Equity Trustees calls trustee-for-hire model ‘successful’ despite Shield, First Guardian

Equity Trustees considers trustee-for-hire a “successful” model despite the impact of the $1 billion Shield and First Guardian collapse.

In a submission to Treasury’s consultations on trustee obligations which was launched in the aftermath of the Shield and First Guardian scandal, the firm said banning the trustee-for-hire model – which it refers to as the “professional independent trustee model” – would likely lead to “stifled innovation” in the superannuation market.

The submission argued banning the model would eliminate the small APRA fund market, members would be forced to move to a superannuation offer not of their choice, increased costs to some members and would cause APRA to undertake years of extensive work.

ASIC launched a second set of proceedings against Equity Trustees Superannuation Limited, which was the only trustee to have onboarded both Shield and First Guardian onto platforms. 

Although the consultation flagged outlawing the outsourced trustee model, both outsourced and insourced trustees for platforms were implicated in the Shield and First Guardian failure.

Macquarie and Netwealth, both the branded trustee and platform to investors in Shield and First Guardian respectively, have settled with the regulator to remediate investors to their original starting investment position for a combined $421 million.

Equity Trustees and Diversa Trustees both decided to fight allegations of wrongdoing in court.

EQT Holdings managing director Mick O’Brien told investors last year the group was defrauded by the fund managers, however ASIC has contended in legal proceedings the trustee was still responsible for assessing this risk.

Diversa Trustees has applied to the government for a $239 million bailout of First Guardian investors, but Equity Trustees is still considering its position.

The Equity Trustees submission argued there are no material features of a professional independent trustee model that are less effective than the two in-house models and that an independent trustee model prevents conflicts of interest.

The group supported the other consultations, including those for lead generators and managed investment schemes (MISs), and called for other parts of the value chain to see further regulation including financial advisers.

“In addition, we recommend that further regulatory change be considered for financial [advisers] and urge Treasury to consider this aspect of the value chain given their trusted role in the management of the financial futures of families and individuals,” the submission said.

APRA has added license conditions on the trustee that prevents the onboarding of “high-risk” investment options until an independent expert confirms the investment has gone through an improved onboarding process.

The submission criticised these conditions, arguing it will lead to a narrowing of investment choice on platforms.

The submission said trustees should not be required to be the last resort for compensation relating to failures in other parts of the financial system, specifically calling out failures from MISs or financial advisers, arguing it was incompatible with the legislated objective of superannuation.

“This purpose would need to be altered to include the underwriting of losses arising from any part of the financial system,” the submission said.

“Such a proposal is deeply flawed in that it introduces significant moral hazard for other financial system operators, members and regulators given the exercise of diligence and prudence would be obviated by a compensating superannuation trustee.”

Furthermore, the group pushed back against the proposal that would give ASIC the power to direct trustees to commence remediation processes.

“It is likely that they would seek redress through the most expedient mechanism (superannuation trustee capital) irrespective of the cause of the loss,” the submission said.

“As a result, the superannuation system could end up underwriting failures in other parts of the financial system including responsible entities and financial advisers.”

EQT Holdings, the parent company of the trustee, is in the process of potentially divesting its trustee-for-hire arm, having undertaken a strategic review of the business.

EQT Holdings owns ETSL, as well as HTFS Nominees which is in the process of being acquired by HUB24.

Equity Trustees was the trustee for DASH’s Super Simplifier, which hosted Shield, and NQ Super, which hosted both funds.

Investments in Shield and First Guardian grew due to a sophisticated network of lead generators that contacted people who used online “superannuation health check” advertisements before utilising high-pressure sales tactics to refer them to financial advisers.

ASIC acted against the funds over concerns investor money was being misused on high-risk investments, pet projects of directors and personal expenses, leading to the $1 billion collapse of retirement savings.

None of the trustees or SQM Research, which is also being sued by ASIC, have been alleged to have any related party interests with the distribution of the funds, but the regulator has targeted proceedings over alleged due diligence failings.