We recognise the deep suffering that has been caused by the Sterling collapse. It has been a profound tragedy for those who have lost life savings and their housing security. In many cases, this has occurred after they have reached retirement age. The stories are devastating. They are well documented in the majority report. We thank all those who came forward to share their personal experiences both through written submissions and testimony.
Discussion of the role of the Western Australian Government - WA DMIRS
In our view, there needs to be further detailed consideration of the response of the Western Australian Government to the Sterling Income Trust matter. There are material questions that remain unanswered, particularly in light of two WA Supreme Court cases that were decided last year; namely: Soussa v Thomas  WASC 172 and Hassell v Yates  WASC 389. Both cases were decided by His Honour Justice Smith.
In a submission to this inquiry dated 8 November 2021, the Western Australian Minister for Environment, Climate Action, Commerce states:
I am advised that the Department of Mines, Industry Regulation and Safety – Consumer Protection Division (Consumer Protection) raised its concerns with the Australian Securities and Investments Commission (ASIC) early in 2017 regarding the financial arrangements established by the Sterling Group with its tenants, investors and property owners. I am advised that initial contact was made in March 2017 followed by formal referral in April 2017, at which time a number of documents were provided to ASIC by Consumer Protection.
In the view of the Western Australian Government, the Commonwealth and ASIC were far too slow to act...
It is my view that the Commonwealth to date has abandoned the victims of Sterling First, and relied on the State Government to support them – despite the matter being wholly in the purview of the Commonwealth [emphasis added].
However, this matter does not fall wholly within the purview of the Commonwealth. As stated in paragraph 4.43 of the majority report, ASIC was not the only regulatory body that had the ability to intervene given the structure of the SNLL scheme split the regulatory jurisdiction between ASIC and WA DMIRS. ASIC does not have jurisdiction over real estate and tenancy matters, including residential tenancy matters. These are matters which fall within the jurisdiction of the WA Government.
It was under Western Australian law that the Sterling Life tenants were liable to be evicted even though they had entered into a Payment Direction Deed which (on the face of it) appeared to provide protection if the income from the Sterling Investment Trust was insufficient to pay the rent.
This is underlined by the evidence obtained by the Committee from Circle Green Community Legal (Circle Green) (based in WA) who argued that WA DMIRS had the opportunity in 2017 to find that the SNLL scheme contravened sections of the Residential Tenancies Act 1987 (WA). Refer to section 4.44 of the majority report and section 4.45 for the position of WA DMIRS.
The importance of Western Australian law and the actions of WA DMIRS are evidenced by the two WA Supreme Court cases referred to above. In these two cases, determined in the WA Supreme Court through application of Western Australian law relating to residential tenancies in Western Australia, it was found that the particular Sterling Life tenants could be evicted notwithstanding agreements entered into which (on their face) provided that the landlords could not take action against them if the return from the Sterling Income Trust was insufficient to pay the rent amount.
In this regard, we note that the submission of the WA Government makes no reference to the first decision which was handed down months prior to the making of the WA Government's submission to this inquiry.
In that first decision, the case of Soussa v Thomas  WASC 172, the WA Supreme Court found that a key provision in the Payment Direction Deed entered into by the landlord, the tenants and a Sterling entity was unenforceable by operation of Western Australian law.
Given the importance of this issue, we quote at length from the judgement:
In particular it is argued [by the tenants] that clause 2.7 of the Payment Direction Deed [entered into by the tenants, the landlord and a Sterling entity] expressly limits the [tenants] contractual obligation to pay rent and stipulates that in the event that there is any shortfall between the amounts paid out of the Sterling Investment Fund on the one hand and the rent stipulated by the lease to be paid on the other hand, then the [tenants] are not liable to pay the shortfall.
However, the effect of [the standard terms] of the lease is that [the tenants] must pay rent on time or the [landlord] may issue a notice of termination and, if the rent is still not paid in full, [the landlord] may take action through the court to evict the defendants...
Because this clause is a standard term prescribed as such by Part B of Form 1AA, the effect of s27A and s82(1)(b) of the Residential Tenancies Act is that the right conferred on [the landlord]...cannot be waived by any other agreement or arrangement. In addition, to the extent that clause 2.7 of the Payment Direction Deed is inconsistent with this right, or purports to exclude, modify or restrict the operation of the standard term in clause 3, pursuant to s.82(1)(a) of the Residential Tenancies Act, clause 2.7 must be construed as void and of no effect...
It cannot be found that the terms of the Payment Direction Deed discharged the obligation of [the tenants] under the terms of the lease to pay rent if there are no funds left in the Sterling Income Trust to make monthly payments of rent. Such a construction, if accepted would raise a direct inconsistency with the obligation in the standard term in clause 3 of Part B of the lease that [the tenants] must pay rent on time or [the landlord may take action leading to eviction for unpaid rent]. The effect of the direct inconsistency is that pursuant to s.27A and s.82 of the Residential Tenancies Act to this extent, cl. 2.7 of the Payment Direction Deed is void and of no effect.
...For these reasons, I find that the notice of termination for non-payment of rent issued by [the landlord] to the defendants requiring vacant possession by 22 October 2019 was effective.
To be clear, the tenants had signed a Payment Direction Deed which (on its face) provided protection for their continuing right of occupancy in the event that the income from the Sterling Income Trust was insufficient to meet rental payments (as became the case). However, sections of the Residential Tenancies Act 1987 (WA) operated to make the provision void and of no effect.
Why was this fatal flaw in the protection of the tenants arising under the Residential Tenancies Act of WA not identified by WA DMIRS? This was not in the purview of the Commonwealth – it fell four square within the jurisdiction of the WA Government.
The second decision of the WA Supreme Court in the case of Hassell v Yates  WASC 389 reinforces the point. His Honour Justice Smith, applying WA law, again came to the conclusion that the Sterling New Life tenants were able to be evicted from their long-term residential tenancy due to non-payment of rent notwithstanding that the Payment Direction Deed appeared (on its face) to protect them from that exact eventuality.
Whilst there were some differences between the circumstances in the two cases (including technical differences around the incorporation of the terms of the Payment Direction Deed into the residential tenancy agreement), the result of the cases was the same – the lease was terminated for failure to pay rent and the tenants were obliged to provide vacant possession of the property.
Consider the relevant provisions of the Residential Tenancies Act 1987 (WA):
27A.Written residential tenancy agreement to be in prescribed form
A lessor must not enter into a written residential tenancy agreement except in the prescribed form.
Penalty: a fine of $5 000.
(1)Except as provided under this Act —
(a)any agreement or arrangement that is inconsistent with a provision of this Act or purports to exclude, modify or restrict the operation of this Act is to that extent void and of no effect; and
(b)any purported waiver of a right conferred by or under this Act is void and of no effect.
(2)A person must not enter into any agreement or arrangement with intent either directly or indirectly to defeat, evade or prevent the operation of this Act.
Penalty for this subsection: a fine of $10 000.
We make the following observations:
It was because of these provisions (under WA Law) that the Sterling New Life tenants were not protected by the Payment Direction Deed containing the non-recourse clause.
This is not some arcane point of law. The sections of the Act actually provide penalties for breach. They are presumably intended to act as safeguards for residential tenants. However, in this case, they operated to void the provision of the Payment Direction Deed which would have protected the tenants from eviction.
The above goes to the heart of the issue of the tenants' misconception that they had entered into a secure 40 year residential tenancy which would provide security in retirement. If the Sterling investment performance was insufficient to cover the rent (as was the case), then the non-recourse clause (on its face) should have protected the tenants from eviction. This was the clear intent of the Payment Direction Deed which was part of the suite of contract documents. It was not effective because of the operation of Western Australian law – in particular sections 27A and 82 of the Residential Tenancies Act 1987 (WA).
As discussed in section 3.11 of the majority report, the Western Australian Commissioner for Consumer Protection is aware of the issue and noted that it would be examined as part of the review of the Residential Tenancies Act 1987 (WA). Obviously, this is too late for the impacted parties. The question is what steps did the WA DMIRS take prior to the collapse of the Sterling Group?
In answers to questions on notice from Senator Pratt, Consumer Protection WA stated:
On 16 December 2015, a request for information was sent to Mr Ryan Jones, then person in bona fide control of Sterling New Life. A response was received from Mr Ryan Jones on 14 January 2016. The investigation file was closed on 9 March 2016 but with a recommendation that there be further examination of Sterling New Life.
Consumer Protection continued to monitor Sterling New Life. Consumer Protection's Senior Housing Advisory Centre was receiving regular enquiries about the Sterling Group's scheme.
A further assessment was made of Sterling New Life’s contracts and documentation and legal advice on the Sterling New Life’s offerings was sought...
The evidence of Consumer Protection indicates that there was an ongoing investigation, including for potential breaches of the Residential Tenancies Act 1987 WA (again refer to the answers to questions on notice asked by Senator Pratt).
In the response to the questions on notice from Senator Pratt, there is reference to Consumer Protection referring the Sterling New Life matter to ASIC on the basis that: 'the most significant concerns about the operations of Sterling New Life related to the investment aspects and that these were matters within ASIC’s jurisdiction.' What about the operation of sections 27A and 82 of the Residential Tenancies Act (WA)? Under the two Supreme Court cases decided last year, it was WA residential tenancies law which resulted in the tenants not having protection under the Payment Direction Deed.
Again, refer to the questions on notice provided by Senator Pratt to WA Consumer Protection. When asked to advise what legal advice was received by the Department, the response was:
Consumer Protection has obtained legal advice in relation to a range of matters concerning the Sterling Legal Group scheme and legislation that it administers [presumably that included the Residential Tenancies Act 1987 (WA)].
When asked for a copy of legal advices, the Department responded:
Legal advice provided to the Consumer Protection is subject to legal professional privilege which vests in the Crown and only the Western Australian Attorney General is entitled to waive this legal professional privilege. As a result, copies of legal advice cannot be provided.
Hence, the Committee is left in the position of not knowing what legal advice the WA Government received in relation to the operation of sections 27A and 82 of the Residential Tenancies Act 1987 and when it received that advice.
Finally, we again refer to the evidence provided by Circle Green Community Legal (Circle Green) outlined in section 4.44 of the majority report. Circle Green argued that WA DMIRS appears to have had an opportunity in 2017 to find that the SNLL scheme contravened sections of the Residential Tenancies Act 1987 (WA). To quote:
If they had made that finding DMIRS could then have taken steps in their role as regulator to prevent or at least to discourage the SNL scheme from proceeding. It seems unlikely that the SNL scheme would have gone ahead in the face of opposition from DMIRS, or without their approval (whether express or tacit).
Would any of the tenants have entered into the arrangement had they known that sections 27A and 82 of the Residential Tenancies Act 1987 (WA) had the effect of voiding the key clause in the Payment Direction Deed which (on its face) gave them protection against the income from the Sterling Investment Trust not covering their rent? The testimony was clear. The expectation of the tenants was that they had entered into a residential tenancy which had secured their housing requirements for the term of their 40 year residential tenancy.
There needs to be further and deeper analysis of the role of the WA Government in this matter. There are further questions which need to be answered.
Consideration of Majority Recommendations
For ease of reference, we restate each recommendation from the Majority Report and our view with respect to the recommendation.
Recommendation 1 in the Majority Report
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 Compensation Scheme of Last Resort (CSLR) will cover AFCA determinations in the following subsectors: personal financial advice for retail clients, mortgage and finance broking, securities dealing, and credit provision. As currently proposed, it will not extend to managed investment schemes (although it will apply to personal financial advice given to retail clients in relation to managed investment schemes).
In determining the scope of the CSLR in the bill currently before Parliament, the Government considered (amongst other things): evidence of unpaid compensation over time, whether the class was a commonly used or standard financial product, and the consequences of expanding the scope of the CSLR (including the sustainability of the CSLR).
Following this analysis, it was considered that managed investment schemes should not be included in the CSLR. We support this position. Refer to the additional comments under Recommendation 4.
It should also be noted that the Government does not intervene in individual AFCA determinations, including AFCA’s decisions as to which cases fall within its jurisdiction, nor does it direct AFCA other than via its broad authorisation conditions which are defined by regulation. AFCA operates as an independent authority in accordance with the law. This is an important principle.
Finally, we refer to our detailed comments above in relation to the impact of WA residential tenancy laws. There are further questions to be considered in this regard.
Recommendation 2 in the Majority Report
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.
As agreed under the National Housing and Homelessness Agreement, the States and Territories are primarily responsible for housing and homelessness, including in respect of tenancy issues. This is an important point; especially in the context of the Sterling situation. It reinforces the impact of State laws upon those impacted by the Sterling collapse. Refer to our detailed discussion above. Given the outcome of the two Supreme Court cases in WA, further questions need to be answered by the WA Government. (It should be noted that there were victims of the Sterling collapse in other States. However, in the time available, the impact of residential tenancies laws in those States has not been able to be considered.)
Recommendation 3 in the Majority Report
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.
ASIC is an independent government agency and the government does not direct ASIC to commence legal proceedings or interfere with particular cases. Moreover, it is clear from the evidence provided to the inquiry that ASIC has pursued and is pursuing a range of enforcement actions against relevant parties.
Recommendation 4 in the Majority Report
The committee recommends that the Australian Government expand the scope of the Compensation Scheme of Last Resort to include managed investment schemes.
We do not agree with this recommendation. Commissioner Hayne recommended that a compensation scheme of last resort (CSLR) be established consistent with the key recommendations of the 2017 Supplementary Final Report of the Review of the financial system external dispute resolution framework (the Ramsay Review).
The Government has introduced legislation proposing a CSLR consistent with the Royal Commission’s recommendations and the Ramsay Review. The Ramsay Review specifically addressed the issue of extending the CSLR to managed investment schemes and recommended against it. Refer to recommendation 2 of the Ramsay Review below:
RECOMMENDATION 2: A CSLR RESTRICTED TO FINANCIAL ADVICE BUT FUTURE PROOFED
A CSLR, if established, should initially be restricted to financial advice failures where a financial adviser (relevant provider) has provided personal and/or general advice on ‘relevant financial products’ to a consumer or small businesses. This means that only advice given by a ‘relevant provider’, as defined in section 910A of the Corporations Act, would be covered by a CSLR. Relevant financial products include, for example, financial advice on investments in managed investment schemes, superannuation and banking products that are not basic banking products. A CSLR should be designed for the future and accordingly be scalable, which means it can be expanded over time to cover other types of financial and credit services should evidence of significant problems of uncompensated losses emerge.
It should also be noted that there was extensive consultation prior to the introduction into Parliament of the bill providing for the CSLR. The Treasury released a discussion paper for public consultation in December 2019 and exposure draft legislation in July 2021. Over 120 submissions were received over these consultations, with the Treasury engaging extensively with a wide range of stakeholders. The CSLR as introduced into the Parliament reflects consultation feedback.
The Economics Legislation Committee is currently undertaking a review of the bill proposed by the Government. That inquiry will no doubt consider this issue in greater depth.
Recommendation 5 in the Majority Report
The committee recommends that the Australian Parliament undertake a review of the implementation of recommendations from all relevant parliamentary and government inquiries in relation to financial service regulation since the global financial crisis and an evaluation of the government responses, including the Hayne Royal Commission.
The committee asks the Minister to table, in its response to this report, all recommendations from all relevant parliamentary and government inquiries since the global financial crisis and the government responses.
We note there have been multiple reviews undertaken into the Financial Services sector in recent years, including (but not limited to) the 2014 Financial Services Inquiry and the 2018 Hayne Royal Commission. The Australian Law Reform Commission is also currently undertaking a review into Chapter 7 of the Corporations Act. The Government is also currently consulting on terms of reference for a review into the quality of financial advice and has committed to a number of additional reviews on facets of the financial services system through the response to the Royal Commission.
We understand that the government undertakes regular reviews of implementation programmes. However, there is of course always merit in a consolidated review process to be undertaken.
Recommendation 6 in the Majority Report
The committee recommends that the Australian Government review the penalty regime associated with contraventions of the Corporations Act 2001 to deter the creation of high-risk financial products that have a significant risk of failure.
At the outset, it should be noted that the penalty regime is designed to deter and penalise misconduct, not necessarily to prevent the creation of high risk financial products which may be sold in accordance with law.
Further analysis of penalties given under the existing regime should inform any review. Given the scope of this inquiry and the limited time, we have not had the benefit of being able to review the data in this regard.
We agree that consumers need to be protected from those who have engaged in egregious unlawful conduct which has caused financial devastation.
Recommendation 7 of the Majority Report
The committee recommends that the Australian Government expedite the development of legislation to grant the Australian Securities and Investments Commission a directions power in relation to financial services and credit licensees as recommended by the Australian Securities and Investments Commission Enforcement Review Taskforce, noting that an exposure draft was already issued in 2020.
We note that ASIC has been provided with a number of additional powers in recent years which are consistent with the recommendations of the Hayne Royal Commission and will help better protect consumers, including the product intervention power and the design and distribution obligation regime.
Most recently, reforms to breach reporting obligations started on 1 October 2021. The regime will strengthen and clarify breach reporting requirements for financial services licensees in the Corporations Act 2001 and introduce a breach reporting regime for credit licensees under the National Consumer Credit Protection Act 2009. This reform will mean that ASIC will be able to identify and take early action in relation to misconduct.
When considering the need for further enhancements and reforms (such as a directions power), law makers should take time to assess the impact of recent reforms. It is only then that the need for (and scope of) further reforms (such as a directions power) can be determined.
Recommendation 8 of the Majority Report
The committee recommends that the Australian Government consider extending the Australian Securities and Investments Commission's public warning power to include situations where the Australian Securities and Investments Commission has reasonable grounds to suspect a financial product or credit product (or a class of such products) has resulted, will result or is likely to result in 'significant consumer detriment'.
ASIC already has the ability to issue to the public a written notice for a wide range of reasons, including in cases of unconscionable, misleading or deceptive conduct when ASIC is satisfied that one or more persons has suffered or is likely to suffer detriment as a result of the conduct and the notice would be in the public interest.
As referred to above, a number of reforms have been made, including in relation to product intervention powers, DDO and breach notification. Whilst there is merit in considering further initiatives and enhancements, there also a need to take time to consider the practical impact of recent reforms.
Recommendation 9 of the Majority Report
The committee recommends that the Australian Government work with state and territory governments to clarify the jurisdictional overlap between Commonwealth and state regulation of financial products. In particular, the Australian Government should review investment schemes that include real property rights, including accommodation, leases and tenancy rights under state and territory laws.
We have provided extensive comments in relation to the operation of residential tenancy laws in Western Australia. It is noted that the impact of the Sterling failure upon the occupation rights of tenants has been particularly devastating in this case. This matter is worthy of further consideration.
Recommendation 10 of the Majority Report
The committee recommends that the Australian Government review the marketing of, and financial advice for investment products which deal in real property interests and whether or not sufficient protections are available for investors in these products.
It is noted that the impact of the Sterling collapse was exacerbated through Sterling tenants losing their housing security. This was a particularly devastating consequence of the collapse. We have provided detailed comments in relation to the situation in WA. It needs to be recognised that the key protection in the Payment Direction Deed was found to be void and unenforceable under WA residential tenancies law.
Recommendation 11 of the Majority Report
The committee recommends that the Australian Securities and Investments Commission develop a framework to promote greater awareness and understanding among retail investors and financial consumers in relation to buying financial products and services.
There is a continuing need for raising awareness and understanding in relation to these matters. We note that ASIC has a number of programmes and initiatives currently operating, including the MoneySmart website and initiatives to promote financial literacy. There is always merit in reviewing the performance of such initiatives and making enhancements.
Senator Paul ScarrSenator Andrew Bragg
Deputy ChairCommittee Member
Liberal Senator for QueenslandLiberal Senator for New South Wales