InFocus: Who should offer protection to investors?

The recent fiascos of the managed investment schemes (MIS) have once again prompted the question what else should be done to better protect consumers from risky investments.

These have included an ongoing debacle of Sterling Investment Trust and, more recently, the liquidation of another operator of managed investment schemes PE Capital Funds Management.

While the chair of the Australian Securities and Investment Commission (ASIC), Joe Longo, who spoke earlier this month in front of the Senate Parliamentary Joint Committee on Corporations and Financial Services, admitted ASIC should have issued a more decisive response with regards to Sterling, consumer groups insisted that the Compensation Scheme of Last Resort (CSLR) should be expanded to include all the financial services that were covered by the Australian Financial Complaints Authority (AFCA).

According to consumer advocacy group CHOICE’s chief executive, Alan Kirkland, who also recently appeared before the Senate Committee, the CSLR should be extended to cover managed investment schemes, funeral insurances policies and debt management firms as “an absolute minimum”.

He said that if CSLR included MIS, a larger number of Sterling’s victims would have obtained access to compensation.

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However, CHOICE-affiliated volunteer-led group, Sterling Action Group (SAG), found through the survey of 55 victims that the maximum compensation under the CSLR would still fall short when it comes to the financial losses incurred by Sterling Group’s victims.

The SMSF Association’s deputy chief executive, Peter Burgess, who also expressed a “deep concern” with regards to the exclusion of MIS from the CSLR, said it was particularly worrying for self-managed superannuation fund (SMSF) investors as such exclusion would mean that the advice industry was going to pick up the costs.

Further to that, such an exclusion could lead to a situation in which advisers were being left to pay disproportionate costs as the fault would be placed with them.

The Financial Planning Association (FPA) of Australia shared the same concerns. Its chief executive, Sarah Abood, said that although the organisation had welcomed the Senate Economic Legislation Committee’s report of the Government’s proposed model regarding the CSLR, there were still concerns that it would fail to provide adequate protections for investors.

According to the FPA, the Government should expand the base of the proposed CSLR to reflect the AFCA jurisdiction in order to ensure the sustainability of the scheme for consumers and fairness for contributors.

This would make 15 industry and consumer bodies advocating for the expansion of the CSLR, supported by recommendations in the Senate Economic Reference Committee’s own report into the Sterling Income Trust.

Although, the minister for superannuation, financial services and the digital economy, Jane Hume, said the CSLR was not designed to pay compensation to any consumer who lost money in an investment and therefore should not be expanded to cover MIS or high-risk investments.

A number of recent investigations and examples of financial wrongdoing further highlighted the inadequacy of the Government’s approach to the implementation of recommendation 7.1 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the FPA said.