Sequoia says super fund safety net could offer path to recovery for victims of Shield, First Guardian

An email, titled “Important Update Regarding Your Superannuation Investment” and seen by ifa, was sent to clients of InterPrac-authorised advisers who invested in Shield and First Guardian.

The correspondence states that Sequoia, as part of an ongoing review, has identified that certain clients may be able to pursue “remediation” through a mechanism known as the Operational Risk Financial Requirement (ORFR).

Since 2013, all APRA-regulated superannuation funds have been legally required to maintain an ORFR reserve – described in the email as a “financial safety net designed to protect members from losses that arise due to operation issues such as governance failures or investment menu oversight”.

“You may have noticed small ORFR-related deductions on your annual superannuation statements,” the email reads.

“These contributions are made by all members in APRA-regulated funds to ensure there is a reserve available if something goes wrong that affects member accounts.”

Sequoia added that its “legal and advice teams have made a formal submission to relevant trustees, asking them to consider whether the issues with Shield and First Guardian warrant the use of the ORFR reserve to support affected members”.

“While we cannot guarantee a successful outcome, we believe there is a legitimate case and are committed to advocating strongly on your behalf.”

The email closes with assurances that Sequoia has established a “salaried advice team whose sole purpose is to assist clients like you, both now and into the future”, alongside platitudes such as “You’re not alone” and “We are here to help.”

The correspondence was signed by Ross Phlorides, a provisional adviser who, according to the ASIC register, only joined Sequoia in January this year.

ifa notes that this may not only reflect a steep introduction to financial advice for someone yet to complete their professional year, but could also indicate the level of effort Sequoia is dedicating to remedying investor losses.

Sequoia reiterates support in media release

In response to questions posed to Sequoia, ifa received a media release in which the firm reiterated its commitment to supporting investors affected by Shield and First Guardian towards full remediation.

The release confirmed that Sequoia’s legal and advice teams have formally submitted requests to relevant trustees, while also suggesting Garry Crole, managing director of InterPrac Financial Planning, has an intimate understanding of ORFR due to having served on the board of Diversa Trustees from 2013 to 2016 – “a critical period when the ORFR was enacted”.

“This experience gave him unique clarity on the ORFR’s purpose as a safeguard for members,” the release reads.

Further in the release, Crole himself highlighted the fallout from the Shield and First Guardian collapse, saying it showed “why the financial services industry must protect members whose retirement savings were lost through operational failures”.

“The ORFR demonstrates the foresight and strength of the Australian superannuation system to compensate members swiftly and fairly without compromising system integrity,” he said.

“Use of the ORFR to remediate member losses would reinforce trust in Australia’s wealth management and superannuation industries”, he continued.

“While it is essential that those who misled trustees, research houses, and licensees are called to account, the Australian superannuation system has evolved to safeguard members and those safeguards must be fully utilised".

InterPrac and Sequoia under scrutiny

One of the licensees potentially facing regulatory action is InterPrac – a wholly owned subsidiary of Sequoia – which had authorised Ferras Merhi and Venture Egg until severing ties at the end of May, as well as Reilly Financial and Miller Wealth Group, which allegedly advised clients to invest in one or both funds.

Despite criticism, Crole's statements to date suggest that as a licensee InterPrac was wronged. In a recent webinar, he advised that the firm has taken “decisive action on some breaches of three practices that we had within the network”.

“I worked very closely with the regulator and the clients of those particular practices, and I think that in 12 months’ time, a lot of the noise around that will have played out,” Crole said.

“We’re looking to be very actively supporting the clients of those three practices, and we’ll be announcing some strategies in respect to that in coming weeks.”

Presumably it is as part of that promised support that InterPrac is now issuing ORFR activation requests to the trustees in question.

“We request that the superannuation trustees immediately declare an ORFR event has occurred, and access their ORFR reserves to remediate every client that has been exposed to these investments. This would benefit every member that has been impacted by investment losses,” Crole said on Thursday.

Is ORFR a legitimate pathway?

Under APRA standards, RSE licensees must maintain financial resources to address potential losses arising from operational risks. The required reserve varies according to the fund’s size, operational risk profile, and business operations.

According to its website, a well-managed superannuation fund with an effective risk framework should hold ORFR reserves of at least 0.25 per cent of funds under management (FUM) for funds under $30 billion, 0.20 per cent for funds between $30 billion and $165 billion, and 0.175 per cent for funds over $165 billion.

ifa understands there is no obligation to release these funds, and it remains unclear whether Equity Trustees, Macquarie, Diversa Trustees or Netwealth would deploy them to compensate members affected by Shield and First Guardian.

Reports in The Australian Financial Review on Thursday suggest that Macquarie could be in talks with ASIC to ascertain whether to pay compensation to customers that lost money in the failed Shield Master Fund.

The paper, which attributes the claims to “sources briefed on the talks”, said Macquarie is weighing up a customer remediation plan, but that this would not absolve it of any legal action the regulator may take in the future.

'Seek advice', says AFCA

ifa reached out to AFCA in an effort to understand where ORFR sits within the broader remediation framework, and what guidance it might be providing to clients of Shield and First Guardian.

In response, a spokesperson for AFCA said: "We are aware there are many individuals concerned about how to access redress in relation to the First Guardian and Shield Master Fund collapses. We are continuing to look at this situation, and we are engaging with relevant regulators about actions they are taking.

"This is a complex situation due to the many entities involved, the corporate structures and interrelationships between some of these entities and their respective responsibilities and obligations to the consumers they served."

Noting that these matters are "relevant to AFCA’s jurisdiction", the spokesperson said the commission encourages "anyone who thinks they may have been impacted by the collapse of First Guardian and Shield Master Fund to seek advice".

"They can also lodge a complaint with the financial firm, or firms, they have received services from. All Australian Financial Services Licensees are required to have internal dispute resolution systems in place. Consumers can also lodge a complaint with AFCA."

APRA and Equity Trustees declined to comment on enquiries from ifa.

Equity Trustees' last public statement was in relation to ASIC announcing it had commenced civil penalty proceedings in the Federal Court against Equity Trustees Superannuation Limited, alleging it failed in its due diligence requirements over the inclusion of the Shield Master Fund on its platform.

In response, managing director Mick O’Brien said: “Equity Trustees recognises the deeply difficult circumstances for individuals affected. We have fully cooperated with ASIC’s investigation and are carefully reviewing the claim.

“Equity Trustees takes its compliance obligations very seriously and has robust processes in place to uphold the best interests of members.”