This chapter examines the various mechanisms of compensation and redress that investors and tenants have explored in relation to the collapse of the Sterling Income Trust (SIT) and broader Sterling Group. The chapter then looks at other proposals that may provide consumers with access to appropriate means of compensation, including the proposed Compensation Scheme of Last Resort (CSLR), as well as defective administration and Act of Grace payments.
Return to investors from liquidation
As outlined in Chapter 2, the Sterling Group and its related entities were placed into voluntary administration on 3 May 2019 and subsequently put into liquidation in June 2019 (except Rental Management Australia Pty Ltd [RMA]). Theta Management Pty Ltd (Theta) was placed into voluntary administration on 13 December 2019 and entered liquidation in March 2020.
In its submission, the Australian Securities and Investments Commission (ASIC) commented that the 'liquidators of Theta and the Sterling Group are currently in the process of realising the companies' assets, and assets of the [SIT]'. ASIC noted that significant assets appeared to include properties owned by Acquest Property and the rent roll held by RMA.
However, ASIC also pointed out that the 'liquidators of Acquest Property have concluded that there will be insufficient funds in the liquidation to pay out unsecured creditors of the company'. ASIC noted 'that the business of [RMA] was realised under a deed of company arrangement and to ASIC's knowledge, no returns were paid to unsecured creditors'. ASIC has advised:
The liquidators of the Sterling Group and of Theta both anticipate little if any return to unsecured creditors and investors. However, this will not be confirmed until the liquidation process is completed. In ASIC's experience, around 95–97% of liquidation reports lodged with ASIC report an estimated dividend of less than 11 cents in the dollar.
That said, ASIC has chosen not to pursue recovery of the $2 million penalty associated with the Federal Court decision against Theta 'as doing so would decrease the funds available for distribution to creditors by Theta's liquidators'.
There may also be civil actions available to Sterling investors across a number of areas relating to rental payment disputes, the provision of legal advice (in relation to rental tenancy issues) and the provision of financial advice (in relation to investment decisions).
However, civil actions are not straightforward, and the Western Australian Department of Mines, Industry Regulation and Safety (WA DMIRS) outlined the predicament that investors of failed schemes, including the Sterling Group investors, face when exploring options for justice and compensation:
While there may be legal avenues available for victims of the collapse to seek redress, these processes are slow and costly and the opportunities to receive adequate compensation may be somewhat limited.
At this stage, there does not appear to be any private legal action in relation to investor losses. ASIC advised that it was 'not aware of any private legal action, whether individually or as a class, being brought in relation to the Sterling collapse seeking compensation for investor losses'. ASIC observed 'that actions available to private litigants in an insolvency scenario are likely to have substantial overlap with actions which would be investigated by a liquidator'.
Disputes between SNLL tenants and landlords
Several civil proceedings have arisen from disputes between landlords and tenants who entered the Sterling New Life Lease (SNLL) scheme.
Two recent decisions in the Supreme Court of Western Australia have considered the operation of the SNLL scheme. The first case involved an action between a landlord investor who rented out his home through the SIT and the tenants who thought they had leased the property for 40 years. The court found that the non-recourse clause in the residential tenancy lease did not operate to prevent the landlord terminating the lease for non-payment. In a similar case, involving a residential tenancy agreement under the scheme, the court also found that the lease could be terminated for non-payment of rent.
The WA DMIRS has indicated that the implications of both decisions will be examined as part of a review of the Residential Tenancies Act 1987 (WA). Mr Gary Newcombe, Western Australian Commissioner for Consumer Protection, told the committee:
This has produced the situation where the court found that the landlord was able to terminate the lease, even though the deed basically said if rent was not paid the tenant was not liable for it, because that was in conflict with the standard-form provisions of the Residential Tenancies Act, which give the landlord the right to terminate a lease for non-payment of rent. But the provisions in the deed which were effective prevented the landlords from seeking to recover unpaid rent.
Advice provided to tenant-investors
Another area of potential civil action could be in relation to the legal advice provided to SNLL holders. Circle Green Community Legal (Circle Green) submitted that it understood:
…that none of the SNL tenants who sought legal advice prior to entering into SNL leases were advised of potential risks involving indefeasibility, superior title, or failure to register or caveat their RT Agreements.
Circle Green also noted that 'none were advised that the residential tenancy agreement would terminate on the death of every tenant, or that as a result, it was not possible for a SNL tenant to leave a [SNLL] in their will to a beneficiary'. It argued:
In our opinion these are serious omissions and it is important that victims of the SNL scheme who obtained legal advice prior to entering into the SNL scheme be aware that they may have claims against their legal advisers. In fact, this is likely to be the best chance of redress for those tenants that did seek legal advice, not only because there is likely to be a viable cause of action, but also because legal practitioners are required to have professional indemnity insurance which indemnifies them against potential consequences of a breach of professional duties.
At the hearing on 15 December 2021, Circle Green told the committee:
…our understanding is that the tenants that we spoke to who did seek legal advice were getting advice from lawyers that had been recommended by the Sterling Group itself. It seems as though the advice was quite brief, from the instructions that we got about what that advice entailed. I can't necessarily speak to exactly what that advice was, because obviously I wasn't there, but there were things that we identified almost immediately upon viewing some of those documents, along with some of the regulatory issues. It's quite a significant omission in the provision of advice.
WA DMIRS noted in response to questions on notice that 'Consumer Protection was advised by ASIC that they would be looking at the role of lawyers in the Sterling Group scheme and would refer any concerns to relevant authorities'.
Professional indemnity insurance
Another option for compensation could arise from civil action against the Professional Indemnity Insurance (PII) policies of financial advisors. PII protects those who operate businesses which provide advice. If a client is unsatisfied with the advice they have been given, they may hold the entity that has supplied them with it as legally responsible for their loss.
However, even in circumstances where consumers have successfully made a claim for compensation against an insurer, this has not guaranteed a satisfactory outcome. For example, in March 2020 the Australian Financial Complaints Authority (AFCA) issued a determination in respect of a Sterling Group investor:
The claim was successful, however an amount of $100,000 was deducted, with the insurer claiming this was the amount of excess stipulated in the policy. Therefore, the actual amount of compensation that was paid was reduced to $18,957.60 from which the liquidator then deducted a $614.60 administration fee.
However, the committee understands that the CSLR would cover instances where AFCA has jurisdiction, a favourable determination has been made, and the financial firm has not made payment, including where the financial firm is insolvent and cannot pay the excess associated with any claim on the firm's professional indemnity insurance.
Both CPA Australia and the Financial Planning Association of Australia (FPAA) have recommended that 'Treasury undertake a government funded thematic review of PII for the retail personal advice sector, focusing on key risks including accessibility, adequacy, exclusions, and impact on capital adequacy of the [Australian Financial Services – AFS] licensee'.
CPA Australia also noted:
ASIC only assesses if PII cover is appropriate for an AFS licensee at time of application or as part of a surveillance activity. In contrast, registered tax agents and BAS agents are required to provide details of their PII policy at time of application and must demonstrate at renewal of their registrations that they continue to hold appropriate PII that meets the requirements of the Tax Practitioners Board.
As such, CPA Australia recommended that 'ASIC require all AFS licensees to submit their PII cover details as part of their existing annual compliance obligations'. It argued that 'ASIC should audit a random sample across market participants to ensure there is adequate consumer protection for the users of financial products and advice'.
Sterling First Action Group suggested that 'current and prospective members of AFCA provide a copy of their current PII policy to be deemed eligible for an AFCA membership'. It argued that '[r]egulatory changes should also be implemented giving ASIC the power to enforce AFCA requests for information'.
Separate to the liquidation process and legal avenues outlined above, many Sterling Group investors were directed to lodge a claim with AFCA, which is empowered by law to make binding determinations requiring financial firms to compensate consumers. ASIC noted that before Theta ceased to be an AFCA member on 9 March 2021, both 'AFCA (and ASIC) had encouraged investors to lodge their complaints against Theta's conduct as soon as possible to preserve any possible remedies in the future'.
The committee notes that not all investors took this advice and only around 30 per cent of investors lodged a claim with AFCA.
AFCA has issued three determinations with respect to the Sterling Group of companies. Two of these determinations found that the promoters of the Sterling Group's rent-for-life schemes had engaged in misleading or deceptive conduct. In both cases, the complainants were told that they were securing a 40
‑year lease paid for by the returns on their initial investment—with no discussion of the risks that would arise if those returns were insufficient to cover the rent. As noted in one determination involving Theta:
Mr M and Mr J's failure to disclose the risks associated with the underlying investment is misleading and deceptive. In particular, they failed to disclose the risk that distributions would be insufficient to cover rent, that the capital investment could be depleted and did not disclose the risk to their security of tenure if the SIT could not fund the rental payments. It is reasonable to expect that the complainants would not have entered into the Lease-Investment Arrangement, had they known about the risks associated with the underlying investment.
Under this determination—described previously in relation to PII—AFCA determined compensation of $118,957.60 was payable to the complainant but only around $18,957.60 was received due to the excess on the PII policy.
In addition, AFCA also issued a determination in relation to a complainant against Libertas Financial Planning Pty Ltd (Libertas), whose authorised representative provided financial advice to the complainant to enter a [SNLL]. As a result, Libertas was ordered to pay the complainant $268,207.57 in compensation and $5,000 for non-financial loss. AFCA's determination noted:
The panel is satisfied that Mr M made representations as alleged by the complainants, and that those representations were misleading. Mr M failed to disclose key risks of the underlying investment.
The committee notes that a third determination issued by AFCA found in favour of the financial firm (in this case Theta) in relation to an investment in SIT units not associated with a rent-for-life lease. While AFCA found that the PDS for the units was misleading, the complainant was not able to establish that he relied on these misrepresentations when making the decision to invest.
As was noted by ASIC, prior to the Australian Government's announcement that it would introduce a CSLR, AFCA and its predecessor schemes would not accept complaints against a financial firm if it was insolvent, as there was no prospect of the consumers receiving compensation. However, AFCA changed this policy on a temporary basis due to the government's announcement that it would introduce a CSLR.
AFCA then paused the processing of complaints against insolvent financial firms on 14 April 2020, while it awaits detail of the legislative introduction and commencement of the CSLR. AFCA's Chief Operating Officer, Mr Justin Untersteiner, told the committee:
The idea is, if and once the bill is passed and the legislation's enforced, we can then review our complaints against the scope of the CSLR, and if we believe that those cases would be from the phase-in scope of the CSLR we would reactivate them and commence work.
In relation to the Sterling Group collapse, AFCA has reported receiving complaints against Theta and Libertas, who were both members of AFCA. At the hearing on 18 November 2021, Mr Untersteiner advised:
We currently have 146 open complaints against Theta, all of which are currently paused because Theta is in liquidation and pending the outcome of the scope of the compensation scheme of last resort. The complaints against Theta predominantly relate to the dealings in the [SIT]. We have 14 open complaints against Libertas.
Under the current rules, AFCA can only make determinations regarding financial firms that are members of AFCA when then complaint is made. ASIC has noted that Theta ceased to be an AFCA member on 9 March 2021. As such, AFCA can no longer register new complaints lodged against Theta.
As noted above, the committee understands that there are several Sterling Group investors who did not register a compliant with AFCA before Theta ceased to be a member. For example, WA DMIRS pointed out that 'a significant number of the victims have not lodged complaints or have actually since withdrawn their complaints, preferring to proceed with actions through the Courts'. WA DMIRS further noted 'that many victims have done so because, in the absence of a CSLR, any determination by AFCA would likely to be unenforceable on a liquidated entity'. WA DMIRS argued:
These victims will now be unable to lodge a complaint, as the relevant financial advisor involved is no longer an AFCA member. Consequently, the victims will be adversely impacted by the exclusion of Court and Tribunal decisions under the proposed CSLR scheme.
CHOICE outlined the injustice associated with not having lodged a complaint prior to the CSLR being announced:
It is a disillusioning experience for victims who have been subject to similar conduct by the Sterling Group to see historical determinations for compensation having been awarded, only for them to now be excluded from accessing justice and compensation.
DH Flinders Case
A further complication regarding access to compensation (and, if eligible, the proposed CSLR) is in relation to those SNLL tenants who invested through the Silverlink product and the advice provided by Libertas.
In November 2020, the Supreme Court of New South Wales handed down its judgment in the case of DH Flinders Pty Ltd v AFCA, which found that AFCA's Rules did not provide jurisdiction to hear cases where a representative had acted outside the authority of their licensee. AFCA told the committee:
What we saw, in this situation, if I look at the Libertas complaints, is that Libertas had provided their several authorised representatives authorisation to deal in and provide general advice around the [SIT] but they hadn't provided that same authority to deal in the Silverlink preference shares. What the complaint related to at Libertas was a complaint around general advice towards the Silverlink preference shares, which was to authority never provided by Libertas. That's the issue we have around the jurisdiction there.
Prior to the decision in the DH Flinders Case, AFCA believed that its jurisdiction under the Rules in relation to the liability of a licensee's authorised representative was consistent with section 917 of the Corporations Act 2001 (Corporations Act) whereby there are circumstances where a licensee remains responsible for the conduct of an authorised representative even if they act outside that authority.
AFCA indicated that it chose to work with ASIC to change its Rules rather than appeal the court's decision:
AFCA did not make this decision lightly and concluded that a prolonged appeals process would likely take months to complete, would not necessarily return a different result, and so would not provide certainty for complainants and financial firms in a timely manner.
ASIC subsequently issued a legislative instrument on 5 January 2021 requiring AFCA to update its Rules. The updated AFCA Rules applied to complaints received by AFCA from 13 January 2021 onwards, while the complaints received before that date would be handled under the previous Rules.
The difficulties associated with making the AFCA scheme retrospective to address the outcomes of the DH Flinders Case were explained by the Department of the Treasury at a hearing on 27 January 2022:
The question of DH Flinders is a bit different. That is around retrospective application of how things work within AFCA. AFCA isn't a government body; it operates by contract between it and its members. That is a much more complicated question because it has two elements. One is the contractual agreement between AFCA and its counter party. The government is not a party to that contract. The second part of that is it's talking about retrospective application of jurisdiction. That gets really complex and legally technical. We would need to really work that through in terms of what is feasible and how to do that.
AFCA advised that it was 'currently in communication with complainants and financial firms about complaints which are impacted by the judgment' and advised that 'complaints lodged from 13 January 2021 onwards are not affected because of a change to our Rules'. It noted:
AFCA has reviewed 19 complaints against Libertas and, after careful consideration of each case, has assessed 15 as being outside AFCA's Rules, given the DH Flinders ruling. A further 3 complaints have been found to be partly covered by the Rules. The complaints partially within our jurisdiction will now be progressed.
According to AFCA, any complaint that falls outside AFCA's Rules can still be considered if the financial firm involved consents for that to happen. However, after writing to Libertas on 2 September 2021, AFCA was advised by Libertas that it did not consent to AFCA considering these complaints.
Scope of the proposed CSLR
In August 2019, the government committed to establishing a CSLR, which was a recommendation of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission). The Royal Commission recommended that the three principal recommendations to establish a CSLR made by the supplementary final report of the Review of the Financial System External Dispute Resolution and Complaints Framework (Ramsay Review) should be carried into effect.
The Ramsay Review made three principal recommendations on the establishment of an industry funded CSLR. In summary, it recommended:
establishing a CSLR that targets the areas of the financial sector with the greatest evidence of need;
a CSLR, if established, be initially restricted to personal financial advice failures but be scalable in the future to include other types of financial service as the evidence of uncompensated losses arise; and
a CSLR, if established, be established with design features, including that the scheme be prospective, ex-ante funded and accessible to consumers and small businesses.
As part of its response to the Royal Commission, the government announced that it would establish a CSLR and the Department of the Treasury (Treasury) subsequently conducted a consultation process on the draft legislation which concluded in August 2021.
On 28 October 2021, the government introduced legislation into the Parliament to establish the CSLR. The proposed CSLR would provide compensation to eligible consumers where a determination issued by AFCA remains unpaid and the determination relates to one of the following financial products or services:
personal advice on relevant financial products to retail clients;
insurance product distribution.
However, the proposed scheme would not apply to managed investment schemes and compensation for each claim would be capped at $150,000. The scheme would also only apply to unpaid AFCA determinations made since 1 November 2018.
ASIC has observed in relation to the proposed CSLR scheme:
Investors in [SIT] or Silverlink who receive an AFCA determination of compensation for personal financial product advice, or for certain securities dealings as a retail client, which goes unpaid may be eligible for compensation under the proposed CSLR.
Certain AFCA determinations made from November 2018 (the date of AFCA commencement) may be eligible.
Concerns raised by stakeholders
Stakeholders have raised concerns that the CSLR as proposed would leave many consumers who have purchased certain financial products unprotected. For example, the FPAA argued:
The scope of the CSLR in the bill does not include all financial products – Managed Investment Schemes (MIS) or Real Estate Income Trusts (REITs) and other complex products are exempt. It is restricted to personal financial advice to retail clients, dealing in securities and engaging in credit activities. This is because the bill is based on historic unpaid determinations data when product issuers were not required to be a member of an [External Dispute Resolution] scheme and complaints about financial products and providers fell outside the jurisdiction of AFCA's predecessor schemes.
The FPAA went on to argue that should the bill 'be passed unchanged, victims of the [SIT] misconduct will not have access to the CSLR and will be at risk of being uncompensated for the detrimental loss they have suffered'..
Similarly, Mrs Keddie Waller, Head of Public Practice and SME, CPA Australia, told the committee:
This exclusion will leave many consumers who invest directly into these schemes, such as Sterling First, ultimately unable to seek appropriate compensation or redress in the event of a future collapse. This will have a significant impact on the wellbeing and financial security of these individuals and will place further pressure on the social security system, as victims will be forced to rely on the age pension.
Stakeholders also criticised the proposed cap on the maximum compensation that can be paid through the CSLR. For example, the WA DMIRS argued:
The proposed $150,000 cap on claims would prevent the full recovery of losses for many victims of the Sterling Group collapse. While Consumer Protection has not recorded detailed data of these losses, it is known that individual victims may have lost somewhere between $110,000 and $315,000 each. The proposed cap should be increased or the CSLR operator empowered to pay higher compensation if individual circumstances justify higher payments.
Proposed changes to the CSLR
As a result of the above concerns, stakeholders have called for the proposed CSLR to be expanded to provide access to victims of the Sterling Group and SIT collapses, who would otherwise be uncompensated. For example, CHOICE supported compensating victims of the Sterling Group collapse by expanding the proposed CSLR scheme to include managed investment scheme collapses.
CHOICE also observed that the 'rationale for excluding the managed investment schemes is seemingly the assumption that including such collapses in the scheme risks creating a moral hazard'. CHOICE argued:
The Ramsay Review thoroughly considered the risks of moral hazard for a CSLR and concluded, 'the Panel does not consider that the risks of moral hazard in the instance of establishing a CSLR have been substantiated.' The Ramsay Review found there is a 'very small risk' of a moral hazard given there are other significant disincentives and protections in place.
In its submission to the Treasury's consultation process, Sterling First Action Group also addressed concerns that expanding the scope of the CSLR to managed incensement schemes could present a moral hazard:
It is recognised that existence of a CSLR may present a moral hazard where both the promoters of a [managed investment schemes] and investors in it may consider the existence of a safety net (i.e., the CSLR) will provide them with the incentive to indulge in more speculative behaviour than is prudent. However, we contend that this caveat should not apply to historical cases as they transpired prior to the existence of a CSLR, and hence there was no safety net that influenced the behaviour of the either scheme promoter or the investors.
It is also important to note that Sterling Group investors relied on financial advice that was misleading and deceptive and were provided with defective product disclosure statements that contained misleading or deceptive information. As such, the issue of a moral hazard in this scenario is not applicable.
CHOICE has noted that some victims of the collapse 'will be excluded from receiving compensation from the CSLR even if managed investment schemes are included in the scope of the scheme. This includes some people who were sold the Silverlink product through Libertas'.
Indeed, at the hearing on 18 November 2021, AFCA noted:
…what we know at the moment is that most of the Theta matters relate to the SIT. Hypothetically—I'm not forming a view, by the way; I'm just saying hypothetically—if managed investment schemes are included in the scope of the CSLR, on the surface they [SIT investors] would be included in the compensation scheme of last resort. That's not the case though for the Libertas matters, because, as I mentioned, part of the compensation scheme of last resort is you need a determination; we can't even issue a determination against those Libertas matters because we don't have jurisdiction to do that.
Both CPA Australia and the FPAA have argued that the scope of the CSLR should be amended to include all licensees who are legally required to be a member of AFCA as part of their respective licence conditions. In their view, this should include AFS 'licensees who provide financial services to a retail client…and Australian Credit licensees'. The FPAA argued:
As the responsible entity for a registered MIS must hold an AFS licence, such an expansion of scope will ensure that when a body is authorised to operate such a scheme and provide financial services, they will be both covered by the CSLR as well as contribute to its funding. It will also ensure consumers are adequately protected by the CSLR and its funding obligation is fairly shared across the financial services industry.
WA DMIRS advocated for a transitional arrangement to apply for victims who have acted in good faith based on the limited options that were legally available to them at the time, to allow them to apply to AFCA for a determination and to receive compensation. It also argued if the CSLR is not accessible, the government should strongly consider alternative forms of compensation for victims of the collapse of the Sterling Group.
Similarly, CHOICE recommended that the committee investigate and recommend avenues of redress for all victims of the Sterling Group collapse, including:
compensation through a once-off levy on the ten largest financial firms;
compensation for defective administration; or
a lump-sum payment provided by the government.
Defective administration and Act of Grace payments
Two potential avenues that Sterling investors could seek compensation for their losses are:
the Scheme for Compensation for Detriment caused by Defective Administration (CDDA Scheme); and
The CDDA Scheme permits individuals to apply for compensation from non‑corporate Commonwealth entities in certain circumstances where they have experienced detriment because of the agency's defective administration.
Although the CDDA Scheme is more commonly applied in service delivery contexts, such as tax administration and social security payments, it can apply to the activities of ASIC as a non-corporate Commonwealth entity.
Indeed, investors in the Prime Aged Care and Retirement Property Trust (Prime) sought to make a claim under the CDDA Scheme in February 2019:
In their application, the Prime Trust investors said ASIC erred by granting a financial services licence to APCH [Australian Property Custodian Holdings]. They said ASIC should not have trusted that Lewski possessed the good fame and character required to be named a key person on the licence.
The investors say ASIC had a number of opportunities to rip up APCH's ticket between first granting the company a licence in 2001 and granting it a variation in 2007.
However, ASIC is unable to consider applications under the CDDA Scheme because it is not currently authorised to decide applications. Only Portfolio Ministers and officials authorised by the Portfolio Minister can decide applications made under the CDDA Scheme and ASIC has not been authorised since September 2015.
When exploring the issue in the Parliamentary Joint Committee on Corporations and Financial Services (PJCCFS), the Treasury advised that:
ASIC is one of only three Commonwealth entities that has body corporate status and is also a non-corporate Commonwealth entity. As the CDDA Scheme applies to non-corporate Commonwealth entities it would apply to ASIC, unless that is inconsistent with a provision in the ASIC Act. Treasury's position is that the application of the CDDA Scheme is inconsistent with section 12(3) of the ASIC Act, which defines the Minister's powers of direction. For this reason, Treasury considers that the Minister cannot direct ASIC to make a CDDA payment in a particular case and the Minister cannot personally authorise an ASIC officer, as the Minister's agent, to make a CDDA decision.
In relation to the number of CDDA Scheme claims lodged with ASIC since the CDDA Scheme authorisation was no longer effective, ASIC advised:
Since 21 September 2015, ASIC has received:
(a) Four individual applications; and
(b) Three applications made on behalf of groups of investors.
In each case, the applicants were advised by ASIC that it was not authorised by its Minister to consider their claim, and that they could submit an act of grace payment application with the Department of Finance.
Act of Grace payments
The Act of Grace mechanism under section 65 of the Public Governance, Performance and Accountability Act 2013 applies to ASIC and is administered by the Department of Finance. The mechanism is a discretionary power to allow payments to be made if the Finance Minister or their delegate considers there are special circumstances and it is appropriate.
While ASIC cannot currently consider applications made under the CDDA Scheme, the Act of Grace mechanism is an alternative compensation mechanism to the CDDA Scheme that is available. On this option, Treasury argued that:
…the Act of Grace process provides an effective mechanism for deciding compensation claims. The Act of Grace process offers effectively the same discretionary outcome as the CDDA Scheme. Under both mechanisms, an application is considered on its merits, afforded procedural fairness (including the provision of reasons for the decision) and is subject to review. In addition, unlike a CDDA Scheme decision, an Act of Grace decision is subject to judicial review under the Administrative Decisions (Judicial Review) Act 1977.
Indeed, approximately 40 Prime investors lodged an Act of Grace claim on 16 June 2020 (a further 10 investors joined at a later date) and, while ASIC and Treasury have provided the Department of Finance information relating to the claim, a decision on this claim has yet to be made.
The committee would like to thank stakeholders for their engagement in this inquiry, as well as those tenant-investors who put in submissions and shared their stories with the committee. The committee acknowledges the devastating financial, social, and emotional impact that the collapse of the Sterling Group and the Sterling Income Trust (SIT) has had on these individuals and their families.
The committee recognises that the efforts of investors, especially tenant‑investors, to seek justice and redress using current mechanisms have not resulted in material financial compensation for the losses suffered. Unfortunately, the committee understands that there will be little if any return to unsecured creditors and investors from the liquidation process. The committee is also mindful that legal avenues available for victims of the collapse are likely to be slow and costly and provide only limited compensation.
The committee also notes that some tenant-investors may have received flawed legal and/or financial advice on the potential impact of investing in the Sterling Group and the SIT. The committee considers that any tenants who obtained legal advice prior to entering a Sterling New Life Lease (SNLL) should consider seeking further legal counsel as to any potential options for redress.
In addition, the committee is concerned that current requirements for Professional Indemnity Insurance (PII) are not appropriate to cover compensation for high-risk investments when the excess is set at a level that acts as a barrier to adequately meeting the potential liability for compensation claims. This should be considered in the context of the Compensation Scheme of Last Resort (CSLR) legislation currently being considered by Parliament.
The committee notes that a commitment to make money available to compensate victims for their losses because of the misconduct of the Sterling Group of companies, and the failure of the Australian Securities and Investments Commission (ASIC) to prevent this misconduct, is a commitment that can only be made by the government and not the Senate. The committee has therefore in this inquiry sought to ensure that victims of this scheme have just access to the CSLR, which they have long been encouraged to participate in by ASIC and the government. The government has an obligation to facilitate this justice.
The committee understands that Australian Financial Complaints Authority (AFCA) has made only a small number of determinations for Sterling Group related claims and the outcomes of these have not necessarily met investors' expectations. Further, many victims have been unable to access compensation or redress through AFCA as their complaints have fallen outside the scheme's jurisdiction (in the case of Libertas related claims) or have been paused (in the case of Theta related claims) until the government's proposed CSLR has been legislated.
Based on AFCA's previous determinations which found that Theta and Libertas engaged in deceptive and/or misleading conduct, the committee believes that many of the Sterling Group investors are likely to have a strong case for compensation. However, the committee is extremely disappointed that Libertas continues to withhold its consent for AFCA to investigate those complaints against it that were lodged prior to 13 January 2021.
The committee is greatly concerned that Libertas is using the DH Flinders Case to absolve itself of the responsibility to provide compensation for the poor advice provided by its representative, even though an AFCA determination has found that Libertas is responsible under section 917B of the Corporations Act. Given the injustice associated with AFCA claims made before 13 January 2021, the committee recommends that ASIC investigate and, if appropriate, commence legal proceedings against Australian Financial Services licence holders (current and former) which are alleged to have breached section 917B but have not consented to participate in relevant AFCA processes. Hence, the initiation of legal action might encourage DH Flinders, Libertas and any other financial firms captured by the DH Flinders ruling to consent to participate in the AFCA process, rather than face the potential cost of and penalties associated with court proceedings.
The committee also appreciates that there are investors who did not register a claim with AFCA relating to Theta prior to it ceasing to be an AFCA member and are therefore no longer able to make a claim which would entitle them to access the CSLR if they became eligible.
The committee notes that the government's proposed model for the CSLR will only cover certain financial products and services. Consumers who have invested in products outside of these provisions, such as managed investment schemes, will not be protected by, or able to access compensation from, the proposed CSLR. As a result, victims of the collapsed Sterling Group and the SIT are unlikely to be assisted by the CSLR scheme if it is legislated as proposed.
It is for these reasons, that the committee is of the view that there is a strong case for the proposed CSLR to be expanded, particularly given the evidence of uncompensated losses that have occurred due to failed management investment schemes, such as the SIT. Therefore, the committee recommends that the government amend the proposed bill establishing the CSLR to include managed investment schemes and ensure that the CSLR is genuinely broad-based and provides a clear avenue of redress for victims of such schemes.
The committee is aware that some individuals impacted by the Sterling Group collapse, including people who purchased the Silverlink product, may not be eligible for compensation through an expanded CSLR. Further, the committee notes the concerns regarding the proposed CSLR compensation caps that would not fully cover the losses incurred by Sterling investors, particularly tenant-investors.
Given the complexities associated with the Sterling investment products and the lack of appropriate regulatory oversight provided by the Australian Securities and Investments Commission, the committee calls on the government to investigate and implement a timely solution that would allow all investors in the Sterling Group to access the CSLR. In addition to financial compensation, tenant-investors should be supported to access appropriate and affordable housing given that they lost this security with the failure of the 'rent-for-life' scheme.
The committee recommends that the Australian Government take all necessary action to support investors in the Sterling Group of companies, including those who invested in the Sterling Income Trust and Silverlink Preference Shares, being able to access the Compensation Scheme of Last Resort.
The committee recommends that tenant-investors should be supported to access appropriate and affordable housing given that they lost this security with the failure of the 'rent-for-life' scheme.
The committee recommends that the Australian Securities and Investments Commission investigate and, if appropriate, commence legal proceedings against Australian Financial Services licence holders (current and former) that are alleged to have breached section 917B of the Corporations Act 2001 but have not consented to participate in relevant Australian Financial Complaints Authority processes.
The committee recommends that the Australian Government expand the scope of the Compensation Scheme of Last Resort to include managed investment schemes.