Super members need to be better protected, and Jim Chalmers needs to act now

With $1bn of super savings at stake, Jim Chalmers must turn his attention to the multibillion-dollar sector and act now to protect members.

Jim Chalmers needs to crack down on the super industry. Picture: Tara Croser

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As you are reading or listening to this commentary, almost certainly trusting superannuation subscribers are being ripped off by bad practices.

Superannuation members have already lost about $1.2bn via the crash of First Guardian’s responsible entity, Falcon Capital.

Such events rarely happen in isolation, so other disasters will be taking place. Already a danger alert has emerged. Since the First Guardian revelation, weeks have passed with no government or regulator action to discover other brewing disasters. We must protect confidence in our superannuation movement.

Accordingly, it is vital that Jim Chalmers instructs ASIC or some other regulator to begin a major investigation to determine what other bad activities are taking place.

Jim Chalmers during Question Time at Parliament House in Canberra. Picture: Martin Ollman/NewsWire

Obviously, there are many ways to begin such an investigation, but the first step should be to examine commissions being paid to advisers by superannuation fund managers giving those managers the right to manage the ­self-managed superannuation fund money of the advisers’ clients.

Sometimes it is reasonable for high commissions, but for the most part when they are paid it is a sign of danger and isolates the funds that need to be checked as an immediate priority.

Another dangerous sign is the prevalence of multiple luxury cars being driven by the people behind both the fund manager paying the commissions and/or the adviser receiving them.

When the investigator begins looking at the funds receiving the money, they will of course receive statutory filings that say all is well.

We now know these filings are being used to conceal what is actually happening, so the investigators need to look at exactly where the money is being invested. In some cases, it will be drained into lifestyle-type activities, which is straight forward fraud and relatively easy to stop immediately.

Nevertheless, the losses will normally be greater than those losses covered by government guarantees.

The second area of investigation is more complex. The manager in promising high returns will almost certainly be taking greater risks – dangers that usually have not been highlighted to the superannuation fund members.

For example, the investigators may find that a dangerously high proportion of the funds available to invest may be allocated to a group of high-risk investments, again without a proper alert.

We have just seen a massive mobilisation of private lending to groups associated with Sydney pub baron Jon Adgemis, who is now offering a token sum in the dollar. A whole series of private lending groups invested about $1.5bn in the properties linked to Adgemis. I know it’s a hindsight judgment, but the private lenders were taking what I personally would classify as “over the top” risks.

Pub boss Jon Adgemis. Picture: David Swift/NCA NewsWire

If the exposures were limited, the fund manager has not breached trust. But if exposures to these high-risk exercises are high, it is a dangerous situation and one that the investigator needs to highlight and take whatever action is possible to stem losses, both actual and potential.

The object of the investigation of current operating funds is to isolate fraud and high-risk strat­egies that have not been properly conveyed to superannuation beneficiaries. The investigators then take the required action.

The bad situations that are uncovered will help in setting better rules in the future, but as we have seen in the financial planning legislation, rules don’t stop bad practices.

What is required is a market-savvy and alert set of regulators who are watching the situation carefully. What is happening currently in our regulation bodies is that the people who are being given the job of regulation have backgrounds and skills that are different to what is required. Moreover, they often stray into agenda-driven causes that have nothing to do with proper regulation.

What happened in First Guardian will be useful in appointing regulators with the required skills, but far more important will be to chase down the bad and fraudulent practices that currently will still be in the system and devastating superannuation savings.

Originally published as Super members need to be better protected, and Jim Chalmers needs to act now