Just like in the 1960s, regulators need to get street smart and follow the commission trail to protect Australians from being wiped out

Peter Spencer-Franks is a victim of the collapsed $450m First Guardian Master Fund. Picture: Colin Murty

Australia has experienced massive consumer investment losses for more than sixty years using the techniques that First Guardian responsible entity Falcon Capital applied to suck money from the vulnerable.

And because the technique has been applied so widely over so many decades, it is highly likely that there are more First Guardians in the pipeline.

Over those sixty years, politicians have conceived bodies and acts of Parliament to minimise consumer investment losses. All contributed to a better investment community, but none of them were able to stop people using our traditional consumer milking techniques.

It is true that after the banking royal commission ASIC, APRA and assorted other regulators set up a financial planning education system which was designed to greatly improve the ethics and objectives in consumer investment management.

And there is no doubt that by educating financial planners and setting up proper bodies, the conduct of the financial planning industry in Australia was greatly improved. Indeed, I am currently noticing that in the industry that the vast majority of younger people joining have good ethics and want to perform well on behalf of clients.

A Lamborghini repossessed in the First Guardian funds collapse.

But that doesn’t stop the crooks or those with high risk financial objectives.

Like in investment matters, regulations in other areas don’t always ensure good behaviour.

In childcare we put in regulations and increased the standard of people in the industry, but it didn’t stop child abuse.

Remember the pink batts? Politicians sprayed money to incentivise people to insulate their homes. It was well intentioned and successfully insulated many homes, but the rackets and consumer exploitation were monumental.

Currently, the current solar battery boom will improve home power economics for many people, but it looks like crooks in that industry are emerging and it may be a repeat of pink batts.

Back to investment. The regulators have to understand that it is highly unlikely that First Guardian is an isolated situation. History tells us that once a mouse finds a way through the protective traps, mice follow.

ASIC and APRA need to shed their agendas and bring together qualified teams to look at what is happening to Australian superannuation savings in the real world.

Australia’s traditional consumer savings harvesting system, as well displayed in First Guardian, is simple, easy and effective.

People who control clients’ money are offered big commissions to invest in a particular opportunity that is being cleverly or widely promoted. A multitude of statutory financial assurances are given but in the end, the advisers pocket the money and in this case so did the investment promoters.

The Australian community of liquidators is privately confirming that First Guardian should have been liquidated at least two years ago. The regulators, comforted by the legislation, were not watching.

Let me take you back to the 1960s post a stock market crash.

Like the 2000s and financial planning, Australian politicians believed that the new Uniform Companies Act and its rules on capital raisings would insulate it from the repercussions of crashes. And of course they were just as wrong then as they are now.

A company called Reid Murray advertised debentures widely and consumers responded but there were also big commissions paid to those who could mobilise good debenture money. In those days, of course, superannuation was not part of the scene, but ordinary people were.

Reid Murray was not a dishonest company, but it owned companies that were financed by huge borrowings and eventually the borrowings dried up and it went broke.

Cambridge Credit (also honest) had a similar strategy. It did not fail with Reid Murray but managed to keep going until the early 70s. It kept the debenture money flowing with promotion and high commissions to advisers and was able to record profits partly by swapping assets with a linked company called Savoy.

Of course, those assets included some of today’s top Queensland tourist properties. Again, it was the adviser commissions that were so vital in keeping Cambridge afloat. But its inevitable failure took place.

Then at the end of the 1970s we established the National Companies and Securities Commission (1981) so that we would not have any more Cambridge or similar failures. Next came the great boom of the 1980s with unlimited bank credit and once again there were disasters.

In the current environment it is the regulators’ first task to find out if there are any more First Guardians to be exposed and shut down. But then they need to step back and work out if we can reverse history and find a way to become alerted to high commission payments being paid to people controlling money. History tells us that there probably isn’t a way but I have a suggestion.

As we do now, regulators can set all sorts of rules on how to report, but in the end, if the report is false then no-one is the wiser. Rather it requires street smart people who are right on top of what is happening in the market and will see where big commissions are festering and will chase what is happening to the money — not just by looking at company reports — but by what is actually taking place.

Even then, I am not sure that the mice won’t find a way around the trap, particularly, as years go by, less market-oriented people are appointed to be in charge of regulatory bodies.

Even so it is stunning that the same techniques of the 1960s are still able to be used despite thousands and thousands of regulatory pages.

I don’t know where the next First Guardian is but if I was guessing, there is a good chance that somewhere someone is mobilising money in private lending vehicles offering big commissions to advisers controlling superanuamtion money and offering their clients good investment returns. Don’t suddenly over-regulate private lending or self managed funds. Appoint street smart market-savvy regulators.