Stephen Jones (Throsby, Australian Labor Party) Share this | Link to this | Hansard source

The collapse of Trio Capital was the largest superannuation fraud in Australian history. Around $176 million of superannuation funds were lost and are unlikely to be recovered. Nearly 6,090 Australians invested in Trio and, through Trio, in a number of managed investment schemes. Two hundred and eighty-five of those investors put their money in Trio through self-managed superannuation funds.

Self-managed superannuation funds are the largest single sector of Australia's $1.4 trillion superannuation assets and are the fastest-growing sector. Many of the 285 SMSF investors in Trio are located in the Illawarra and, over the course of the last two years—almost the entire time I have been in this place—the member for Cunningham and I have been meeting with and corresponding with the many men and women who have lost some or all of their life savings as a result of this corporate fraud. That is 285 personal stories of severe financial shock and the ensuing personal devastation that flows from this.

The facts are stark: by investing in SMSFs they were not eligible for compensation under part 23 of the Superannuation Industry (Supervision) Act. Most of the SMSF investors I have met have told me they were unaware of the difference between an SMSF arranged investment and APRA regulated superannuation. Indeed, that was the nature of the evidence that was given to the Parliamentary Joint Committee on Corporations and Financial Services that inquired into this fraud and collapse.

It is clear that the SMSF investors in Trio relied heavily on the advice of their financial advisers. They also had confidence in Australia's system of financial regulation. However strong a regulatory system we have, the challenges of dealing with deliberate and complicated, indeed sophisticated, fraud are substantial. This case demonstrates that we need greater fraud detection and prevention measures and I urge the government to work with regulators to take action in this area.

Since 2007 Labor has tightened the regulation of the financial services sector by putting in place better protections for consumers. The Future of Financial Advice reforms, the FOFA reforms, have implemented a number of important measures which, if they had been in place in 2007, might have prevented some of the Trio losses that we are talking about tonight. This is because they require a financial adviser to put their clients' interests first. They also ban kickbacks and commissions. For example, in the Illawarra it has been said that a local financial adviser, Mr Tarrant, received in excess of $840,000 in payments and commissions from Trio staff for putting his local investors into Trio through an SMSF.

While the Future of Financial Advice reforms are measures that greatly strengthen our financial system, I believe that more can be done. I believe that we should develop a last resort compensation scheme for cases of corporate fraud in order to provide better protections for SMSF and managed investment scheme investors. The question of a last resort compensation scheme is considered in a report commissioned by the Minister for Financial Services and Superannuation, conducted by Mr Richard St John and released in April last year. The recommendations by Mr St John were also discussed in the aforementioned PJC report.

One scenario where a last resort compensation scheme might apply is when there is a financial loss due to misconduct or insolvency by a financial services licensee. Such a proposal was supported by some industry bodies, including the SMSF Professionals Association of Australia and the Association of Superannuation Funds of Australia, amongst others.

In the case of Trio, a fraud occurred offshore where the investment funds were allocated to hedge funds with overinflated assets that may or may not have even existed. The Trio scenario was a failure of the investment strategy of a managed investment scheme. This failure can be the result of a number of causes—in the case of Trio, it was fraud. The investment itself was risky; the investment strategy was flawed; or, as in the case of Trio, a fraud was committed. Whatever the scenario, the outcome was the same from the investors' perspective: they have lost their money, in many cases their entire life savings.

I believe there is a flaw in our financial service sector when it comes to SMSF investors. In the case of failed investments SMSF investors are left to fend for themselves and to bear the cost themselves for any misconduct or insolvency by a financial services licensee for any corporate failure. The assumption here is that the SMSF investors are themselves the trustees and therefore they have both the power and the knowledge about their investments—the vehicles and the assets in which they invest their money—and therefore bear the risks associated with those investments, having both the power and the knowledge that separates them from those investors who invest through an APRA regulated fund in which they are not themselves the trustee. For that reason other insurance-like arrangements exist for those APRA regulated funds.

Under our existing system, some investors in Trio—those in APRA regulated funds—could get compensation while those in SMSFs got nothing. It is a pretty tough message for these investors to accept. Given the importance of Australia's system of workplace superannuation and occupational superannuation, and the personal devastation that results from these significant financial losses, I believe that SMSF investors need a last resort compensation scheme. There are many issues raised by such a proposition. Managed investment schemes in particular are under increasing scrutiny now due to a number of high-profile examples of investment failure. Many questions have been rightly raised about the lack of regulation and lack of accountability by trustees around these schemes.

In his report, Mr St John considers that the regulation of managed investment schemes such as those invested in by Trio are not yet on a sufficiently solid framework on which to transfer to other licensees the requirement to pay compensation. Improved regulation and accountability in this area should be a priority for ASIC and for government.

There is one important issue to consider, which was acknowledged in the PJC report: that providing full compensation for the failure of risky investments creates a moral hazard. That is, who should bear the cost of a failed investment? Some who have lost their money in Trio believe that taxpayers should now chip in to compensate them for the failure of their investment. This is a difficult proposition unless it can be proved that the loss was the direct result of government fraud or negligence, and I have as yet seen no evidence of this. Any determination of a claim such as this should be made by an independent body with access to all the relevant evidence. Indeed, that is why we have courts of law. It is proper that a court—an independent body—makes such an adjudication, not the government itself, particularly when an allegation may be raised against the government or government instrumentality.

Another question is: should investors in a scheme that is well managed and financially prudent bear the cost of compensation for failed investment schemes that were not. I believe one approach to this is to consider the approach adopted in the United Kingdom where a last-resort compensation scheme already operates, known as the Financial Services Compensation Scheme. This UK scheme applies where claims for compensation through professional indemnity insurance, or minimal capital requirements for financial services licences, are inadequate. Under the UK scheme, payments of compensation are capped and calculated in accordance with a formula, such as 70 per cent of the first $50,000 lost, plus 70 per cent of the next $80,000 and 50 per cent for the next $80,000, or something along similar lines.

Therefore, in a similar vein to the conclusions of the PJC report, tonight I am calling for the federal government to take active steps towards developing a compensation scheme of last resort by placing a levy on managed investment schemes. This would operate in a similar way to the existing scheme for APRA supervised superannuation, where a levy also applies in the event of fraud and the activation of that part of the act.

For Australian investors to maintain their confidence in our financial system and for investors to be better protected against fraud and maladministration, it is time to look in more detail at these matters. Those on the other side have an inbuilt antipathy towards any sort of government regulation. Indeed many within the industry have a similar antipathy, but what is at stake is too great; it warrants a bipartisan approach. On this side of the House, we believe that it is the role of government to get the regulatory system right so that investors can invest with confidence.

Paul Fletcher (Bradfield, Liberal Party) Share this | Link to this | Hansard source

I am pleased to follow the member for Throsby on this important motion and to pick up one of his closing comments, which is that this is an area which is so important that a bipartisan approach is called for. I note that the report of the Parliamentary Joint Committee on Corporations and Financial Services into the Trio collapse did produce a bipartisan set of recommendations. I do want to comment on his thoughtful motion. I do not agree with this policy recommendation but I want to make three points in the time available to me. First, we can all agree that Trio is a tragedy. Second, I think we should be careful of mis-characterising the role of self-managed superannuation funds. And third, I would like to come briefly to the measure which is contemplated in this motion.

Firstly, I think it is uncontentious that what happened in Trio was a tragedy, $176 million lost. A significant number of my constituents lost money investing through their self-managed superannuation schemes, particularly into the ARP Growth Fund. Because they are self-managed superannuation funds, they are not eligible for compensation, as the member for Throsby said. Quite large balances were lost, on average $700,000 per self-managed super fund investor. It is clear that there was outright fraud and criminality involved in this scandal.

I want to particularly mention Mr Paul Gresham, who subsequently changed his name to Mr Tony Maher, the financial adviser serving the northern suburbs of Sydney, who ripped off a number of my constituents. Some of them trusted him for nearly 20 years. At some point it seems that he went bad. He moved their money from professional pensions PST where it was invested in reputable funds managers like Maple-Brown Abbott, and put it into the ARP Growth Fund. It was then, as the member for Throsby describes, sent offshore and the money subsequently disappeared. It appears Mr Gresham was also involved in the original transaction under which, in 2004, a reputable funds manager in Albury was taken over by what we now know to be a criminal syndicate. This was unambiguously a tragedy. The policy issue we are wrestling with is: what is the right response?

The second thing I would like to come to in the brief time available is we ought to be careful of mis-characterising self-managed superannuation funds. For people who understand the nature of the vehicle, they are, in my view, a very good and flexible vehicle for people to accumulate retirement savings. I think the market evidence suggests that with now over $450 billion of the $1.5 trillion in superannuation in self-managed funds. They offer great flexibility and autonomy, and that I would suggest is why they are growing so rapidly. But people do need to understand the risks that are involved and the fact that, if you take on the responsibility for managing your retirement savings, you are taking on that responsibility. Quite a lot goes with that, including, as the member for Throsby has highlighted, the fact that you do not have the benefit of the provisions in the Superannuation Industry (Supervision) Act which apply to APRA regulated funds in the case of fraud and theft.

I do caution that there are a number of powerful players in the superannuation sector who are not too happy about the quantum of funds which is now moving into self-managed superannuation funds. It suits them to suggest that there is some flaw with the self-managed superannuation fund vehicle. As policymakers, we ought to be very conscious that there is a degree of self-interest involved on the part of some of those who make arguments which might lead to quite onerous regulation applying to self-managed superannuation funds and compromising their effectiveness as a retirement savings vehicle.

What I also think is very important, that we should draw as a conclusion from the Trio collapse, is that our $1.5 trillion superannuation savings pool is a honey pot for international criminals. We must make sure that there is adequate regulatory scrutiny and proactive action to protect against that threat. One conclusion of the committee's investigation in the Trio collapse is that our regulators have perhaps not been as proactive as they ought to be. Recommendation 14 of the report was that the Australian Federal Police should consider the options to create an organisational focus on matters pertaining to superannuation fraud, working in cooperation with the Australian Crime Commission.

Thirdly, let me now turn to the specific measure that the member for Throsby has proposed in his motion this evening. I am going to speak specifically about the wording of the motion, which talks about a member funded compensation scheme for self-managed superannuation scheme investors. I note that in his remarks the member for Thorsby talked about a levy on managed investment schemes. That would actually be a different type of policy measure that would apply to managed investment schemes into which self-managed superannuation funds and other kinds of investors invested. Let me restrict myself to what is described on the face of the motion—that is, the idea that if a particular self-managed superannuation fund loses money due to fraud or theft, then other self-managed superannuation funds should be in some way levied to compensate for that or potentially that there ought to be a levy across the entire sector. I think both of those are potentially contemplated by the kind of language that is in the motion. I certainly acknowledge the genuine policy intent to deal with this serious problem, but I do not think this is the right solution.

Firstly, the whole notion of self-managed superfunds, as I have referred to, is that you choose to take on, as an individual, the responsibility for managing your retirement savings—the pool of funds built up to fund your retirement income—together with the savings of up to four other people, usually members of your close family. That does bring with it greater risks. The policy basis that has applied for the last 20 years or so is that one of the risks is that you do not have the benefit of the last-resort compensation scheme that applies in the case of APRA regulated funds.

Secondly, for people who have consciously chosen to—as it were—go it alone rather than relying upon a professional investment manager, a corollary is that if it goes well you capture the benefits. If it does not go well, you bear the losses. Those are losses from making poor investment choices, as well as losses from fraud and theft. That is not a very palatable message if you do badly—it is quite an attractive message if you do well—but it is inherent in the nature of self-managed superannuation funds. If you do not want to take that risk, and I would argue that the majority of people are probably not well advised to take that risk and are probably not in a good position to do so, then do not choose a self-managed superannuation fund.

The third point I would make is that any such scheme must only be available in extremis, where there has been fraud or theft proven. As the member for Thorsby indicated, one of the real policy challenges in this area is moral hazard. In other words, if there is a last-resort scheme available then people who lose money will have a very strong incentive to take advantage of that scheme and they might also have an incentive to take risks or be less careful than you would be if such a scheme did not exist.

In the case of APRA regulated funds, where such a scheme does exist, the first resort is the professional skills and capacity of the management team which is running the fund into which individual investors have put their money. Therefore, a policy decision that says, 'We will have a last-resort scheme in the case of fraud or theft,' has that initial safeguard that you have a team of professionals managing the money in the first place. In the case of self-managed superfunds, it is by definition a collection of people who do not do this as their main job. This is, in essence, something they are choosing to do for themselves, but they are not generally professional investors.

Therefore, it becomes quite a challenging public policy notion to say, 'You can manage your own affairs, but a corollary of doing that is that you are liable—at least to some extent—if any one of the other several hundred thousand people who are also doing this ends up being defrauded or having money stolen from then. Then, you will have some of your own money taken to fund the compensation to that person.' That is a difficult policy approach.

I do not doubt the good intentions behind the member for Throsby's attempt to grapple with this serious policy problem. It is a problem we should have a continued focus on, but I do not think that the proposed policy solution of a scheme that applies across all SMSFs is a good one. In essence it really undercuts what is the core idea of a self-managed super fund—that you take responsibility with the ups and downs. If that is not something that suits you, you are probably better advised to be in a different investment vehicle.

Sharon Bird (Cunningham, Australian Labor Party, Parliamentary Secretary for Higher Education and Skills) Share this | Link to this | Hansard source

I take the opportunity this evening to express my support for the intent of the private member's motion which has been moved by my colleague the member for Throsby about self-managed superannuation. I want to start by acknowledging the point that was made by a member in point (1)(d) of his motion, which is that this House notes:

… the severe hardship caused to investors in Trio Capital, which collapsed as a result of fraudulent activity and which was the largest superannuation fraud in Australian history, with around $176 million lost or missing.

A significant number of the victims of this fraud, as the member for Throsby indicated, live in my electorate. Some of them have personally come to see me or have written to me about the devastating financial and very often emotional toll that this has had on them and their families. Without exception these people had dedicated significant effort and resources over their working life to saving for a secure and quality retirement. Their concerns were only to provide for themselves in their retirement age, to not be a burden to their families or communities but to continue the independence that had been a feature of their working life and which they aspired to continue in their retirement.

The member for Throsby's motion seeks to address one aspect of this terrible circumstance: the lack of coverage for those individuals whose funds were in self-managed superannuation rather than the Australian Prudential Regulation Authority regulated superannuation funds. In supporting this motion, I first want to acknowledge that there are wider matters that have been raised by this fraud, but I believe the specific matter that this motion seeks to address is very important for the future, while acknowledging it does not provide a solution for those who have already been affected. However, I should acknowledge that many of the locals to whom I have spoken have been at pains to make it clear to me that they also are concerned to see reforms put in place to provide stronger protections for other people in the future.

The difficulty that this motion addresses is the fact that some of the victims of this fraud were eligible for a compensation scheme whilst others were not. The Superannuation Industry (Supervision) Act 1993, under section 23, creates a provision that comes into effect where fraudulent conduct or theft has caused a loss for a superannuation fund's member. However, section 1AA(2) specifically exclude self-managed superannuation funds. This section allows an application to the minister arguing that an eligible loss has occurred to activate, on determination by the minister, that the public interest requires a grant of assistance where compensation is paid and recovered through a levy on all APRA regulated superannuation funds and approved deposit funds. This mechanism was triggered in the Trio case, and in April 2011 the federal minister announced that approximately $55 million in financial assistance would be made available to the eligible investors, and the cost would be recovered through the levy. There were, however, direct investors in self-managed superannuation funds who were not covered by this section of the act and the compensation mechanism. Regularly, some of my local constituents have indicated to me that they were not aware that the scheme they were involved in did not have this protection in the case of fraud or theft and that they would have been willing to carry an additional cost to provide such protection.

The remaining mechanisms under professional indemnity insurance are problematic for many of these investors. The issue of the provision of a compensation scheme for these investors has been canvassed on several occasions over the years since the Wallis inquiry in 1997 and up to the Richard St John review commissioned by the federal government which reported in May last year and the joint parliamentary committee report tabled on 16 May 2012. I acknowledge that all of these inquiries came to the conclusion that the introduction of a compensation scheme by a levy on SMSF investors, generally on the basis of the potential for moral hazard, which my colleague covered, would have the effect of 'decreasing responsibility for appropriate caution and prudence' to quote the words of the report. However, I feel it is appropriate, as this motion suggests, for the self-managed superannuation sector and policymakers to address this issue in order to find an appropriate and effective way for member-funded compensation schemes to be developed for circumstances of fraud or theft affecting members of self-managed superannuation funds. I endorse the final point of the motion, which calls on the government to work for enhanced fraud detection and on regulators to enhance fraud detection and prevention in this evaluation system.

Michael McCormack (Riverina, National Party) Share this | Link to this | Hansard source

I commend the member for Throsby on this motion and also the members for Bradfield and Cunningham for their speeches on it. It is very difficult to represent people who have been ripped off and people who have had their superannuation nest egg taken away in unfair and illegal circumstances. Tonight gives me the opportunity to speak about important superannuation matters and I agree that the government should be working with regulators to enhance fraud detection and prevention in the superannuation schemes.

The Trio inquiry has highlighted the considerable financial losses and the physical and dreadful emotional toll suffered by hundreds of Australian investors who were defrauded in the largest superannuation fraud in this nation's history, costing them $176 million in retirement savings. The parliamentary joint committee inquiry has also exposed the failure of key checks and balances in the Australian regulatory system, with regulators missing some important signals or failing to identify the fraud or to act rapidly enough to shut it down and protect investors. The coalition has welcomed the release of the committee's report on the collapse of Trio Capital and has called on the government and regulators to act on its recommendations. We expect the Australian Securities and Investments Commission, the Australian Federal Police and the Australian Prudential Regulation Authority to act decisively and seek justice on behalf of those investors who have suffered greatly due to the collapse of Trio Capital.

The government needs to provide ASIC with appropriate funds to enable the liquidator of Trio to properly investigate the various offshore companies into which the Trio funds were invested. The government must also appropriately resource the AFP to establish a dedicated superannuation fraud squad which will provide valuable protection for Australians in the superannuation system from criminal activity in the future. We heard from the member for Bradfield about the potential for international theft of the $1.5 trillion pool of superannuation funds.

I spoke today with Trevor Ion, a financial planner from Wagga Wagga, about his thoughts on this motion and superannuation matters. He advised me he has been in the industry since 1986 and has seen many different types of fraud and collapses with investments within the superannuation environment as well as with investments outside the superannuation environment. The questions Mr Ion asks about any scheme are ultimately about the structure, the cost, whether there choice to opt in and how much will the scheme cost to administer. His company gives choice to clients who are prepared to pay the cost to protect their investments from market volatility. Therefore, should trustees have the choice to pay these costs? Mr Ion advised me that they have clients who are trustees of self-managed super funds with secure investments who would object to paying for a cost they may not benefit in and thus subsidise the trustees who have higher risks.

The government also needs to stop playing with people's superannuation. Only last month there was a report in the Australian about the government's plans to ramp-up taxes on self-managed super even further. People who have done the right thing by working hard and saving to achieve a self-funded retirement so that they are not a burden on the public purse are being penalised by this government. We should be supporting these people and encouraging them; not raiding their retirement savings. The government should not be placing tax grabs on people's retirement savings to try to get some cash to make up for deficits, the $120 billion in unfunded promises and the collapse of the mining and carbon taxes.

As of 30 June 2011 there were 442,528 self-managed super funds with a total of 841,283 members. Indeed, self-managed super funds held 30 per cent of all assets in superannuation at the same time. This is a total of about $407 billion. When in government, the coalition worked hard to protect Australians' superannuation and to ensure they understood the benefits of superannuation and that they had options. We removed the confusing and discriminatory reasonable benefit limits and simplified the superannuation laws. We introduced reforms to allow Australians to choose their own superannuation fund, including the freedom to choose a self-managed fund. We increased contribution caps to allow people to voluntarily save for their retirement at a stage of their lives when they can better afford additional contributions and when they are more focused on their retirement needs. We also encouraged superannuation saving for low- to middle-income earners through the co-contribution scheme.

We have unfortunately seen increased taxes, however, on voluntary savings by changing concessional contribution caps from $50,000 to $100,000, down $25,000 across the board. Anyone who wishes to save more than $25,000 per annum, which includes the compulsory contribution, has to pay more tax. This is an important motion. I commend the member for Throsby for introducing it, because people should not have their nest eggs ripped off through fraud.

Debate adjourned.