The government has told ASIC to consider whether current financial resource requirements for managed investment scheme (MIS) operators are appropriate, while APRA has warned platform trustees to lift governance standards.
Both proclamations were due to the fallout of the failed Shield and First Guardian master funds.
Minister for Financial Services Daniel Mulino announced on Tuesday he had written to ASIC about MIS resourcing concerns, adding that the government is “considering what other action” needs to be taken to ensure the regulatory system remains fit-for-purpose.
“Australians deserve a dignified retirement, and it is essential that our investment and superannuation systems remain robust,” Mulino said.
“The collapse of certain managed investment schemes has led to investors losing millions of dollars in superannuation savings in the Shield and First Guardian funds. I have met with some of those investors and expressed my deep concern at what has occurred and the impact on them.”
ASIC chair Joe Longo told a recent Parliamentary committee hearing that the government needed to take a fresh look at the rules governing MISs.
The minister also welcomed APRA’s announcement that warned platform trustees to lift their governance standards or face tougher regulatory oversight, after a review in the wake of Shield and First Guardian scandals found some trustees were over-reliant on external ratings agencies for due diligence and lacks systems to flag emerging investment product risks.
The prudential regulator said it has identified “compliance-driven processes” and lax applications of internal standards while some platforms are evaluating and onboarding investment products, and that certain trustees “have significantly more work to do than others”.
“While APRA notes variation in practices across platform trustees, APRA calls on all platform trustees to address any weaknesses and accelerate efforts to lift standards,” APRA deputy chair Margaret Cole said after the prudential regulator published a letter to all platform trustees.
APRA urged platforms to conduct both internal and external research on new investment products in areas like performance and fees, quality of the valuation and liquidity during the onboarding process.
This call for less dependency on research houses came after one agency, FE fundinfo, was found to have kept First Guardian Master Fund as a top-rated product months after the Federal Court froze its assets, according to a Professional Planner investigation.
While the regulatory expectation is clear, the legal duty for platforms around product due diligence could be contested. ASIC previously warned that law reforms will be needed to make that duty clear, should it lose its legal case against Equity Trustees in the federal court for hosting the Shield Master Fund.
While some platforms declined to host Shield and First Guardian funds citing due diligence concerns, including HUB24, Court said she was not aware of anybody notifying ASIC of their worries.
In its letter, APRA said it also wants to see more comprehensive policies to manage conflicts of interest – in cases where trustees onboard an investment product owned by their own corporate group, there needs to be “structural separation” or other measures of control.
Platforms are also expected to conduct ongoing monitoring of emerging risks in investment products, such as performance issues, negative news, unusual fund flows and liquidity problems. APRA said it has observed issues where some trustees set the under or outperformance thresholds so low or high that they are unlikely to ever be activated.
When a product needs remedial actions, APRA said some trustees have no clear plans or timelines for critical issues like member transfer. Some simply close the investment options to new contributions, while existing investors tend to be locked in without resolution for extended periods of time and continue to suffer from underperformance.
The Financial Services Council, which is developing guidance for platforms to understand obligations when operating in a superannuation environment, said it will collect real-life examples that will serves as red flags for its members to consider.
It urged the government to examine other issues such as lead generation services and gaps in the capital and insurance requirements for advice businesses, which it said were laid bare in the Shield and First Guardian collapses.
“The ultimate goal is to lift standards to prevent future harm to investors and consumers and to strengthen consumer trust in the superannuation system,” FSC chief executive Blake Briggs said.
Over $1.2 billion of retirement savings across 11,000 investors are at risk in the Shield and First Guardian saga. Last week, Macquarie agreed to remediate $321 million in super investments into Shield for around 3000 members of the Macquarie Superannuation Plan.
APRA said it will engage with platform trustees individually in next steps to the letter and determine if they have breached any prudential standards, as well as reviewing responsible persons to their core duties under the Financial Accountability Regime.
