Navigation: Previous Page | Contents | Next Page
Chapter 9
Concluding comments
9.1
The collapse of Trio Capital was the largest superannuation fraud in
Australian history. Roughly $176 million in Australians' superannuation funds
is lost or missing from two fraudulent managed investment schemes: $123 million
from the Astarra Strategic Fund (ASF) and $52 million from the ARP Growth Fund.
9.2
Trio was the responsible entity for both these schemes, as well as 23
other legitimate managed investment schemes. It was also the registrable
superannuation entity and common trustee of five Australian Prudential
Regulation Authority (APRA) regulated superannuation funds. These funds
invested heavily in the various managed investment schemes.
9.3
Significant funds from the ASF and ARP Growth Fund were invested in
hedge funds in the British Virgin Islands. These hedge funds were controlled by
Mr Jack Flader, one of the masterminds of the fraud. It appears that when
the hedge funds collapsed, Australian investors' funds disappeared. However, it
is not clear whether the principal underlying asset of the ARP Growth Fund—a
derivative contract between Professional Pensions ARP Limited (PPARP) and Bear
Stearns—ever existed and had value.
Compensation issues
9.4
Nearly 5400 investors in the APRA-regulated funds that invested in these
schemes received full compensation under the provisions of the Superannuation
Industry (Supervision) Act 1993 (SIS Act). In total, the compensation
package of $55 million represents the largest payout for superannuation
fraud in Australia. It was financed through a (prepaid) levy on all APRA-regulated
superannuation funds.
9.5
The committee views this levy as an appropriate mechanism in a
compulsory tax preferred retirement savings system, where individuals rely on APRA's
prudentially regulated and licensed trustees. The levy results in minimal cost
to the totality of superannuation savings and is critical to maintaining
ongoing confidence.
9.6
There were around 690 direct investors in the ASF who are not eligible
for compensation. Of these, around 285 investors were in self managed
superannuation funds (SMSFs). The SIS Act excludes SMSFs from financial
assistance where certain superannuation entities have suffered loss as a result
of fraudulent conduct or theft.
9.7
As this report has emphasised, the committee is extremely troubled by
both the nature and the scale of these losses, and the effect they have had on
hundreds of investors. The committee has received substantial evidence from
Trio Capital investors detailing their considerable financial losses and the
physical and emotional toll of these losses on them and their families.
9.8
However, the committee does not believe it is prudent to protect SMSF
investors from losses to theft and fraud in the way that APRA-regulated
superannuation fund investors are covered under the SIS Act. SMSFs are, by
their nature, different to APRA-regulated funds. They are typically individuals
with considerably more control over their investment strategy and portfolio
than APRA-regulated superannuation fund investors. This control and choice are
the key appeals of SMSFs. SMSFs also avoid the high fees and commissions that
investors in the various industry superannuation funds must often pay. (A
statistical summary of SMSFs found that in 2008, the average operating expense
ratio of the SMSF sector was 0.69 per cent compared to 1.2 per cent for the
whole superannuation industry.)[1]
9.9
These benefits of investing in SMSFs come with attendant
responsibilities, one of which is to be alert to the risk or fraud and theft.
Unlike APRA-regulated investors, SMSF investors do not have a professional
management team to exercise this caution. As chapter 3 of this report
discussed, a compensation scheme for SMSFs would in effect expose all SMSF
investors to poor investment decisions and a lack of prudence by other SMSF
investors. A levy on SMSFs as part of a SMSF compensation scheme could be
substantial.
9.10
Nonetheless, the committee does consider there is merit to investigating
a scheme that places a levy on managed investment schemes to compensate SMSFs
in the event of losses by reason of fraud and theft on the part of the
responsible entity. A proposal along these lines should be considered as part
of the current review of compensation arrangements for consumers of financial
services.
9.11
The committee recognises that this scheme, if conceived and implemented,
will be too late to assist those SMSFs that have lost substantial sums in the
Trio Capital collapse. However, it urges the government to investigate the
possibility of compensating investors in the ARP Growth Fund. As this report
has noted, these investors were induced by Mr Paul Gresham to remove their
money from a Pooled Superannuation Trust—which is regulated under the SIS
Act—to invest directly as a SMSF in the fraudulent ARP Growth Fund. It may be
that they are eligible to receive compensation.
Pursuing the funds and the criminals
9.12
The committee also reiterates that more must be done to investigate
whether the missing Trio funds can be recovered, and to pursue criminal
investigations into the key figures responsible for the fraudulent overseas
Trio funds. To this end, the Australian Securities and Investments Commission (ASIC)
must provide all necessary funding for PPB Advisory to pursue its investigation
to a full conclusion. Mr Flader's evidence must be part of this investigation.
The committee also questions whether an enforceable undertaking is the only
sanction that Mr Gresham deserves. It shares the surprise and
disappointment of several submitters that this has been his only punishment to
date.
9.13
The conduct and involvement of the Wollongong-based Mr Ross Tarrant in
advising 220 of his clients to invest in the ASF was clearly different to that
of Mr Gresham. Mr Gresham had had contact with the perpetrators of the
fraud since at least 2003. Mr Tarrant was not aware of the fraud. Nonetheless,
Mr Tarrant was paid hefty commissions by recommending Trio to his clients.
9.14
As this report proposes, the committee emphasises the need for ASIC to investigate
financial planners and accountants' advice to SMSF investors in Trio Capital.
The committee welcomes the imminent reform of the financial advice sector
through the implementation of the Future of Financial Advice (FoFA)
legislation. It notes that some of the financial advice given to Trio clients
may have been in contravention of the 'best interests' test and conflicted
remuneration provisions of the FoFA legislation.
The regulators
9.15
The committee is concerned that the two key regulatory agencies—ASIC and
APRA—did not identify and pursue the Trio fraud until after Mr Hempton had sent
his alert. Between 2004 and 2009, APRA conducted no fewer than five prudential reviews
of Astarra Capital. However, these did not lead to any action. Moreover, the
reviews were primarily motivated by a concern with governance related matters,
rather than the events that laid the platform for the fraud to occur: the
purchase of Tolhurst in 2003 and the replacement of the Trust Company as the
trustee of Professional Pensions Pooled Superannuation Trust in 2004 (see
chapter 2).
9.16
As chapter 4 also noted, APRA's response to Trio's inability to value
the assets of the relevant funds in 2008–2009 was far too slow. The committee
is critical of the apparent lack of communication between APRA and ASIC on this
issue. When ASIC commenced its investigation of the hedge funds in June 2009,
it did not seem aware that Trio was not providing APRA with basic facts about
the existence of assets and their value.
The responsible entity and the gatekeepers
9.17
This inquiry highlights the importance of the regulatory framework governing
managed investment schemes. The effectiveness and the efficiency of this
framework to identify and investigate fraud, built as it is on compliance
requirements and a series of gatekeepers, have been brought into question.
9.18
A key part of that system is the single responsible entity. The purpose
of this single entity was to establish a single point of accountability to
investors for the management of assets, instead of a system where both the
manager and the trustee were accountable. Chapter 5C, subsection 601FC of the Corporations
Act 2001 establishes the duties of the responsible entity. Chapter 5C also
establishes a supervisory structure of compliance plans and compliance
committees to ensure that follows the rules set out in the managed investment scheme's
constitution.
9.19
The strength of single responsible entity regime is its clean lines of
accountability. With some notable exceptions, most submitters supported the
regime primarily for this reason. However, the system can falter when the
responsible entity stalls and deceives. In these circumstances, as the Trio
case amply demonstrates, there are various points of systemic weakness relating
to the role of the regulators, the auditors, custodians, research houses and
financial advisors.
9.20
The story of Trio Capital's collapse is one of misplaced trust. Banks,
acting as custodians, trusted the information they were provided by the
responsible entity. The internal and external auditors also trusted the
financial information given by Trio. Research houses are not required to check
the underlying assets of the financial statements they rate. Financial
advisers, with their limited resources, rely on the various gatekeepers to
establish the veracity of the funds they recommend to clients. The clients, at
the end of this chain, often lack the time, knowledge and resources to verify
the worth of the funds in which they invest.
9.21
The regulators, custodians, research houses and financial planners all
expressed their frustration at the inability of Trio's internal and external
auditors to verify information in financial statements. The auditors cite the
limitations on their role and emphasise that the primary responsibility for
detecting fraud rests with the responsible entity. The committee strongly
endorses ASIC's forward program to improve the rigour of compliance plans, the
auditing of these plans and the composition and governance of compliance
committees.
9.22
The committee also supports ASIC's work in relation to custodians. The
collapse of Trio Capital has exposed the very limited role of custodians in
Australia. The Trio custodians stated that they do not have the expertise to
question underlying values of either domestic or offshore funds. The committee
believes that ASIC should consider changing the name 'custodian' to a term such
as a 'Manager's Payment Agent'.
9.23
The committee is also concerned that the reports and ratings of research
houses are misunderstood by investors and give false security to investors. It
is important that investors and advisers realise the limitation of custodians'
role.
9.24
Improved oversight of the responsible entities of managed investment
schemes by auditors, custodians and research houses is crucial. However, the
committee also believes that to this end, it will assist if there is a
statutory requirement for a responsible entity of a registered managed
investment scheme to disclose its scheme assets at the asset level. Compared to
the United States and Europe, the level of underlying portfolio disclosure of
managed investment schemes in Australia is very limited. As Mr Shawn Richard
noted:
...if a fund of hedge funds are unable to show the list of
underlying assets purchased by a 3rd party manager, it will always
be very difficult for all relevant parties to make the necessary checks in
order to confirm whether the Australian manager is delivering on its stated
strategy, risk profile and liquidity guidelines as well as detect fraud.[2]
9.25
The disclosure of specific information on portfolio holdings of managed
investment schemes will improve confidence throughout the regulatory system. It
will provide a greater level of assurance for internal and external auditors,
custodians, research houses, the regulators, financial planners and investors
themselves that the investment scheme is legitimate and well-based.
Draft legislation to improve transparency of superannuation assets
9.26
The committee is encouraged that in April 2012, the government released
draft legislation which would require superannuation funds to publish on their
websites details of the assets that the fund has invested in (among other
matters). The draft Explanatory Memorandum states:
Parties who invest assets of an registrable superannuation
entity (RSE), or assets derived from assets of an RSE, will be required to
notify the provider of the financial product that they must provide information
to the RSE licensee that will allow the RSE licensee to comply with the
requirement to publish portfolio holdings.[3]
9.27
The draft explanatory memorandum (EM) gives the case where a RSE
licensee invests the assets of its fund through a custodian into a financial
product provided by 'Managed Investment scheme 1'. Managed Investment Scheme 1 is
a fund of funds, making investments into other managed investment schemes
including a product offered by Managed Investment Scheme 2. The draft EM states
that in this case:
- the custodian must notify Managed Investment Scheme 1 that the
assets invested are those of the superannuation fund;
- Managed Investment Scheme 1 must subsequently notify Managed
Investment Scheme 2 that it is investing assets derived from the assets of the
superannuation funds; and
-
Managed Investment Scheme 2 will have an obligation to provide
information directly to ABC Super that is sufficient to identify its financial
product and the value of ABC Super's investment.
9.28
The committee believes that these obligations are important. However,
they deal with verifying assets between the RSE and the responsible entity of
the investment scheme. As noted, it is also important that SMSF investors are
protected by the responsible entity disclosing its scheme assets at the asset
level to the regulators and gatekeepers.
A final note
9.29
The recommendations contained in this report are designed to enhance the
responsible entity regime by improving access to, and verification of,
information supplied by the responsible entity. It is of particular concern to
ensure a rigorous and efficient system through which to check the presence and
value of the assets of the managed investment scheme. This framework will
enable fraud to be detected more readily by the regulators and the gatekeepers.
9.30
The committee believes that the recommendations contained in this report
will improve understanding among retail investors of the roles and
responsibilities of gatekeepers and in so doing, improve financial literacy
levels. They will focus the minds of investors, regulators and gatekeepers on
the need for a professional scepticism about the funds they are required to
consider.
9.31
The committee views SMSFs as an important and attractive savings vehicle
for those wishing to, and equipped to, exercise personal control over their
retirement savings. The Trio Capital experience does not expose any significant
concerns with SMSFs as a savings vehicle. There are concerns, however, with the
lack of knowledge and sophistication of SMSF investors. There is a continuing
need to improve their financial knowledge and understanding, and the quality of
the advice that they receive.
9.32
The committee also believes that ASIC and APRA must exercise particular
vigilance in their responsibilities to regulate and oversee superannuation
investments and managed investment schemes investing overseas. The Australian
superannuation pot is one of the largest in the world and, given the camouflage
provided by the long-term nature of these investments, is potentially a ripe
target for unscrupulous operators. In terms of managed investment schemes
investing in overseas hedge funds, while they account for only a fraction of
total Australian and overseas investments in SMSFs, they demand the regulators'
full attention given their complexity and cross-jurisdictional nature.
Ms Deborah
O'Neill, MP
Chair
Navigation: Previous Page | Contents | Next Page
Top
|