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The 'expectation gaps' and some possible remedies
The evidence of chapters 3, 4, 5 and 6 indicates that investors in Trio
Capital were either unaware of, or had different expectations of the remit and
function of the regulators, auditors, custodians, research houses and financial
advisers. In evidence to the committee, these differences were termed
'expectation gaps'. These 'gaps' are as follows:
- first, and most significantly, most Trio investors in
self-managed superannuation funds (SMSFs) seemed not to be aware that their
investment was not protected to the same extent as investments made in Australian
Prudential Regulation Authority (APRA) regulated superannuation funds. This has
been a clear and recurring theme during this inquiry and is of particular
concern to the committee;
- second and related, there is an expectation among investors that
financial advisers will check the investments that they recommend to their
clients, to ensure not only that there are prospects for good returns but that they
are run legitimately;
- third, there is a lack of understanding as to how Australian
Financial Services Licences (AFSLs) are issued. The AFSL attaches to the
company, not the directors;
- fourth, both the regulators and investors have expressed
frustration at the role of Trio Capital's financial statement and compliance
plan auditors, particularly their inability to verify information. The auditors
cite the limitations on their role and that the primary responsibility for detecting
fraud rests with the responsible entity. They note that auditors can only
obtain reasonable assurance that a financial report is free from material
misstatement, whether caused by fraud or error;
- fifth, there is an expectation in the public mind that custodians
will act to protect and secure the underlying investment. By contrast, Trio's
custodian, the National Australia Trustee Limited, has noted that the custodian
does not have the expertise to question underlying values of either domestic or
sixth, there is a lack of understanding as to the claims made in
the reports issued by research houses and in particular, whether the data
provided by the responsible entity upon which these reports are based has been
verified. There is also some confusion as to whether the ratings are intended
as an indicator of future performance, or simply an assessment of past
- finally, Australian Securities and Investments Commission (ASIC)
has noted that, compared to the United States and Europe, the level of
underlying portfolio disclosure of managed investment schemes in Australia is
very limited. Both ASIC and Morningstar have suggested there should be disclosure
at asset level for registered managed investment schemes to help investors
assess both the type of financial products they are exposed to, and the extent
of that exposure.
This chapter discusses each of these gaps and makes several
recommendations. It concludes by emphasising that addressing these expectation
gaps will require a focussed effort on the part of ASIC, the Australian
Taxation Office (ATO) and financial planning bodies, to educate SMSF investors about
the inherent risks and complexities in managed investment schemes. These
efforts must be made in conjunction with the actions proposed in this chapter's
Informing and protecting SMSFs
The main 'expectation gap' in the Trio Capital collapse was the belief
of many SMSF investors that they would be protected from, and compensated for,
fraud and theft. The issue of compensation was considered in some detail in
chapter 3. Chapter 6 noted that many investors expressed genuine surprise and
shock that they did not enjoy the same protections as those afforded to
investors in APRA-regulated superannuation funds. Some were even unaware they
were investing in Trio funds through an SMSF. The committee notes that many,
perhaps most, superannuation investors do not consider whether there is
compensation available in the event of fraud and theft before they choose their
superannuation fund (be it an APRA-regulated fund or an SMSF.
The committee acknowledges the anger and frustration of many SMSF
investors in Trio Capital who were not aware that as an SMSF, they were
operating in a different regulatory environment. The committee considers that,
by and large, the problem was not that these SMSFs were investing recklessly,
but that they were not informed of the risks.
The committee believes there are important steps that should be taken to
remedy this situation. First, and most obviously, there is a key role for the ATO
and ASIC to better inform SMSF investors of their responsibilities, their legal
duties and their exposure to risk. At a minimum, the ATO's website must have a
clear, understandable, large print warning placed on its website explaining
that SMSF trustees are not covered in the event of theft and fraud.
The committee recommends that the Australian Taxation Office include a
clear, understandable, large print warning on its website that self managed
superannuation fund trustees are not covered in the event of theft and fraud. This
warning must be effectively communicated to all existing Self Managed
Superannuation Fund trustees through the guidance material of the Australian
Securities and Investments Commission.
In addition, the committee believes that the guidance material provided
by the Australian Taxation Office must explain the difference between the
regulatory protections offered to members of APRA-regulated superannuation
funds under the Superannuation Industry (Supervision) Act 1993 (SIS Act)
and the limited protections offered to SMSF investors under the Corporations
Act 2001 (Corporations Act).
The committee recommends that the guidance material provided by the
Australian Taxation Office for Self Managed Superannuation Fund investors
clearly state the difference between the protections and compensation
arrangements for investors in funds regulated by Australian Prudential Regulation
Authority as distinct from the limited protections available to Self Managed
Superannuation Fund investors.
Notwithstanding the need for
these warnings and disclosures, the obvious question arises as to whether this
is at all an adequate response to the Trio case. There is a strong argument
that while warnings and guidance materials for SMSF investors in relation to
fraud may alert investors, they will not generally dissuade the investment. For
one, the chances of losing superannuation money to fraud and theft in Australia
remain statistically low. Moreover, when a financial adviser recommends the
investment, the SMSF investor is naturally more concerned about the likely rate
of return than the possibility of theft or fraud.
The committee notes that it is
also difficult to envisage that a website warning or guidance material alone
will lead SMSF investors to conduct the type of forensic analysis required to
uncover a fraud of the sophistication of Trio before being burnt. Even
Mr Hempton 'blew the whistle' well after the fraud had occurred and even
then, was unsure whether there had in fact been fraudulent activity. Put
simply, SMSF investors may not have the time, the insight or the knowledge to
detect complex fraudulent activity.
The issue then becomes how SMSF
investors can be protected in the rare event that they become a victim of
fraudulent activity. On this matter, the committee makes two points. The first
is to reiterate the recommendation in chapter 3 that the St John inquiry into a
statutory compensation scheme for financial services must consider how
compensation should work in investment structures where investors do not have
the benefit of the SIS Act compensation scheme. As chapter 3 discussed, one
option could be to place a levy on managed investment schemes covering SMSF
investors for theft and fraud.
The committee's second
proposal—potentially an alternative to an investment scheme levy—is to allow
SMSFs that want to be covered for theft and fraud protection to do so through
registering with APRA. This process would be subject to all necessary
prudential licensing and knowledge requirements.
SMSFs and the role of financial advisers and planners
It is not surprising that many of those investors who lost money in the
Trio Capital collapse directed their anger and frustration at the financial
adviser, who recommended the investment. Chapter 6 presented these views. Quite
apart from any expectation on the rate of return, investors expect that
financial advisers will recommend an investment that is legitimately operated
and properly regulated.
Following the introduction of the Future of Financial Advice (FoFA)
legislation, financial advisers will have a fiduciary duty to act in the best
interests of their clients and to put their clients' interests ahead of their
own when providing advice. There is also a ban on the payment and receipt of
certain remuneration which has the potential to influence the financial product
advice given to retail clients.
Financial advisers will be required to make full and timely disclosure of
commissions to investors. The provisions will in the future restrict certain
conduct which appears to have been engaged in by advisers in the Trio case and
which at that time did not breach any law.
However these provisions would not protect against a circumstance where
an adviser 'turns bad' and sets out to either defraud his clients, or at the
very least to concentrate on enriching himself while wilfully disregarding the
evidence that the investment scheme into which he is putting his client's money
was fraudulent. In the committee's view this is an accurate description of what
occurred with Paul Gresham. The committee notes that if an adviser chooses to
behave fraudulently or illegally, writing new laws will not add any protection;
what is required is more effective enforcement of existing laws.
The committee highlights the fact that advisers, financial planners and
in the majority of cases accountants, provide a critical entry point on
establishment of an SMSF. It is concerning, on the evidence before the
committee, that many Trio investors were not aware they were not entitled to
compensation. This poses the fundamental question of what advice, if any, was
provided by planners and accountants. The committee is particularly interested in
establishing what advice was given to SMSF investors in Trio Capital by
financial planners and advisers.
The committee acknowledges the Future of Financial Advice reforms,
particularly the provisions addressing conflicted remuneration. Nonetheless, it
recommends that ASIC conduct a specific and detailed investigation of both
planners' and accountants' advice to SMSF investors in Trio Capital. This
investigation must examine what information was provided to these investors
regarding their duties and responsibilities, and whether they were
informed—either verbally or in writing—that they are not entitled to
compensation in the event of theft and fraud.
SMSFs and the role of the ATO
Another aspect of the issue of
protecting SMSF investors concerns the role of the ATO. From the evidence in
chapter 4, it is clear that (in contrast to APRA) the focus of the ATO is not
on the level of risk-taking of SMSF investors, but on ensuring that there is an
investment strategy which is not for the purpose of tax avoidance. In the Tax
Commissioner's own words, 'the nature, effectiveness and risk of their
investment is really a matter for the trustees, subject to certain rules in the
law which say that certain investments are not able to be entered into'.
The key point is that the ATO
does not offer protection for SMSFs. Rather, it is the registration notice
point for SMSFs, ensuring that SMSFs have a clear investment strategy and that
they are not being used as vehicles for tax avoidance. Given this remit, the
ATO is indifferent to the risks of fraud and theft to which SMSF investors are
exposed. It is not its responsibility to minimise these risks.
Australian Financial Services Licensing arrangements
Another point of confusion for many Trio Capital investors related to
AFSL arrangements. Chapter 4 noted that ASIC issues licences to the entity,
rather than the individual. However, as chapter 6 observed, several Trio
Capital investors criticised ASIC for giving an AFSL to Mr Shawn Richard.
As one submitter argued:
By investigating the role of ASIC and APRA you will find that
had they correctly reviewed the licensing application information and PDS
documents and undertaken Due Diligence and applied correctly their Duty of Care
then Shawn Richard would never have been given a license and as a result Trio
Capital would not have been established. As a final outcome the investors would
have been protected from the eventual fraud.
Mrs Fay Gammel made a similar observation:
Why were Financial Licenses issued by the Regularity (sic)
Authorities when the past history of a number of these operatives was known to
be "dodgy"? Mr Shawn Richard seems to be a typical example.
There is a clear expectation that undesirable elements should be kept
out of the financial services sector through tighter regulation of licenses.
However, as ASIC noted in its submission, there are limitations in the current
ASIC's ability to protect investors by restricting entry
into, or removing participants from, the financial services industry who might
cause or contribute to investor loss is limited under the current FSR [Financial
Services Regulatory] regime. This is because the current FSR regime:
- sets the threshold for obtaining an AFS licence relatively low
and the threshold for cancelling an AFS licence relatively high; and
- focuses on the licensed entity rather than the directors,
employees or other representatives.
The committee draws attention to the discussion in chapter 4 on the
reforms to ASIC's licensing powers contained in the FoFA legislation, which passed
in the House of Representatives in March 2012. The Bill would amend the
relevant sections of the Corporations Act to give ASIC greater discretion in
granting and cancelling AFSLs. Chapter 4 noted ASIC's comment that had these
provisions been in place when the Trio fraud was happening, 'it may well have
enabled ASIC to act at an earlier stage'.
This will come as no consolation to Trio Capital investors. Nor will the
FoFA amendments change the current situation of an AFSL attaching to the
business, rather than individual directors. As chapter 2 noted, Shawn Richard,
Cameron Anderson and Matthew Littauer, through their indirect control of Wright
Global Asset Management, acquired the reputable funds manager Tolhurst (later
AFM) in November 2003. ASIC issued Tolhurst an AFSL in March 2004 as part of
the new licensing regime, thereby making Mr Richard, Mr Anderson and
Mr Littauer the directors of a company with an AFSL.
In the committee's opinion, the Trio case does reflect a problem with
the current licensing system. The fact that ASIC does not make checks when
there are changes in ownership of an AFSL creates a loophole for a would-be
criminal syndicate looking to acquire a reputable company holding an AFSL.
The committee recommends that the government consider whether current
processes are adequate when there is a change of ownership or control of a
company which holds an Australian Financial Services Licence, or whether there
is a need for more detailed scrutiny of the new owner.
The role of auditors
A third and significant 'expectation gap' concerns the role of auditors.
The views of Trio Capital's auditors—WHK, the external auditor and KPMG, the
internal auditor—were canvassed in chapter 5 of this report. Chapters 4 and 6
presented criticisms of their roles by ASIC and APRA, and by Trio investors.
As discussed in chapter 4, the main theme of APRA's evidence to the
committee was that, in a case like Trio, it is reliant on auditors to check the
accuracy of the information that is supplied to it. APRA noted that in 2007 and
2008, the fund received 'an unqualified audit sign-off'.
ASIC also offered pointed criticism of the role of the auditors in the
Trio case, but noted that this was due to systemic failure. As ASIC's Chairman
told the committee, 'there are checks and balances that we felt were built into
the managed investment scheme (MIS) system that are just not working the way
perhaps it was contemplated originally'.
Chapter 4 outlined ASIC's views on possible reforms to enhance the
effectiveness of compliance plans and compliance committees.
Chapter 5 noted KPMG's view that there is an 'expectations gap' between
what the public believe he work of a compliance plan auditor to be, and the
work that by law the auditor is required to perform. Specifically, it argued
that stakeholders often have erroneous expectations that: auditors are
primarily responsible for the preparation and presentation of financial statements;
that 'clean' audit opinion provides absolute assurance over the accuracy of the
financial statements and guarantees the entity's future solvency; that auditors
perform a 100 per cent check over all items recorded in the accounts; that auditors
are to provide early warning regarding the possibility of a corporate collapse;
and that an auditor's role includes detecting all fraud.
KPMG argued that these expectations contrast with the legal obligations
of the auditing profession. In particular, it noted that auditing standards
require an auditor to plan and conduct an audit to obtain 'reasonable (as
opposed to absolute) assurance' that the financial statements are free from
material error and fraud. This does not mean that auditors are required to certify
or guarantee the accuracy of the financial statements or that the business
model is sound. It added: 'there is a clear opportunity for education and
improving the understanding of the public at large as to the nature and scope
of the auditor's role'.
As chapter 4 noted, KPMG considered that the expectation gap could be
reduced 'through AUASB and ASIC working together to provide additional
It also argued that there could be greater guidance in terms of standards
relating to the conduct of a compliance plan audit.
The committee is particularly concerned at the 'expectation gap' between
what is expected of auditors and what they are actually responsible for doing.
This 'gap' relates to some fundamental issues. In particular, it is of concern
that auditors' approval of financial statements does not necessarily mean that
the actual assets underlying the financial statements exist. Further, an
auditor's assessment of a compliance plan and the work of the compliance
committee as effective essentially only means that they exist. Clearly in the
case of Trio, the requirement for the auditors to demonstrate 'professional
scepticism' about the information given to them was insufficient to prevent the
loss of investors' funds.
The committee believes that the government should investigate the areas
that ASIC has identified to improve the operation of compliance plans and
compliance committees. In particular, there is merit to the suggestion of an
approval process for compliance plan auditors so that ASIC has the powers to
remove or impose conditions on such approval. In terms of compliance plans, the
committee urges the government to examine ASIC's proposal to review the
effectiveness of the role of these plans and if necessary, require more details
to be provided in these plans. The committee also recommends that the
government consider minimum requirements for compliance committees and the
membership of these committees.
The committee recommends that the government investigate options to
improve the oversight and operation of compliance plans and compliance
committees. In particular, this investigation should focus on the need for:
- more detail to be included in compliance plans;
- qualitative standards by which compliance plan auditors must
conduct their audits;
- liability for the responsible entity and its directors for any
contravention of the compliance plan, rather than only for material
contraventions, as is currently the case;
- legislative requirements as to experience, competence or
qualifications for compliance committee members;
- regulatory or member oversight of the appointment of compliance
- an approval process for compliance plan auditors so that ASIC has
the powers to remove or impose conditions on such approval; and
- governance arrangements to be clearly stated in relation to the
proceedings of the compliance committee.
The role of custodians
The Trio Capital collapse also exposed the limitations of the role of
custodians (see chapter 5). Several submitters noted that the custodian had not
performed its role properly as it had not verified the presence and the value
of the underlying assets, and it had not protected the investment.
ASIC noted in its submission that 'there may be an expectation gap between
what is legally required of custodians and what investors expect the custodian
to be doing to safeguard their investment'.
It drew attention to its current review of custodians and flagged that one
aspect of the review will be to consider whether custodians should be more
proactive in identifying and reporting suspicious matters involving their
Chapter 5 noted the views of National Australia Trustee Ltd (NATL), ANZ
Custodian Services and the Australian Custodian Services Association. All three
drew the committee's attention to the system in which custodians operate,
centred as it is on the responsible entity. ANZ wrote in its submission:
It has been suggested in submissions made to the Committee
that a custodian is required to confirm the existence of a fund's underlying
assets. This is incorrect. The custodian’s role and function, as bare trustee,
is to hold assets on behalf and upon instruction of the RE. Its duty, which is
owed exclusively to the RE, is to act on proper instructions from the RE in
relation to those assets. The role of the RE is to manage the assets of the
scheme, including activities such as investment strategies and valuations. A
custodian does not have discretion to choose whether or not to act on a proper
instruction which is lawfully given by the RE. The custodian has no discretion
regarding the investment or management of the custodial assets.
Mr Leigh Watson, Executive General Manager of Asset Servicing at the
NAB, told the committee:
The custodian simply does not have expertise under the
current regime, because it is not required to, around second-guessing or
valuation of funds. Apart from reporting on values—either from independent
sources, preferably, or from the manager RE who is responsible for that—the
custodian simply does not have the expertise to question underlying values of
offshore or even domestic funds. 
Chapter 5 noted that custodians may only know if the assets for which
they are acting as custodian actually exist when they are asked to redeem the
funds in order to make a payment. In this context, the NAB suggested that the
committee may wish to consider whether there should be an obligation to report
to a regulator if the instructions from the responsible entity carried out by
the custodian found that assets did not exist.
On the evidence before it, custodians appear to have a limited role in managed
investment schemes of the kind conducted by Trio, and by many legitimate
financial services providers. The custodian does virtually nothing to protect
the funds of investors. It makes no independent checks before transferring
money offshore. Instead, the custodian simply acts on the instructions of the responsible
It is the committee's view that there is a clear expectation gap between
what retail investors understand as the role of the custodian and what a
custodian is legally required to do. The committee strongly supports ASIC's
program to review custodian businesses and identify those issues requiring
regulatory reform. In particular, the committee urges ASIC to consider the
safeguards that a custodian could put in place to ensure it able to identify
and report suspicious transfers that do not trigger the anti-money laundering provisions.
In this context, the committee considers that the word 'custodian',
particularly as used in product disclosure statements, is inappropriate. It
urges ASIC to find another term, one which does not give unwarranted
reassurance to investors. One option could be a 'Manager's Payment Agent'.
The committee recommends that as part of its review of regulatory
arrangements relating to custodians, ASIC should consider changing the name
'custodian' to a term that better reflects the current role of a custodian.
This new term—reflecting the limited role of custodians—must be used in Product
The role of research houses
The collapse of Trio Capital has also exposed differences in the way
investors and advisers view the work of research houses on the one hand, and
the reality of how this work is conducted and how it should be interpreted on
the other. There are two issues. First, there appears to be a perception among
investors that research reports and ratings are a comment on future performance
of a fund. This is not the case—the reports are solely an analysis of the past
performance of the investment. Second, there is a reasonable expectation among
investors that research houses will verify the data upon which their reports
and ratings are based. Again, as chapter 5 explained, this is not the case.
As was the case with the auditors, the custodians and to a lesser extent
APRA, Morningstar relied on the information provided by Trio without verifying
whether the data was accurate. This is not to suggest that Morningstar acted
improperly. Rather, it reflects the structure of the system, built as it is on
the responsible entity acting honestly.
The committee notes that ASIC has been conducting a consultation process
with a view to updating its Regulatory Guide on managing conflicts of interest
for research report providers.
A consultation paper was released in November 2011 and the release of an
updated regulatory guide is expected in May 2012. The consultation paper deals
with issues including managing conflicts of interest, the methodology and
transparency of the research and the quality of the research in terms of the
resources devoted to it.
However, there is no mention in ASIC's consultation paper of the issue
specific to research houses and the collapse of Trio; namely, that the data
provided to research houses by the responsible entity is not independently
verified. The committee believes that this is an important issue to consider.
ASIC's planned work on the role of managed investment scheme compliance plans,
auditors and committees would provide important assurances for research houses
that their work is based on accurate data.
Better disclosure by managed investment schemes
The seventh and final 'expectation gap', and possible area for reform,
relates to the disclosure requirements of managed investment schemes. Clearly,
in the case of Trio, there was fraudulent activity perpetrated through the
Astarra Strategic Fund (ASF) and the ARP Growth Fund. The question has arisen
during this inquiry as to whether the regulators, the auditors, the research
houses, the financial advisers and investors themselves would all benefit from
better disclosure by the managed investment schemes of their asset portfolio
ASIC raised the possibility of whether there should be disclosure at
asset level for registered managed investment schemes to help investors assess
both the type of financial products they are exposed to and the extent of that
It noted that currently:
[T]here is no current statutory requirement for a responsible
entity of a registered managed investment scheme to disclose its scheme assets
at the asset level. Therefore, there is no means by which scheme members can legally
require specific information on the portfolio holdings of the registered
managed investment schemes in which they have invested. Absent the responsible
entity providing this information on request of the scheme member voluntarily, investors
cannot assess their exposure to particular assets associated with particular
registered managed investment schemes and take this into account when
considering whether or not they should continue to hold those investments.
ASIC Chairman, Mr Greg Medcraft, raised this issue of the underlying
portfolio level of disclosure in his evidence to the committee. He explained:
At the end of the day, if you think about this system, the
basic premise of the system is about efficient markets, and efficient markets
are about making sure that there is not an asymmetry of information. I think
here that, if you cannot actually find out what is in the underlying portfolio,
it is a key weakness in terms of not having that information available to
Mr Medcraft elaborated on this issue before a Senate Estimates hearing
in October 2011:
My view is that any investor—whether it be in a super fund or
a managed investment scheme—should be entitled to see what the underlying
assets of that fund are. As a former fund manager and banker, I think that
every investor should have the fundamental right, whether it be with a
non-disclosure agreement or whatever, to see what the underlying investments
are. I think it is common sense.
I think that is almost globally accepted because the
investors' one has the most skin in the game; it is their money. From being
overseas and in different markets, I was surprised when I came back to learn
that our level of underlying portfolio disclosure in Australia was very limited
when you compare it to markets like the United States or Europe. I think this
was recognised in the Cooper review, which made recommendations to the
government in terms of having underlying disclosure at six-monthly intervals to
take a picture twice a year and have that available to investors. If we look at
other markets, as I say, the United States has full portfolio level disclosure
of funds on a quarterly basis within, I think, 30 days. It clearly can be done.
It is done in other markets. I think it is quite important. Our system in
Australia is a very open, free system and what we say to investors is that you
have got to take responsibility for your investment decisions. I think that is
consistent that investors taking responsibility should have access to that
underlying portfolio. To that end, we have had very good discussions with industry
groups in terms of looking at perhaps coming up with an industry standard for
portfolio level disclosure. My preference is to see an industry standard
develop in terms of portfolio level disclosure. I think it is actually quite
Morningstar argued the need for greater disclosure and transparency of
Australian fund managers and promoters of investment schemes, and in
particular, 'comprehensive, periodic disclosure of the stocks, bonds, and other
securities that make up the underlying portfolio holdings'.
It also noted that Australia lags behind global best practice in this area.
Morningstar claimed that mandatory disclosure of portfolio holdings would:
[A]ssist researchers, investors, financial advisers, and
other market participants to detect deviation from stated investment mandates.
Enhanced disclosure would also enable parties to gain a greater understanding
of the characteristics and specific risks associated with the assets in which
monies are being invested. The level of illiquid assets in a portfolio would
also be more readily observed. Such disclosure would also provide greater
opportunity for detection of undesirable investment manager behaviours such as
In an answer to a question placed on notice, Mr Shawn Richard acknowledged
that the establishment of the ASF as a fund of hedge funds 'may have allowed
for my employers to take advantage of the lack of transparency that comes with
dealing in the hedge fund industry'.
The committee believes that greater disclosure of portfolio assets would
help to improve monitoring of managed investment schemes, which would in turn
assist in the earlier detection of fraud. It seems likely that had the
regulators and gatekeepers had information about the underlying assets of the
Trio Capital funds, the significant delay in APRA's requests for information in
2009 would not have occurred.
The committee recommends that the government release a consultation
paper to investigate the best mechanism for a responsible entity of a
registered managed investment scheme to disclose its scheme assets at the asset
level. The objective must be to enable scheme members to legally require
specific information on the portfolio holdings of the registered managed
investment schemes in which they have invested.
The committee has recommended in this chapter a number of options to
improve and to investigate the operation of the regulatory framework governing
SMSFs and managed investment schemes. Some relate specifically to Trio; others
relate to broader problems that the Trio collapse has exposed. The committee
believes that all these recommendations warrant careful consideration. The end
goal must be a system that promotes the education and understanding of retail
investors and which enables the regulator and gatekeepers to monitor and detect
fraud as efficiently as possible.
In addition to investigating the options for regulatory reform set out
in the recommendations above, overcoming the various 'expectation gaps' will
require improving investors' knowledge. Clearly, many SMSF investors in Trio
Capital lacked basic knowledge of their responsibilities and the different
regulatory settings between SMSF and APRA-regulated funds. As several investors
have noted, the financial advice they received did not draw their attention to
either the detail of their investment or the operating environment of SMSFs
(see chapter 6). It is important that ASIC does conduct an investigation into
the exact nature of advice to SMSF investors in Trio Capital (see
More broadly, the committee notes that SMSFs have been an increasingly
popular investment option for Australians over the past few years. With this
has come the challenge of educating these investors about their
responsibilities and the risks that come with having greater control over their
investment through a self-managed fund.
The committee encourages ASIC, the ATO and the various financial
planning bodies to focus on providing clear, accurate and well-circulated
advice to SMSF investors through publications, guidance materials and PDSs. The
committee acknowledges that ASIC has produced excellent guidance material, such
as its 'Investing between the flags' publication. It also launched the National
Financial Literacy Strategy in March 2011. Both initiatives are to be
commended. As the superannuation landscape evolves, it is vital that this
information is updated and widely disseminated.
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