Ever since the Trio Capital scandal, the message has been clear: SMSFs are on their own and defenceless against fraud. But as Andrea Slattery explains, SMSFs indeed have legal and other avenues to fight theft and fraud, and receive compensation.
That the Trio Capital fraud scandal set alarm bells ringing with regulators, the Federal Government and across the entire financial services industry was hardly surprising.
Nor was the fact that there were two inquiries into what went wrong and what possible investor compensation options were available – one by Richard St John and the other by the Parliamentary Joint Committee.
Their ensuing reports (from different perspectives) looked at the fallout from the Trio fraud, and have made recommendations in a bid to prevent it occurring again.
The SMSF Professionals’ Association of Australia (SPAA) contributed to both reports; as an organisation, we vigorously supported inquiries that were trying to find some answers about how to prevent another Trio Capital and ensure people have confidence that their superannuation savings were secure.
While those reports were good in many ways in identifying issues and recommending solutions, it was disappointing to see the self-managed super fund (SMSF) sector unfairly – in SPAA’s opinion – bear the implicit brunt of the criticism that accompanied the release of these reports.
Although members of the Australian Prudential Regulation Authority (APRA)-regulated funds made up the bulk of Trio investors who lost their entire savings, regulators and government appeared anxious to keep the focus on the small number of SMSFs that were involved.
In particular, they were sending a message that SMSFs were, in the unfortunate choice of words by the Minister for Financial Services and Superannuation, Bill Shorten, ‘swimming outside the flags’ when it came to a question of compensation when fraud and theft occurred.
The message was simple: SMSFs were outside the APRA tent and on their own.
That was right as far as the application of Part 23 of the Superannuation Industry (Supervision) Act 1993 (SIS Act). But SPAA has continually made clear that this message is wrong.
There are other avenues that SMSFs can pursue in relation to compensation when theft and fraud occur.
Let me give some examples. If the SMSF investor is using an advisor, they have the ability under the Corporations Act 2001 to take action against the advisor if the loss is due to misconduct or inappropriate advice.
This course of action simply reinforces the need for SMSF trustees to do their homework to ensure they only appoint advisors with the right qualifications – whether they are accountants, actuaries, financial planners or lawyers.
Advising SMSFs requires specialist skills and trustees should never forget this.
Trustees may also have the option under section 55(3) of the SIS Act to take action if they suffer loss or damage because of the conduct of another person that was engaged in misconduct.
And in other instances, some products such as bank deposits are protected by their own insurance schemes.
Proof positive – if that was needed – was provided by a recent court settlement (the details were not made public) where an elderly woman was awarded the replacement of most of her life savings of $1 million which she had in an SMSF and other investments which had been lost through Trio.
Remember, too, that while SMSFs have been in the media headlights following Trio for being ineligible for compensation, it should not be forgotten that not all members of APRA-regulated funds always receive full, or in some cases any, compensation in the event of theft or fraud under Part 23 of the SIS Act.
Trio also highlighted this fact, with a number of APRA regulated fund members not only missing out on receiving any compensation, but they also had their balances reduced to support the payment of the APRA regulated fund levy.
SPAA wouldn’t argue the system is perfect and we want changes made. But the impression SMSFs are defenceless when fraud and theft occur is simply wrong.
That said, there are shortcomings with some of these options that Trio highlighted. It is for this reason the concept of a last resort compensation scheme is being considered at each sector level for the financial services industry that would provide compensation to consumers, irrespective of the product they invest in.
It would seem to SPAA, therefore, that instead of singling out the shortcomings of SMSFs, those charged with overseeing the regulation and management of superannuation assets should be alerting everyone about the limitations of compensation in the event of theft or fraud.
But even taking that step is simply a band-aid solution to an industry-wide problem.
The time has come for a total rethink about how investors are looked after when there is a ‘Trio’.
Because one thing is certain; a $1.3 trillion superannuation industry means the issue of compensation won’t go away.
Andrea Slattery is the chief executive officer of SPAA.
