Advisers, researchers, investment managers and trustees are in the firing line across the Tasman after the Australian financial services regulator called out flaws in the current regime that have led to “industrial scale” fraud.
Joe Longo, Australian Securities and Investment Commission (ASIC) chair, told an industry gathering last week that the A$4.2 trillion super system was under attack from high-risk product promoters.
There is “a significant pot of money in our super system that bad actors are trying to exploit, on an industrial scale”, Longo told an audience at the Financial Services Council symposium.
His warning follows the recent collapse of two investment schemes, Shield and First Guardian, that have seen more than 11,000 super fund members lose a collective A$1 billion plus: to date ASIC has instigated more than 40 court actions relating to the failures with broad-sweeping investigations underway into all entities involved.
But the recent failures highlight a “more insidious problem” in the super system that would likely require tighter controls for already-regulated parties while bringing more businesses inside the legislated zone.
“We need to be asking what payments are being made to lead generators, financial advisers, and their respective licensees along the way. What links are there between the property developers, responsible entities, and financial advisers? And are our existing conflicted remuneration and conflicts of interest rules robust enough to manage this tangled web? In short, we’ve got to follow the money,” Longo said.
“… It appears to us that we need higher standards for the key gatekeepers in the system – the research houses, financial advisers, super trustees, and responsible entities of managed investment schemes. We need to ask ourselves whether some of the entities involved in this suspected misconduct are adequately captured by existing laws.”
He said the growing prevalence of “bad actors” could ultimately undermine confidence in the Australian super system.
The ASIC wake-up call comes amid a spike in complaints across the advice, super and investment sectors.
“Last financial year, investment and advice complaints rose by 18 per cent. Complaints involving self-managed super funds rose 95 per cent,” Longo said. “And complaints alleging failure to act in the clients’ best interest rose 124 per cent.”
ASIC has doubled the number of new financial advice-related probes over the last 12 months with a similar increase of investigations into managed investment schemes.
In his speech, Longo also flagged some long-held concerns about the Australian investment management regulatory architecture including poor data capture.
“To be frank, our data collection powers lag global best practice,” he said. “Other regulators – including the SEC, the EU’s ESMA, the UK’s FCA, and New Zealand’s FMA – are all empowered to collect data on managed funds for use by the regulator, industry and consumers. Australia is an outlier here.”
And Longo said the threshold for registering investment schemes in Australia is so low “it basically serves no barrier to entry at all”.
“It doesn’t matter if the underlying asset is alpacas or meme coins – if the fund has a valid trust deed and disclosure document, ASIC has to register it.”
Under the trans-Tasman mutual recognition agreement, Australian managed investment schemes can register in NZ with minimal extra disclosure requirements.