Trio Capital requires an industry-wide fix

The time has come for a total rethink about how investors are looked after when there is a 'Trio Capital', according to Self-Managed Super Fund Professionals' Association's Peter Burgess.

Recent reports handed down by Richard St John and the Parliamentary Joint Committee (PJC) have highlighted glaring deficiencies in the compensation arrangements for consumers of financial services.  

There are references in both reports to self-managed superannuation funds (SMSFs) and the additional risks that SMSF members face, because unlike members of the Australian Prudential Regulation Authority (APRA) regulated funds, they are ineligible for compensation in the event of theft or fraud.

The PJC report recommends that the Australian Taxation Office include a large, clear and understandable print warning on its website that SMSF trustees are not covered in the event of theft and fraud, and called for a clear statement that SMSF investors have limited protection when compared with APRA funds.

In the wake of the PJC report, the Australian Securities and Investments Commission (ASIC) has also called on the Federal Government to introduce requirements that would force investors to sign a written document acknowledging a warning that their funds would not be compensated for theft or fraud before setting up a SMSF, and then every two or three years after that.

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There are advantages and disadvantages with SMSFs, and not having access to compensation granted under Part 23 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), is clearly one of the disadvantages.

In this context, the SMSF Professionals' Association of Australia (SPAA) agrees more could be done to alert potential SMSF investors about this shortcoming.

But such warnings should be carefully worded and only refer to the inability for SMSF members to be compensated under Part 23 of the SIS Act.

It would be inaccurate and highly misleading for such warnings to give the impression that SMSF investors have no options available to them should they suffer fraud or theft.

Although acknowledging that this appears to be the case for SMSF members who were Trio investors, it is not always the case.

Let me give some examples. If the SMSF investor is using an adviser they have the ability under Corporations Law to take action against the advisor if the loss is due to misconduct or inappropriate advice.

This course of action, of course, simply reinforces the need for SMSF trustees to do their homework to ensure they only appoint advisors with the right qualifications - whether they are accountants, actuaries, financial planners or lawyers.

Advising SMSFs requires specialist skills, and trustees should never forget this.

Trustees may also have the option under section 55(3) of the SIS Act to take action if they suffer loss or damage because of the conduct of another person that was engaged in misconduct.

And some products, such as bank deposits, are protected by their own insurance schemes. So to say SMSFs are defenceless when fraud or theft occurs is clearly wrong.  

That said, there are shortcomings with some of these options that Trio Capital highlighted.

It is for this reason the concept of a last resort compensation scheme is being considered at each sector level for the financial services industry that would provide compensation to consumers irrespective of the product they invest in.

There is another aspect to this.

Although SMSFs have been in the media headlights following Trio for being ineligible for compensation, it should not be forgotten that not all members of APRA regulated funds always receive full, or in some cases any, compensation in the event of theft or fraud under Part 23 of the SIS Act.

It would seem to SPAA, therefore, that instead of singling out the shortcomings of SMSFs, those charged with overseeing the regulation and management of superannuation assets should be alerting everyone about the limitations of compensation in the event of theft or fraud. But even taking that step is simply a band-aid solution to an industry-wide problem.

The time has come for a total rethink about how investors are looked after when there is a "Trio". Because one thing is certain; a rapidly growing $1.3 trillion superannuation honey pot means the issue of compensation won't go away.

Peter Burgess is the technical director of the Self-Managed Super Fund Professionals' Association.