Action at Last from Regulators on $1 Billion Superannuation Scams

Regulators have decided to come down hard on superannuation scams that have already taken around $1 billion out of the accounts of vulnerable Australians.

Australian Securities and Investments Commission (ASIC) chair Joe Longo said the regulator had doubled the number of investigations into misconduct by financial advisors to send a strong signal that it would not tolerate any actions that reduced confidence in the $4.2b superannuation system.

That confidence has taken a significant hit this year with the failure of the managed investment schemes Shield Master Fund and First Guardian threatening around $1b of superannuation savings belonging to around 11,000 people.

Trustees and platforms in ASIC’s sights

In a sign of how far the ASIC action could go, Mr Longo specifically mentioned investment platforms used by most financial advisers and promised to act against all parts of the investment chain even if they were not the originators of the scam.

He stressed that many of the customers of the failed scheme had remained confident because of the involvement of household names in the super transactions and that all players involved had a strong responsibility to the end customers, even if they were not involved directly in the scam.

A record 40 investigators are now combing through the wreckage of the managed investment schemes Shield Master Fund and First Guardian, which were available on platforms such as Macquarie, Netwealth and Diversa.

Superannuation savers have $1b tied up in these collapses and, even if the maximum current last resort payments are triggered, they are only likely to reach around $300 million, leaving a trail of significant losses.

These losses may be covered further if ASIC finds other parties can be held liable, even if they were not directly involved in the scams.

“If you are a trustee of a super fund, or a responsible entity, your responsibility is through to that end investor, that end member,” Mr Longo said.

Given Mr Longo’s strong language about the collapses, it appears likely action could be taken against many players involved in the investments including investment platforms often used by financial planners and fund trustees as well.

He stressed that trustees had a responsibility to look after consumers.

Lead Generators’ Conduct Under Scrutiny

The ASIC probe into the two collapses is looking particularly at the conduct and payment of lead generators, financial advisers who applied high-pressure sales tactics, platform operators and even the research houses that rated the schemes.

Mr Longo’s comments at a Financial Services Council event in Sydney were the first real indication of wide-ranging action on behalf of the investors, many of whom have been left absolutely stunned by the apparent evaporation of their superannuation savings.

He also said that the sharp rise in misconduct could damage trust in the system as a whole and that further legislative and regulatory intervention is not out of the question.

Redemptions in the funds involved have been paused, directors have had travel restraints imposed and assets have been frozen as authorities scramble to get to the bottom of how much money remains to be returned to investors.

Mr Longo’s comments also suggest that the scope of any rescue payments could be widened to include other players such as trustees, financial planners and platforms.

Conflict of interest at the heart of scams

Mr Longo said conflicts of interest were the nub of the issues with both of the schemes and the whole issue of consumers being encouraged to roll over their superannuation against their best interests needed to be closely scrutinised, with platform trustees needing to have strong strategies in place.

These might include identifying practices that may result in the erosion of super balances, including from inappropriate advice fee charges.

“You can’t pass the buck,” Mr Longo warned.

Among other possible regulatory action could be asking for new financial services licensees to provide some capital to regulators during the approval process to slow down potential new scams and also better compensate consumers in the event of a collapse.