Super system fails investors as red flags ignored
Thousands of Australians have lost more than $1 billion in collapsed retirement funds First Guardian and Shield. There are lessons to be learned.
The corporate watchdog, ASIC, is investigating failed superannuation funds Shield and First Guardian, and taking action against the key players who lured people nearing retirement into what have been revealed as deeply flawed managed investment schemes.
Some are promoted incorrectly as suitable for self-managed superannuation fund (SMSFs) trustees, but are without sufficient regulatory scrutiny.
As reported by ABC News, the regulator is investigating almost everyone involved, including the telemarketers who first contacted investors, often using hard-sell tactics to convince them to move their superannuation savings out of regulated super funds and into managed investment schemes that do not face the same level of scrutiny.
ASIC has not ruled out the possibility that incidents involving other funds could surface during its investigation.
ASIC is also looking into the relationship between financial planners and the telemarketers who convinced the investors to sign legal documents that would lock them into moving their superannuation savings – in many cases hundreds of thousands of dollars – into less regulated schemes.
Questions have been raised about commissions passing hands, which if true would be contrary to recommendations made by the Hayne banking royal commission.
ASIC deputy chair, Sarah Court, told a parliamentary joint committee hearing that 140 licensed financial advisors were being examined. She said 20 had been taken to court, 50 were under investigation and 70 more were on an ASIC follow-up list.
Ms Court told ABC News she could not comment on ASIC's investigations and whether criminal charges would be laid but noted that “the buck stops with all of those people that were involved in this”.
“We are by no means finished here,” she said.
ASIC has also gone after the licensees that were supposed to govern the financial planners giving the advice, cancelling the licences of MWL Financial Services, United Global Capital, and Financial Services Group Australia.
Red flags revealed
How investors found themselves investing in these schemes offers a cautionary tale for all superannuation investors.
One victim said she was highly pressured to make quick decisions and incorrectly told her First Guardian investment was low risk, diversified, and achieved better returns than her balanced Hostplus super fund. The advice was not specific to her individual needs or in line with her risk profile, and it was conflicted.
Other red flags include:
Promotion of unrealistic high returns, often double what should be expected
Advisors put all investors into one fund, which is counter to accepted benefits of diversification
Investors were often not sold on investing in First Guardian or Shield, but on well-known superannuation platforms
They were led to believe they were setting up an SMSF but in fact the money was being invested in other platforms
People were lured in through a rushed process by telemarketers that was transactional and not personal
The SOA was emailed to be docu-signed. “They’d click the button to sign it and, bang, they were essentially locked into the investment from that point in,” a financial advisor told the ABC.
Questions about super platforms
Attention has turned to the role played by the super funds housing the First Guardian and Sheild products.
While ASIC is exploring possible conflicts of interest and flawed advice that led to the current failure, the finance watchdog, APRA, is reviewing platform operators in general – a fast-growing segment of the $4.2 trillion superannuation industry.
APRA has accused the super funds of being too reliant on external researchers to approve new products for investment, exposing consumers and financial advisors to overly risky or even potentially fraudulent schemes.
With the collapse of Shield and First Guardian in her sights, APRA deputy chairwoman Margaret Cole said trustees “cannot outsource accountability”.
Superannuation platforms allow financial advisers to invest on behalf of their clients in options including shares, hybrids, bonds, and managed funds – “much like a supermarket houses consumer products on its shelves”, the ABC News story explained.
Super Consumers Australia’s CEO, Xavier O’Halloran, said superannuation platforms played a major role.
“They put these products on their shelves. And as a result, people have lost money,” he said.
"Talking to consumers, they just saw the names of the platforms in a lot of cases... they looked at those and they had faith in those brands and so they invested their money accordingly.
“But it seems the super funds didn't do their job in protecting people from putting these poison products on their shelves.”
ASIC’s Sarah Court says that is part of what they are examining and there may be a case for investors to get compensation from the super trustees that ran the platforms.
APRA has written to super funds calling on them to address any weaknesses and accelerate efforts to lift standards, warning it would escalate supervision.
“We will not hesitate to take robust regulatory action as necessary,” it said.
Government plans super reforms
Assistant Treasurer, Daniel Mulino, has announced he is working with ASIC to make it more difficult for risky funds to be licensed, and to clamp down on high-pressure sales tactics used on social media.
“We are seeing failings at every step of the value chain, including from lead generators, financial advisors, superannuation trustees, auditors, managed investment schemes and research houses,” he told the media.
“Events like Shield and First Guardian are an important reminder for all Australians to be alert to high-pressure sales tactics, including requests to make a decision on the spot, and ‘clickbait’ online advertising.”
Related reading: ABC, ASIC 1, ASIC 2, APRA
