Should heads roll over Trio Capital?

The last APRA regulatory failure around HIH Insurance saw heads roll. Mike Taylor asks whether the gravity of the Trio Capital collapse ought not to justify similar punishment.

The chairman of the Australian Prudential Regulation Authority (APRA), John Laker, is one of the highest-paid people on the Commonwealth’s payroll. In the wake of the Parliamentary Joint Committee (PJC) report into the collapse of Trio Capital, he might consider his future in the role.

If one thing was made very clear in the PJC report, it was that both APRA and its sister regulator the Australian Securities and Investments Commission (ASIC) had failed in one of their primary objectives – detecting and eliminating fraud in the nation’s more than $1.3 trillion superannuation industry.

The PJC report is scathing of the performance of both APRA and ASIC and, given its findings, the executive team at APRA should be grateful that it did not call for someone’s head to be delivered on a platter.

In fact a precedent exists for senior executives to pay a high price for regulatory failures. In 2003 the then chairman of APRA, Graeme Thompson, paid the price for the collapse of insurance company HIH.

Indeed, the Labor Opposition at that time was calling for executive blood, with the then Opposition finance spokesman, Stephen Conroy, calling for APRA’s board to resign over the regulator’s “failure to do its job”.

Conroy was quoted back in 2003 referring to the board being responsible for APRA’s light-touch, self-regulatory model, which had proved incapable of dealing with corporate greed.

What needs to be understood about the failings of APRA with respect to Trio Capital is that they have had far greater impact than that of the collapse of HIH. Indeed, the PJC report last week noted that the collapse of Trio was far more troubling than the collapse of Storm Financial.

It said this was because while Storm Financial involved Australian investors being persuaded to put their money into investment vehicles which were much higher risk than was appropriate, Trio had actually involved fraud.

Just how well APRA performed with respect to Trio has been the subject of numerous questions asked both within the jurisdiction of the PJC and in the broader Senate estimates process, and the regulator has at times been less than clear as to who amongst its most senior personnel had oversight of Trio.

This lack of clarity was evident in the regulator’s response to a question from Tasmanian Liberal Senator David Bushby asking which APRA officers were responsible for the review.

The response provided by APRA was a rather oblique: “Members of the APRA frontline supervision team responsible for these superannuation entities and their immediate managers conducted these reviews”.

Bushby might quite rightly have been prompted to ask who on the senior executive therefore had oversight of the issue – was Laker involved? Was his deputy chairman, Ross Jones, involved?

The bottom line for APRA is that the findings of the PJC on Trio are no less damning than the findings of the HIH Royal Commission.

Quite simply, the PJC raised strong concerns about the performance of the financial services regulators in circumstances where it said the Trio fraud “appears to have been designed to take advantage of vulnerabilities in the superannuation system”, with a key element of the scheme having been to move the funds of Australian investors overseas.

“A key finding of this report is that key checks and balances in the Australian financial and superannuation system did not work to identify the existence of fraudulent conduct and to shut it down rapidly,” the PJC report executive summary said.

“It was left to an alert industry participant to uncover the Trio fraud.”

It said that in September 2009, John Hempton, CEO at Bronte Capital Management and a former Treasury official, had written a letter to ASIC Chairman Tony D’Aloisio, alerting ASIC to the suspiciously smooth returns achieved by the Astarra Strategic Fund in the context of a turbulent financial environment.

The PJC report said Hempton’s letter resulted in ASIC launching an investigation into the activities of certain Trio funds.

However it said APRA and ASIC “must take their share of the blame for the slow response to the Trio fraud” in circumstances where APRA conducted five prudential reviews between 2004 and 2009, but took no enforcement action as a result of any of these reviews.

It said ASIC only began its investigation in October 2009 after Hempton’s tip-off.

“The committee also has concerns at the length of time it took for ASIC to detect the fraudulent activity. It is particularly concerned that communication between ASIC and APRA was lacking in the months from late-2008 to mid-2009,” the PJC report said.

“It seems that APRA had not communicated to ASIC its requests for Trio to provide information.

"As a result, when ASIC commenced its active surveillance of hedge funds in June 2009, it did not seem aware that Trio was not providing the prudential regulator with basic facts about the existence of assets and their value. This information should have been communicated.

“The committee also believes that the regulators missed key events that laid the platform for the Trio fraud.

"The first was the purchase of Tolhurst from its previous owners in late 2003 by interests associated with Mr (Jack) Flader.

"The second event related to investments in Trio products via a pooled superannuation trust called Professional Pensions PST (PPPST). In 2004, the trustee of PPPST, the Trust Company, was replaced after expressing concerns at the new investment approach of the interests associated with Trio.

"These concerns were either not relayed to APRA or did not lead APRA to take action.”

Many unsuspecting Trio investors have paid a significant price for some glaring regulatory failures. It is not unreasonable to expect that those responsible for overseeing the failures should also pay a price.