Major firms face pressure to compensate First Guardian and Shield investors
Just $1.6m has been recovered by liquidators from the $450m invested in the collapsed First Guardian Master Fund and any potential distribution, if it comes, is at least 18 months off, a bleak update on Wednesday shows.
We are not talking here about a bunch of speculators who lost money on crypto. These are everyday mum-and-dad investors at the heart of the super system.
As the government mulls how to approach this issue, one thing is for sure. How this saga plays out is going to dictate the terms of compensation in super for decades to come.
As the debate rages over whether the companies involved should compensate those caught in the mess or whether the government should mandate some sort of levy across the sector, many investors do not support a culture of compensation.
After all, the market creates winners who take risks; on the flip side, there must also be regular losers.
If you offer a safety net to every investor in every situation, then the risk of moral hazard appears. In other words, if players know that someone else will step in should everything fall apart, the theory is that you will encourage even worse behaviour in the future.
But the First Guardian and Shield debacle – where a managed investment scheme collapsed – presents a distinct set of circumstances.
By law, every Australian must pay 12 per cent of their salary into super. As a result, there is a reasonable expectation that if you are compelled by the government to take risks in the market, there should be some safety net when alleged rule-breaking prompts losses.
What’s more, the investors caught in this trap were lured and reassured by the presence of some of the biggest names in the investment industry.
The operators at the core of the story were minor and little-known. But Macquarie, Netwealth and Equity Trustees, which were linked to the flow of money into the troubled products, are brand names that comfort investors due to their established track record.
The problem with industry-wide levies that aim to cover losses against this sort of thing is that they are deeply flawed. That is especially so inside financial services, where the Compensation Scheme of Last Resort, bankrolled by financial advisers, is one of the worst examples.
The scheme was created to compensate investors for losses related to companies that went under and were consequently unable to pay anything. However, the CSLR special levy is expected to blow out from $47m this year to $107m by 2027. Meanwhile, advisers complain they are paying not just for the flaws of their peers today but also the misdeeds of others in the past.
As it turns out, Macquarie has jumped the gun by agreeing with financial regulator the Australian Securities & Investments Commission to refund $320m to its customers affected in the scandal. There are many reasons why Macquarie might have done this – the goodness of its heart is perhaps one, but a lesser issue compared to the efficiency of getting the hell out of a debacle when a bank is rapidly building market share with retail investors.
Other key players have taken a different approach. Investment platform Netwealth is asking the government – represented in this case by Financial Services Minister Daniel Mulino – to assist it in any compensation payout by citing a little-known clause in the superannuation laws.
Separately, Equity Trustees is being hauled before the court by ASIC in pursuit of civil penalties due to alleged due diligence failures.
Nobody comes out of this affair looking good.
Asked if other key players should follow Macquarie’s lead, ASIC commissioner Alan Kirkland told The Australian’s The Money Puzzle podcast: “We would like them to do so.”
Certainly, there is now a clear precedent that the companies involved should be the key source of any compensation flowing through to an estimated 12,000 investors. What’s more, there is also clear evidence that industry-wide levies don’t work.
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Plug risky gaps in system: big super’s message to government
Up to $1bn worth of super savings held by everyday investors could be lost in the fiasco surrounding the First Guardian and Shield fund failures. This is the worst investment scandal in decades and the question remains: Who will pay for it?