InterPrac pursues trustee remediation for Shield, First Guardian collapses

The financial advice licensee at the centre of the Shield and First Guardian managed investment scheme collapses, InterPrac Financial Planning, has moved to tap into the operational risk financial requirement reserves of trustees that hosted the failed schemes on their platforms as a potential source of compensation for clients who lost money.

InterPrac yesterday said it was in the process of issuing operational risk financial requirement (ORFR) activation requests to superannuation trustees which placed the Shield and First Guardian investment suites on their platforms.

“We request that the superannuation trustees immediately declare an ORFR event has occurred, and access their ORFR reserves to remediate every client that has been exposed to these investments,” the firm said.

Australian Prudential Regulation Authority regulated super funds are required to hold an amount equivalent to a certain percentage of assets, depending on the total size of the fund.

The reserve is created by deducting money from the accounts of all fund members and is designed to be a potential resource for trustees to use to compensate fund members in the event of losses caused by fund operational issues, which could include fraud, process errors or failures, and technology issues.

The reserves can be held within the fund itself, or on the trustee’s balance sheet and were brought into effect following the collapse of Trio Capital, when the government was required to provide a grant of $55 million to super funds to make good the losses members suffered.

Funds with assets under $30 billion are required to hold reserves equivalent to 0.25 per cent of assets; funds with $30 billion to $165 billion are required to told 0.2 per cent; and funds with assets of more than $165 billion are required to hold 0.175 per cent.

Accessing ORFR reserves would “benefit every member that has been impacted by investment losses”, InterPrac said.

InterPrac managing director Garry Crole said in a statement the ORFR “demonstrates the foresight and strength of the Australian superannuation system to compensate members swiftly and fairly without compromising system integrity”.

But legal experts contacted by Professional Planner yesterday said that whether the move by InterPrac represented a legitimate use of the ORFR would hinge on the specific circumstances in which a fund member lost money.

Gilbert + Tobin partner Luke Barrett said negligent conduct by an external adviser generally did not constitute an operational risk of a super fund, and would not be covered by the ORFR.

Barrett said an inadequate due diligence process – or a good process that was not followed – of a trustee for approving products placed on a platform may constitute an operational risk; but the collapse of a product on a platform due to fraud or negligence by the fund manager would be “an untested application of the ORFR” and “would be a nuanced question”.

Other sources that spoke to Professional Planner but declined to comment on record shared the same sentiment.

Barrett noted that if compensation were paid from the ORFR reserves of a fund, the reserves would be replenished through a deduction from the accounts of all members of the fund, including those who were not affected by losses and who did not receive compensation. He said the ORFR was not designed simply to compensate members any time they lost money through the normal course of investing or due to market movements.

The APRA prudential practice guide SPG 114 Operational Risk Financial Requirement says there are only three permissible uses of ORFR reserves,

• to address operational risks that could reasonably be considered to have caused or could cause one or more beneficiaries in an RSE within the RSE licensee’s business operations to sustain a loss, or to be deprived of a gain to which they otherwise would have been entitled;
• to to meet the requirements of Prudential Standard CPS 230 Operational Risk Management for the effective management and prevention of operational risk incidents, including the remediation of identified material weaknesses and maintenance of critical operations within tolerance levels through severe disruption; and
• to reduce a surplus where ORFR financial resources are materially larger than the ORFR target amount.

APRA declined to comment on InterPrac’s proposed course of action.