The sheer scale of the most recent fund failures is making it impossible to ignore, with a combined $1 billion in client funds at risk between the Shield and First Guardian funds – and that’s before the Australian Fiduciaries and Brite Advisors cases get thrown in.
It is, as ASIC chair Joe Longo described at the Financial Services Council’s (FSC) Shaping Advice event in Sydney on Wednesday, indicative of an “insidious” problem.
“The problem obviously isn’t financial advice itself, or super platforms, or marketing,” Longo said.
“There is a significant pot of money in our super system that bad actors are trying to exploit, on an industrial scale. We’ve all seen the numbers on Shield and First Guardian playing out. More than $1 billion invested by over 11,000 people. Our priority has been to preserve assets so that they can be realised for investors, but even with this action, it is unlikely every investor will be made whole.”
Echoing the regulator’s recent messaging on these firm failures, he stressed that while bad financial advice is “obviously a key part of this problem”, it’s far from the only one.
“There are a whole range of other entities that are involved in this process that we’re looking at – for example, the lead generators, the research houses, the superannuation trustees, and the managed investment schemes,” Longo said.
“Because of the number of entities involved, it can be difficult even for experienced investors to spot the problems here and what’s really going on.”
He added: “When we look at these examples, we see that the various players across different sectors each represent just one aspect of the problem – a problem in my view that needs a holistic response from industry, regulators, and from government.”
Also speaking at the event via a pre-recorded video, Financial Services Minister Daniel Mulino signalled that there could be a rethink in how the cost of these failures is covered through the Compensation Scheme of Last Resort (CSLR).
While the financial advice subsector is only meant to cover the cost of bad advice through the CSLR, the practical reality is that when there has been advice misconduct related to a large fund that has gone belly up, the entirety of the client losses is apportioned to the advice.
Regardless of whether the primary area of fault lies with the responsible entity, if an advice failure is attached, the whole CSLR bill gets sent to the advice subsector.
Arguments for this to change have been made since the CSLR’s structure was put in place, but the Treasury review – the release of which appears to be in a constant state of “imminent” – may allow for this to change.
While Minister Mulino made it clear he didn’t want to “pre-judge” the outcome of the review, he acknowledged that he needs to think about the scheme and the ecosystem that might lead to losses.
“I think that we do need to think about this in that way. We do need to think about all the different components of what can lead to investor losses and think about this in a holistic way,” the minister said.
“I think that when my predecessor thought about scams in that way, it was actually very important and led to better outcomes. So, I want to work with the FSC, I want to work with other actors in this industry so that I can get a small understanding of what are all of the levers that need to be thought about.
“Because I expect going forward that if we’re going to deal with this in a way that is sensible and pragmatic, but also that limits losses, that limits how much is going into the CSLR, that we’re going to have to think about a range of actions.”
ASIC stepping up enforcement, wants more MIS power
The multiple high-profile fund failures has led to the regulator not just needing to increase its investigations. Longo said the number of new financial advice-related investigations commenced since last year has doubled – but exposed a blind spot.
According to the chair, instances like Shield and First Guardian require a “whole-of-ecosystem response”, however, he also wants to improve what ASIC can look into.
“Part of the reason this problem needs a collective response is that our data collection powers for managed funds are limited, which means our oversight is too,” Longo said.
He also called the managed investment scheme regime “very permissive”, adding that the “bar is so low to register one, it basically serves no barrier to entry at all”.
“It doesn’t matter if the underlying asset is alpacas or meme coins – if the fund has a valid trust deed and disclosure document, ASIC has to register it,” Longo added.
“And then, so much of our work becomes about picking up the pieces afterwards when things go wrong, rather than preventing the harm – and who pays for that? All the people in this room.”
The MIS regime has long been slated for overhaul, with the most recent attempt languishing despite receiving more than 70 submissions.
Launched in March 2023, the Treasury website for the review of the regulatory framework for MISs still has the findings due in “early 2024”.
Instead, a spin-off inquiry into wholesale investor thresholds put the review on hold – all so that a parliamentary committee could recommend no changes in February this year.
Longo said ASIC is “continuing to advocate” for reform to the MIS framework, however as it looks to work with the system as it currently operates, he called for more action from the “gatekeepers”.
“There’s a reason why we are focusing on the role of licensees in our enforcement work – you are the first line of defence. You must have strong quality controls for your approved product lists,” he said.
“We also expect super trustees to review their processes to ensure new members aren’t being exploited by super-switching business models. You should have processes in place that allow you to identify practices that may result in the erosion of super balances, including from inappropriate advice fee charges.
“You can’t pass the buck by saying, ‘Well, there’s an adviser in the picture, so therefore trustees we have a diminished role.’
“Similarly, if you are a licensee who has engaged the service of a sales referral source, you should have in place adequate monitoring and supervision arrangements to detect concerning conduct and to make sure your advisers are acting in the best interests of their clients.”
In his comments earlier in the day, Minister Mulino said the government needs to “let investigations into those events play out”, but the misconduct appearing to take place across a range of areas means it requires attention.
“I think we need to, in the fullness of time, look at all of those different components and see whether or not regulatory settings are appropriate and sensible,” the minister said.
Nah…far easier to blame the Advisers….
If Advisers working/selling these funds at these firms stayed anywhere from 3 month to 12 months and then left, whilst the Senior Managers, Directors, responsible managers, marketing and Compliance staff stayed anywhere from 24 months to many years who are we going to blame. Can’t blame the reasearchers, the trustee’s of super funds as it’s far too messy.
We’ll just introduce some more red tape for Advisers and all move on.
Yes, you should look at the whole eco-system.
First of all we have SQM Research that rated First Guardian as investable. Then you have super platform trustees such as Netwealth, Equity Trustees, Diversa (Praemium) approving First Guardian on the super investment menu’s. Due diligence is required under APRA Prudential Standard SPS 530 at this step.
Then you have FAAA warning ASIC about the lead generators involved in spruiking First Guardian. This goes unchecked and ASIC does nothing. ASIC allows the First Guardian Ponzi scheme to continue from 2019-2025.
Then using the same business model and tactics such as using investor money for personal expenses the Shield Master Fund is born in 2021. This is again supported by SQM Research giving the fund a Favourable investment rating. Macquarie and Equity Trustees add it to their super investment menu requiring due diligence under SPS 530.
But somehow the gatekeepers at SQM, Macquarie and Equity Trustees have failed their gatekeeper duties and for SQM multiple times! Whilst ASIC could have acted on the FAAA’s warning and intercepted these issues many years ago.
But somehow advisers and the profession is being hung out to dry for relying on the current eco-system of research house ratings, platform trustee oversight and the regulator themselves.
This doesn’t make any sense. ASIC should equally hold the non-advice financial eco-system to account rather than just bashing advisers who have trusted and relied on those gatekeepers in the system.
Yeah, it was the rating. Not the millions of dollars some advisers received under the table, hey?
How does that happen?
It didn’t.
There’s no evidence—nor has ASIC even alleged—that advisers received “millions under the table.” That kind of claim isn’t supported by the investigation or any public findings.
What is known is that fund managers routinely pay research houses (like SQM) for ratings and platforms like Macquarie receive shelf fees to list certain funds. That’s an industry-wide practice and a completely different issue to direct adviser remuneration. If we’re going to critique the system, let’s focus on actual conflicts that exist in the research and platform structures, not unfounded accusations against advisers.
So why would someone make the statement about under the table millions?
You haven’t mentioned the auditors who the gatekeepers rely on. I understand that fictitious returns were produced by the managers. The auditors should have picked that up.
Are you licensed by Interprac?
100%. Ironic though of ASIC saying the super funds and platforms shouldn’t be passing the buck when they are doing exactly that.
Class action of advisers v’s ASIC/SQM/Macquarie/Netwealth….?
Imagine if ASIC shadow shopped the lead generators when the FAAA and advisers first reported Shield. That would have been a simple result. How about if Super Trustees had to flag abnormal inflows to new investment options. I think the regulator should have a bit more self reflection as to their own performance before lumping more regulations on everyone.
I think that it is time for a Royal Commission to investigate ASIC.
No that is a RC many would like to see money well spent provided old mate Hayne does not run it…!
It’s almost like what advisers have being saying all along is that client losses in the majority are due to product failure, not due to advice. Since it has taken ASIC and the government to take decades to work this out despite all the evidence, advisers can look forward to funding these losses for the next few decades via the CSLR tax until they actually do something about it.
Decades….. but have they really worked it out?
I don’t think they have.
In this instance the advisers are very much to blame.
Another interprac adviser I assume?
It’s worth considering that in this case, both advisers and their clients were arguably victims of a broader product failure—not the root cause of it.
The focus seems to be solely on advisers, but where is the accountability from the other parties involved?
SQM Research, which issued a favourable rating despite later governance failures
Macquarie, Netwealth, Equity Trustees, Diversa who approved and distributed the fund on their super platforms
And even ASIC, who received warnings from the FAAA years ago and failed to act sooner
If we’re going to talk about responsibility, it should be shared across all gatekeepers—not just advisers acting in good faith based on approved and rated products.
Good points. If Advisers are going to be held responsible for the investments made, what is the point of have ASFL’s with their approve list of investments, and ASIC also charging a fee each year to monitor (or something) ASFL’s and their representatives? Seems ASIC is charging fees to do the job of ensuring the ASFL’s do their job and turns out only the Adviser is responsible when it all fails? It all seems like Red Tap and Regulation that does not protect the consumer – but does a good job of employing lots of people who are it appears ultimately unaccountable?
No you’ve got that wrong. Many of the Advisers worked at those firms anywhere from 3 months to 9 months. Individuals like Feras Merwhatever, is different ball game.