Financial Advice Association Australia (FAAA) chief executive Sarah Abood took to LinkedIn on Friday evening with a strong rebuttal of the inflammatory article published in The Australian at the end of last week – $1bn scandal: How an entire financial planning industry looked the other way while Shield and First Guardian thrived.
Published on ifa here, Abood rightfully points out that there is an incredibly small number of Australian Financial Services licensees that are actually involved. The ring gets even smaller when you consider the vast majority of the advice involved can be traced back to Ferras Merhi and Venture Egg.
Both Merhi and Venture Egg were authorised representatives of InterPrac Financial Planning, though the licensee has since cut ties with the adviser.
Alongside funnelling about 5,000 clients with $250 million in Shield and 3,600 clients with $192 million invested in First Guardian through Venture Egg, according to Merhi’s own previous media comments, he also controlled Financial Services Group Australia.
This licensee authorised four firms that ASIC highlighted in connection to Shield and First Guardian: Rebellis Financial Services, 5 Point Australia, AS Financial Planning, and STC Financial.
Merhi is also caught up in the lead generation portion of these failures. Between the two funds, they paid in excess of $100 million to lead generators, including Merhi-owned or linked firms.
Though the exact extent of funds that went his way isn’t entirely clear yet, the First Guardian portion appears to be at least $13 million.
All of this is to say that framing the failure as the broader financial advice community looking the other way is nonsensical.
The article is absolutely right to call out the advice failures involved – anyone who has had a look at a client statement of advice would see it as little more than generic rationalisation to put a client in a product regardless of their circumstances or risk tolerance.
How could it be anything else when a mere handful of advisers were “servicing” in excess of 5,000 clients. Even the most efficient firm would need a couple dozen advisers to hit these numbers.
But an article that lumps all advisers in the same boat and tars honest professionals (who are going to have to cover far more of the cost for these failures than they should) with the same brush as the directors who actually committed the alleged wrongdoing shows a shocking lack of understanding at best.
As the FAAA’s Phil Anderson noted, the article provides no evidence to support its conclusions about advisers.
“To suggest that the entire profession looked the other way, implies that they knew and did nothing about it,” Anderson said on LinkedIn.
“This is a bit like blaming all law-abiding drivers for the damage that drunk drivers cause and then suggesting that they should have stopped it. ASIC has identified that only five of 1,700 advice licensees were involved. How can you blame the 1,700 for what five did?”
Even for the advisers who were involved, he contended that there would be no way for them to know just how poorly the businesses were being run, particularly if a group of “major super funds” didn’t.
It’s a fair point. The most cynical view would be that they knew it would fall apart and didn’t care, but from a self-interest point of view, it makes more sense that they figured it would perform alright and there wouldn’t be any harm.
After all, having your assets frozen and being taken to Federal Court doesn’t sound like a lot of fun.
This is where the inherent unfairness of the CSLR comes in. It is likely that a large amount of the advice will be found to have involved misconduct, however, even the worst examples will pale in comparison to what the fund RE’s were alleged to have been up to.
Co-mingling of funds, paying redemptions from new investors and splashing out on a Lamborghini should all be a bit higher on the list of concerns.
Yet no other member of the managed investment scheme ecosystem will have to drop even a cent to cover the losses.
For advisers, it’s yet another bill set to be slapped across their desks for conduct they had nothing to do with and, as Abood pointed out, blew the whistle on.
“In cases that we are aware of, advisers saw and were horrified by advice they had been asked to review as a second opinion – and reported the entities involved to ASIC (which has, to its credit, acted swiftly and devoted substantial resources to these investigations),” she detailed.
“And many advisers are currently working with the victims, doing everything they can to help them recover as much as possible and get their financial plans back on track.”
Where the danger in an article like this lies in tarnishing the public perception of every member of the profession.
It also gives critics of financial advisers more ammo.
Xavier O’Halloran, CEO of Super Consumers Australia, for instance, called the article a “great read” on LinkedIn.
“In light of this slow car crash unravelling over the past year, it’s bizarre we’ve seen these constant calls to water down consumer protections in advice and gut the Compensations Scheme of Last Resort,” he said.
Unfortunately, it’s hard to imagine exactly what further imposts on financial advisers could have curbed this kind of behaviour.
Simply stated, you can’t legislate morals.
The government could make ethics the basis of all 40 hours of continuing professional development every year and it wouldn’t stop someone who knows they’re doing the wrong thing.
At that point, it’s not a matter of understanding ethics, it’s a matter of having some.
As an addendum, there is a widespread acknowledgement that advisers will have to cover the tab. However, InterPrac is the licensee with the most exposure and as things stand, is still in operation.
It would need to go insolvent before the CSLR is pulled in for the Venture Egg advice.
The point O’Halloran and his ilk just don’t get, is that more regulation does not necessarily equal better consumer protection. If it is bad regulation, or duplicate regulation, then most consumers actually end up worse off.
That’s what has happened with financial services regulation over the past 15 years. Some of it has made consumers better off, but most of it has just made things more complicated and expensive for consumers, without providing any benefit. In many cases the burden of bad regulation has “nudged” consumers towards dangerous unregulated sources.
CSLR is one of the worst pieces of bad regulation yet. It incentivises consumer harm, by allowing perpetrators to escape scot-free, while innocent advisers are punished instead.
Unbelievable, for 30 years I have seen advisers report to ASIC things that don’t look right only to be ignored and told ” we look at systemic patterns not individual reports” or alike. So generally, nothing happens until after the event. Meanwhile, ASIC spend all their time chasing ideologies around commissions and bad advice based on technicalities, ignoring multiple complaints from advisers who are concerned about the industry reputation. Now the proverbial hits the fan, and its the adviser community’s fault….., and we have to foot the bill…..really, why are we paying an ASIC Levy…so they can work from home, fly a different flag, hug trees and smash advisers????
ASIC has been blaming advisers since CBA and banking cover coverup shifting all the blame to Storm financial
Storm had sell instructions on clients account so that when market dropped they would be sold out of position before they got close to margin call… but now all ASIC do is every MIS failure they just blame it on advisers. Don’t worry about the fact ASIC gave Storm financial a clean bill of health before everything went wrong.
The Commonwealth Bank forced Storm into administration on 9 January 2009 when the bank called up its lending facilities to Storm, citing a default on Storm’s own margin lending facility with the bank.[22][23] Whilst the date of the alleged default by Storm was 10 October 2008, the Commonwealth Bank records at the time showed Storm to not be in default. The banks acceptance of non-default was evidenced by the banks approval to Storm for a $30 million loan facility on 24 October 2008, the banks funding of a $10 million facility to Storm on 29 October 2008 and a new loan facility of $4.725 million on 5 December 2008 for the purchase of a new building.[24]
Whilst in the past the Commonwealth Bank sent margin call notices out to Storm clients, the advisor or both,[25] the bank’s failure to issue margin call notices at the critical time was one of the major influences in late 2008 that triggered the eventual collapse of Storm.[26] The banks failure to issue margin call notices together with its inability to reconcile the correct financial position of each client ultimately led to many clients passing through their margin call trigger points and ending in negative equity.[27]
The unreliability and inaccuracy of the data provided to Storm and Storm clients by the Commonwealth Bank was identified in clause 24 of an evaluation conducted by the Roger Gyles QC on 18 November 2011.[28] This evaluation further states that not only was the banks data inaccurate but that Commonwealth Bank officers knew of these inaccuracies. Separate analysis revealed the extent of the CBA data errors and how integral these errors were to the significant losses that Storm clients suffered.[29]
On 8 December 2008, the Commonwealth Bank sent a letter[30] to all of its Storm clients who found themselves in negative equity (according to CBA data which was faulty)[31] as a consequence of falling markets and the banks failure to issue clients with a margin call notice. The lack of information meant that clients were unable to transact on their portfolios with confidence consequently resulting in significant losses.[26] The CBA letter to Storm clients further incorrectly states that Storm was the sole manager of the clients margin loan throughout the period. On 24 December 2008 the Federal Court of Australia found that Storm had proved, to the requisite standard of proof for interlocutory injunction, that the CBA had engaged in conduct that was, in contravention to the Corporations Act 2001, misleading or deceptive or likely to mislead or deceive.[32][33]
The Commonwealth Bank then issued a letter on 9 December 2008 to its Storm clients that were sold out of the market allegedly on the instructions of Storm’s CEO, Emmanuel Cassimatis. This letter repeated elements of CBA’s 8 December 2008 letter as well as alleging that Storm provided instruction to the bank that the CBA / Storm portfolios of all margin lending clients with an LVR greater than 90% be fully redeemed.[34] Material elements of CBA’s letter of 9 December 2008 was also found to be deceptive and misleading by the Federal Court of Australia.[32][33]
On 17 December 2008, the Commonwealth Bank sent a generic letter to all its Storm clients further reinforcing the banks message of 8 and 9 December 2008 that Storm was the sole manager of the clients margin loan and further adding that Storm was “completely responsible for your [the clients] financial position…”.[35] Once again, the Federal Court of Australia found to the standard of proof for interlocutory injunction that the assertions by the Commonwealth Bank were deceptive and misleading.[32][33] Unfavourable findings for the Commonwealth Bank were brought down on Wednesday 24 December 2008 by Justice Greenwood in the Federal Court in an interlocutory action brought about by Storm Financial.
Furthermore, following these unfavourable findings, the Commonwealth Bank on the next available business day after the Christmas break being Monday 29 December 2008 issued notices of demand to Storm Financial calling up Storm’s entire commercial facilities.[22][24] The ultimate consequence of the banks demands was to force Storm Financial into administration on 9 January 2009 ‘coincidentally’ being the date that Justice Greenwood had set the matter down for mention for the purpose of setting a trial date with the Commonwealth Bank being the defendant.[33] Storm being forced into administration by the Commonwealth Bank had the desirable outcome that the bank avoided trial.
The Federal Court found CBA had acted in a misleading and deceptive way, particularly in how it blamed Storm and handled margin calls.
Despite these findings, ASIC primarily pursued action against Storm Financial and its directors, not the banks.
CBA settled claims with many clients without admitting liability, and ASIC accepted this outcome.
A 2012 Senate inquiry into Storm Financial sharply criticised ASIC’s weak enforcement and CBA’s conduct, but no prosecutions followed.
Is the FAAA actually going to do anything and seek that The Australian to retract comments and apologise publicly to advisers? Or simply post a comment…
“Unfortunately, it’s hard to imagine exactly what further imposts on financial advisers could have curbed this kind of behaviour.” Really? Maybe those underlings involved in this scandal could have grown a backbone and said something? You do know that one of the directors sent $240mn overseas unchallenged? The ‘industry’ as you term it needs to SHOW that it is keeping its house in order. Fingers-crossed won’t work.
Surely the licensee had some inkling
Or the AIOFP who they were members of
How do you expect those underlings to actually know that?
I would suggest that this is job of accountants…. Notably auditors.
Victims reported the behaviour to the licensee (Interprac) who continues to choose to ignore it by currently (still) licensing a business who switched us into the Guardian fund with no advice and yesterday I get an email from Netwealth to say my superfund balance has dropped from over $200k to zero balance – because this business switched my investments without advice, without my agreement and then a couple of weeks later sold me as a client to Future Egg – turns out they likely could sell us for more if we were already switched when sold to future egg.
Interprac continue to let this business operate and they are actively recruiting more and more clients, charging exorbitant fees and switched without advice into unsuitable products.
Even months after being given the emails, evidence etc… Interprac still licence and support this business to continue to rip money off everyday Australians – I just checked the ASIC Professional Registers. It’s one thing for Sequioa and Interprac to say they didn’t know, and they took action as soon as they knew. It’s another completely when they know, and have known for months, and fail to do anything about it. CSLR should not have to reimburse losses incurred after the licensee is aware of the issue and takes no action – especially when they choose to put their head in the sand and ignore it.
Just remember the ALP gave us the CSLR despite clear and multiple warnings regarding the inequity of it.
But they of course knew better. As did all the other “Canberra Experts”.
The Minister who is responsible for the mess has left parliament and seems to have taken a pretty nice job in Europe.
Meanwhile, we’re sitting here dealing with the ‘hot mess’.
ALP out.
The mainstream media’s predictable framing of the Shield and Guardian failures as an indictment of “the entire financial planning industry” signals the opening salvo in what will inevitably become a coordinated campaign for further regulatory intervention. With The Australian’s inflammatory headline already setting the narrative, we can expect industry super funds and their powerful allies and well-funded lobby groups to weaponize this crisis for their own ends, pushing for restrictions that would further consolidate their market position. The hypocrisy is stunning when we consider ASIC’s track record—the regulator knew about Dixon Advisory for years before its spectacular collapse yet failed to prevent hundreds of millions in losses. Now we’re expected to believe that the entire advice profession somehow shares collective responsibility when ASIC itself identified only five licensees out of approximately 1,700 as being involved. Blaming “the industry” when the regulatory watchdog repeatedly fails to act is akin to holding the neighborhood watch responsible for crimes the police ignored. The FAAA faces a critical test in defending the profession against this narrative, but their historical reluctance to mount full-throated defenses leaves little confidence they’ll rise to the occasion.
The immediate casualty will be InterPrac and its parent Sequoia, whose authorization of Venture Egg represents such a catastrophic oversight failure that their survival is virtually impossible. Their likely collapse will send shockwaves through the profession, triggering an unprecedented flight to quality. This exodus will reshape the entire advice landscape, accelerating consolidation toward licensees with the resources, processes and commitment to prevent such disasters. The bitter irony is that while honest advisers will pay increased CSLR levies and face new regulatory burdens, the managed investment scheme ecosystem that enabled these failures—the platforms, research houses, and lead generators who collected over $100 million—will most likely escape unscathed. The profession now faces a perfect storm: media vilification, regulatory overreach sponsored by vested interests, and the seismic disruption of losing one of its largest networks, all while being forced to pay for failures that a handful of poor and bad actors created.
In my opinion:
Perhaps the consumer advocate who posted the link to the article on the weekend may wish to clarify their position as to whether they agree with the article’s content regarding advisers.
If not, is it therefore fair to raise questions regarding the positioning of the consumer advocate?
As advisers, we’re expected to use data to prove fact, shouldn’t the same idea apply?
15,300 advisers should not be subjected to the power and influence of institutions who don’t use data to back their claims.
Tells you a lot about the consumer advocates opinion of financial advisers.
How can the financial advice profession have trust and confidence in these advocacy institutions that have large influence over advice?
I’m filthy on this one.
When a rogue Doctor or Lawyer or Accountant ends up in the media, the message is that they were a bad egg, terrible person, etc – the media don’t start slandering ALL Doctors/Lawyers/Accountants… so why do they do that to us?
Because it’s easy. That’s why.
Maybe we’re moving into a world where professional advisers have had enough of being unfairly kicked in the teeth and will actually fight back properly.
No other profession tolerates the crap advisers do, so why should we?
Because we are still not seen in the same light as Doctors and Solicitors.
We are still recovering from dodgy practices during that came to light dueing the GFC, and the Hayne Banking Royal commission.
We need to advocate, and clearly be seen calling out bad advice when it comes across our desk, and have opinion pieces like what Sarah has done refute tabloids like the Australian and other press.
This never changes. If some rogue does the wrong thing, we all get the blame. The drunk-driver analogy you use is totally apt!