Everyone else is to blame: The Shield and First Guardian motto

Little exemplifies the level to which Sequoia is grasping at straws than addressing its “urgent request” for activation of the Operational Risk Financial Requirement (ORFR) regime to Minister for Financial Services Dr James Mulino.

At least Sequoia chief executive Garry Crole used Minister Daniel Mulino’s correct email address.

The level of attention to detail in its plea for the government to take action to remediate the roughly 12,000 affected investors doesn’t bode well for its chances of success.

Also addressed to Prime Minister Anthony Albanese and Treasurer Jim Chalmers, the letter, seen by ifa, details the string of systemic failures that led to these collapses.

“The Shield Master Fund and First Guardian Master Fund failures which appear fraudulent in the case of First Guardian represent more than individual fund collapses,” Crole detailed, adding that they also “expose systemic weaknesses”.

The CEO was clear in who was to blame, citing the due diligence processes by APRA-regulated trustees, ongoing monitoring obligations of approved investment options, responsible entity oversight and auditor independence, platform governance standards across the superannuation industry, and a “regulator who elected not to share information of its concerns with stakeholders”.

It isn’t a bad list, and all of those parties should rightfully be chastised.

However, it’s hard to overlook a fairly significant player in the $1.1 billion disaster that Crole failed to mention.

Licensees.

All told, five licensees had authorised representatives that advised clients to invest their super in one or both of the failed funds.

Sequoia subsidiary InterPrac is the only one that still has an AFSL, with ASIC cancelling the licences of Financial Services Group Australia (FSGA), Next Generation Advice, MWL Financial Services, and United Global Capital.

InterPrac also has the largest potential exposure given it licensed Ferras Merhi and his firm Venture Egg, as well as Reilly Financial and Miller Wealth Group.

However, reading Crole’s letter, you would have no idea that any of the investors were advised at all, let alone how many came through InterPrac-authorised firms.

Looking at the details of the proposal, InterPrac outlined a three-tier approach that involves APRA issuing guidance that the failures qualify as ORFR events that would “provide a very clear regulatory pathway for all trustees to activate reserves”.

Step two is the super trustees deploying their ORFR reserves to remediate their members, followed by the government establishing a “temporary, conditional Commonwealth facility to top-up trustee ORFR where shortfalls exist”.

Again, none of the responsibility for paying back client losses falls on the licensee in this scenario.

The only party that has taken ownership of their role in failing consumers is Macquarie, with the financial giant’s super fund trustee reaching a deal with ASIC to cover the $321 million of investments in Shield from around 3,000 members.

Though even this can be a problem, according to Crole.

“We commend Macquarie for proactively remediating affected members demonstrating both regulatory compliance and ethical leadership, but this has created an uneven outcome,” he wrote.

“Members invested through Netwealth, Equity Trustees, and Diversa face unclear remediation pathways despite identical operational risk circumstances.”

Similarly, he argued: “Given Macquarie has paid 100 per cent of invested capital back to members but no interest payments and would be expected to receive 60 per cent back on the entire balance of Shield at close date rather than capital invested, Macquarie should be asked to use ORFR for interest at 5 per cent.”

So, even though Macquarie is the only party involved to have accepted any responsibility, it should make another payment while InterPrac pays nothing.

Sure, there’s a cynical take that Macquarie only did it because it will get some money back through liquidation and the positive press will keep its reputation strong.

But regardless of motivation and whether any of that is true, there are 3,000 super members who haven’t lost their savings because Macquarie took some accountability.

Crole’s letter coming the same week that Netwealth sought government support to cover its members’ $101 million exposure to First Guardian has merely emphasised that no one can expect the parties involved to own up to their role and take a financial hit.

After all, everyone else is to blame.