Compensation scheme for fraud still not on SMSF horizon

21 May 2012 – Financial Services and Superannuation Minister Bill Shorten has released a long-awaited independent review of compensation arrangements for investors, including SMSFs, but the report has played down the need for a new safety net to protect investors who lose money due to misconduct by their financial advisers.

In response to a spate of multi-million dollar collapses during the global financial crisis, the government asked Richard St John, an authority on governance, to investigate the case for a statutory compensation scheme for victims of serious misconduct, such as misappropriation of clients' funds.

The inquiry was launched because existing laws provide no guarantee of compensation for investors and superannuation funds operating outside the regulation of the Australian Prudential Regulation Authority (APRA). Presently, superannuation funds regulated by APRA pay a levy to fund a financial assistance program in case of losses incurred due to fraudulent activity. The SMSF Professionals Association (SPAA) among others has been calling for a similar levy and assistance scheme to be introduced for SMSFs.

The government's media release on the St John report says that its conclusion is that if the current arrangements are reinforced then 'it would be open to round them out in due course with a more comprehensive scheme of last resort' but recommends that 'it would be inappropriate and possibly counter‑productive to introduce a last resort compensation scheme at this stage'.

Among other conclusions, the report says that 'the regulatory platform for financial advisers and other licensees needs to be made more robust and stable before a safety net, funded by all licensees, is suspended beneath it'.

Investors who lost millions in the collapses of Westpoint, Babcock & Brown and various managed investment schemes have taken legal action against their advisers, with the recent Parliamentary review of the failed super fund Trio Capital resulting in investors receiving $54 million in compensation under a separate government scheme. However those who invested in Trio through their SMSF are ineligible for compensation.

In an interview on ABC radio earlier this year, Minister Bill Shorten said that SMSF investors 'are not entitled because we have a regulatory protection scheme for people who are in superannuation funds which bind themselves to the APRA processes. Other people who made direct investments or invest beyond the flags don't receive the current compensatory mechanisms.'

The SPAA has been campaigning for a compensation scheme to be funded by product providers, and says delaying its establishment is 'unsatisfactory'. Consumer advocate group Choice also rejected the report's conclusion, with its chair Jenni Mack saying that Choice 'will be asking the government to implement a last resort investor ­protection compensation scheme ... without any delay.'

St John said in his report that he was concerned that a compensation scheme would penalise better capitalised operators, would not improve standards of behaviour among financial planners and product providers, and could introduce an element of 'moral hazard'. The final report is available on the Future of Financial Advice website.

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