The corporate regulator says its legal action against Equity Trustees will set a precedent for trustee obligations and that law reform will be needed if it loses.
During a Parliamentary Joint Committee hearing on Thursday, ASIC deputy chair Sarah Court said the regulator believes trustees have failed in their due diligence duties, a position that will be tested in its action, announced in August, against Equity Trustees for hosting the Shield Master Fund.
“We may win that, then those obligations will be clear,” Court said.
“If we lose that case that’s been contested, that’s another potential area of law reform that may be required to make clear what the obligations of platform providers are.”
The collapses of the Shield and First Guardian master funds have left $1.2 billion in retirement savings of 11,000 Australians in limbo.
The regulator alleges that advice firms received payments from the funds, who in turn used lead generation services to funnel customers into the funds without factoring in their best interests.
However, ASIC has also been scrutinising the due diligence role played by platform trustees that hosted those products as well as ratings houses.
The ASX-listed Equity Trustees announced on 4 September it would defend the ASIC allegations, saying it has acted in line with its fiduciary duties and obligations under the law.
“[Equity Trustees] understands the deeply distressing circumstances for those affected by the misconduct of now banned financial advisers and allegedly fraudulent promoters, responsible entities and managers, and continue to provide access to counselling and wellbeing support and information,” Equity Trustees managing director Mick O’Brien said in the ASX announcement.
ASIC was asked if it knew whether the government would act on any recommendations in its submission into the managed investment schemes MIS review.
Those recommendations included updating the wholesale investor threshold, beefing up retail investor protections and increasing MIS data collection powers.
ASIC chair Joe Longo said he was unaware of what the next steps in the MIS review would be, but called on parliament to take a “fresh look” at the regime.
“These issues are certainly getting a lot of attention at the moment for all the reasons we’re talking about today,” Longo said.
“There are some fundamental issues in terms of its permissiveness, how easy it is to set [an MIS] up and have it registered, the insolvency regime [and] the failure regime around MISs isn’t fit for purpose which isn’t good for investors when things do go wrong. Reasonable minds will differ as to what might need to change… my view is that it does need to be changed there.”
The PJC hearing was held the day before ASIC revealed Longo had informed Treasurer Jim Chalmers he would not seek re-appointment as ASIC chair when his five-year term ends next May. Longo was appointed by former Coalition Treasurer Josh Frydenberg and commenced his role on 1 June 2021.
The ASIC announcement came just minutes before APRA announced deputy chair Margaret Cole had also advised the Treasurer she would leave the prudential regulator at the end of her term on 30 June 2026.
Game of whack-a-mole
In addition to its action against trustees, ASIC has revealed 140 advisers are being examined for their role in the collapse of the Shield and First Guardian master funds, while all licensees that have been listed by ASIC as being involved in the scheme by the regulator have been banned except for InterPrac.
But lead generation services, which ASIC alleges were paid by advice firms with funds from Shield and First Guardian, have also played a central role in the scheme.
Asked by the PJC whether lead generation and cold calling services have been on the regulator’s radar, Court said ASIC has been aware of them “as far back as 2005 when Choice super become available”.
“We did a suite of work into these issues starting around 2020 and have done a range of different campaigns,” she said.
ASIC senior executive leader for financial advice Leah Sciacca said the current lead-generator models have been “more successful” than some others in the past as they grew faster and quicker in size.
But in response to questioning Sciacca said the regulator hasn’t explicitly requested Treasury or the government to ban cold calling.
“We have been engaging with Treasury even more recently around potential law reform that would look to address some of these practices,” she said.
“We have been engaging with Treasury in relation to cold calling and lead generation… but the frequency and nature of those conversations have escalated of late.”
Sciacca said when the regulator did a thematic review of lead generation and cold calling businesses, the models all didn’t look the same.
“The role they play in the broader advice process differs on the different entities,” Sciacca said.
“Some we found were really engaged in the process, others were more marketing-type businesses that were also marketing other products, more generic consumer products.”
Chris Savundra, ASIC’s executive director for enforcement said these various models continuously evolve to get around the law.
“There’s an aspect here of it being whack-a-mole,” Savundra said.
“The model changes because it’s skirting around the law and our regulatory perimeter. We need to look if the lead generator crosses that line into personal advice.
“It becomes unlawful if they’re not licensed, which most lead generators are not… so it requires us to look at each conversation individually – if that’s available. That’s a very difficult and painstaking task to undertake.”
‘Sorry tale’
Senator Jane Hume noted the unfairness to the financial advice profession that would likely be forced to cover the remediation for Shield and First Guardian victims through the Compensation Scheme of last Resort.
“There was a lot of structural gaps in this sorry tale,” Hume said, adding that lead generators and weak MIS oversight were strong elements of the failed scheme.
Legislation for the CSLR was introduced to parliament when Hume was Minister for Financial Services, but the Coalition failed to pass it before Labor won the election in 2022.
Labor initially pushed for MISs to be included in the scheme but backed down when it presented its own bill that passed parliament.
“It’s entirely unsustainable because it is only one component, the financial advice sector, that is sustaining that Compensation Scheme of Last Resort even though we’ve got platforms, investment providers, research houses, MISs and auditors all involved in this process,” Hume said.
“It seems to be just the financial advisers who are kind of at the end of the chain here that are going to end up picking up the tab – and that’s good financial advisers paying for the bad behaviour of a small few.”
Court said the regulator is “acutely conscience” of the impact the CSLR will have on financial advice and is one of the reasons the regulator is working to return money to investors through other links in the chain.
“The financial advice firms that were involved in this model were remunerated very lucratively for the purported advice that was been given, but I’m not trying to cast aspersions on that sector more broadly,” Court said.
“There’s no silver bullet here, the growing pot of superannuation money is attracting more and more dishonest brokers to find ways to get their hands on those savings. The scale of what we have seen in relation to these two funds is causing all of us – regulators and policymakers – to turn our minds to how can we prevent this.”
