The fallout from the collapse of the Shield and First Guardian Funds has been well documented. ASIC has a microsite dedicated to its various regulatory investigations and enforcement actions in connection with these failures. ASIC’s enforcement action spans the value chain from lead generators to dealer groups, advisers, the responsible entities of the Shield and First Guardian products and the trustees of the superannuation and investment platforms on which Shield and Guardian were investment options.

This article focuses on issues for boards of superannuation trustees of platform style superannuation funds and their functionally equivalent investment platforms or investor-directed portfolio services (IDPS). In addition to ASIC’s activity, APRA has undertaken a thematic review of investment governance and published its initial findings. APRA is currently issuing customised report cards to superannuation trustees of platform products, highlighting areas requiring improvement.

The key implication for boards of superannuation trustees and investment platform products is that, while aspects of investment governance will naturally be delegated to investment committees, boards must take a more active role in the selection of new investment options and ongoing monitoring of investment options. Problematic sales practices highlighted by the Shield and First Guardian collapse should also prompt boards to make appropriate changes to their investment governance policy settings.

Context

In the wake of the Shield and First Guardian collapse, ASIC has commenced civil penalty proceedings in the Federal Court against Equity Trustees Superannuation Limited (Equity Trustees).[1] ASIC has alleged that Equity Trustees has failed to:

  • exercise the same degree of care, skill and diligence as a prudent superannuation trustee;
  • act within the best financial interest of the beneficiaries; and
  • do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly.

Similar proceedings have been commenced against another platform superannuation trustee this week.[2]

The products impacted by the Shield and First Guardian collapses were primarily superannuation platform products. These products are generally adviser-led and allow members, with assistance from their adviser, to select from a broader range of investment options than traditional superannuation funds. There is generally a selection of hundreds of managed funds in addition to listed securities and other asset class investment options. These products mirror in many ways functionally equivalent non-super IDPS platforms, members of which were also impacted by the Shield collapse. While the superannuation products have a separate board, many organisations that offer both super and investment platforms, utilise a common governance committee for investment menu selection processes. The considerations for boards of both product types are similar, given the functional similarities between the platform products.

The key issues boards should be thinking about are:

1. Customised report card from APRA

Superannuation trustees will receive a customised report card from APRA outlining areas in their investment governance framework that require enhancement. Boards should be involved in understanding the issues and the proposed action in response to these letters. Similar uplifts may be required for IDPS.

2. Financial Services Council Best Practice Principles

The FSC has announced it will develop Best Practice Principles for menu selection, monitoring and governance. Boards should consider whether it is appropriate to adopt these principles as part of their investment governance framework.

3. Other measures

There are a range of other measures boards could consider in light of the learnings from Shield and First Guardian. Those measures may include:

  • Testing the vulnerabilities within the existing investment menu and taking steps to remove inappropriate investment options. Macquarie Investment Management Ltd has recently removed some 281 investment options from its platform products and we expect other trustees will follow.
  • Establishing or revising existing concentration limits or asset holding limits to prevent members and investors from being overexposed to any single investment option.
  • While we expect boards will continue to delegate aspects of investment governance to investment committees, boards may consider it important that they are involved in the initial selection of new investment options and receive reports detailing the risks associated with any new investment option.
  • The Shield and First Guardian collapses have highlighted the role intermediaries played in attracting investors to these products. Boards may wish to consider the role of lead generators, dealer groups and advisers and implement policies to ensure that potential and existing members are not subject to aggressive sales tactics by third parties such as lead generators. This might involve review of registration documentation for advisers and dealer groups to ensure that they do not receive or make payments to any product issuer or take referrals from lead generators in connection with their advice.
  • Boards could reconsider the frequency with which they receive reports concerning the on-going monitoring of investment menus as part of the investment governance framework.
  • Boards and their risk committees should consider whether any changes are required to their risk management framework or risk appetite statements in the light of Shield and First Guardian and ASIC’s enforcement action.

Finally, we note that ASIC has announced a probe into conflicts of interest relating to separately managed accounts (SMAs). We understand that platform trustees and operators are likely to receive notices from ASIC in the coming weeks, seeking information relating to potential conflicts of interest in their SMA offerings. While Shield and First Guardian did not involve SMAs (and the probe is unrelated), a number of the conflict of interest issues highlighted in those cases may be relevant to SMA products. Trustees of SMA products should now be reviewing the distribution arrangements for those products in preparing to respond to ASIC’s probe.

Overall, we expect to see rationalisation of investment menus and higher barriers to entry for new funds seeking inclusion on investment menus. ASIC in their pleadings in various regulatory actions have emphasised that both Shield and First Guardian were new funds with no track record. As ASIC’s enforcement actions continue to unfold we expect this to be a continuing area of focus.