBA benefited by having use of the funds as well as by paying lower interest rates than it would pay to raise the funds elsewhere, particularly through wholesale funding. It is this second aspect of the benefit which is in issue. CBA recognised this aspect of this benefit in its accounts as the net interest margin made on the deposits. 48 CBA calculated the net interest margin using its transfer pricing mechanism, whereby margin was the funds transfer price (FTP) less the rate paid to superannuation members, called a "customer rate" by CBA. The net interest margin represented the saving made by CBA from sourcing funds at a rate lower than their worth to CBA. CBA paid to Colonial and Avanteos an agreed share of the margin made on the cash investment and deposit products which had been sourced by Colonial and Avanteos. Colonial and Avanteos retained that share of the margin for their own benefit. 49 According to the applicants, these arrangements for the receipt of a margin by the trustees were not disclosed to superannuation members. They say that the documents show that Colonial and Avanteos took the view that as the revenue was derived from the deposit products, different disclosure obligations applied. 50 The applicants say that the vice in this arrangement was manifest where Colonial and Avanteos invested superannuation funds on behalf of members with CBA. They say that it was plainly in the interests of CBA, Colonial and Avanteos for the customer rate paid on those investments to be as low as possible, to maximise the margin they each made. According to the applicants, their interests ran counter to the members' interests, which was to receive a high rate on the investments. 51 The applicants say that the discovery reveals that this conflict was not managed by Colonial or Avanteos and that they relied on artificial constructs said to derive from their different capacities to justify the arrangement. A "Price Governance Guide" dated February 2014 for Colonial First State (CFS) investments (covering Colonial "CFSIL" and Avanteos "AIL") showed this (so the applicants submitted): 1.2 In what capacity does CFSIL administer and distribute deposits? CFS is appointed to administer and distribute deposits by the ADI (CBA or BankWest). Only an ADI can legally issue a deposit product and therefore, CFS is acting purely as an administrator in its corporate capacity (not as a Trustee or Responsible Entity). Rather than deduct explicit administration fees, in keeping with the customer experience of other deposits, CFS instead receives benefits as part of the Commonwealth Bank Group for sourcing deposit funding to assist the Bank in its Treasury activities. CBA Group accounting principles recognise the business unit and/or subsidiaries responsible for sourcing Group funding activity by allocating earning on deposits raised at the Funds Transfer Pricing "Worth of Funds" rate. The size of the benefit (gross margin) received by the Bank and attributed to CFS in its corporate capacity [is] determined by 2 key components and equation is below: 52 The next sections of the Guide were entitled "How does CFSIL / AIL as Trustee or Responsible Entity invest in these deposits?" and "How does AIL's Pooled Cash Account invests in these deposits?". The Guide stated that the FirstChoice Fund and Essential Fund offered members investment options to invest in the deposit products offered by CBA and administered by Colonial, and that a portion of Avanteos' Pooled Cash Account was invested with deposit products offered by CBA and administered by Colonial. 53 Now the applicants say that any contention that CBA's payment to Colonial and Avanteos of the margin was made in their capacity as "administrators" of the products was artificial. They say that the transfer pricing mechanism operated to identify and reward the business units and subsidiaries of CBA which sourced funding for CBA. They say that the deposits were sourced not in Colonial's and Avanteos' capacities as administrators of the products, but rather in their capacity as trustees of the superannuation funds which made the investments on behalf of members. 54 The applicants further submit that it is artificial for Colonial and Avanteos to suggest that they could properly separate their roles as administrators of cash and deposit products on behalf of CBA, from their roles as investors in those products in their capacity as trustees of superannuation funds. They say that the two capacities were inherently in conflict, and Colonial and Avanteos took no steps to manage the conflict. 55 I would say now that I am not convinced as to the applicants' criticisms concerning the net interest margin. Clearly this is a triable issue on which the respondents' witnesses and a more detailed context will assist. I will also need to understand the relevant accounting principles and any administrative charge component. 56 Second, the applicants say that the process for setting and agreeing the interest rates on the cash and term deposits investments reveals that Colonial and Avanteos were not acting in the best interests of members and were not exercising the care and skill of a prudent superannuation trustee. They say that the overriding concern of Colonial and Avanteos was their own commercial interests of maximising their revenue from the investments. 57 They say that despite the respondents' defence, the discovered documents do not show that Colonial and Avanteos used their influence with CBA to obtain better rates for the benefit of members. Rather, they say that Colonial's and Avanteos' overriding purpose was their own and CBA's commercial objectives, which ran counter to the interests of members. 58 The Price Governance Guide that I have just referred to provided an overview of the approach to pricing the relevant cash and term deposit investments. The Guide stated that the ADI (CBA) was responsible for setting customer rates, but that Colonial and Avanteos "consult[ed]" CBA and made recommendations to CBA on price. In setting out the factors which determined the customer deposit rate, the Guide adverted to the problem, though did not see it as a problem. It stated that the primary influence on customer rates was the funds transfer pricing rate. It also asserted that the "goal of pricing customer rates is to achieve the optimum balance of two competing objectives: 1. Customer satisfaction and volume; 2. Maximising profitability". The Guide stated that in terms of maximising profitability, Colonial, Avanteos and CBA needed to consider group profitability, net profitability and sustainable profitability. The Guide made no mention of considering the best interests of members, nor any other relevant statutory covenant or equitable duty. 59 Further, the applicants say that other documents showing the approach to pricing for the FirstRate Saver product are also instructive. Colonial and CBA agreed to a "pricing policy" for FirstRate Saver recorded only in an email exchange. The applicants say that it was not part of FirstRate Saver's pricing strategy to achieve the best rates obtainable for the members. At establishment, it was plainly stated that Colonial "believes that there is not the need to offer market-leading rates in the channel that the product is targeting…". The applicants say that the reference to the "channel" being "targeted" is a reference to superannuation fund members seeking to invest in the most conservative of products, namely cash products. 60 The applicants say that from the early period of offering the FirstRate Saver, Colonial and CBA took a "co-ordinated approach" to managing rates. In particular, Colonial and CBA priced FirstRate Saver to ensure that it did not undermine pricing on other CBA products. 61 Further, they say that under the documented interest rate change procedures for FirstRate Saver, there were four events which would trigger a review of the product's interest rate: (a) changes to the pricing policy strategy for FirstRate Saver or the benchmark CBA product; (b) changes to the interest rate of the benchmark product (if applicable) or the RBA cash rate; (c) "significant changes to Funds Transfer Pricing (FTP) that will immediately impact the product margin"; and (d) a "breach" of a target revenue band due to any long term funding premium (a component of the FTP). 62 The applicants say that the latter two factors concerned the impact on Colonial's margin (and CBA's margin) received from the product, showing that their revenue was a key driver in pricing the investment. Notably, so the applicants say, the availability of higher rates in the market was not a trigger to change the pricing. 63 Further, they say that the requirement for approval from CBA for Colonial to change rates was described internally by Colonial as merely an operational process, with the interaction between RBS (a division of CBA) and Colonial "more out of courtesy than RBS being an approval authority for changes to CFS FirstRate pricing". The applicants say that there are no discovered documents showing CBA initiating or directing a change in the rates it was offering on FirstRate Saver. 64 Further, the applicants say that from December 2013, Colonial First State, covering both Colonial and Avanteos, had a Deposit Pricing Review Committee (DPRC); its members were senior managers of Colonial and Avanteos. In addition to FirstRate Saver, the DPRC also dealt with pricing for FirstRate Term Deposits, Essential Cash Deposit, Cash Fund and the Pooled Cash Account. The Charter of the DPRC stated that its purpose was: To ensure cross-business engagement and input in the pricing approach for CFS sourced deposits. Deposits are an important driver of revenue, sales and customer satisfaction and these have direct trade-off to the interest rate (price). Pricing process includes understanding and responding to: CBA's transfer pricing system, the competitive positioning of our products and the impact on advisers and customers, product design features, revenue and pricing policies and their day-to-day management and including the discretionary pricing. 65 But the Charter did not mention acting in the best interests of superannuation members. And nor did it advert to the other statutory covenants and equitable duties owed to those members. 66 Further, the applicants say that the packs prepared for DPRC meetings identified the interest rates paid on each of the products, as well as the current "margin", and the revenue made by Colonial or Avanteos on each of the products, and in doing so highlighted the centrality of the margin to the pricing decisions. The DPRC packs frequently referred to the need to maintain or "optimise" the margin on products. 67 Further, rates offered by other ADIs were also listed in the packs, but framed as "competitor positioning". The applicants say that there is no indication that this competitor information was compiled for the purpose of assessing whether a better rate could be achieved by Colonial or Avanteos for their members, nor has any discovery revealed any attempts at bargaining to achieve better rates. 68 Further, it is said that the packs also revealed that other Colonial and Avanteos sourced cash deposits, including from institutional investors, received higher interest rates from CBA than FirstRate Saver and Essential Cash. In particular, the rates on the "Insto 31 day" were consistently priced higher than FirstRate Saver and Essential Cash. It is said that the higher rates for those products showed that CBA was prepared to pay higher interest rates on cash investments. I should say here that when I was taken to some of the material, the applicants' assertions appeared dubious; further, there were "apples and oranges" problems. 69 It is also said that the approach to setting rates for FirstRate Term Deposits was flawed. A "Pricing Summary" paper for FirstRate Term Deposits prepared just prior to the launch of the product stated that "successful pricing" for the FirstRate Term Deposit would strike a balance between "gaining acceptance from financial planners by offering credible rates that strengthen their regard and use of FirstChoice platform overall [and] [m]aintaining the Group revenue position for platform funds". The paper went on to say that, "[o]ffering credible term deposit rates will maximise acceptance of the Term Deposits and deliver flows to the platform. Beyond this higher rates are unlikely to deliver sufficient new flows to justify the lower margin". 70 According to the applicants, the apparent driving consideration in agreeing the interest rates offered for FirstRate Term Deposits was setting a desired long-term target net interest margin from the transfer price received from CBA. Colonial and CBA agreed a formula to give effect to the pricing approach, pursuant to which the customer rate would be set at the transfer price less a target net interest margin, adjusted for any tactical net interest margin movements. It is said that upon commencement it was agreed between CBA and Colonial that a net interest margin of 0.90% was to be targeted. 71 Again, so the applicants say, there is no indication in the discovered documents that Colonial used the relationship with CBA to seek let alone obtain higher rates for members. Indeed, Colonial, rather than advocating for higher rates for its customers, in response to pricing proposals from CBA, proposed lower interest rates for its members, including for the purpose of seeking to recover some margin. 72 Third, the applicants say that Colonial's and Avanteos' approach to the pricing of the cash investments and term deposits is highlighted by internal presentations about "Revenue Opportunities". Colonial and Avanteos identified revenue opportunities for themselves as arising from the reduction of interest rates payable to customers, that is, superannuation members, which would increase the margin the trustees received on the investments. The presentations rarely made mention of members' best interests. Further, it is said that at times, trustee best interest considerations were identified as a "risk" to a proposed interest rate reduction. The applicants gave other examples of Colonial's unfavourable approach to the investments in the context of "revenue opportunities". 73 Fourth, the applicants say that in late 2018, CBA took steps to effect a demerger of the Colonial First State business. As part of that preparation, CBA, Colonial and Avanteos commenced negotiations for the terms and rates at which Colonial and Avanteos would make the cash and term deposit investments. Once demerged, it was envisaged that Colonial and Avanteos would no longer participate in CBA's transfer pricing regime. 74 The applicants say that those negotiations are the best evidence of the approach which ought to have been taken by the respondents at all times to ensure that dealings were on an arm's length basis and that the best interests of members were protected. There was a recognition at that time that the existing pricing process would need to be changed. And ultimately the interest rates offered by CBA on all of the cash investments once the demerger had been effected were materially higher than the rates paid before. 75 The applicants accordingly submit that they are likely to have at least a significant measure of success in the proceeding. The applicants say that I am able to reach this conclusion based on the pleadings alone. Further, it is said that a review of the discovered documents re-inforces such a conclusion. 76 In the circumstances, the applicants say that it is very unlikely that they would be ordered to pay the respondents' costs. Further, it is said that if the applicants succeed, they are likely to recover an amount substantially greater than the costs of the proceeding. I should say now that I tend to agree with that last conditional proposition.

Analysis 77 In my view, the applicants' submissions invite me to embark on a superficial assessment as to the merits, contrary to authority. And this is all done based only on the pleadings and a selective subset of the discovered documents. 78 But in my view it is inappropriate for me to embark upon such an assessment of the merits in the present context and on the present material. In general, on applications for security for costs the merits should be treated as a neutral factor. I am not persuaded that that general position should not apply. I would decline the invitation extended to me by Dr Kristine Hanscombe QC for the applicants. 79 First, the discovery process is ongoing. Further, the parties have not yet served their evidence and I am not yet close to setting the matter down for trial. 80 Second, and contrary to the applicants' submissions, the respondents have put on a meaningful defence. And it is more informative than most. 81 Third, the reliance by the applicants on Hells Angels is flimsy. 82 In Hells Angels, Greenwood J recognised that the merits should generally be treated as a neutral factor but observed that it may be appropriate to depart from this position where "the causes of action are demonstrated as having very serious prospects of success indeed" and that this "…might be especially be so in cases where the best the respondent can do is say we simply don't know the facts and therefore cannot admit the facts asserted by the applicant and thus no affirmative case is asserted against what appears to be a robust claim" (at [34]). But in Hells Angels, the respondent did not advance any affirmative case upon which it relied in answer to the applicant's factual assertions. Rather, it pleaded that it did not know the material facts and could not admit any of them. But even where the merits were considered to be more than neutral, Greenwood J still exercised his discretion to grant security, although he discounted the quantum; I will discuss the appropriateness of that discounting approach later. Contrastingly, in the present case the respondents do not assert that they do not know the material facts and cannot admit any of the factual allegations advanced. In this case, the respondents have denied the allegations advanced by the applicants. Moreover, they have done significantly more than this. 83 Fourth, in terms of the evidence before me, but putting to one side the combination of speculation and opinion evidence which I have rejected from the applicants' solicitor, I have only been provided with a very selective subset of the discovered documents. Clearly, I have not had the benefit of either the full context of the balance of the discovered documents or of any witness evidence. At present I am not in a position to confidently draw the inferences contended for by the applicants concerning the strength of their case. 84 Indeed let me give some examples of the difficulties by reference to some of the documents in evidence. 85 The applicants refer to a document dealing with the FirstRate Saver and ask me to infer on the basis of that document that the FirstRate Saver's pricing strategy was not to achieve the best rates obtainable for members. But that document states that the FirstRate Saver pricing policy should have the goal of being highly competitive with any platform delivered cash or at-call deposit product, and competitive but not leading, in comparison to direct online saving products. 86 Further, a significant aspect of context is that the latter reference to direct online saving products is to high interest deposit products offered by banks such as ING and Bankwest, both of which had lower credit ratings than CBA and were therefore higher risk as evidenced by the fact that both ING and Bankwest's parent HBOS required government bailouts during the global financial crisis around the time FirstRate Saver was launched, and which commonly have terms and conditions around minimum deposits or limitations on account withdrawals. 87 Further, the applicants allege that the interest rates paid on the relevant deposit options were lower than those available in the market for equivalent investments. But at the moment, the applicants have not presented any strong basis for justifying the proposition that the returns received by them were below market. 88 Indeed, the applicants have particularised only one alternative deposit product as offering a higher interest rate, but returns to investors in that product seem to have been lower than returns received on the FirstRate Saver deposits. 89 In this context, the first applicant, in answer to a request for particulars of the interest rates that he was contending were the relevant interest rates which could or ought to have been obtained by Colonial, made reference to interest rates that National Australia Bank had paid in respect of an investment option named the MLC Cash Fund which was available through a range of MLC superannuation funds. 90 But one of the graphs in evidence showed that the FirstRate Saver had generally provided a higher return after administration and investment fees than the MLC Cash Fund. 91 This comparison did not favour the applicants' case for the period June 2011 to April 2019; but the comparison was more favourable to them between April 2019 and April 2020. 92 Further, the applicants have referred to other non-pleaded alternatives. But some of these are not equivalent investments. The "Insto 31 day" and "Insto 61 day" deposits are not at call deposits. Moreover, the equivalent "Insto at call" deposit was at the relevant time paying a lower interest rate than FirstRate Saver. 93 Now the respondents on the present application have filed evidence of the interest rates on a selection of deposit products that they contend are comparable to the investments the subject of the proceeding. But in my view even their material has its difficulties. Four of the comparisons are with products available outside superannuation. The remaining four comparisons are with products available inside superannuation, where the funds in each case were invested in the trustee's parent bank or with a related party life insurer, with one of the trustees similarly subject to a group proceeding of the present type. Now the highest the respondents put this evidence is that one of the Colonial products generally provided a higher return after administration and investment fees than one of the selected superannuation products. But in the circumstances I do not think that this evidence takes the respondents far in the present context. 94 In summary, I am not prepared to treat the question of merits as being other than a neutral factor at this stage. Let me turn to some other matters.

Characteristics of group members and nature of the claims 95 The applicants point out that they are seeking the restoration of their funds which were invested in superannuation or an account of profits. And they say that all of the group members as beneficiaries of the three superannuation funds are individuals, numbering in the hundreds of thousands. It is said that their funds invested in superannuation were earned wages, whose enjoyment was compulsorily deferred and control of which was reposed in a third party. It is said that the present case does not have the characteristics of a standard piece of commercial litigation, but rather should be characterised as workers seeking to avail themselves of commercial assistance to pursue a proper return on their deferred wages. And as so characterised, the applicants submit that this factor should weigh in favour of my exercising my discretion to decline to order further security. 96 In this context, the applicants rely on what White J in Augusta Ventures said in an application for security for costs in an industrial class action (at [136] and [137]): The character of the claims being pursued by the applicant should also be kept steadily in mind. A claim for wages in respect of work performed does not ordinarily have the same speculative or contingent quality of many Part IVA actions. Neither of the present two actions is "a piece of commercial litigation"… … From the worker's perspective, the proceeding is the pursuit of a claim for basis industrial entitlements. The circumstance that the worker has to finance the pursuit of those entitlements by entering into a funding agreement with a commercial litigation funder does not, at least ordinarily, alter that perspective. 97 Now although I do not have direct evidence in relation to the characteristics of group members, nevertheless I accept the applicants' description in the main, although the characterisation of the asserted motivations is more problematic. 98 But as for Augusta Ventures, the central feature of the context concerned a claim under the Fair Work Act 2009 (Cth), in circumstances where s 570 of that Act precluded with limited exceptions a costs order being made against a party. 99 I cannot see how Augusta Ventures really assists the applicants. The Court was dealing with the scenario where the applicants could not directly be visited with a costs order or an order for security because of the terms of s 570. But if security was ordered against the funder with consequences to the proceeding for its non-provision, those consequences would be visited on the applicants. Understandably, this was a powerful consideration in that case. 100 As Allsop CJ said (at [26]): But where the FW Act provides that no party is to be liable for costs, except in circumstances where he, she or it has behaved in a manner worthy of criticism, it would appear wrong to stay, dismiss, or by some order against the funder otherwise impede, a party's ex facie bona fide action, invoking Pt IVA of the Act, seeking to vindicate workplace rights by reason of a failure of a third party to provide security for costs, for which the party will not and cannot be responsible. If it be wrong to stay, dismiss or otherwise impede the proceeding, I do not see the basis of threatening to do the same by an order in the character of a condition on the proceeding going forward unimpeded. 101 And as White J said (at [128] and [129]: Secondly, care should be exercised to ensure that both the terms and rationale of s 570 are not undermined by requiring persons other than the applicant to provide security for a respondent's costs in a proceeding to which s 570 applies. That would obviously be the case if an order was made that the applicant's proceeding be stayed or dismissed if the ordered security is not provided. It could hardly be appropriate for a court to order a stay of proceedings until some person other than the applicant has provided security for a respondent's costs. Related to this is the consideration, explained in the reasons of the Chief Justice, that an order for the provision of security is not like other orders of the Court for payment of a monetary sum. They are not enforceable in the manner of a monetary judgment. Such orders are instead made in the control of the conduct of litigation in the Court. It is rare for an order for security to be made unless accompanied by some consequence in the proceeding. Thirdly, the policy rationale for s 570 and its effect should not be undermined by indirect means, for example, by an order for the provision of security by a person other than the applicant when it is the applicant who will bear the burden of the provision of the security. The Court should not allow, let alone assist, a respondent to bring about indirectly a situation which would not be permissible by direct means. 102 But in the present case, one does not have analogous circumstances; there is no equivalent s 570. 103 Further, when White J was discussing the character of the claims, he was talking about a claim for wages in respect of work performed, which as he said did not have "the same speculative or contingent quality of many Pt IVA actions" (at [136]). That is hardly an appropriate and analogous description of the claims before me. 104 Further, the applicants say that there is a public interest element in the present proceeding, which also ought bear on my exercise of discretion. As they put it, they are seeking to uphold the statutory covenants and duties of superannuation trustees. It is said that my judgment on those duties will be to the benefit of other members of these funds, and to members of other superannuation funds more broadly. The first proposition may have some substance but the second proposition is doubtful. 105 But this is not a case where the group members do not stand to gain any financial benefit from its outcome. Further, there is a commercial litigation funder who stands to make a profit from the litigation, and who has already agreed to provide security for costs if ordered or agreed. 106 Further, when White J was talking about a public interest component it was in a specific context. He said (at [141]): A court imposing a pecuniary penalty under the FW Act may order that the penalty, or part of it, be paid to the Commonwealth, a particular organisation or to a particular person (s 546(3)). Accordingly, it is possible that any civil penalties which may be imposed in the present litigation would be ordered to be paid, in whole or in part, to the Commonwealth. An order to that effect may serve to underline the public interest nature of part of the litigation. 107 So, his discussion was in the context of the civil pecuniary penalties that had been sought. That is made clear from the discussion beginning at [138]. But I am not dealing with such a case.

Other matters 108 Let me address some other matters. 109 First, the applicants point out that Augusta has undertaken to the Court to pay an adverse costs order. And the evidence filed on behalf of the applicants is that Augusta has sufficient assets to meet any adverse costs orders made in the proceeding. The evidence shows that Augusta is a substantial litigation funder, funding substantial litigation in Australia. Now that may be true, but Augusta is essentially foreign based including its assets. 110 Second, no argument has been advanced by the applicants that a further order for security for costs would stultify the proceeding. 111 Third, the applicants say that whilst the provision of security now will be at the expense of Augusta, if the proceeding is successful whether by judgment or settlement, that expense and a reasonable return on it will ultimately be at the expense of the applicants and group members. The applicants and group members would in effect have to fund the provision of security. The cost of providing security will be recoverable from them under the funding agreement and may add to any commission. Moreover, if I accept the applicants' submissions as to the small chance of an adverse costs order being made against them because they have a strong claim on the merits, then the cost of providing security will have been an unnecessary burden on group members. But the nature of the funding arrangements as between the applicants and the litigation funder is part of the bargain accepted by the group members and a consequence of the way the litigation has been funded. Further, it does not change the fact that the funder stands to profit from the outcome of the proceeding. 112 Fourth, the applicants say that given that all group members are individuals whose individual claims are likely to be modest, were the proceeding not funded by a litigation funder, it is very unlikely that the Court would order that security for costs be provided. Now that may be so. But here there is a third party funder who stands to benefit. That provides a quite different context. 113 In summary, I have taken the above matters into account, but none of them are compelling or would justify not ordering further security.

Quantum of security 114 The parties are at issue as to the quantum of security to be provided. Now I am not here setting out to give a complete and certain indemnity to the respondents. Further, the quantification of an appropriate amount by way of security is not an exact science. 115 In this case, the respondents have served evidence from Mr Cameron Hanson, the solicitor for the respondents. Mr Hanson's estimate includes the estimated number of hours required for particular work, as well as the hourly rates of the solicitors and counsel undertaking that work. That estimate is based on two phases of work. 116 The first phase concerns actual costs for work performed from 1 December 2019 to 30 September 2020. The respondents' legal team performed work from on or about 1 December 2019 to 30 September 2020 which was beyond the scope of anticipated work described in Mr Hanson's earlier evidence filed in connection with the first security for costs application and upon which I ordered that the first tranche of security be provided. 117 The second phase is for the estimated cost of the second discovery in the proceeding. On 16 October 2020, orders were made providing a timetable for the giving of discovery by Avanteos and further discovery by Colonial and CBA. Mr Hanson has estimated that the costs of giving the second discovery will be similar to the costs of giving the first discovery. 118 I have no reason to doubt what Mr Hanson said in his affidavit of 30 November 2020 at ([11] and [12]): My estimate for the Second Discovery is based on my expectation that the number of documents to be reviewed in the course of the Second Discovery will be similar to the number of documents reviewed in the First Discovery. That expectation is based on the following matters: (a) because the First Discovery and the Second Discovery have been given consecutively rather than concurrently, a large number of documents that were reviewed for the purposes of First Discovery but were not ultimately discoverable will require re-review for the purposes of the Second Discovery in order to ascertain whether they are discoverable in accordance with the Second Discovery orders; and (b) the Second Discovery does not only require discovery of documents relating to the new claims against Avanteos but also requires discovery of documents: (i) falling within the discovery categories for the First Discovery but that were sent or received within an additional 12 month period; (ii) contained in the mailboxes of persons holding two new positions for the whole of the relevant period covered by the discovery orders relating to Colonial and CBA; and (iii) contained in the mailboxes of persons holding 13 positions for a period of around 3 years relating to new discovery categories arising out of the planned demerger in around late 2018 of the Colonial and Avanteos businesses from CBA. 119 Mr Hanson estimates that the respondents' total costs, other fees and subpoena-related disbursements incurred by the respondents in this proceeding from the end of the first discovery phase on 1 December 2019, which was the subject of the security for costs order on 9 September 2019, up to and including the end of the second discovery phase will be $3,023,117,14. 120 Now Mr Hanson's estimate of the costs of the second discovery is disputed by the solicitor for the applicants, who has estimated that the number of documents to be discovered in the second discovery, and the costs of giving the second discovery, will be no more than half that of the first discovery. The solicitor for the applicants points to the smaller number of documents that are likely to be produced and, further, that there will be a duplication of work from the first tranche of discovery. 121 But I prefer Mr Hanson's evidence for the following reasons. 122 First, by reason of Mr Hanson's position as the respondents' solicitor and his experience in the conduct of this proceeding, including in relation to the first wave of discovery, he is best placed to provide a realistic estimate of the likely costs of undertaking the second discovery. 123 Second, Mr Hanson has provided a detailed estimate which is informed by various matters, including that the majority of the second discovery relates to discovery to be given by Avanteos, Avanteos has not given discovery in the proceeding to date, the claims introduced by the applicants in respect of Avanteos effectively mirror those in respect of Colonial, and the second discovery also requires discovery of documents created since the time of the first discovery by Colonial and CBA and also requires discovery by Colonial and CBA in respect of new categories in light of the second further amended statement of claim. 124 Third, and contrary to the applicants' assertions, the costs of giving discovery are not directly correlated with the number of documents actually discovered. Rather, the costs of giving discovery are directly correlated with the number of documents that have to be reviewed for the purposes of giving discovery. 125 Fourth, if there is a duplication of earlier work, this is a function of the sequential nature of the exercise which is not the fault of the respondents. 126 Fifth, more generally, on Mr Hanson's evidence an estimate of approximately $1.9 million for the further discovery in a matter of this size and complexity is reasonable. 127 Sixth, Mr Hanson's previous estimate of the likely costs involved in discovery and subpoenas in the first wave ($1,962,516.90) aligned very closely with the actual costs which were incurred to 1 December 2019 ($1,844,870.45). This correlation confirms my confidence in his estimates of such matters. 128 Seventh, for completion, I should say that I do not agree with the discounting approach referred to in Hells Angels (at [67]) to the extent that it suggests that a merits assessment could warrant a discount; that seems to me to blend concepts, but I do not need to consider this further. 129 In summary, I see no reason not to accept Mr Hanson's estimates, but with a 25% reduction for most categories given that one is trying to estimate what would be recoverable on a party/party basis.

Conclusion 130 For these reasons, I will order that the applicants provide further security for costs in the amount of $2,317,743, being approximately 75% of the estimates given for most cost categories. I certify that the preceding one hundred and thirty (130) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Beach.