Shield and First Guardian marketing payments likely illegal: Abood

Lead generation from third-party marketing firms – also known as super comparison sites hounding unwitting consumers into cookie-cutter advice arrangements – is just one link in the convoluted chain of misconduct and failures that has put more than $1 billion of super savings at risk.

Between the Shield and First Guardian, they paid in excess of $100 million to lead generators, including Venture Egg boss Ferras Merhi-owned or linked firms.

Though the exact extent of funds that went Merhi’s way isn’t entirely clear yet, the First Guardian portion appears to be at least $13 million.

When it comes to the role of Merhi and his involvement in both advice and lead generation, Financial Advice Association Australia (FAAA) chief executive Sarah Abood said accepting “really substantial marketing payments” is clearly conflicted.

“We're all very well aware that conflicted remuneration can no longer be paid. We aren't seeing anything in the public domain around this, but it certainly looks to us that these marketing payments were illegal,” Abood said on an FAAA webinar on Tuesday.

“They're illegal to pay, and they were illegal to accept, but we haven't yet seen an ASIC action taken on that basis, or anything in court.”

Indeed, she explained that the first issues that other financial advisers had reported to the FAAA as problematic were related to cold calling and advice firms being involved with the high-pressure sales tactics these third-party marketers employed.

“[They] appeared to be arrangements that might have been designed to avoid anti-hawking legislation because, of course, it's illegal to hawk financial products. Some of these firms that we saw had hired third-party firms to kind of do their hawking for them, if you will,” Abood said.

“I want to clarify: I'm not a lawyer, so I'm not using that term in the legal sense, but it looked to us as if these high-pressure sales tactics were being applied at a remove. We don't believe that's appropriate.

“It's perfectly legal to market your business and to let consumers know that you're there and what you can do. It’s certainly incredibly inappropriate to be hiring high-pressure salespeople, because you can't do the high-pressure sales yourself.”

She also reiterated that the amount of advisers involved in the scandal was incredibly small compared with those doing the right thing, which the CEO had previously stressed in response to mainstream media reporting on advice involvement in the collapses/

“One of the things that I find extraordinary is how few advisers were involved,” Abood said.

“There are only five financial advice firms, at least so far, that ASIC has identified as being involved with these, and a single adviser, a chap called Ferris Merhi, is personally responsible for over 8,000 of the investors who put money into those two schemes.

“So, in an environment where the average clients per advisor is somewhere between 100 and 130, I find that alone extraordinary and I also find it hard to understand how that was possible, how it wasn't picked up earlier that something really odd is going on with this particular adviser.”

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.

Poor advice ‘without a doubt’ involved

Last month, ASIC deputy chair Sarah Court said that while the regulator is limited in terms of the information it can disclose given the ongoing investigations, the “whole area of exploitation” remains an important focus.

“Our primary aim here in the enforcement work that we’re taking is, at least at the outset, to preserve any assets that remain in the schemes so that they can be realised to the extent that they are available for the benefit of the consumers, while we continue our investigative work,” Court said.

“We’ve really invested heavily in these matters, and we have diverted a number of resources from other important projects.”

Importantly, she noted, the investigations are looking at the entire chain, including conduct of the lead generators, the financial advisers, the superannuation platforms, “who we think have a real role here”, and the research houses that “listed these funds as investable”.

Abood welcomed the focus on more than just the financial advice element of the failures, however she stressed that “it's not the case that advice is not at fault here”.

“We've seen some pretty poor advice associated with these two products that have failed. That said, I think we can all agree that the people who are most responsible for this failure are the people who set up the products,” she said.

“In the case of First Guardian – of course, it's still subject to the liquidator and we haven't seen a court case yet, but it appears that it may have been a Ponzi scheme. There's certainly language that the liquidators used in their report that would suggest that.”

The “core issue” remains the product, but the CEO made it clear the profession needs to acknowledge where advice did play a role.

“We saw examples where advice had been given extremely quickly after a lead had been received. Some of that statement of advice was uncompleted,” Abood said.

“We sometimes saw almost entire fact find sections that were not completed, that they had notes there saying ‘client did not provide’ and there was cookie cutter advice in the sense that every client appeared to be recommended the same product, and a product that was focused on property was apparently an inappropriately high proportion of a client's portfolio. All of that we would absolutely consider to be problematic.”

She added: “With a very small number of advisers, we can't allow this to happen again. It's really important that we understand what were the warning signs that we should have seen and acted on earlier, and make sure this can't happen again.”