The collapse of the Shield and First Guardian master funds, in which thousands of consumers have lost their life savings, is a complete disaster for our industry, bringing back the trauma of scandals past including Trio Capital and Storm Financial.
The trust that has been slowly and painstakingly won back by the broader financial services industry since the Hayne royal commission’s scorching is at risk, as is the consensus reached about the importance of winding back red tape in advice to expand access to consumers.
Senior government sources tell this column that the Shield and First Guardian issue is winding its way to the top of the Treasury team’s priorities, inevitably pushing other reforms such as the Delivering Better Financial Outcomes legislation down the list.
Of course the government – and all of us – should be focused on seeking solace and remediation for the victims of this scandal, in which two products with serious issues, from conflicts of interest to allegedly fraudulent performance data and underlying assets, somehow got their hands on the retirement savings of thousands of superannuants.
Given most if not all of the consumers affected by the collapse were (or believed they were) professionally advised, much media and regulatory attention is understandably focused on the advice part of the chain.
To be clear, advisers are fiduciaries and any ultimately found to have given poor advice or been complicit in these misdeeds should be brought to justice.
But any suggestion that the advice profession is wholly or even mostly responsible for this scandal is false and must be negated – especially when it comes to the next phases of this processes and the thorny question of remediation by professional indemnity (PI) insurers and the Compensation Scheme of Last Resort.
While the quantum of financial losses, which sit at an estimated $1.2 billion, in these incidents are significant, it is important to keep the alleged advice failures in perspective. A handful of licensed advisers and advice firms are under investigation by ASIC. A smaller number have already been banned, of which some are in liquidation.
It is understood that there are still more advisers and advice firms to be named by the regulator in this saga but it is unlikely their numbers would exceed those already singled out.
Moreover, an investigation by Professional Planner published on Thursday found some Statements of Advice recommending consumers invest in these funds may have been wrongly or falsely attributed to some of those advisers under ASIC’s probe, introducing the possibility of fraud at the advice end of this story as well.
For context, there are thousands of financial advisers who had access to these funds who did not recommend them to clients. Viewed through this prism, the vast majority of advisers showed they were capable of due diligence when other players seemingly were not.
Professional advice provided to a consumer is clearly an important part of the supply chain through which investment products are distributed in this country – but they are not the only one and they are by no means the most well-resourced or powerful.
Some advisers involved are alleged to have received inducements or benefits for promoting the funds. But putting that serious allegation aside for a moment, technically advisers only had access to these funds because super trustees including Macquarie, Netwealth and Equity Trustees* provided access to them, the latter of which is now the subject of a lawsuit from ASIC over alleged due diligence failures.
These trustees may well see themselves as a neutral tech layer in the industry – a kind of ‘investment supermarket’ not responsible for the consumption choices of its users. But evidently, the regulator does not agree and how the courts feel about that question will set a significant precedent for industry operations.
The platforms were relying on the endorsement of a single research house, SQM, which provided a relatively low but nonetheless investment grade rating to the funds in question. To his credit, SQM founder and managing director Louis Christopher will face questioning about the firm’s role in the incidents at the Professional Planner Researcher Forum in December.
The researcher was relying partly on audits reportedly conducted by a respected accounting firm in at least one of the two funds.
And those audits – and everyone later in the chain – were seemingly relying on performance data from a related party responsible entity in at least one of the two funds which were allegedly fraudulent, based on underlying assets that were problematic or even non-existent.
Failures seemingly occurred throughout the chain, in a shocking demonstration of the buck-passing and box-ticking cultures for which financial services can sadly sometimes be known.
The lack of leadership and due diligence is significant given the major fragmentation of advice business models, meaning a larger number of independent financial advisers are increasingly reliant on third parties who they are paying for information and access.
And then there is the corporate regulator itself.
While ASIC should be commended for looking holistically at the chain and bringing at least one lawsuit against a trustee and not just small business advisers, there are questions about the pace with which it acted on complaints and the tacit endorsement it gave to these products as regulated schemes in the first place.
Regulatory sources say ASIC’s scope is limited to monitoring and enforcing but not ‘approving’ managed investment schemes, especially where they operate within a super trustee and not under a financial services licence of its own.
Perhaps that is one of many flaws in the industry’s construction and legal underpinning and a question for the government.
But at least on a cultural level, if not legal, there is a need for greater accountability and responsibility by all parts of the chain – not just the consumer-facing, advice-producing end of it.
This article was updated on 5 September to clarify that EQT refers to Equity Trustees, not to private equity firm EQT Private Capital.
On the money, as always, Aleks. Why it’s advisers, and ONLY advisers, that end up in the crosshairs over these product failures is getting well beyond a joke. It’s time that ALL those involved, from the regulator on down, were held accountable.
I agree with all the points you’ve made here Aleks.
One question I’d like to raise is whether you and your team have the capacity to undertake more investigative journalism in this space?
Media can be extraordinarily powerful in shining a light on issues that desperately need attention, and in this case, financial services regulation has had little to no impact on protecting consumers from financial harm of this nature.
Instead, the regulatory and political reaction has largely been to layer on more red tape, driving up the cost of giving advice when, in reality, good advice already does, and could do even more, for the community and the economic prosperity of the country. And the best the government can come up with is a Compensation Scheme of Last Resort, forcing all advisers to pay for the misdeeds of a few, as if the high cost of compliance wasn’t already enough.
More directly, why was the Senate Inquiry into the Dixon collapse dropped? That decision goes to the very heart of accountability and transparency in our industry, and it’s exactly the kind of question that demands proper investigation.
An investigative lens that cuts through the buck-passing and exposes where accountability really lies would serve not just advisers, but consumers and the broader financial system.