Early UGC First Guardian determinations reveal scale of client losses

The bulk of the attention around the currently unfolding failures of the Shield and First Guardian funds has been on the alleged fraud and the advice from Ferras Merhi-linked firms – whether Venture Egg or those licensed through Financial Services Group Australia.

Similarly, the lion’s share of the focus in the collapse of United Global Capital (UGC) has been on investments into its related party Global Capital Property Fund Limited (GCPF) – which is actually a company, not a managed investment scheme.

However, the confluence between the two is that UGC was also directing clients to invest in First Guardian all the way back in early 2020, with Australian Financial Complaints Authority (AFCA) determinations detailing how a lead generation firm that was also a UGC authorised representative convinced clients to invest in the fund.

At the time of publication, AFCA has made 43 UGC-related determinations publicly available, with three of these cases relating to clients being advised to rollover their superannuation into an SMSF in order to allocate the bulk of their savings to First Guardian Master Fund.

The client detriment in these cases were all above $300,000 and averaged out to almost $350,000.

While the advice from UGC is distinct from that of other firms that recommended clients invest in First Guardian, it is an early indicator of the potential losses to these investors.

The Compensation Scheme of Last Resort’s (CSLR) cap on claims of $150,000 is also bad news for these clients, with the possibility of distributions from the liquidation process the only hope to bridge the gap between the figures.

Further compounding the issue is that many clients may have missed their window to make a complaint to AFCA.

On 31 May, the complaints authority officially expelled UGC from the scheme. The CSLR’s revised actuarial report revealed that 684 complaints were made by that cutoff, however the firm had somewhere in the range of 1,200 clients with potential losses.

As the Federal Court only froze First Guardian’s assets on 27 February this year, just three months before the complaints deadline, it is likely many of the clients that failed to lodge a complaint were First Guardian investors.

Advice issues at UGC

UGC’s so-called “Advice Model”, which the Federal Court detailed in October last year, involved the firm or its corporate authorised representatives (CARs) making cold calls to consumers for a “superannuation health check” and encouraging them to rollover their superannuation into an SMSF and invest their retirement savings in related party products.

“UGC ran promotional campaigns offering prospective clients the opportunity to win an iPhone or similar prize. UGC’s representatives used the contact details provided to contact the prospective clients to offer a ‘free general superannuation health check’. The prospective clients were asked certain questions to ascertain if they were suitable to be referred to UGC,” the judgment said.

“Under the UGC Advice Model, the CARs called prospective clients to ascertain their superannuation balance, the fund it was held in, whether they were working and their age.

“Next, a ‘super specialist’ gave a presentation to prospective clients, the effect of which was to recommend that the prospective clients transfer their retirement savings from their regular superannuation accounts into a self-managed superannuation fund and invest in related entities, such as GCPF, through the SMSF.”

The AFCA determinations also paint a bleak picture for the First Guardian cases, which all found the advice was “not appropriate or in the best interests of the complainants”.

“The financial firm failed to show how the SMSF would meet the complainant’s objectives and adequately explain the benefits and disadvantages of an SMSF,” one of the determinations found.

“The financial firm also failed to adequately set out its rationale for recommending First Guardian compared to other investments. It recommended a high-risk strategy with inadequate diversification and high fees with limited explanation.”

Another alarming element of the advice process is the role of cold calling from a CAR of the firm, referred to in the AFCA determinations as “Company E”.

Based on the period that UGC authorised the lead generation firm – 7 April 2020 to 24 February 2022 – Company E was Empire Wealth Group Australia (EWGA).

Prior to its UGC authorisation, from 17 June 2019 to 12 December 2019 it had been a CAR of Falcon Capital – the responsible entity for First Guardian.

EWGA entered liquidation in March this year and its website has shutdown, however an archived version of the site prominently features UGC, First Guardian Capital and Chiodo Corp, a firm linked to the Shield Master Fund as well as Keystone Asset Management director Paul Chiodo, as its partners.

In one of the AFCA determinations, EWGA was already sending clients to UGC in the gap between its authorisation under Falcon and UGC, however there was already evidence of an agreement.

“The complainant was introduced to the financial firm and its products via a cold call and then a face-to-face meeting with a representative (Ms P) of Company E [EWGA]. The meeting was on 18 February 2020 and Company E was not a corporate authorised representative of the financial firm at this time,” the determination found.

“The complainant says Ms P told him she was promoting a ‘superior superannuation product’ and by moving his superannuation into an SMSF and investing in First Guardian funds, he would receive far better returns than if he remained in his existing superannuation fund.”

During this meeting with Ms P, the complainant completed an SMSF application form that included instructions that the SMSF’s fund be invested 70 per cent into the First Guardian defensive fund and 30 per cent into the First Guardian balanced fund.

According to AFCA, the application form listed Company E as the referrer, provided authority for Company E to give information to the financial firm and made 10 acknowledgements to the effect that:

• Company E and the financial firm were unrelated entities;
• Company E was not operating under the financial firm’s Australian financial services licence (AFSL); and
• neither Company E nor the financial firm were representing the SMSF as being appropriate for the complainant.

“On the same day, the complainant signed a ‘self-managed super fund establishment & statement of advice proposal’, agreeing to pay the financial firm $1,950 to establish the SMSF and $1,000 for a statement of advice. The document did not include any financial product advice for either the SMSF or First Guardian funds,” it said.

“The SMSF was established on 26 February 2020 and the financial firm provided its statement of advice (SOA) two days later, on 28 February 2020.

“Based on the complainant’s submissions and the timeline set out above, I am satisfied the complainant decided (and committed to pay) to roll his superannuation into an SMSF for the purpose of investing in First Guardian funds based on advice from Company E.”

While EWGA was not yet a CAR of UGC, the determination noted that this occurred just six weeks later, “which likely formalised the arrangement that was already in place”.

As such, AFCA found UGC was still liable for EWGA’s advice.

“There is no evidence the financial firm told the complainant Company E was not acting on its behalf,” it said.

“While the acknowledgements in the SMSF application clearly state the companies are unrelated, they do not state there is no agency arrangement between them. I therefore consider there was an agency relationship (either actual or ostensible) and the financial firm is responsible for Company E introducing the complainant to the idea of using an SMSF to invest in First Guardian funds.”