4.1
This chapter looks at the regulatory actions in relation to the Sterling Group and the Sterling Income Trust (SIT), including whether the Australian Securities and Investments Commission (ASIC) should have intervened earlier to protect consumers. The chapter then examines the need for improvements to the financial services regulatory regime.
Regulatory responsibilities
4.2
The regulatory responsibilities for the products and services provided by the Sterling Group are shared between the Commonwealth (in the case of financial services) and the Western Australian Government (in the case of housing).
4.3
As the financial services regulator, ASIC has responsibility for the regulation of financial products, including managed investment schemes and the issuing of shares. ASIC is responsible for administering the Australian Financial Services (AFS) licence regime and conducting risk-based surveillance of financial services businesses to ensure that they operate efficiently and fairly. In addition, ASIC provides guidance to consumers and industry and takes enforcement action where appropriate.
4.4
ASIC has indicated that it had specific jurisdiction over certain aspects of the Sterling Group, including the SIT, as a managed investment scheme, and the Silverlink redeemable preference shares. ASIC also had jurisdiction over Theta Asset Management Pty Ltd (Theta) as an AFS licensee and the Responsible Entity for the SIT.
4.5
The Western Australian Department of Mines, Industry Regulation and Safety (WA DMIRS), through its Consumer Protection Division, is responsible for the administration and enforcement of legislation governing real estate in Western Australia (WA), including compliance with the WA Residential Tenancies Act 1987 (RTA).
4.6
Indeed, ASIC has argued that the 'complexity of the product resulted in two different regulatory bodies having jurisdiction over different aspects of the offering'. ASIC observed:
The Sterling New Life Lease [SNLL] arrangement was regulated by DMIRS, as the regulator responsible for the licensing and supervision of real estate agents and laws in relation to residential tenancies. The [SIT] and the Silverlink redeemable preference share issue were regulated by ASIC. To the extent that there was overlap, ASIC has worked alongside and liaised closely with DMIRS to take action against the Sterling Group.
Regulatory involvement by the WA DMIRS
4.7
The Consumer Protection Division in the WA DMIRS was the first regulatory agency to be alerted to potential concerns about the Sterling Group and the SNLL product that was being offered.
4.8
Concerns about the marketing of Sterling Group products were first raised with the Consumer Protection Division on 19 May 2015. In December 2015, DMIRS conducted follow-up inquiries to determine whether the contracts and long-term leases offered by Sterling Group were compliant with the WA RTA and closed this inquiry in July 2016.
4.9
In November 2016, WA DMIRS reported that it received a complaint from a tenant-investor who 'paid the Sterling Group $100,000 but was under the impression that she was purchasing a property rather than entering a long-term lease'. WA DMIRS stated that it 'provided advice and assistance to this tenant to enable her to negotiate the return of her $100,000 from the Sterling Group'.
4.10
Following further investigations, including the attendance of Consumer Protection officers at a seminar intended to encourage investment in the SIT, WA DMIRS first raised its concerns with ASIC on 16 March 2017 with formal contact made on 12 April 2017.
4.11
WA DMIRS outlined the reason for making this referral:
Of particular concern at the time was whether the monies invested in the SIT would adequately cover the rental payments for the tenants and investors in the scheme over an extended period. These matters were altogether different from the RTA issues previously investigated by Consumer Protection. They did not fall within the scope of the RTA investigation and were considered outside of our jurisdiction.
4.12
Following action by ASIC on the SNLL offering, WA DMIRS received further information about new investments by tenants through Silverlink in December 2018 and advised ASIC of this development.
ASIC involvement with Sterling Group and the SIT
4.13
The following section outlines ASIC's involvement with the Sterling Group and the SIT, including how it identified there was a risk to investors' money and its subsequent regulatory response.
Initial reports of misconduct
4.14
ASIC's involvement with the Sterling Group's product offerings extends well beyond the more recent concerns. Indeed, as far back as 2013, ASIC:
…placed a stop order on Theta in its capacity as responsible entity of the Rental Management Investment Trust, which was the former name of the SIT. The PDS in question related to a proposed listing of the trust on the Australian Stock Exchange. In accordance with our usual procedures, our corporations team considered the matter. We understand there were some non-compliant commercial features of the proposed offering that resulted in a stop order being made. The PDS related to the aggregation of rent rolls and did not entail any lease-for-life or similar arrangements.
4.15
Subsequently, ASIC received three reports of suspected misconduct relating to the Sterling Group in 2015–16. However, ASIC indicated that these reports did not relate to the Sterling New Life Lease (SNLL) product or the SIT and that they were assessed according to ASIC's normal regulatory criteria, and it was considered that no further action was warranted.
Preliminary investigations and actions
4.16
On 14 June 2017, ASIC obtained and reviewed the Product Disclosure Statements (PDSs) for the SIT and formed the view that the PDSs were defective on several grounds. These included:
concerns about inadequate disclosure of risks and conflicts of interest;
omissions of material information about the investment;
the presentation of prospective information about targeted returns; and
outdated and incorrect references.
4.17
As a result of these concerns, ASIC issued an interim stop order to Theta on 9 August 2017, which prevented further sales through the SIT and prohibited any offers, issues, sales, or transfers of the interests in the trust. On 29 August 2017, ASIC issued a final stop order for interests in the SIT and advised in a media release:
The stop order was due to concerns about [PDSs] for [the SIT], including inadequate disclosure of risks and conflicts of interests, omission of material information about the investment, presentation of prospective information about target returns, and outdated and incorrect references.
4.18
In addition, ASIC undertook several actions in September 2017 as part of its compliance investigation into the SIT, that included:
preventing seminars for the SIT and SNLL products from being held, relying on the stop order, while liaising with the WA DMIRS;
issuing a section 912C notice on Libertas Financial Planning, seeking information on, among other things, its oversight of the SNLLs; and
requesting Sterling First provide ASIC with materials relating specifically to the SNLL product.
4.19
After consultation with ASIC, Sterling Corporate Services Pty Ltd and Theta issued a new PDS for interests in income and growth units in the SIT. On 7 March 2018, ASIC indicated that it reviewed the new PDS and determined not to take action to stop the use of the new PDS. ASIC noted:
ASIC's broader focus at that time was the solvency of the [SIT], having received Theta's audited financial statements on 29 September 2017 which raised a 'material uncertainty' over the [SIT's] ability to continue as a going concern. ASIC took proactive steps in respect of these issues and on 30 April 2018 Theta closed the [SIT] to new investors and informed ASIC that the Second PDS was no longer in use.
4.20
After further investigations into the financial viability of the SIT, ASIC:
…formed the view that steps should be taken to stop new investors from investing in the [SIT] because of (among other things) concerns ASIC had with the financial viability of the product, the complexity of the product, and the elderly target audience.
4.21
On 30 April 2018, following the issuing of several notices under the Australian Securities and Investments Commission Act 2001 (ASIC Act) and the Corporations Act 2001 (Corporations Act), Theta closed the SIT to new applications for units and withdrew the PDS.
4.22
On 29 May 2018, ASIC commenced a formal investigation into the Sterling Group and the SIT in relation to whether individuals associated with the entities had contravened several sections of the ASIC Act. As it became clear that the SNLL product was going to be impossible to continue, Theta advised ASIC on 27 August 2018 that it would wind-up the SIT.
Actions in relation to Silverlink
4.23
As discussed in Chapter 2, Silverlink was established as a dedicated investment company offering an investment option for SNLL tenant-investors.
4.24
In April 2018, WA DMIRS advised ASIC that Sterling Group 'had begun to offer preference shares in the Silverlink Investment Company Limited (a Silverlink company) in addition or as an alternative to investments in the [SIT]'. ASIC noted that it 'understood the promotion of preference shares in Silverlink as an investment option was occurring despite there being no PDS or prospectus in relation to these shares, and despite Silverlink not holding an AFS licence'.
4.25
On 22 June 2018, ASIC met with the directors of Theta and Silverlink and was advised that the promotion of the Silverlink preference shares had ceased. ASIC became aware in December 2018 that Silverlink had been offering redeemable preference shares since around December 2017. This had occurred despite undertakings from the Sterling Group that the 'Silverlink investment option had been removed from the Sterling Group website since 18 May 2018'.
4.26
Following its June meeting with the directors of Theta and Silverlink, ASIC informed the committee that:
On 2 July 2018, Sterling sent a letter to SNL investor-tenants which gave an undertaking to fully remediate investor-tenants if they wanted to terminate their [SNLL]. ASIC obtained that letter on 4 July 2018. The letter was addressed to "Sterling New Life Tenant's" generally, but ASIC later learned that it had not been sent to Silverlink investors. Further, in late June 2018, Sterling's communications with ASIC omitted the Silverlink tenant-investors from a list of Sterling New Life Lessees.
In its further investigations, ASIC has since obtained an email dated 24 July 2018 which was sent internally to a SNLL sales representative which specifically referred to concealing Silverlink from ASIC.
4.27
As a result, ASIC formed the view that further contraventions of corporate and criminal law may have occurred in relation to the redeemable preference shares and, on 14 December 2018, wrote to two directors of Silverlink requiring them to stop further offering of these shares and provide written undertaking to that effect. On 13 March 2019, ASIC 'determined that there should be a broader investigation into the conduct of the Silverlink companies as part of the investigation of the [SIT]'.
4.28
ASIC subsequently submitted that:
Based on ASIC's further investigations in relation to suspected criminal conduct, ASIC believes that the Sterling Group actively concealed from ASIC fundraising through Silverlink companies.
Civil proceedings against Theta
4.29
On 11 December 2019, ASIC commenced action in the Federal Court in Western Australia focused on the promotion and management of the [SIT]. The action was against Theta and Mr Robert Patrick Marie, the Managing Director of Theta.
4.30
On 19 November 2020, the Federal Court found Theta and Mr Marie, contravened the Corporations Act on multiple occasions in authorising the issue of five defective PDSs for the SIT. The court ordered Theta to pay a penalty of $2,000,000 with respect to the declarations of contravention and ordered Mr Marie to pay a penalty of $100,000.
4.31
ASIC subsequently banned Mr Marie for four years from providing any financial services. Mr Marie was also banned from controlling an entity that carries on a financial services business and from performing any function involved in the carrying on of a financial services business in any capacity. According to ASIC:
Mr Marie has been banned due to contraventions of the Corporations Act stemming from the issue, by Theta, of five defective [PDSs] for the SIT, under which $16,710,669 in total was raised from retail investors between 20 May 2016 and 1 May 2018.
4.32
ASIC also explained 'that the liquidators of Theta and the Sterling Group are required by law to investigate and consider the bringing of claims against directors or other persons for the benefit of creditors of those companies'. ASIC also indicated 'that following those investigations, the liquidators of Theta and the Sterling Group have not determined to bring claims against directors or other persons involved in Theta or the Sterling Group'.
Criminal proceedings
4.33
On 15 October 2021, ASIC referred a matter to the Commonwealth Director of Public Prosecutions (CDPP) and is currently 'working with the CDPP in relation to possible criminal proceedings against individuals associated with the Sterling Group'. As this matter is currently in progress, ASIC was unable to provide further details on its exact nature.
Adequacy of the regulatory response
4.34
This section examines whether the regulators took appropriate actions in relation to the collapse of the Sterling Group and the SIT, and specifically whether ASIC should have acted on the available evidence sooner. This section also looks at whether there are any regulatory gaps that would prevent ASIC from responding to emerging consumer harms caused by managed investment schemes.
Timeliness of regulatory intervention
4.35
Many stakeholders expressed strong concerns that the losses suffered by tenants and other investors could have been prevented had ASIC taken a more proactive stance on protecting consumers in the financial services industry. For example, consumer advocacy firm SR Group argued:
…that ASIC, during the course of its investigations, failed to identify shortcomings in the Sterling Group's business model and legislative compliance, including failing to appropriately respond to complaints received from consumers and other government departments, including the [DMIRS]. In doing so, ASIC failed to protect the interests of Sterling Group investors. We allege that ASIC's failure to effectively perform its regulatory duties has contributed to the loss of funds for Sterling Group customers.
4.36
These views were echoed in the considerable number of personal accounts from individual tenants and other investors in the Sterling Group. The Western Australian Minister for Commerce also argued that both 'the Commonwealth and ASIC were far too slow to act'.
4.37
In response, ASIC has maintained that it 'acted in good faith at each point in the chronology based on the information and evidence available to us at the time and the powers entrusted to us'. The Chair of ASIC, Mr Joseph Longo, argued:
ASIC took regulatory action when we became aware of serious concerns in relation to the Sterling Group and [SIT]. We appreciate that those who have suffered losses have wished for us to have moved faster at times or to have intervened earlier. Any action we take must be based on the collection of proper evidence. We must follow due process before we can intervene, particularly in circumstances where there is incomplete or conflicting information. Our role also requires us to regularly make difficult choices about which reports of misconduct to examine and which apparent breaches to investigate.
4.38
In relation to the August 2017 stop order, ASIC's position was that:
In our view, a stop order was the most efficient and timely approach to prevent further sales of interests in the [SIT] unless and until the disclosure issues were resolved. This is a power ASIC can itself exercise and does not involve an application to the court. In our view, a court injunction to stop further sales would not have been any quicker.
4.39
On reflection, ASIC conceded that more could have been done to disseminate the media release following the issuing of the stop order in August 2017:
In hindsight, ASIC acknowledges that there may have been more we could have done to bring the stop order to the attention of existing investors, so they could consider whether or not they wanted to make a complaint about the defective PDSs, and potentially seek a refund of their investment. We are considering how we might better publicise stop orders in the future.
4.40
Similarly, it is unclear why ASIC did not take action to stop the use of the new PDS in March 2018 when it had 'serious concerns' with the financial viability of the SIT in November 2017 following the lodgement of Theta's audited financial statements for the SIT for the 2016–17 financial year.
4.41
ASIC also reflected on whether it could and should have done more in relation to the marketing and advertising of the combination of the SNLL and SIT:
At the time, we considered that our jurisdiction was limited to the financial product, being the [SIT]. In hindsight, we may have taken action, jointly with the WA DMIRS, in relation to the marketing of the overall SNLL arrangement.
4.42
At the hearing on 18 November 2021, Mr Longo also emphasised other contributing factors that may have impacted ASIC's ability to act sooner in its inquiries and investigations into the Sterling Group:
…at the time there were several other collapses that the office was looking at in [WA]. In fact, they, regrettably, involved much larger sums of money. They were very well-known ones: Chris Marco, unregistered MIS, the Macro Pilbara scheme and the Veronica Macpherson matters. All of those collapses were being dealt with at exactly the same time as this came in, so there was a lot going on.
4.43
The committee notes that 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. As ASIC pointed out:
Under the legislation ASIC administers, it does not have jurisdiction over real estate and tenancy matters, including residential tenancy agreements, and the licensing and conduct of real estate agents. In the case of the [SNLL] and its WA tenants, the relevant regulator is DMIRS, as the regulator responsible for the licensing and supervision of real estate agents and administering laws in relation to residential tenancies.
4.44
Indeed, Circle Green Community Legal (Circle Green) argued that WA DMIRS had an opportunity in 2017 to find that the SNLL scheme contravened sections of the Residential Tenancies Act 1987 (WA). Circle Green concluded that:
If they had made that finding, DMIRS could then have taken steps in their role as regulator to prevent or at least 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).
4.45
In relation to its regulation of the SNLL product, WA DMIRS maintained that:
No breaches of relevant State legislation warranting prosecution action were identified before the Sterling Group went into voluntary administration' and that investigations 'were terminated when the voluntary administration was announced’.
4.46
That said, WA DMIRS indicated that it was reflecting about whether a potential gap existed in state consumer protection and tenancy laws:
…the experience with the Sterling Group has raised operational concerns that section 27 of the [RTA] (WA), which deals with restrictions on the consideration that can be required or received from a tenant for or in relation to a residential tenancy agreement, did not contemplate the type of arrangements included in the Sterling Group scheme.
Consumer Protection will be examining this issue, having regard to the two recent Western Australian Supreme Court decisions, and will provide advice to the Minister for Commerce.
ASIC could have assessed the risk as higher
4.47
ASIC's ability to exercise its powers in relation to the Sterling Group was dictated by the current financial services regulatory regime. According to ASIC, financial products are regulated using a risk-based approach:
Regulation has traditionally focused on the transparency of the sales process (through disclosure) and the conduct of the intermediaries involved in the sale. Unlike regulation for many non-financial products, conduct and disclosure regulation is typically not concerned with the merit (i.e. 'safety' or quality) of a financial product and the services associated with it.
The regulatory settings were generally based on the belief that disclosure would be effective to enable consumers to make informed decisions, including in relation to the risk they are taking when making a financial decision. This is especially the case with investment products such as interests in managed investment schemes.
4.48
Indeed, Mr Longo indicated that 'the system assumes that when people invest, they know they're taking on risk' and explained:
The system doesn't expect the regulator to be there monitoring the performance of all of these managed investment schemes and whether the risks that investors take on prove to be wise or unwise investment decisions. I don't think that's the expectation of parliament. And may I say, with respect, it could not have been the expectation of parliament, because there are just so many of these schemes involving—so in order for ASIC to be monitoring the performance in each and every scheme and following up each and every concern of each and every scheme to the nth degree, is I think quite an unrealistic expectation.
4.49
In relation to the monitoring of PDSs, Mr Longo argued:
PDSs aren't even filed with us. In fact, the first page of this PDS says that ASIC doesn't approve it. If you go to the PDS, there's standard language on the first page stating that ASIC doesn't approve or warrant any part of the PDS. It's up to the people who produce the PDS. It's their document. It's their responsibility to get it right. That's the system, and, of course, the regulator gets involved. It's sort of a game of Whac-A-Mole, as I think a journalist put it earlier in the week. Facts and circumstances come to our attention that lead to a breach of the law, and that requires evidence and due process. Even so, we can't be there for every scheme that goes bad. We try to be, but at that point the harm might have already been caused, because the business model and what goes in the PDS is the responsibility of the people who are pressing or promoting that scheme.
4.50
That said, there is still an important role for monitoring and proactive action by ASIC where the risk profile warrants it. In the case of the SIT and Silverlink returns funding the rental payments of the SNLLs, there are questions about what the level of risk was and what should have been an appropriate regulatory response. Compared to other managed investment schemes, the risks associated with the combination of the SIT/Silverlink returns and SNLL product appear to have been heightened by the following factors:
tenant-investors were elderly and retired, and were less likely to be able to recover financially if the scheme failed;
tenant-investors often had to sell their principal residence to fund their investment in the SNLL product, thereby risking their housing security if the SNLL product failed;
the highly complex and interrelated structure of the Sterling Group whereby tenant-investors' access to housing was dependent on the financial performance of the investments;
directors and key executives with connections to questionable schemes that had previously failed; and
unrealistic prospective returns from the SIT and Silverlink products and unviable pricing structures of the SNLL product.
4.51
Given that each of the risks outlined above should have been of serious concern, a question arises as to why ASIC did not consider the combined risks to be of sufficient gravity to act sooner. Indeed, the Australian Financial Complaints Authority (AFCA) highlighted some of these same risks in its subsequent determinations, finding that the promoters of the SNLL scheme had engaged in misleading and deceptive conduct by failing to disclose the inherent risk of the underlying investment. In particular, AFCA drew attention to the potential for a shortfall between investment distributions and rental payments and the flow on effect this would necessarily have on the security of investors' capital and tenure.
4.52
Also of note is ASIC's lack of concern regarding the involvement of questionable directors and key personnel. CPA Australia highlighted the problem:
…schemes fail and, yes, people may have been involved in schemes that have previously failed. But if you are seeing the participants who were previously involved in questionable schemes then it should warrant a greater level of oversight to ensure that they are suitable to be involved again and at a suitable level of oversight to ensure that that scheme is operating appropriately.
4.53
In response, ASIC maintained that the regulatory framework did not preclude such people from promoting schemes and did not acknowledge the need for heightened oversight in response to poor previous behaviour. Mr Longo argued:
From ASIC's perspective, under the legislation we have some grounds for not registering managed investment scheme, but they're very narrow. Let's assume you have a bad reputation. Some of these individuals, if I may say so, might have had a mixed reputation in Western Australia. That didn't mean they couldn't register their managed investment scheme, and it certainly didn't mean that ASIC could disallow registration or not permit registration.
4.54
Under the new director identification number requirements, company directors need to verify their identity by registering for a unique identifier that a director applies for once and keeps forever. However, it is unclear whether historical records will be amended so that this unique identifier will capture past directorships and company associations, and thereby assist retail investors to readily identify directors and key personnel who may have been involved in enterprises that have previously failed. Indeed, the Sterling First Action Group noted that there were variations in the information provided by the directors of the Sterling Group, which made it difficult to track their involvement in past companies and schemes.
Recent regulatory changes may not have assisted
4.55
There have been several recent reforms intended to better protect consumers of financial products that may have been of benefit in relation to ASIC's oversight of the SIT had they been in in force at the time of the Sterling Group's collapse. These include:
the introduction of the new product intervention power; and
the establishment of a new obligation on issuers and distributers of financial products with new design and distribution obligations.
Product Intervention Powers
4.56
Under the product intervention power, ASIC can issue a product intervention order where a product has resulted in, will result in or is likely to result in significant consumer detriment.
4.57
However, ASIC noted 'that there is a relatively high threshold which must be met in order to establish significant consumer detriment' and indicated:
On balance, ASIC's view is that the product intervention power would not necessarily have provided a faster solution to the Sterling Income Trust managed investment scheme than intervention through the issuing of stop orders on the PDS and ultimately the closure of the product by Theta on 30 April 2018.
Design and Distribution Powers
4.58
The design and distribution obligations require product providers to identify the class of consumers a product is suitable for and target the marketing of the product accordingly. According to ASIC:
If the [SIT] product were marketed and sold to a large number of consumers for whom the product was not appropriate (for example, because the target market was inappropriate or because it was not distributed in accordance with the defined target market), then there would likely have been a breach of the design and distribution obligations. In such circumstances, ASIC may have imposed a stop order on further sales of the product until the design and distribution issues were resolved.
4.59
In the case of the SNLL product, the target market of tenant-investors—elderly Australians with limited financial means—were unlikely to be suited to the high-risk, high-return offering which purported to pay their rent from potentially volatile investment earnings. But under the design and distribution obligations framework, the obligations to determine this would rest with the product designers:
ASIC is not a merits regulator. This means ASIC cannot and does not express views about whether a particular investment is good or bad. Product issuers and distributors have the primary responsibility of ensuring that their products are compliant and perform as expected.
4.60
Given ASIC's apparent reluctance to be proactive, if regulatory intervention had occurred using these powers, it would likely have been too late for investors, many of whom would still have suffered irreparable damage, both financially and more broadly.
Possible legislative and regulatory reforms arising out of the collapse
4.61
The collapse of the Sterling Group is another example in a long list of managed investment scheme failures that have preyed on vulnerable Australians.
4.62
Given the ease with which schemes that are novel, risky, illiquid or speculative can be registered and sold in Australia, it would seem prudent to consider whether the appropriate legislative and regulatory settings are in place to prevent future consumer losses, particularly in relation to failed managed investment schemes.
4.63
A former Chair of ASIC, Mr Tony D'Aloisio, also reflected on the limitations of the current regulatory regime to adequately protect retail investors. Mr D'Aloisio told the committee:
There's been a big movement in our markets with retail investors—investors through unlisted products. The challenge has been how to protect them. It's something that was recognised, in my time as chair, as something that ASIC needed to look at. To date there's been an ad hoc approach to a system to protect them…
4.64
Indeed, stakeholders highlighted several options to improve the financial services regulatory regime to better protect investors. Some of the options are aimed at managed investment schemes specifically while others options apply to financial regulation more broadly.
Licensing and registering managed investment schemes
4.65
Many stakeholders questioned how operators with a history of failed financial investments could readily obtain an AFS licence and how managed investment schemes could be registered without any assessment of the underlying investment proposition. Indeed, many victims highlighted that they may not have been involved with the Sterling Group had they known the dubious history of the directors and key personnel and/or that ASIC registration of a managed investment scheme is not an endorsement of the product.
4.66
CPA Australia argued that further regulatory reform was required 'to ensure that, in the future, all victims of financial product failure and/or poor financial product advice can access appropriate and efficient means to seek justice and redress'. Ms Keddie Waller from CPA Australia stated:
…we believe it is reasonable for an individual considering investing directly into an ASIC registered MIS, that holds an ASIC issued AFS licence, to take a level of comfort that the company has had an appropriate level of assessment and oversight from the regulator, such that it is appropriate for that MIS to be commercially operating. We question the appropriateness of the current regulation and oversight of registered MIS products if a commercially flawed business model can be approved and offered to the community.
4.67
In relation to obtaining an AFS licence, ASIC has limited discretion under the Corporations Act to 'refuse an application for an AFS licence for reasons beyond the relevant criteria'. ASIC therefore suggested:
If it were considered desirable to give ASIC a greater discretion in the licensing process, the primary licensing provision in s913B could be amended to 'ASIC may grant a licence' (rather than 'ASIC must') if certain criteria are met. This would mean that, for the applicant, the award of a licence is more akin to a privilege rather than a right.
Alternatively, the law could provide a residual 'catch-all' discretion to broaden the circumstances in which ASIC may refuse a licence (i.e. 'ASIC must grant a licence if the following conditions are met … unless there is any other reason which in ASIC's reasonable opinion justifies the refusal of the application').
4.68
Additionally, ASIC submitted that similar amendments could be made to the provisions in the Corporations Act dealing with situations when ASIC can suspend or remove a licence.
4.69
In relation to managed investment schemes, ASIC suggested that consideration could be given to streamlining the process of registering managed investment schemes so that ASIC may register a scheme provided that:
the operator holds the relevant AFS licence; and
the registration forms have been completed (with attachments) and signed by on behalf of the licensee.
4.70
ASIC argued that this would 'make it clear that registration is a mere administrative process and does not involve merit review of the proposed scheme by ASIC'.
Offering of high-risk managed investment schemes
4.71
The SNLL was a complex, high-risk scheme dependent on the returns of other investments. Many of the tenant-investors in SNLLs maintained that they were not informed that payment of their rent-for-life leases were linked to the return of an underlying managed investment scheme.
4.72
At the hearing on 15 December 2021, Mr Longo described ASIC's light touch approach to the registration and licencing of managed investments in Australia:
We have little or no discretion when it comes to registering managed investment schemes and licensing responsible entities. In practical effect, a wide variety of potentially very risky investments are consequently registrable as managed investments in Australia. The barriers to entry for a new managed investment scheme like the [SIT] are modest. As noted earlier, it's not ASIC's role to assess whether these are good or bad investments.
4.73
CPA Australia outlined this regulatory approach leads to a significant gap in consumer protections for such high-risk financial products. They argued:
This must be addressed to protect those who choose to invest in such products without seeking professional advice – either by choice or because they may not realise they are directly investing in a financial product.
4.74
ASIC pointed to similar international jurisdictions that do not permit high-risk schemes based on unconventional underlying assets from being offered to retail investors. ASIC argued:
Broadly speaking, a 'collective investment fund' and 'mutual funds' are the UK and US equivalents to Australian 'managed investment funds'. Each of the jurisdictions identified has restrictions that collective investment schemes or mutual funds must abide by where they are being offered to retail investors. Retail investors are generally non-professional or individual investors.
If such restrictions were applicable in Australia at the relevant period, this would likely have resulted in the [SIT] not being available to retail investors.
4.75
Additionally, ASIC noted that:
If policymakers are minded to consider reform to avoid investment in registered managed investment schemes that are more likely to cause retail investors harm there would be value in giving consideration to the requirements in other well respected jurisdictions.
Managing non-viable or insolvent managed investment schemes and their responsible entities
4.76
Issues related to non-viable and insolvent managed investment schemes and their responsible entities have been consistently raised in various contexts, including parliamentary inquiries, over the last decade.
4.77
In 2012, the Corporations and Markets Advisory Committee (CAMAC) made a number of recommendations in relation to managing non-viable or insolvent managed investment schemes and their responsible entities, which proposed:
including a definition of an insolvent scheme in legislation;
introducing a voluntary administration regime for insolvent schemes;
requiring that an incumbent responsible entity or temporary responsible entity provide reasonable assistance to a prospective responsible entity in certain circumstances;
giving the court a general power to adjust the duties and liabilities of a temporary responsible entity to particular circumstances;
giving the court the power to wind up a scheme if it is insolvent; and
providing for a statutory order of priorities in the winding up of a scheme—based on that provided for companies in section 556 and adjusted, where necessary, for schemes—and provide a first priority for payments to a temporary responsible entity
4.78
In particular, ASIC referenced Recommendation 20 from the Senate Economics References Committee's final report into agribusiness managed investment schemes, which stated:
The committee recommends that the government use CAMAC's report on managed investment schemes as the platform for further discussion and consultation with the industry with a view to introducing legislative reforms that would remedy the identified shortcomings in managing an MIS in financial difficulties and the winding-up of collapsed schemes.
4.79
In its response to that report, the government agreed that an enhanced regulatory framework for managed investment schemes was required and stated that the framework would be reviewed following the introduction of the new corporate collective investment vehicle (CCIV) regime.
4.80
In November 2021, the government introduced legislation to enable the CCIV regime. However, the status of the proposed managed investment scheme framework review is unclear and the issues surrounding insolvent managed investment funds persist, as highlighted by the SIT collapse.
Public warning notices
4.81
ASIC has the power to issue a public warning where it has reasonable grounds to suspect conduct that contravenes certain parts of the ASIC Act (for example, the prohibition on misleading or deceptive conduct). However, ASIC last issued a public warning notice on 13 February 2018 and has only issued 11 public warning notices in the last decade.
4.82
CHOICE argued that ASIC should utilise its existing public warning power to quickly alert consumers about emerging risks of managed investment schemes and recommended:
…that ASIC issue public warning notices more frequently to alert consumers about emerging harms in the financial sector, especially in relation to managed investment schemes. A public warning power is a useful regulatory tool that can be deployed quickly to help prevent further consumer detriment from occurring.
4.83
In addition, CHOICE called on ASIC to 'develop a framework for ensuring early identification of consumer harm through managed investment schemes to ensure that the regulator issues early and quick public warnings when appropriate'.
4.84
Similarly, the Financial Planning Association of Australia (FPAA) recommended that consideration could be given to some form of public notification or a requirement to issue a notice, note or letter with the PDS in instances where ASIC has raised concerns. It argued that:
…this could be like the notification super trustees are required to provide members under the 'Your Super, Your Future' performance test obligations.
4.85
However, ASIC noted that 'the public warning power only applies to conduct that breaches the ASIC Act, not to inherently risky products or services as such'. ASIC went on to explain that the:
…power only relates to situations where we have reasonable suspicion of relevant contraventions of the ASIC Act. It is not a general power to warn investors about 'dangerous' or 'risky' products.
4.86
Noting the concerns of stakeholders about the limitations on the suite of regulatory interventions available, ASIC proposed that:
If it were considered desirable to give ASIC a broader public warning power, the power could be extended to include situations where ASIC 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'. This would bring into the scope of the public warning power the types of situations potentially amenable to a product intervention order.
Seminars and the provision of general advice
4.87
Some investors spoke of becoming involved in the rent-for-life scheme after attending seminars spruiking the product utilising a general advice disclaimer. The committee understands that the information provided at these seminars (and in subsequent discussions with the Sterling Group representatives) was misleading and did not fully explain the relationship between the investment products offered and the rent-for-life scheme.
4.88
Many investors did not seek 'personal advice' prior to investing and were only given 'general advice' that did not take into account their personal circumstances and financial situation. Had 'personal advice' been provided that took into account the individual financial circumstances of each investor, it is highly likely that many of them would have been unwilling to take the risk of linking their housing security with a relatively high-risk underlying investment.
4.89
These experiences reflect the FPAA's concerns 'that highly complex, high-risk products like the SIT continue to be marketed directly to consumers through seminars, targeted advertising and general advice'. To improve consumer understanding of the type of advice provided, the FPAA recommended:
…the law be changed to rename the term 'general advice' to 'product information' and 'strategy information', which better reflects the definitions and is less misleading to consumers. Any replacement must ensure that the term 'advice' can only be used in association with 'personal advice' — that is, advice that takes into consideration personal circumstances.
The general advice warning should be amended to include a statement that the recipient may benefit from advice which takes account of their personal circumstances, and they should consider seeking advice from a financial planner. The warning should be mandatory at financial product seminars.
4.90
Mr D'Aloisio suggested that a possible solution is 'to give the retail investor the ability to make decisions—not to talk about sophisticated or unsophisticated investors but to talk about investors and what they need, and my feeling on that is that it's having access to advice'. Mr D'Aloisio noted:
What I'm suggesting is that…if you can improve the advice you're going to give these people prior to them making the investment…and you put the pressure on getting that advice—and I've called it 'risk discovery advice'—I think that puts them in a much better position as a retiree and investor…
Breach reporting requirements
4.91
The FPAA also identified gaps in the new breach reporting regime in the Corporations Act, specifically that financial product providers are exempt from section 912EB of the Act. The FPAA told the committee:
Section 912EB requires a financial planning licensee to investigate and remediate and compensate a consumer where there's a financial loss due to misconduct or a breach. That part of it is not extended to financial products. So they will identify a breach, but if there is a loss caused by that breach of the Corporations Act, there's no requirement for them to remediate the client.
4.92
As a result, the FPAA 'strongly advocated for the provisions in s912EB to be extended to product providers throughout the development of the breach reporting legislation due to the experience financial advisers have had with clients impacted by past product failures'.
4.93
The SMSF Association also supported the expansion of the breach reporting regime to include product providers. It argued that this would 'increase the level of accountability and obligations of product providers, and ultimately an earlier opportunity for regulator intervention'.
Legislated directions power
4.94
In 2016 and 2017, a review was undertaken to assess ASIC's enforcement regime and the suitability of its regulatory tools. The recommendations arising from the ASIC Enforcement Review Taskforce were put on hold pending the outcome of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission). The recommendations from the Royal Commission endorsed the adoption of the recommendations made by the ASIC Enforcement Review Taskforce and, on the 4 February 2019, the government released its response to the Royal Commission, supporting the recommendations that included providing ASIC with powers to give direction to financial services and credit licensees.
4.95
This is reflected in the Exposure Draft published in 2020 in preparation for ASIC's directions power to be legislated. Under the draft, section 918(1)(a) provides for ASIC to may make a direction if they have 'reason to suspect that a financial services licensee has engaged or is engaging in conduct that constitutes a contravention of a financial services law'. Under section 918(1)(b), ASIC may make a direction if they have 'reason to suspect that a financial service licensee will engage in conduct that would constitute a contravention of a financial services law'.
4.96
In its submission, CHOICE supported the passage of legislation to provide ASIC with a directions power that 'would help ASIC address or prevent emerging risks to consumers' and would enable ASIC 'to become a more proactive and effective regulator'. CHOICE explained:
The other thing we'd note in terms of preventing any future harm is that ASIC still lacks another key power, which is a directions power that's been recommended by multiple reviews and was backed by the banking royal commission. That would give it more flexibility to step in and stop harm where it sees risks of harm to consumers. So we'd also ask the committee to look at a recommendation around the government prioritising a directions power for ASIC, because that's one of the key things that can help to prevent further harm in the future.
4.97
At the hearing on 15 December 2021, Mr Longo stated that a broad directions power would have enabled ASIC 'to direct Theta to contact existing tenant investors and general investors and inform them of the defective PDS and their right to complain or seek a refund'.
Committee view
4.98
It is clear to the committee that the Sterling Group was promoting a highly complex scheme based on a flawed business model that linked long-term tenancy to the performance of an investment. The promoters of the scheme did not have the necessary skills to undertake such a business venture successfully, and the financial products being offered were completely inappropriate for the group targeted. The fact that such a scheme could be offered to retail customers in the first place is a poor reflection on the current regulatory framework for managed investment schemes in Australia.
4.99
And yet, the experiences of the Sterling investors are but another example in the large number of investment products that have failed and resulted in substantial investor losses. Both this committee and the Parliamentary Joint Committee on Corporations and Financial Services have conducted several inquiries over the last decade into failed investment schemes, the underlying regulatory regime, and the performance of the regulator.
4.100
The long history of failed management investment schemes in Australia and the associated destruction of consumer wealth demonstrates that this problem goes beyond what occurred with the Sterling Income Trust (SIT) and Sterling Group of companies. Clearly, there is a broader systemic issue related to the regulation of financial products to retail investors in Australia. Similar jurisdictions, such as the United Kingdom and United States, impose restrictions on collective investment schemes or mutual funds where they are being offered to retail investors to protect them from such losses. While the committee notes that the government has previously committed to review the regulatory framework for managed investments schemes, it is yet to formally commence this process. Many recommendations arising from previous inquiries on similar issues have yet to be implemented and high-risk managed investment schemes continue to be ruthlessly marketed and then suddenly fail, taking retail investors financial hopes and dreams with them.
4.101
It is now more than two decades since the Wallis inquiry and the establishment of a regulatory regime, and a regulator focussed on adequate disclosure. While the 'buyer beware' approach may be a necessary component of financial services regulation, the current regulatory settings are clearly insufficient in protecting the interests of some consumers. As shown by the Sterling Group losses and their devastating impact on retirees, the so-called disclosure requirement in the form of a PDS (when provided), along with the actively misleading marketing material, did nothing to protect consumers. This hands-off regulatory regime gave open slather to proponents of the scheme to wilfully argue to the Australian Securities and Investments Commission (ASIC) that they were in the right, without any onus on ASIC to investigate until it was too late.
4.102
Accordingly, the committee believes it is time for the Parliament to undertake a review of the implementation of the 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 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
4.103
The committee also recommends that the 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.
4.104
In addition, the committee notes that the provision of adequate Professional Indemnity Insurance (PII) is essential to ensuring that retail investors in high-risk financial products are appropriately protected—PII was discussed in Chapter 3.
4.105
That said, the committee also has serious concerns about the performance of ASIC with respect to the Sterling Group matter, including its under-assessment of the gravity of the risks, the timeliness of its response, and its failure to act proactively. The committee is mindful of the requirements for ASIC to obtain proper evidence and follow due process before undertaking investigations and enforcement actions. The committee is also conscious that ASIC's regulatory role does not involve preventing all consumer losses or ensuring compensation for consumers in all cases where losses arise. However, in this instance the committee believes that ASIC had sufficient evidence and grounds for concern in 2017 to refer the matter to its enforcement division for investigation.
4.106
In fact, the issues identified in ASIC's Statement of Concerns were serious and appeared to establish possible contraventions of the Corporations Act 2001 (Corporations Act). Furthermore, these concerns should have been further strengthened when ASIC was provided with a qualified audit report from the auditor of the SIT which raised a 'material uncertainty' over the trust's ability to continue as a going concern on 29 September 2017. Despite these matters, ASIC did not commence a formal investigation until 29 May 2018.
4.107
The committee notes that the financial products were offered by directors and key executives with a history of failed business ventures. Given that the buyer assumes the risk of such products, those responsible for the products should correspondingly face penalties commensurate with any harm caused when these products fail. While the introduction of director identification numbers may be of assistance going forward, it may not help existing consumers if historical records are not included.
4.108
Clearly, the current penalty regime is insufficient to deter high-risk schemes, such as the SIT, being marketed to retail investors. Indeed, the director of the Responsible Entity for the SIT was banned for only four years while the victims of the Sterling New Life Lease (SNLL) scheme face insecure housing for the rest of their lives. As such, the committee considers that the penalty regime associated with contraventions of Corporations Act ought to be amended to sufficiently deter the creation of high-risk financial products that have a significant risk of failure.
4.109
The committee also emphasises that having suitable regulatory tools must be accompanied by a willingness of the regulator to use them appropriately. In a risk-based regulatory framework, being proactive in assessing risk and acting on any adverse assessments is paramount. In the Sterling Group case, there were obvious signs that this was a high-risk structure with potentially devastating consequences for investors who were not experienced and could ill afford for the scheme to fail. Accordingly, the committee encourages ASIC to take the wheel and not a be a passenger until it is too late in the oversight of managed investment schemes and other financial products where there are obvious 'red flags'. To that end, the committee recommends that ASIC be given a broad directions power, as was recommended by the ASIC Enforcement Review Taskforce.
4.110
While ASIC has been provided with new product intervention powers to take more timely action against harmful managed investment scheme products, the committee notes that these would not necessarily have been helpful in the Sterling Group case had they been in force at the time. Additionally, the committee considers that ASIC should have been more proactive in publicising its regulatory actions, particularly when they relate to potential harms caused to consumers by managed investment schemes. The committee recommends that the government consider extending ASIC's public warning power to include situations where ASIC has reasonable grounds to suspect a financial product or credit products has resulted, will result or is likely to result in 'significant consumer detriment'.
4.111
Indeed, the SIT and Silverlink offerings when linked with a SNLL were not just financial products but a hybrid which included consumer elements that required appropriate 'merit' regulation which focused on the quality (in this case, the longevity) of the housing tenure across the proposed 40-year lease. This complexity resulted in both ASIC and the Western Australian Department of Mines, Industry Regulation and Safety having jurisdiction over different aspects of the offering. The committee therefore believes that the government should work with state and territory counterparts 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.
4.112
Overall, the committee believes that there is a clear gap in community expectations around the regulation of financial and investment products. This is demonstrated by the misalignment between people's understanding of financial products and how these products are designed, disclosed, and marketed to them. The committee therefore recommends that ASIC develop a framework to promote greater awareness among retail investors and financial consumers so that they have adequate information to make informed decisions in relation to complex financial products, particularly a realistic assessment of the associated risks and the impact this may have on their financial situation and ongoing lifestyle.
4.113
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 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
4.114
The committee asks the Minister to table, in their response to this report, all recommendations from all relevant parliamentary and government inquiries since the global financial crisis and the government responses.
4.115
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.
4.116
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.
4.117
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'.
4.118
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.
4.119
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.
4.120
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.
Senator Anthony ChisholmSenator Louise Pratt
ChairParticipating Member
Labor Senator for QueenslandLabor Senator for Western Australia
Senator Deborah O'Neill
Participating Member
Labor Senator for New South Wales