ASIC flags super curbs after Shield, First Guardian collapse

The corporate regulator has raised the prospect of limiting what super can be invested in, putting restrictions on retail investments in high-risk funds and slowing SMSF rollovers as it warns of industrial-scale misconduct in financial services.

Pictured are Challenger CEO Nick Hamilton and ASIC chair Joe Longo at an FSC event in Sydney. Source: Supplied

The corporate regulator has raised the prospect of limiting superannuation investment options and restricting retail access to high-risk funds, as it warned a root-and-branch response is needed to counter financial services industry misconduct.

ASIC chair Joe Longo took aim at super trustees and advice licensees for their part in the $1bn Shield Master Fund and First Guardian Master Fund collapses, speaking at a Financial Services Council event in Sydney on Wednesday, where he also pointed to the extremely low bar for registering managed investment schemes.

“In our view, if you’re a superannuation trustee, you must undertake sufficient due diligence of new investment options before you make them available to investors … you are expected to check that the product is fit for purpose,” Mr Longo said.

“The same goes for advice licensees. There’s a reason why we are focusing on the role of licensees in our enforcement work – you are the first line of defence here. You must have strong quality controls for your approved product lists.”

Shield and First Guardian were managed investment schemes that collapsed in the last 12 months triggering ASIC investigations into alleged mishandling of a combined $1bn in investor money that is now feared lost.

Shield and First Guardian super members face a grim future following the mishandling of around $1bn.

Macquarie, Equity Trustees and Netwealth hosted the failed funds on their platforms, while InterPrac was the largest licensee involved.

For the 12,000 investors whose superannuation is potentially squandered, it is a painful waiting game as liquidators pore through the Shield and First Guardian wreckages to try and recover some of their money.

Many of these investors were cold called by lead generators using aggressive tactics to get consumers to switch out of their industry funds.

“Australia’s managed investment scheme regime is very permissive. The bar is so low to register one, it basically serves no barrier to entry. It doesn’t matter if the underlying asset is alpacas or meme coins – if the fund has a valid trust deed and disclosure document, ASIC has to register it,” Mr Longo said.

“And then, so much of our work becomes about picking up the pieces if things go wrong, rather than preventing the harm,” he cautioned.

In the wake of the fund collapses, the regulator expects super trustees to review their processes to ensure new members aren’t being exploited by switching business models.

“You should have processes in place that allow you to identify practices that may result in the erosion of super balances, including from inappropriate advice fee charges. You can’t pass the buck by saying, ‘Well, there’s an adviser in the picture, so as trustees we have a diminished role’,” he said.

“Similarly, if you are a licensee who has engaged the service of a sales referral source, you should have in place adequate monitoring and supervision arrangements to detect concerning conduct and to make sure your advisers are acting in the best interests of their clients.”

Mr Longo warned bad actors were trying to exploit Australia’s $4.2 trillion super system on an industrial scale.

“Bad actors wreak havoc on more than Australians’ life savings when they exploit the cracks in the system. They also risk damaging trust in the system as a whole, and precipitating further interventions from policymakers and regulators,” he warned.

Standards for gatekeepers – meaning the research houses, financial advisers, super trustees, and responsible entities of managed investment schemes – need to be higher, he said.

“We need to ask ourselves whether some of the entities involved in this suspected misconduct are adequately captured by existing laws,” Mr Longo said.

In the wake of the Shield and First Guardian collapses, Mr Longo said the corporate regulator is now examining whether financial and professional indemnity requirements are sufficient; whether there need to be limits on what superannuation can be invested in; if restrictions are needed on retail investment in high-risk funds; if the definition of a retail investor is still ‘fit for purpose’; and if the process of rolling over superannuation and creating an SMSF needs to be slowed down.

A further area for reform is the long-running issues in the managed investment scheme sector, he said.

“ASIC and others have been calling for a range of reforms here for almost three decades. Our data collection powers lag global best practice. Other regulators – including the SEC, the EU’s ESMA, the UK’s FCA, and New Zealand’s FMA – are empowered to collect data on managed funds for use by the regulator, industry and consumers. Australia is an outlier here.”

As the regulator probes the financial advisers who put thousands of client super savings into First Guardian and Shield, licensee InterPrac’s parent company Sequoia Financial exited a trading halt on Wednesday following a price query from the ASX.

Sequoia’s shares tumbled close to 30 per cent on Monday after The Australian revealed Shield Master Fund investors unknowingly played a key role in ensuring Sequoia’s $40.5m sale of Morrison Securities succeeded after they were put into the stricken fund by advisers linked to Sequoia through its subsidiary, InterPrac.

Sequoia on Wednesday said it was not aware of any information that could explain the recent trading in its securities and that it was co-operating with ASIC’s investigation.

Originally published as ASIC flags super curbs after Shield, First Guardian collapse