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Chapter 5

Developments with Trio Capital, Whitehaven Coal, Macquarie Entities and Storm Financial

5.1        The final chapter of this report covers a number of issues of particular interest to the committee relating to topical and significant matters before the Australian Securities and Investments Commission (ASIC).

Trio Capital

5.2        At the December 2012 hearing, the committee indicated that it would like an update from ASIC on its investigations into Trio Capital Limited (Trio) and related entities.

5.3        ASIC Chairman Mr Greg Medcraft began by refuting claims made by Victims of Financial Fraud spokesman Mr Paul Matters about ASIC's Trio investigation:

Recently our Trio investor advocate, Mr Paul Matters, made a number of claims about ASIC's Trio investigations and the action of ASIC staff. These claims need to be addressed. Mr Matters said on ABC radio and on YouTube that he had been leaked a Trio Capital bank statement showing $74 million had been lost immediately after ASIC became involved in the investigation. This is completely incorrect. The funds were distributed by the administrator to a number of subsidiary Trio super funds. ASIC officers are not in the business of leaking documents, and this is a serious smear on the men and women who work in our organisation. Mr Matters should substantiate this allegation. Mr Matters has never contacted ASIC about this bank statement and the $74 million. But we would consider meeting with any Trio investors, not just Paul Matters.[1]

5.4        ASIC Commissioner Mr John Price said that ASIC continued to work with the Australian Crime Commission and the Australian Federal Police on matters relating to Trio, and that its investigation into the collapse of Astarra Asset Management Pty Ltd (AAM) and its responsible entity, Trio, is continuing.[2]

5.5        Mr Medcraft noted that as a result of ASIC's investigation, 11 people had now been 'jailed, banned or disqualified or have removed themselves from the industry'.[3] In 2011, the former AAM investment manager, Mr Shawn Richard, was 'sentenced to a total of three years and nine months imprisonment with a minimum term of two years and six months'.[4] Mr Medcraft said that ASIC had permanently banned Mr Eugene Liu, the chief investment strategist of AAM, from providing financial services,[5] although Mr Price noted that Mr Liu was appealing against that decision.[6]

5.6        The committee asked ASIC to provide on notice a breakdown of the 11 persons either jailed, banned, disqualified, or that had removed themselves from the industry. As at 16 May 2013, the committee had not received an answer from ASIC.

5.7        Mr Price said that ASIC was still investigating Mr Tony Maher, formerly Mr Paul Gresham, who was the investment manager of the ARP Growth Fund, a managed investment scheme operated by Trio. Mr Price noted that the inquiry was taking more time because it involved international events and witnesses.[7]

5.8        The committee questioned ASIC about the outcomes of the liquidator's examination into Mr Maher in December 2012, and the accusation that Mr Maher may have received commissions and payments of several million dollars. Mr Chris Savundra, Senior Executive Leader of Markets Enforcement, stated that the liquidator's examination confirmed ASIC's belief that Mr Maher 'does not have any assets or funds which investors will be able to recover', either inside Australia or overseas, and that the money that Mr Maher received 'has been spent'.[8] This was confirmed by ASIC following the hearing:

The liquidators of Trio Capital Ltd (in liquidation) conducted a public examination of Paul Gresham (now known as Tony Maher) on 10 to 12 December 2012. During that examination he was questioned about the payments he received and what had happened to that money. In particular he was questioned about the approximately $2 million he received in undisclosed commissions.

He was also questioned about assets or funds that he may have in Australia or offshore. No funds or assets of substance were identified.

Mr Gresham gave evidence that he has spent the money he received (including the undisclosed commissions) on such things as overseas travel. Mr Gresham has no remaining funds or assets of any worth.[9]

5.9        ASIC also conceded that there still appeared to be 'insufficient evidence' that the alleged mastermind of the Trio fraud, Mr Jack Flader, had breached Australian law.[10]

Committee view

5.10      The committee reiterated its view that there needs to be greater cooperation between the corporate regulators, ASIC and APRA, and also between the corporate regulators and the law enforcement agencies.

5.11      The committee notes that the alleged mastermind of the Trio Capital fraud is still at-large overseas. The committee is disappointed that mechanisms do not exist to apprehend people residing overseas who are suspected of criminal activity in relation to funds located in Australia. The committee notes that there is no supra-national regulator that is able to monitor and pursue illegal activity that crosses national boundaries.

5.12      Fraudulent activity where money is siphoned to other jurisdictions is an international problem. The committee is of the view that Mr Medcraft's new position as head of the international corporate regulator provides an opportunity to negotiate measures that would close the loopholes in international fraud detection and response. The committee recognises that these efforts may require more than a commitment between regulators and that a more formal agreement may be required. This agreement should include various national crime commissions, as well as the various financial and securities regulators.

5.13      The committee will continue to inquire at future oversight hearings into the circumstances and the aftermath of the Trio Capital collapse. The committee reaffirms its bipartisan determination to ensure that the utmost is done to address the systemic concerns that the Trio fraud has exposed.  

The Government's response to the committee's Trio Capital report

5.14      In April 2013, the Government released its response to the committee's May 2012 report into the Trio Capital collapse. The Government accepted 13 of the committee's 15 recommendations. The other two recommendations were noted, but not rejected.

5.15      The committee is particularly pleased with this response, which it views as an endorsement of the committee's careful, considered appraisal of the complex issues raised in the Trio Capital inquiry. Moreover, it reflects the strong contribution that parliamentary committees can make in informing and influencing government decision-making processes. The committee also acknowledges the influence of the Richard St John report on compensation arrangements for consumers of financial services.

5.16      The committee urges the Government to follow through on those recommendations on which it has promised action. These promised actions are as follows:

• the Government will consult on changes to the Corporations Law to strengthen professional indemnity insurance requirements of providers of financial services;
  • the changes would give legislative force to key aspects of ASIC standards of adequacy for professional indemnity insurance such as scope of cover, policy exclusions and coverage of representatives; and
  • require licensees to report annually to ASIC, as part of their financial reporting requirements , on the adequacy of their professional indemnity insurance cover;
• the Government will consult on risk management processes by a responsible entity of a registered managed investment scheme that deal explicitly with the risk of fraud;
• the Government will task the Heads of Commonwealth Operational Law Enforcement Agencies to consider systems and other approaches that can assist in identifying 'outlying' patterns in investment performance and other fraud indicators;
• the ATO will seek to amend its registration process to add additional warnings that SMSF members are not eligible for compensation;
• ASIC will also consult on requiring advisers, on the establishment of SMSFs, to advise clients that they do not have access to compensation arrangements under the SIS Act;
• the Government will consult on whether ASIC should have more powers when an AFSL holder changes ownership. Currently, ASIC's powers to cancel an AFSL are limited. This can allow industry entry to a person who would have failed the 'good fame and character' licensing test if they had sought the licence directly;
• as part of the same process, the Government will also consult industry on APRA's powers for licensing superannuation funds. An internal review concluded that APRA's powers to approve or refuse a change in superannuation fund ownership were limited;
• the Government will on ways to enhance compliance processes including the need for more detailed compliance plans, legislating minimum requirements (such as experience and qualifications), qualitative standards for compliance plan auditors and oversight of the appointment of compliance committee members;
• the Government will consult on the disclosure of managed investment scheme assets, having regard to the Stronger Super reforms on portfolio holdings disclosure by superannuation funds. This will be included as part of consultation paper on improved governance arrangements for a responsible entity of a registered managed investment scheme which will respond to several recommendations of the committee's report;
• the Government will task the Heads of Commonwealth Operational Law Enforcement Agencies to consider the options for a scheme to recover assets from those found to be personally involved in fraud and theft; and
• the Government will task the Heads of Commonwealth Operational Law Enforcement Agencies to consider opportunities to enhance fraud detection capabilities.

Storm Financial

5.17      In 2009, the committee inquired into the catastrophic impact on investors of the collapse of Storm Financial (Storm).[11] In its previous ASIC oversight report, the committee reported that the Commonwealth Bank (CBA) had agreed to settle with ASIC through a compensation package that provided an additional $136 million to Storm investors. The CBA had provided $132 million to Storm investors through its resolution scheme.[12]

5.18      The committee notes that on 15 March 2013, the ABC's business reporter, Mr Michael Janda, reported that Macquarie Group had reached a settlement with people who borrowed money to invest in Storm. Macquarie Group agreed to pay $82.5 million to a group of Storm investors, subject to approval by the Federal Court of Australia.[13]

Whitehaven Coal hoax

5.19      The issue of Whitehaven Coal concerns its Maules Creek coal project and a media release dated 7 January 2013. The media release, titled 'ANZ divests from Maules Creek Project', contained a statement that ANZ 'has withdrawn its $1.2 billion loan facility to Whitehaven Coal, which was primarily intended to develop the Maules Creek Coal Project'.[14]

5.20      The media release, which purported to be from ANZ, was a hoax, but the false information contained in it had an impact on Whitehaven Coal share prices.[15]

5.21      ASIC advised that it began its investigation into the hoax media release the following day and that it had interviewed Mr Jonathan Moylan from Front Line Action on Coal, but that it could not give further details for fear of prejudicing the investigation.[16]

5.22      In response to questions from the committee, Mr Greg Yanco, Senior Executive Leader of Market and Participant Supervision at ASIC, stated that he believed that ANZ and Whitehaven Coal informed the market of the true position within one hour of the fake media release being disseminated.[17]

5.23      Mr Yanco noted that the 'share price recovered fairly quickly' and Mr Savundra stated that although ASIC had estimated the volume of shares traded after the fake media release, they had not yet analysed whether investors had incurred a loss.[18]

ASX company announcements platform, continuous disclosure, and scepticism about information

5.24      Perhaps the most important observation that ASIC made concerned the trust that people place in announcements. Mr Price pointed out that the key reference point for markets is the ASX company announcements platform and that people should consult this platform before making decisions. Mr Price noted that the false information did not appear on the ASX company announcements platform, but was in fact disseminated by various electronic media.[19]

5.25      Mr Medcraft observed that fraudulent information disseminated through various media was now 'a fact of life'.[20] He reinforced the message about the degree of trust placed in announcements by emphasising that with numerous sources of information now available, investors needed to exercise scepticism:

[I]nvestors who participate in markets need to have a level of diligence, scepticism or whatever about the information they see and use—particularly information they see via social media and the media generally. We have available to us so many sources of information. There is nothing like a decent amount of scepticism in dealing with information.[21]

5.26      ASIC also pointed to the updated guide released by the ASX on continuous disclosure. Under the Corporations Act, listed entities are required to adhere to a regime of continuous disclosure[22] under Listing Rule 3.1 and 3.1A. This rule is given statutory force in subsection 674(2) of the Corporations Act and is policed by the ASX and ASIC. Entities are liable for both criminal and civil penalties if they breach Listing Rule 3.1.[23] 

5.27      The guidance note on continuous disclosure provides advice about the measures that a listed entity can take to ensure compliance with continuous disclosure, for example, with regard to the immediate announcement of market-sensitive information. The guidance note recommends several steps, including having 'a template letter requesting the ASX to grant a trading halt ready for use at all times'.[24] A trading halt ensures that the securities of a listed entity 'are not trading on ASX and other licensed securities markets in Australia on an uninformed basis'.[25] After disclosure to the market, trading in those securities can resume.

5.28      The ASX also encourages listed entities to monitor major national and local newspapers, major news wire services, and social media for comments about their company.[26]

5.29      Mr Medcraft reiterated that for companies, it is about risk management:

It is about having the right tools in place to manage the new normal. Social media is the new normal. There are a number of businesses which assist companies in monitoring social media. That is what is happening overseas—you asked about that. You are correct; it is about risk management.[27]

5.30      Mr Price also pointed out that the ASX conducts due diligence on the announcements that it receives before releasing them to market:

When the ASX receives an announcement, it is quite careful about what it releases. It will review each announcement and contact the company if there is any concern about what is in the announcement. It is also fairly careful about the process of putting the announcement into the system and they are reviewing that process as well.[28]

Macquarie Entities enforceable undertaking

5.31      Macquarie Entities Limited (Macquarie Entities) is a subsidiary of Macquarie Group that provides financial advice services under the name Macquarie Private Wealth.

5.32      ASIC conducts surveillance of financial advisers as key gatekeepers in the financial services system. ASIC became involved because it suspected that stockbrokers at Macquarie Entities had strayed beyond their domain of executing trades and providing general advice and financial advice to sophisticated investors, and had also been providing personal financial advice to retail investors. Providing personal financial advice to retail clients requires a much higher level of compliance with financial advice obligations. ASIC Commissioner Mr Peter Kell noted that a lack of compliance with financial advice obligations had been identified as a problem in an internal review conducted by Macquarie.[29]

5.33      When it examined the compliance systems and client files at Macquarie Entities, ASIC found ongoing failures involving those that it deemed to be providing personal financial advice:

MEL [Macquarie Entities Limited] had failed to address recurring compliance deficiencies that involved a significant number of its advisers.[30]

5.34      Mr Price added that ASIC's greatest concern was the fact that Macquarie Entities had not self-reported the compliance failures by their advisers:

The other thing that was most troubling on this was that in fact they have not been self-reported in terms of what was going wrong.[31]

5.35      As a consequence, ASIC advised that it had accepted an enforceable undertaking (EU) from Macquarie Entities that required it to address the failings and create a new culture within the firm:

The EU requires Macquarie to put in place a plan to rectify the deficiencies under the eyes of ASIC and an external independent expert. It requires Macquarie to rethink significantly the way it monitors its representatives and to create a culture where compliance is central to getting that advice.[32]

Self-executing regulatory systems and ASIC surveillance

5.36      Mr Kell noted that ASIC had concerns 'around inconsistencies in the approach of licensees to breach reporting' across the financial services industry.[33] He emphasised that ASIC encouraged early and constructive engagement with firms:

We try and create an environment where, when firms do come to us with an issue early, we will engage constructively with them and so provide a bit of an incentive to do that. We have said very clearly on the public record as part of our enforcement policy, if you like, that, if we get early engagement, we take that into account in how we respond.[34]

5.37      Mr Kell explained that the current regulatory system relies extensively on self-reporting and that ASIC expects to hear from firms that have identified errors in their own systems.[35]

5.38      Mr Medcraft expressed his frustration that some firms appear to be exploiting the self-reporting regime, potentially undermining investor confidence in the financial system:

It does rely on self-execution and on reporting problems if you see them. We undertake surveillance to come in. But what really annoys me is when basically there is not that self-reporting and there is perhaps a conservative view—let us put it that way—about when you self-report, and we go in and we find a problem. The troubling thing is when we find something and we ask the question, 'Well, there's a problem there; what else is there?' So my message to firms is: if in doubt, self-report, because we would rather know about it. Clearly ASIC are facilitative in dealing with issues and, where there is a problem, we would rather be aware of it and try and work through it with an organisation. But I think for Australians to be confident in participating in the financial system it is actually really important that those that are part of that system do self-report where there is a problem. Transparency is, I think, really important.[36]

5.39      Mr Medcraft warned that self-reporting was complemented by surveillance of areas that ASIC identifies as higher risk:

One thing to emphasise is that, as you know, we are very focused on risk based surveillance. It is actually getting cops out on the beat. The warning to all parties is that we undertake risk based surveillance, which is that we identify indicators of risk, and the people we choose to surveil are those where we consider potentially there may be a higher risk of noncompliance. The message is very clear that, if you are exhibiting perhaps characteristics of high risk, you may be getting a visit from us. It is a very strong warning. I cannot overemphasise that we are very, very focused on surveillance, to the extent of the resources we have available to us.[37]

Committee view

5.40      The committee is satisfied with ASIC's focus on the surveillance of financial advisers and its risk based approach to this monitoring. The regulator's attention must continue to be on those outliers that exhibit key risk factors.

Debenture issuers, property funds, and debenture reform

5.41      The collapse of debenture company Banksia Securities Ltd (Banksia) on 25 October 2012 and the loss of $660 million in invested funds were discussed at the previous ASIC oversight hearing.

5.42      Since that time, administrators were appointed on 21 December 2012 to Wickham Securities, a debenture company based in Brisbane. The company was wound up on 6 February 2013 with PPB Advisory acting as liquidator.[38] It has been reported that Wickham owes investors about $27 million. ASIC has instituted proceedings against Wickham's director, Mr Bradley Sherwin, and his wife, Ms Deborah Sherwin, and the court has made initial orders that various bank accounts be frozen.[39]

5.43      On 4 March 2013, the ABC's Four Corners investigated various property funds, managed investment schemes and debenture issuers, including Banksia, Prime Trust, and LM Investments. Four Corners used the by-line 'as long as they disclose, almost anything goes' to promote the episode on the collapses in the shadow banking sector.[40] The episode made the point that the regulatory system for shadow-banking relies on disclosure, and that so long as the correct disclosure documents are in place, ASIC would not necessarily get involved. Since that episode aired, LM Investments, a property fund headed by Gold Coast financier Mr Peter Drake, has also collapsed.[41]

5.44      ASIC Commissioner Mr Greg Tanzer pointed out that LM Investments was a property fund and that property funds need to be registered with ASIC and are subject to capital requirements. Mr Tanzer also noted that ASIC is looking at the disclosure requirements for property funds given that the risks are greater in trying to realise the assets in a timely manner.[42]

5.45      Some of the bank-like commonalities between property funds and debenture companies were explained by Mr Price, in particular that these companies:

... attract retail investments to provide money in, and then, once they have that money, they lend that money out, often for property investment, property development or other activity.[43]

5.46      Mr Price identified three elements that have contributed to the failure of debenture companies:

First of all, the people who operate these businesses probably did not put enough money into them at the start. So that is a capital problem, effectively. Secondly, because they effectively take investment short term but then lend long term they are susceptible to cash flow problems, particularly if there are changes in the broader economic climate. The third thing is that, on a number of occasions, perhaps the management of bad loans was not as effective as it might have been.[44]

5.47      In response to the collapses in the debenture sector, ASIC set up a taskforce to address the key issues. Firstly, ASIC worked with the Banksia receivers to try and get the best outcome for investors. Secondly, ASIC looked at the gatekeepers in the debenture sector, which include:

... debenture trustees, who have an independent role to look after the interests of investors, and also auditors of debenture companies, who have a role in oversighting the reliability of financial reports—to make sure they fully understood their responsibilities and there was a heightened level of supervision within the industry. That is a process that is ongoing and ASIC is actively involved in that process.[45]

5.48      The third element that ASIC has considered is regulatory reform in the debenture sector. This was foreshadowed on 22 December 2012 by the Hon. Bill Shorten MP, Minister for Superannuation and Financial Services, when he announced that ASIC and APRA would be consulting on a range of proposals. The proposals have two broad aims:

The first is to improve the financial strength of retail debenture issuing finance companies. The second is to more clearly differentiate debenture issuers from banks, building societies and credit unions that are regulated under APRA's prudential framework.[46]

5.49      On 13 February 2013, ASIC released its consultation paper, Debentures: Reforms to strengthen regulation. The proposals include:

• minimum capital and liquidity requirements for debenture issuers that raise funds from retail investors and on-lend those funds;
• clarification of the role of trustees and greater express powers to obtain information from an issuer on an 'as needed' basis;
• debenture issuers engaging their auditor to provide the audited annual report and reviewed half-yearly report directly to the trustee twice per year and answer any reasonable questions put to it by the trustee. The auditor would have to report directly to the trustee any matters that are likely to be prejudicial to debenture holders or relevant to the exercise of the trustee's powers; and
• debenture issuers providing prospectus disclosure when existing retail investors make further debenture investments or 'roll over'.[47]

5.50      Mr Medcraft drew a distinction between the type of 'pretty heavy surveillance' regime operated by APRA in the banking sector and the supervisory role conducted by private sector gatekeepers, such as auditors and trustees in the shadow banking sector. Mr Medcraft said that ASIC's job was to provide the gatekeepers with 'the tools to do the job of front-line supervision of that sector'.[48] Likewise, the consultation paper also makes it clear that:

[t]he proposed requirements will not be part of a regime involving prudential supervision which involves a continuous high degree of regulator engagement with supervised entities and extensive powers to intervene to minimise business failure.[49]

5.51      Mr Tanzer said that ASIC placed a strong emphasis on investor education, both through its MoneySmart website and the messages it gives to financial advisers.[50] Mr Medcraft again emphasised the importance of asset diversification and balancing risk against reward:

If there were two principles we could get Australians to understand, they would be (1) diversification and (2) risk reward. Frankly, if an investment looks too good to be true, it probably is.

...

Diversification, diversification, diversification and risk reward—and, if you don't understand it, don't buy it. That really goes to the heart of what we are trying to teach in schools and what we are trying to teach on our website. It is so important.[51]

Committee view

5.52      The committee notes that the regulatory system for the banking sector relies on supervision and the enforcement of prudential standards and practices by the APRA in an effort to prevent business failure in that sector. By contrast, the committee recognises that the regulatory regime in the shadow banking sector relies on disclosure, private sector gatekeepers, and a high degree of consumer education and awareness. The committee acknowledges that capital and liquidity requirements have made banking more costly and has also made it more expensive for companies to raise money in the shadow banking sector.

5.53      However, the committee believes that the disclosure regime, while it is a necessary tool, is insufficient to adequately protect investors in the debenture sector. The committee strongly supports reform that aims to introduce greater resilience into the debenture sector, including mandatory capital and liquidity requirements, clarification and enhancement of the role of debenture trustees, and greater compliance enforcement by ASIC. The committee strongly supports the Government's approach to strengthening the regulation of the debenture sector to give investors greater confidence in shadow banking products and services.

Self-managed superannuation funds

5.54      Mr Kell noted that self-managed superannuation funds (SMSFs) were an area of concern and that ASIC was taking action against misconduct related to SMSFs. In response to questions by the committee, ASIC provided details of cases that are in the public domain:

Investigations/litigation on foot and in the public arena:

• Royale Capital (QLD) - Royale Capital Pty Ltd and ActiveSuper Pty Ltd were Queensland based companies that solicited members of the public to establish SMSFs and then recommended various share related investments to the SMSF. Civil proceedings have been commenced in the Federal Court of Australia involving 17 defendants, including several international entities.  There are currently asset protection and travel restriction orders against various defendants. A provisional liquidator has been appointed to various entities, including a Queensland property development company MOGS Pty Ltd.
• Trio/Astarra (NSW) - Trio Capital Ltd was a trustee and responsible entity for a number of superannuation funds and managed investment schemes. This included being the responsible entity for the Astarra Strategic Fund (ASF) and the ARP Growth Fund. ASF investors included both APRA regulated super funds and SMSFs. All members of the ARP Growth Fund were SMSFs. There have been a variety of administrative and criminal outcomes in this matter to date, which involves action against more than 10 individuals. These outcomes include lifetime bannings from the financial services industry and the imprisonment of the former directors of the investment manager for ASF.
• Wickham Securities Limited (QLD) - Wickham (now in voluntary administration) is an unlisted unrated debenture issuer. Most of the funds it raised (approximately $26m) came from SMSFs that had placed their funds there at the direction of a financial adviser, Mr Brad Sherwin, who through his company Sherwin Financial Planning Pty Ltd, advised his clients to establish SMSFs and invest in Wickham. Mr Sherwin also had a company DIY Superannuation Services Pty Ltd which provided administration and management services for the SMSFs. ASIC has freezing orders over the property of Mr Sherwin, his wife and several companies associated with them. The administrator estimates that the losses to investors are in the vicinity of $58 million.

Recently concluded:

• Supersave Superannuation Fund (NSW) - This fund was only open to SMSFs. Many investors rolled their superannuation out of APRA-regulated funds to invest in this fund, which attracted more than 100 SMSFs and over $7m from mid 2006 before being shut down by ASIC in late 2007. The principal behind the fund has been fined a record civil pecuniary penalty of $500,000 for his involvement in this and related schemes.
• Craig Dangar (NSW) - Charges were brought by ASIC following an investigation into Mr Dangar's conduct while he was employed to provide superannuation advice to trustees of self-managed superannuation funds, and compliance advice to accounting firms. Mr Dangar pleaded guilty to obtaining a total financial advantage of $250,000 by recommending that two clients purchase a portion of his shares in Morris Finance Ltd, and misrepresenting the true owner of the shares.

ASIC has approximately 10 further investigations on foot which are not in the public domain and primarily concern SMSF related misconduct or other misconduct resulting in significant harm to SMSFs.

In addition to its investigations which involve significant SMSF related misconduct, ASIC will, at any time have a number of other investigations that in some manner involve SMSFs. For example, ASIC is aware that in relation to the Westpoint, APCH and Banksia matters, funds were raised from the public for investment from a variety of sources, including SMSFs.  Given the growth in SMSF numbers, we expect that more investigations will involve some SMSF investors as a matter of course.

The matter of Mr Mark Letten is a further current example.  Mr Letten is an accountant and was a company director of LGH Holdings Ltd (now in liquidation) who ASIC alleges operated 21 unregistered managed investment schemes involved in the acquisition and/or development of real property. The schemes collected in excess of $110 million from approximately 1000 investors over a 10 year period. Many clients were introduced to the schemes through Mr Letten’s accounting practice and many invested via their SMSF. Mr Letten has been charged with 37 offences and is waiting to stand trial in Victoria.[52]

5.55      ASIC has commissioned independent research into SMSFs in order to be able to provide better targeted guidance and education to industry and to people considering setting up an SMSF:

there is research we are doing at the moment on two areas. One is on that issue of what a reasonable amount of resources and experience is that you would estimate people should have before they set up an SMSF, to help give guidance for people who are considering that and to help give guidance to the industry as well. We are also looking at some research as to what the drivers behind people's decisions to set up SMSFs are, so that we can better target our education and look to see if there are issues coming up that suggest that people are setting them up sometimes for the wrong reasons—and then, if you like, at the problematic end of the industry where people are being encouraged to set them up by, frankly, operators who are out to get hold of their money.[53]

5.56      Mr Tanzer observed that the APRA-regulated retail and industry super fund sector has responded to the increased competition from SMSFs and is now producing 'SMSF-like products at a very low cost, which I think is a great advantage for consumers'.[54]

5.57      Given that APRA-regulated funds are covered in the event of theft or fraud, Mr Medcraft recommended that people should consider all options and check out regulated funds before setting up an SMSF:

Before people set up an SMSF they should be looking at perhaps a regulated fund. If you are just looking to set it up for flexibility, or choosing to invest in individual shares or ETFs, deposits, or whatever, a number of regulated funds now have that flexibility within them. And, as we all know, you then have the protection, being a regulated fund, if there is fraud or whatever. It is a really important thing to emphasise that they need to look at the options.[55]

5.58      The committee will be asking more questions on these matters at the new oversight hearing in June 2013. It is particularly interested in receiving updates on products within APRA-regulated funds that approximate those products available in SMSFs.

ASIC's Annual Forum: The New Normal

5.59      Finally, the committee notes that ASIC held its Annual Forum in Sydney on 25–26 March 2013. While committee members were unable to attend, they have had the opportunities to view the sessions online. The committee commends ASIC for an interesting and informative event.

5.60      The Forum's title—The New Normal—referred to three key developments in financial regulation:

(a) structural change through the migration of savings from the banking sector to the securities sector and with it the increased significance of securities regulation;

(b) the ongoing risk that financial innovation will outpace regulation; and

(c) the need to ensure consistent global regulation and a level playing field for securities markets.[56]

These issues were addressed by the Chairman of the US Securities and Exchange Commission, Ms Elisse B. Walter.

5.61      The committee was pleased to note that ASIC's Forum had a session titled 'Bridging the Gap', which made prominent reference to Chapter 7 of the committee's report into Trio Capital. The committee flags its intent to conduct a roundtable involving auditors, research houses, custodians, superannuation trustees and financial advisers.

 

Ms Deborah O'Neill MP
Chair

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