Can the regulators prevent another Storm Financial?

The collapse of Storm Financial and Trio Capital are cited as the catalysts for strengthening the powers of the regulators via FOFA and Stronger Super, but as Mike Taylor reports, that does not guarantee that history will not repeat itself.

Australia’s financial services regulators are being handed greater powers as a result of the Government’s Future of Financial Advice (FOFA) and Stronger Super processes, but this does not mean they will, in future, act to prevent a repeat of either Storm Financial or Trio Capital.

Indeed, recent events within Parliamentary Committees have raised serious questions about what, precisely, the regulators knew about Storm Financial and Trio Capital, and the actions they decided to pursue thereafter.

Amid the continuing fallout from the collapse of Trio Capital, some disturbing facts have been revealed to a Parliamentary Committee: in particular, that the Australian Prudential Regulation Authority (APRA) had concerns about the Trio/Astarra superannuation funds up to three years before it acted.

APRA officials told a hearing of the Senate Corporations and Financial Services Committee that it had elevated the rating of Trio with its Probability and Risk Rating System (PAIRS) as early as 2006.

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However, those same officials made clear that lifting the status of a superannuation fund or other financial services on the PAIRS system was not something that would ever be made public.

Asked whether such a concerning action was something that would be made public by the regulator, APRA’s general manager of actuarial, market and insurance risk services Greg Brunner made it very clear this was something which would not occur.

“The PAIRS ratings for APRA are confidential. They are something that we specifically use for our own purposes. We do not go out and specifically make an announcement that this has happened, because it informs our supervision of the entity,” he told committee members.

“We do not believe that it is helpful to publish our PAIRS ratings, so we do not publish them for any entities.”

Asked whether such an elevated rating would have been useful to accountants and financial advisers “advising vulnerable people to invest in those assets”, Brunner said that moving an entity higher in the PAIRS system “does not in any way suggest we have major concerns about its financial health”.

“It means we believe that within the entity there are some elevated risks,” Brunner said.

“It could be there for numerous reasons. It could be there because of a concern that the board does not have quite the level of expertise that we would have it have. It could be there because their administration systems are not working as effectively. It could be there because we have concerns about a higher level of unlisted assets.

"There are a whole range of reasons why an entity could be raised into an oversight category. There are several categories above that where concern levels are substantially higher.”

However NSW Labor Senator Matt Thistlethwaite was not to be deterred, and queried the APRA officials about whether accountants and advisers ought to have been aware of the elevated risk, in circumstances where they continued to encourage clients to enter into those products.

Brunner responded that the APRA action would not have acted as a deterrent because the rating it had applied to the Trio products “did not in any way suggest that it is not a safe type of entity”.

“In terms of our risk profile, oversight is not a high risk. It simply means that the risk is higher than normal and therefore, from our perspective, it needs greater attention,” he said.

“The greater attention that we give to these types of entities is to actually get them to make improvements to bring their risk profile down, which is one of the main things we are trying to achieve from our supervision.

“In an ideal world, you would want to bring risk profiles down, but there will always be entities that take some higher risks that are going to have some issues, whether they be management issues or systems issues, that result in some higher risk.

"The rating that we had placed it on was not something that rings alarm bells in the sense that we had major concerns about its health,” Brunner told the committee.

What became very clear from the APRA officials’ evidence to the committee was that the regulator possessed very little knowledge about how financial planners or appropriately licensed accountants handled advice around products like the Trio funds, or the value they were likely to place on the intelligence possessed by either APRA or ASIC.

Asked whether a prudent adviser might have picked up the same intelligence as that possessed by APRA, Brunner admitted he was not familiar with the information an adviser would have.

“Presumably they would primarily rely on the product disclosure statements and the annual accounts of that entity,” he said.

“An adviser would certainly be able to raise some questions about the nature of those investments – the fact that they were unlisted and offshore.

“I would imagine that an investment adviser who was looking at a group of different funds, and looked at one that was wholly domestically invested in bonds versus one that is substantially in offshore hedge-fund type of investments, would be able to make a judgement that this one potentially has a higher risk than that one. It does certainly raise some issues.”

The problem, of course, is that few financial planners have access to the same level of data as a regulator, and many do not have the background necessary to forensically interpret that data.

APRA may have had concerns about the Trio/Astarra products and those managing them as early as 2006, but those concerns were certainly not reflected in the assessment provided by the major ratings houses servicing individual planners and dealer groups.

The problem is that there is nothing in either the FOFA legislation nor the Stronger Super policy to suggest any of this will change or that the Trio collapse will not be repeated.