A report into the Sterling Income Trust has concluded that the Australian Securities and Investments Commission (ASIC) should have assessed the risk as higher but that regulatory changes since would have been unlikely to help.
In a final report from the Senate Economics Reference Committee, it said ASIC “could have assessed the risk as higher” as the risks related to Sterling were “heightened” in comparison to other managed investment schemes.
This was because:
- The 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 [Sterling New Life Lease] product.
The risks of the product had also been highlighted by the Australian Financial Complaints Authority (AFCA) which found that promoters of the scheme had engaged in misleading or deceptive conduct.
The report also noted ASIC displayed a “lack of concern regarding the involvement of questionable directors and key personnel”.
Responding in November, when it appeared before the committee, 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.
Finally, the committee noted there had been several reforms intended to better protect consumers which might have been of benefit if they had been in force at the time. These were the introduction of product intervention powers and the establishment of a new obligation on issuers and distributers of financial products with new design and distribution obligations.
However, it doubted whether they would have been of use.
“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.”
It recommended ASIC developed a framework to promote greater awareness and understanding among retail investors and financial consumers in relation to buying financial products and services.
