The Federal Government's Response to the Collapse of Shield and First Guardian: A Crackdown on Managed Investment Schemes
The recent collapses of two large managed investment schemes, Shield Master Fund and First Guardian, have sparked a federal government crackdown on these schemes. The funds' collapses have left approximately 12,000 Australians with $1.1 billion in retirement savings at risk, highlighting the need for regulatory reform.
The incoming ASIC chair, Sarah Court, has described the collapses as 'industrial-scale misconduct', indicating a systemic issue within the industry. Investors in First Guardian, who had moved their savings from highly regulated super funds, face significant challenges in recovering their money. Liquidators reported a mere $1.6 million recovered from the $446 million invested, an insufficient amount to cover fees.
To address this crisis, the corporate watchdog has initiated a series of lawsuits against the companies responsible for overseeing the funds. This action aims to recover funds for investors and expose the regulatory gaps within the financial services industry.
Managed investment schemes, a type of fund established in the late 1990s during the Howard government, have faced scrutiny. The schemes' rapid growth can be attributed to cold-calling tactics by call center 'lead generators', who then referred investors to financial planners for switching from superannuation funds. However, investor money was allegedly directed towards enterprises controlled by the fund managers' associates.
Assistant Treasurer Daniel Mulino emphasized the need for change to prevent future losses, stating that high-profile collapses erode investor confidence. He highlighted the importance of consultation on changes to oversight, ensuring regulatory systems remain effective.
The government's proposed solutions include mandating superannuation funds to report suspicious switching patterns to ASIC, prohibiting fund managers from dealing with their companies using investor money, and strengthening compliance and risk management rules. Additionally, the government is considering emergency reserve requirements for operators and exploring enhanced information-gathering powers for ASIC.
The Treasury's consultation paper underscores the distinction between normal market risks and the misconduct, governance failures, and conflicts of interest that characterized the Shield, First Guardian, and other MIS collapses. The consultation, which closes on February 27, seeks stakeholder input on proposals to enhance MIS governance and oversight, as well as improve ASIC's visibility of superannuation switching.
Mr. Mulino also announced upcoming consultations on lead generation practices, superannuation switching frameworks, and superannuation trustee governance standards. The government aims to ensure the sustainability of the Compensation Scheme of Last Resort.
ASIC's incoming chair, Sarah Court, defended the regulator's actions, asserting that they acted swiftly once aware of fund issues. However, the Treasury's consultation represents a series of ongoing proposals to address industry issues, dating back to 2001, following a review by Malcolm Turnbull. Subsequent inquiries in 2009 and 2012 further recommended changes, and more recent inquiries in 2016 and 2022 called for a review of previous recommendations since the Global Financial Crisis.
