The Financial Services Council will ask platform trustees to lift their oversight standards in an attempt by the industry to self-regulate in the aftermath of the $1 billion Shield and First Guardian collapse.
The council released the FSC Standard No. 31 Wrap Superannuation Platform Trustee Investment and Adviser Governance Principles: Standard and Better Practice Guidance on Thursday, which will not only require platform trustees to have stricter oversight controls for onboarding and ongoing monitoring of managed investment schemes (MISs) but also adviser behaviour.
The new standard was created in response to the Shield and First Guardian collapse after the government encouraged the industry to develop proactive solutions to lift standards.
Trustees will be required to verify licensing, AFCA membership, regulatory history and “screen for adverse media” before onboarding advisers or licensees. The guidance will also encourage trustees to inquire into and understand the business models and supervisory controls of the licensee.
By “adverse media” Professional Planner understands trustees will be required to monitor negative media coverage of advisers including ASIC notices or news publications that highlight negative practices from advisers.
Trustees will be required to continue ongoing oversight focusing on monitoring of “concerning patterns” such as high volumes of rollovers, concentration of clients into illiquid investments and a high proportion of clients located in a different geographic region to the adviser – which could indicate dependence on lead generation practices, which was common in the distribution of Shield and First Guardian.
Trustees will be required to have risk escalation tools including document requisition, adviser watchlists, suspending advice fee deductions, restricting new business or offboarding advisers.
Furthermore, trustees will be required to implement controls around the oversight of advice fee consents, conduct random and risk-based reviews of advice documentation and implement controls to prevent member balance erosion such as fee caps.
The standard aims to also protect unadvised clients by making sure investors have limited access to an appropriate investment menu and preventing advice fee deductions where no adviser is involved.
‘A substantial body of work’
The standard comes as the government consults on legislative changes to trustee oversight standards and MISs in response to the failed Shield and First Guardian funds.
ASIC acted against the funds over concerns investor money was being misused on high-risk investments, pet projects of directors and personal expenses. Court proceedings against both funds are ongoing.
However, in addition to commencing legal proceedings against the funds and the advisers tied to the distribution of the fund, the regulator and government have placed the “gatekeepers” – particularly the platform trustees – under scrutiny for failing in their oversight role, which otherwise could have prevented the collapse.
FSC chief executive Blake Briggs said the standard reflects that the industry won’t wait for legislative change but will instead uplift practices within the current legal framework.
“In the wake of the Shield and First Guardian collapses, the industry has responded to the clear calls by the minister and regulators for a concerted effort to achieve platform governance uplift,” Briggs said.
“Consumers should have confidence that superannuation platform trustees are applying scrutiny to each investment option that they offer on their menus while still preserving the flexibility and choice that members value.”
Minister for Financial Services Daniel Mulino said it was positive to see the industry “coming to the table” and developing a set of standards that would uplift governance in the platform sector.
“This is a substantial body of work that will complement sensible regulatory and legislative reforms which the government is currently consulting on,” Mulino said.
The FSC represents the seven largest platforms by market share, representing roughly 85 per cent of platform funds under management: Insignia Financial-owned MLC Expand, Macquarie Wrap, HUB24, Netwealth, AMP North, CFS Edge and FirstChoice, and BT Panorama.
All of the seven, bar MLC, halted new business from InterPrac Financial Planning advisers – the licensee that authorised the advisers responsible for the majority of the flows into Shield and First Guardian – which led to parent company Sequoia Financial Group attempting to offload the licensee for $50,000.
Tighter MIS oversight
Platform trustees will also be expected to do extensive due diligence on product issuers and their responsible entities, as well as the governance and track record of the investment manager and the fees and costs of the investment option.
Trustees would also be expected to conduct active monitoring of investment options rather than a “set and forget” standard, as well as maintain an eye on rating downgrades, changes to disclosure, valuation practices, liquidity or governance. This was another issue flagged post-Shield and First Guardian where the products changed after being onboarded, which flew under the radar of oversight processes.
There will be deeper scrutiny of disclosure, strategy and risk profiles by trustees, particularly relating to mismatches between the stated strategy of the product and underlying asset allocation or broad ranges, as well as unrealistic returns.
Trustees are expected to consider holding limits for higher risk products.
The standard also mitigates the extent to which research house ratings can be used and says they should only be one input into a trustee’s assessment and not replace the trustee’s own due diligence.
The standard will come into full effect in January 2027, with members required to attest to compliance for the period from 1 January 2027 to 30 June 2027.
