ASIC chair Joe Longo believes that there will always be a risk of people losing money to investment schemes like Shield and First Guardian without totally restricting consumer choice.
Discussing the fallout of the failed Shield and First Guardian at a Senate Estimates hearing on Thursday night, Longo was asked for his view on what potential areas of reforms could arise out of the collapse.
This would include a re-think over how managed investment schemes, super switching and super in general is regulated, Longo said.
“Regrettably, the circumstances of people in Australia losing their money through managed investment schemes – if history tells us anything – that will continue to for all sorts of reasons unless there are restrictions imposed on people’s choice,” Longo said.
“Because the role ASIC is cast in is picking up the pieces and what needs to happen is we need more prevention.”
Longo said the losses occurred in what is already a regulated superannuation environment, but at the same time, it was still too easy to register a managed investment scheme.
“We’re a risk-taking investing nation – that’s what being part of a democratic capitalist economy is about and there will always be losses,” Longo said.
“The critical question is if we want to reduce those losses, I think we do need to think about restricting – particularly retail investors – from being able to invest in anything, pretty much.”
Asked whether any of the regulator’s recommendations to the managed investment scheme (MIS) review would have stopped such misconduct, Longo declined to speculate whether ASIC’s recommendations to the review would prevent such conduct but added that a change to the anti-hawking that included solicitation of services – not just product as the law currently defines – would made a difference.
The MIS review was announced by former Minister for Financial Services Stephen Jones in October 2022 as the new Albanese government abandoned its push to include MISs in the Compensation Scheme of Last Resort.
ASIC’s recommendations included updating the wholesale investor threshold, beefing up retail investor protections and increasing MIS data collection powers.
Hard recovery ahead
The collapse of Shield and First Guardian has left $1.2 billion worth of retirement savings of 11,000 investors in limbo after the regulator acted against the funds over concerns with the underlying investments and the use of advisers and lead generation services to funnel consumers into the products without factoring in their best interest while receiving marketing dollars from the funds.
In his opening statement to the committee Longo said there are 24 ongoing investigations into Shield and First Guardian with 40 dedicated staff working on the case.
The regulator has revealed 140 advisers are being examined for their role in the collapse of the Shield and First Guardian master funds and that it has expanded its proceedings against Ferras Merhi who is considered by the regulator to be a central figure to the advice component of the investigation.
Macquarie agreed to a landmark deal with ASIC to return $321 million to investors in Shield on its platform instead purchasing member holdings with the aim to recover what it can from the liquidation of the fund.
Equity Trustees is the other trustee that held the remainder of the $480 million in total invested in Shield but will fight ASIC in court believing it has acted in line with its fiduciary duties and obligations under the law.
But there was an uphill battle for First Guardian investors as Court said that situation was more challenging adding they “don’t want to give false hope, but we don’t want to give no hope to investors”.
“The liquidators are continuing to do their work but it’s clear there is a significant deficiency of funds although they are taking actions against a variety of entities and individuals that are allegedly involved in First Guardian Master Fund,” Court said.
When it comes to alternative methods of remediation, those that had advisers would still have the CSLR.
“For many of those people, their investments would be less than the $150,000 cap in the CSLR,” Court said.
Uncovering misconduct
Pushed on whether the regulator acted fast enough and when it was first made aware of issues with the First Guardian, deputy chair Sarah Court said the regulator had received reports about conduct about selling practices in June 2020, but none of those reports referred to First Guardian as an underlying investment nor did it present any evidence of funds being misappropriated.
Noting reports that the Financial Advice Association Australia had said it flagged the issue with ASIC, which the committee heard was in October 2023, Court said the regulator had received tips they were acting on earlier than that.
“I’m aware there has been some reporting about the FAAA referring issues to us but were well aware of those issues in 2023,” Court said.
Court said they had received reports about the selling practices of Shield in May 2022, but none of the reports highlighted any issues with the underlying investments.
It wasn’t until April 2023 that the regulator received a report for the first time that raised concern about the fund itself.
“We commenced a preliminary investigation later that month and issued notices shortly after,” Court said.
“We did [in May 2023] issue compulsory notices to Macquarie which then led to Macquarie taking the Shield Master Fund off its platform, I think it was in early June 2023.”
Preliminary investigations into First Guardian commenced in February 2024 due its investigation into Shield over concerns of the high flows of advised money going into that product as well.
“We were not on notice about any underlying concerns about that [First Guardian] fund itself until January 2024,” Court said.
Do you remember back around 10 years ago, that retail investment funds had a trustee to hold the cash and investments on behalf of investors and monitored what investment managers were doing with their investment mandate? These trustees were eliminated for Responsible Entitlies (REs). Have Shield & First Guardian failed as REs? What a joke on ASIC eliminating trustees over retail funds!