Call for super safety net
The Gillard government has left the door open for an industry-wide "last resort" compensation scheme for losses racked up by superannuation funds, including self-managed funds, even after a key review last year strongly recommended against such a scheme.
Still, Financial Services Minister Bill Shorten urged the superannuation industry to consider its own industry-based solution in providing a safety net for losses when it comes to cases of fraud.
The government will also push ahead a series of recommendations to boost safeguards across the superannuation sector, including forcing investment funds to improve levels and disclosure surrounding indemnity insurance coverage.
The moves form part of a long-awaited response to last year's parliamentary joint committee investigation into the December 2009 collapse of Trio Capital and a separate government review of compensation for superannuation investors by Richard St John.
Investors lost more than $176 million when Trio Capital moved money overseas using a network of offshore funds.
While both reports found no systemic problems in the regulation of the superannuation industry, they outlined recommendations including bolstering areas of oversight of funds among regulators and expanding powers to deal with so-called Phoenix activity where investment funds can avoid detection by establishing new entities.
The collapse of Trio represents one of the largest cases of fraud and theft in Australia's superannuation system to date. It also highlighted the risks inherent in the fast growing area of self-managed superannuation funds.
Mr Shorten said the industry would not be asked to contribute directly to a safety net scheme.
But he urged the peak groups of the superannuation sector to consider the issue of under-compensation in cases of fraud or losses. This includes professional insurance schemes to protect retail clients in the event of member insolvency.
"The government will leave open for future consideration the need for a last-resort scheme, which will take account of any residual level of under-compensation after improvements in the industry's conduct standards," he said.
SMSF Professionals Association of Australia chief executive Andrea Slattery said a number of reforms had been made since the Trio collapse, including rolling out a specialist insurance scheme for advisers of self-managed funds.
"Trio was a financial services industry-wide issue, not an issue limited to one sector of super. It's an area where people have to become more competent and we have to improve the communication between statutory and regulatory bodies, as well as the advice to consumer," Ms Slattery said.
Mr Shorten said the government planned to adopt some 13 recommendations from the joint parliamentary report on Trio, and he provided his backing to a further nine recommendations in the St John report. About five recommendations in both reports will be left open to consultation.
Trio losses were concentrated in two hedge funds. The biggest loss - $123 million - came in the Astarra Strategic Fund, which took investments from both APRA-regulated superannuation funds and self-managed super fund trustees.
A further $53 million of losses occurred in the ARP Growth fund, which attracted investments solely from self-managed super funds.
The release by Mr Shorten coincided with the findings of separate Treasury investigation into the regulatory environment in relation to Trio. Treasury cleared key financial regulators the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission.
Its report found no evidence that would have alerted regulators to the fraud. Once investigations into the funds began, APRA and ASIC acted quickly, it said.
Even so, the report said there was an "expectations gap" within the community about the regulatory responsibilities of APRA and ASIC and their ability to safeguard against all investment risks.
Shadow assistant treasurer Mathias Cormann said Mr Shorten's apparent lack of urgency over the findings of last year's parliamentary inquiry into the Trio fraud were disappointing.
"He is kicking the can further down the road to take this whole issue beyond the next election, even though actual decisions now would give certainty to investors," Mr Cormann said.
The Treasury report described the Trio fraud as highly complex with the fund operating through a managed investment scheme.
It said super fund trustees, directors and investors "were continuously deceived" throughout the operation of the fund, particularly about the actual existence of underlying assets and the supposed rates of investment returns.
It also criticised some financial planners "who appear to have been influenced by high commissions" in recommending Trio products.
Under the government's Future of Financial Advice reforms, commissions paid to planners on products have since been stamped out.