Behind the fraud, a more grim reality

But the moment something goes wrong, watch them dash for the exit.

The release this week of the parliamentary joint committee review of the collapse of Trio Capital is a damning indictment on an industry that, when the chips are down, seems to be all care and no responsibility. Trio has the dubious honour of being Australia's biggest superannuation fraud. It collapsed in 2009, taking retirement savings of $176 million owned by more than 6000 investors. While some of these investors - those in Australian Prudential Regulation Authority regulated funds - have been compensated for their losses, about 690 investors remain out of pocket.

They are not covered by the compensation scheme because they invested directly or through self-managed super funds.

Meanwhile only one former director has been jailed and evidence suggests the mastermind of the scheme - Jack Flader - is living in Thailand. The committee reports there is no current investigation relating to Trio by either the Australian Federal Police or the Australian Crime Commission.

But that's another story. One of the more compelling impressions gained by reading the report is the huge gap between the "protections" investors believe they're paying for and what is actually being provided.

Auditors? "It is of concern to the committee that auditors' approval of financial statements does not necessarily mean that the actual assets underlying the financial statements exist," the report says.

"Further, an auditors's assessment of a compliance plan and the work of a compliance committee as 'effective' essentially only means that they exist."

So much for rigorous examination of the accounts.

Custodians? As the term implies, most investors would believe they have a role in safeguarding your money. But the committee found: "Custodians appear to have a limited role in managed investment schemes of the kind conducted by Trio, and by many legitimate financial services providers.

"The custodian does very little to protect the fund of investors. It makes no independent checks before transferring money offshore. Instead [it] simply acts on the instructions of the responsible entity."

The research houses that rate investments such as Trio? "As was the case with the auditors, the custodians and to a lesser extent APRA, the research house Morningstar relied on the information provided by Trio without verifying whether the data was accurate," the report says. "This is not to suggest that Morningstar acted improperly. Rather it reflects the structure of the system, built as it is on the responsible entity providing information and acting honestly."

The regulators don't get off scot-free, either. "Key checks and balances in the Australian financial and superannuation system did not work to identify the existence of fraudulent conduct and to shut it down rapidly," the report says. "The regulators ... must take their share of the blame for the slow response." It points out that APRA conducted five prudential reviews of Trio between 2004 and 2009. It took no enforcement action as a result of any of them. From late 2008 to mid-2009 it was unable to obtain from Trio a valuation of certain assets.

"The committee questions how a trustee can be subject to what APRA describes as 'active supervision' over ... six years and yet, when essential information was not forthcoming ... APRA did not act quickly."

The Australian Securities and Investments Commission, it found, took too long to detect the fraud and a lack of communication between the two regulators meant when ASIC started investigating hedge funds in 2009 it was not aware that Trio was not providing essential information to APRA.

The role of the Tax Office, which regulates self-managed super funds, is somewhat different. While APRA-regulated funds are supposed to meet prudential standards, the assumption is that trustees of self-managed funds are looking after their own money. So the focus is more on ensuring they obey the rules and are not used as a tax dodge.

However, it is concerning that some of the self-managed fund investors in Trio said they were not only unaware that their investment was not protected, but unaware that they had even established a self-managed fund.

Given that most self-managed funds are set up on the advice of financial planners or accountants, these groups also rated a "should do better" on educating their clients and informing them of risks.

The committee has made a number of recommendations to better protect super investors against threats from criminals and to give the regulators more teeth.

It is hoped government will take a good look at them. But the companies making money from our super savings should also be taking a hard look at the "value" they're providing. The report repeatedly mentions the "expectation gap" between the protections investors think they're paying for and what they're getting.

The argument that retail investors expect too much is an old one. But if the people to whom investors look to watch out for their interests are merely relying on the honesty of the people managing the money, why bother to pay them?

- A quick clarification regarding last week's column on the budget super changes: As several readers have pointed out, employers are not required to pay 9 per cent compulsory super on salaries of $300,000. It is only compulsory on salaries up to a quarterly cap of $43,820 - or just over $175,000 annualised. Some employers do pay the full 9 per cent regardless, but employees affected by the budget measure can ask for it to be reduced to the cap or to the new concessional contribution cap of $25,000. That would reduce their super contributions to 8.3 per cent.