Thousands of investors who were exposed to heavy losses by investing their retirement savings into the First Guardian and Shield managed investment schemes have been told they may be able to get “remediation” from the superannuation trustees that ran platforms that housed their investments.
Corporate watchdog the Australian Securities and Investments Commission (ASIC) is investigating the failed First Guardian Master Fund and Shield Master Fund, which have left thousands of investors exposed to heavy losses, collectively worth more than $1 billion.
Until now, much of the media spotlight has been on the “lead generators” that called people, lured them in, and pushed them onto licensed financial advisers that then pumped their money into the now-failed managed investment schemes.
But focus is also turning to the role that superannuation platforms, which are overseen by superannuation trustees, may have played.
Superannuation trustees, including Equity Trustees, Macquarie, Netwealth, and Diversa, gave the go-ahead for First Guardian and Shield to be placed on their platforms.
Last month, ASIC announced it was suing one of the platforms, Equity Trustees Superannuation, for its alleged role in the loss of $160 million of retirement savings in the Shield Master Fund.
These platforms, which have been around for decades, house the investments. They allow financial advisers to invest on behalf of their clients into options that could earn them money, such as shares, hybrids, bonds, and managed funds.
ABC News can reveal that ASX-listed Sequoia, which has itself been under fire over its role in the collapsed First Guardian and Shield funds via its subsidiary InterPrac, has written to investors caught up in the collapses, telling them they may be able to get “remediation” through a mechanism called the Operational Risk Financial Requirement (ORFR).
Corporate watchdog ASIC is investigating the failed First Guardian Master Fund and Shield Master Fund collapses. (Supplied: asic.gov.au)
What is the ORFR reserve, can it be used to pay remediation?
Since 2013, superannuation funds regulated by the Australian Prudential Regulation Authority (APRA) have been legally required to hold an ORFR reserve.
This is a financial safety net designed to protect members from “operational risks,” which Sequoia says include losses that arise due to “issues such as governance failures or investment menu oversights”.
Sequoia says its legal and advice teams have written to relevant super trustees “asking them to consider whether the issues with the Shield and First Guardian warrant the use of the reserve to support affected members”.
It is unclear whether superannuation trustees could direct funds to pay customer remediation using operational risk reserves or via other means.
It is believed that most investors caught up had their retirement savings invested by financial advisers via superannuation platforms.
However, some investors used self-managed superannuation funds and therefore would not be eligible for compensation under the ORFR.
In addition, recouping money via the liquidation process is proving problematic for about 6,000 people who invested about $500 million with First Guardian. They have already been told by liquidators that there may be insufficient funds to pay them back.
Sequoia told investors in a letter, “While we cannot guarantee a successful outcome, we believe there is a legitimate case and are committed to advocating strongly on your behalf to ensure this outcome is given our entire attention”.
Superannuation funds are required by APRA to hold an operational risk financial reserve (ORFR) equivalent to the value of 25 basis points of funds under management.
But some hold general reserves over and above these risk financial reserves.
In October 2024, APRA introduced updated guidance to allow for lower minimums for large funds, with targets of 0.20 per cent for funds over $30 billion and 0.175 per cent for those over $165 billion in funds under management.
Sequoia under scrutiny because of InterPrac
Sequoia itself has been under scrutiny for its role in the failures of the Shield Master Fund and the First Guardian Master Fund, both of which saw heavy flows of money coming from advice firms linked to Ferras Merhi, mainly through his firm Venture Egg. Mr Merhi is under ASIC investigation.
InterPrac, which is a wholly owned subsidiary of Sequoia, had authorised both Mr Merhi and Venture Egg until cutting ties at the end of May.
But Venture Egg isn’t the only InterPrac-authorised advice business that is on ASIC’s radar, with others including Reilly Financial and Miller Wealth Group advising clients to invest in one or both funds.
In August, Sequoia disclosed that $22 million in complaints against its subsidiary InterPrac have been lodged with the Australian Financial Complaints Authority (AFCA) relating to its role in the collapses, but sources have told ABC News the figure could run much higher.
In an ASX release in April, Sequoia said InterPrac was assisting the regulator and would review its operations and systems.
It said it would also consider the obligations of trustees, auditors and custodians of the funds and the obligations of platform providers through which the investments into the funds were made.
It was also reviewing the “obligations of the rating authorities with respect of the funds” — relating to news that investment research firm SQM Research gave “favourable” ratings to the now-collapsed First Guardian and Shield funds.
SQM Research’s founder and managing director, Louis Christopher, has previously said “the firm assigned ratings between 3.5 and 3.75 stars out of 5 to the above-mentioned funds over their life cycle”, but “both funds were subsequently downgraded when we became concerned about limited disclosure, irregularities, and a lack of information from the fund managers”.
Louis Christopher said SQM Research assigned ratings between 3.5 and 3.75 stars out of 5 to First Guardian and Shield. (ABC News: John Gunn)
Compensation Scheme of Last Resort
Some investors who lost money in the First Guardian and Shield schemes can also seek to recoup their retirement savings via the Compensation Scheme of Last Resort (CSLR).
The scheme is designed to compensate victims of financial misconduct when the firm behind a claim has gone out of business or cannot pay up after a determination from the Australian Financial Complaints Authority.
But claims to the scheme are capped at a maximum payout of $150,000 per Australian consumer.
And compensation is funded via an industry levy on financial advisers, which has more than doubled over the past financial year.
Financial advisers contributed about $24.1 million to the program in the year to June. In the current financial year, advisers are expected to contribute $75.7 million.
Industry bodies like the Financial Advice Association Australia (FAAA) have been pushing for the financial advice sector’s contribution to be capped at $20 million annually, and for the government to cover the excess cost from a broader range of sectors.
The FAAA’s CEO, Sarah Abood, told ABC News the funding mechanism that has been built to support the CSLR was “both unfair and unsustainable”.
Sarah Abood says funding for the CSLR needs to be broadened. (ABC News: John Gunn)
She noted managed investment schemes were “a notable and problematic exclusion from the scope of the CSLR, as failures of these products are responsible for substantial consumer harm that currently has no recourse if the firm fails”.