Deborah O'Neill (Robertson, Australian Labor Party) Share this | Link to this | Hansard source

On behalf of the Parliamentary Joint Committee on Corporations and Financial Services, I present the following reports of the committee: Inquiry into the collapse of Trio Capital and Statutory oversight of the Australian Securities and Investments Commission, May 2012, together with evidence received by the committee. In accordance with standing order 39(f) the reports were made a parliamentary paper.

by leave—As Chair of the Parliamentary Joint Committee on Corporations and Financial Services I am pleased to speak to the following reports: Inquiry into the collapse of Trio Capital and Statutory oversight of the Australian Securities and Investments Commission.

In relation to the Trio Capital inquiry report the committee has investigated the collapse of Trio Capital, the largest superannuation fraud in Australian history. At the outset, I would like to express my deepest sympathy for the victims of this fraud. I wish to thank those individuals and organisations who provided the written 77 submissions to the inquiry and those who attended the inquiry's public hearings and the community forum in Thirroul. The strength and resolve of those who have suffered at the hands of this fraud shone throughout the committee's hearings and evidence gathering.

It is important that we understand the scale and consequences of the Trio Capital fraud. About $176 million in Australian investors' money is lost or missing from two fraudulently managed investment schemes run by Trio. Nearly 6,090 Australians lost money as a result of the Trio collapse. Of these investors, 5,400 had invested in Trio through APRA regulated superannuation funds. These investors received nearly $55 million in compensation under the provisions of part 23 of the Superannuation Industry (Supervision) Act 1993 (SIS Act). Of the remaining 690 Trio Capital investors, 415 were direct investors and around 285 investors were in self- managed superannuation funds, SMSFs. SMSF investors have not received compensation.

The final inquiry report makes a total of 14 significant recommendations relating to transparency issues within the superannuation investment framework, improved financial literacy and the need for the appropriate authorities to pursue those responsible for the lost Trio funds as a matter of priority. From the outset it was apparent to the committee that there was a fundamental problem in that many SMSF investors had little or no idea that they had no protection from fraud and no protection from theft. This is of course very different from the APRA regulated savings vehicles. The committee found that there needs to be major improvements to financial literacy in this regard. This inquiry was set up to clearly establish the facts of what happened with the Trio Capital collapse and to determine whether improvements can be made to Australia's financial services sector and consumer regulations.

The committee notes the Richard St John report and the shortcomings he identified in a possible statutory compensation scheme. We did, however, recommended that 74 unit holders, who invested in the Professional Pensions Pooled Superannuation Trust, receive assistance. These investors were offered inducements to move their funds to the ARP Growth Fund.

This inquiry has exposed a clear gap in the general understanding of Australia's superannuation system. Many trustees of SMSFs clearly indicated to the inquiry that they had absolutely no idea that their investment had no protection from theft and fraud—that is, no protection at all from the perpetrators of theft and fraud.

The fraud in itself was complex and involved the schemes investing in a number of hedge funds based in the Caribbean. Despite its complexity, the committee believes that there were a number of failures by the gatekeepers of the financial system. The regulators, ASIC and APRA; Trio directors; the auditors who signed off on its accounts without checking the existence of its assets; and the financial planners who inappropriately recommended Trio's risky investment strategy to their clients have all been examined thoroughly in this inquiry.

While it is important that we not only catalogue what happened we should also focus on what can be done to ensure that this sort of fraud does not happen again. The committee's recommendations are therefore seriously focused on prevention. The committee received significant evidence suggesting a number of expectation gaps in the financial system. These gaps were over investors' understanding of the roles and responsibilities of auditors, custodians and research houses. Educating investors alone, however, will not be enough to bridge these gaps.

The committee recommends that standards in these areas also need to be changed and improved. We certainly welcome the work already being indicated by ASIC and APRA and their recent moves in this direction. The committee also welcomes recent government efforts to improve access to information for investors, particularly those in self-managed superannuation funds.

The Future of Financial Advice reforms—the FOFA reforms—will ensure that financial advisers not only act in their clients' best interests but do not recommend inappropriate investments in return for conflicted remuneration and commissions.

The proposed MySuper reforms will also assist superannuation investors by requiring funds to publish details of their investments. Access to investment information forms a key part of the committee's recommendations. The committee's recommendations seek to improve investor understanding, prudential and regulatory standards and transparency in the financial system.

The SMSF sector is becoming an increasingly important part of Australia's superannuation system. SMSFs account for about 30 per cent of Australians' $1.3 trillion invested in superannuation. By improving the quality of financial advice that SMSF investors rely on and the quality of information available to them, the committee hopes that investors will be better equipped to understand the advantages, risks and responsibilities of managing their own SMSFs. It is important that self-managed super fund investors remain vigilant, particularly against the risk of fraud and theft.

The committee also recommends that APRA and ASIC do more in the investigation and prosecution of investment fraud. Specifically, the regulators should be significantly more diligent in their investigation and prosecution of the masterminds of the Trio collapse. While Shawn Richard has been convicted for his role in the fraud, the committee is concerned that not enough has been done to bring other perpetrators to justice.

More generally, the committee strongly recommends that APRA and ASIC should be more active in their particular attempts to detect investment fraud by identifying outlying patterns in investment performance. More active supervision of suspicious and anomalous fund performance would lead to earlier detection of fraudulent activity.

I would like to thank my fellow committee members for their efforts in compiling this report and collecting the evidence. In particular, I would like to thank the former chair of this committee, Mr Bernie Ripoll, for the considerable work that he has done. I would also like to acknowledge and thank Senator Nick Sherry who rejoined the committee recently and who has given over 21 years of service to this particular committee in its various forms. The senator's many years of parliamentary experience in the financial services sector was most valuable in the concluding stages of this inquiry. The committee hopes that our investigations and unanimous report will go some way to ensuring that such a fraud does not happen again.

I refer now to the second tabled report, which is the committee's May 2012 report on the statutory oversight of the Australian Securities and Investment Commission. Section 243 of the ASIC Act directs this committee to inquire into and report on ASIC's activities and matters relating to those activities to which the parliament's attention should be directed. In preparing the report, the committee held hearings with officials from ASIC and, for the first time, also heard information from the Takeovers Panel. I would like to thank ASIC for its continuing cooperation and assistance and thank the Takeovers Panel for assisting the committee to understand its role and procedures. The committee looks forward to working with the Takeovers Panel in the future.

Regarding standards for financial advisors, as earlier detailed the committee has recently been involved in examining the collapse of Trio Capital. A number of the recommendations of the report go to ASIC's role in regulating managed investment schemes and the AFS licensing regime. The committee intends to further examine ASIC about these issues in future oversight hearings. Some of the recommendations in the committee's report are also very relevant to ASIC's oversight of the financial advice sector. In part, these have already been picked up by the government's proposed freedom of financial advice—FoFA—reforms. Compliance with these proposed reforms will be voluntary from 1 July 2012 and become compulsory from 1 July 2013.

The committee welcomes ASIC's advice that it will consult with industry in its preparation of regulatory guidance on the effect of the reforms well before compliance becomes compulsory. The committee notes that ASIC anticipates releasing consultation drafts of regulatory guidance about conflicted remuneration, scaled advice, the best interests test and ASIC's changed licensing and banning powers by 1 July 2012. The committee believes these reforms will assist in preventing some of the conduct by financial advisers that, sadly, led to too many people investing their retirement savings in inappropriate investment vehicles, like some of the schemes operated by Trio.

The committee has also spent some time considering the issue of the public's understanding of compensation for theft and fraud in relation to self-managed super funds. The committee welcomes ASIC's advice that it would place an alert on its MoneySmart website notifying potential SMSF investors that no compensation is available if they lose money from theft or fraud. The committee looks forward to working with ASIC and APRA to develop a more robust regulatory and prudential standard for the SMSF sector and financial advisers.

With regard to ASIC's strategic framework, the committee examined ASIC's recent actions to advance its strategic aims. The committee very much welcomes ASIC's efforts to educate investors and financial consumers through its increased focus on social media and other websites. Its launch of a multilingual financial literacy kit for new migrants and its release of a consultation paper on proposed new operating requirements for investment platforms are welcome developments. The committee also welcomes ASIC's release of guidance on financial licences in the carbon markets and its enforcement policy outlining when, how and why it will take action. The release of both documents will assist in making ASIC's processes and decisions more transparent. They will ultimately enhance the understanding of investors and financial consumers.

In conclusion, and on a sad note, the committee extends its sincere sympathies to the family and colleagues of Mr Michael Dwyer, the former ASIC Commissioner, who passed away on 2 March 2012. Mr Dwyer's expertise in insolvency matters, in particular, was of significant benefit to this committee.

Bruce Scott (Maranoa, National Party) Share this | Link to this | Hansard source

Does the member for Robertson wish to move a motion in connection with the report to enable it to be debated on a future occasion?

Deborah O'Neill (Robertson, Australian Labor Party) Share this | Link to this | Hansard source

I move:

That the House take note of the report.

Bruce Scott (Maranoa, National Party) Share this | Link to this | Hansard source

The debate is adjourned. The resumption of the debate will be made an order of the day for the next sitting.