The law is there, now ASIC must stand up and be the enforcer
Too bad? Caveat emptor?
Do you tell them they should have inspected the Material Risks section on page 37 of the Product Disclosure Statement more closely?
Perhaps there is something to be said for the principle of caveat emptor, for avoiding the pitfalls of the over-regulated nanny state. But caveat emptor is hardly the cure for this chain of corporate collapses. Most people rely on trust when it comes to their investment decisions, trust in their financial adviser, trust in the system.
Most people are not savvy investors and are entitled to expect some protection from fund managers. They are entitled to expect that if their managers break the rules and burn their life savings they will be penalised.
Most people don't expect to be sharked. They rely on the system which they fund via their taxes to protect them.
And the system has plainly broken. It has failed them. It is bust. Some $15 billion, a generation of savings, has been blown to smithereens. And the promoters, perpetrators and professional hangers-on are roaming about blame-free - Maseratis, mansions and management fees intact - amid the shattered retirement dreams of tens of thousands of their victims.
The answer to this epidemic doesn't lie in more laws, more regulation and more red-tape. It lies in enforcement. The regulators need to man-up and enforce the rules that already exist.
The founder of LM Investment Management, Peter Drake, was fond of reminding investors and the media that he had the imprimatur of the Australian Securities and Investments Commission. His promotional materials are littered with references to compliance and licensing by ASIC.
This imprimatur has lent comfort to investors and sucked more money into the LM vortex.
LM, like the rash of Gold Coast mortgage funds before it, went to the wall last week. All its funds are now frozen and FTI Consulting, the administrators appointed by LM directors, are next to graze on the carcass.
When the Managed Investment Schemes (MIS) laws were introduced, the old external trustee model was removed in favour of in-house trustees, or Responsible Entities (REs) as they are called.
Whether a return to the external trustee model could have staved off the flood of collapses is doubtful. The systemic failure is due not to the regulations, but to their enforcement.
No one is penalising the mortgage fund players for apparently breaching the rules.
James Field, a compliance expert and director of Complispace, says the essential failure of the ASIC regime is that it is based on disclosure rather than supervision. That means that as long as an operator has the right disclosure documents in place, the regulator does not get involved. By the time something goes wrong, it is too late.
You don't see credit unions or funds regulated by APRA (the prudential regulator) going belly up too often. In contrast to ASIC's disclosure regime, APRA takes a "supervisory" approach.
Field says ASIC should require their regulated entities to lodge an online annual compliance report and insist on regular independent governance reviews.
"These initiatives cost the regulator nothing and are only a minor inconvenience for well-managed REs. Most of them are already doing this for AUSTRAC.
"Other regulators such as AUSTRAC seem to understand the importance of supervision or at least being proactive on compliance."
Another potential initiative is for ASIC to require the Auditors of REs (they are usually subject to three separate audits - Compliance Plan, Fund Financials and AFS Licence Financials) to expand their brief and actually audit the overall effectiveness of "internal controls" (that is, compliance systems, complaints handling and so on). APRA regulated entities are subject to these types of audits.
The ASIC draft regulatory guide released last week to industry for consultation is quite comprehensive, says Field, and may go some way towards improving the regime but, in the end, the protection of investors will come down to proper enforcement and supervision.
As to LM, ASIC is reportedly already probing the company and it remains to be seen whether any breach of the applicable laws has taken place.
Frequently Asked Questions about this Article…
LM Investment Management (LM) collapsed recently — the article says all its funds were frozen and FTI Consulting was appointed as administrator by LM directors. The founder, Peter Drake, had promoted the firm’s association with ASIC compliance, and ASIC is reportedly probing whether any laws were breached.
The article argues the wave of collapses is not mainly due to missing laws but weak enforcement. It says the ASIC regime relies on disclosure rather than active supervision, allowing operators with the right paperwork to continue until it’s too late, which has contributed to failures in mortgage funds and other managed investment schemes.
No — the article explains that most everyday investors rely on trust in advisers and the system, and aren’t savvy enough to protect themselves solely by caveat emptor. It says investors are entitled to expect protection from fund managers and effective regulator enforcement.
According to the article, ASIC’s approach is disclosure-based (publish the documents and don’t supervise closely) whereas APRA takes a supervisory, prudential approach. The piece suggests APRA-regulated entities (like some funds and credit unions) tend not to fail as often, implying active supervision better protects investors.
The article cites compliance expert James Field recommending ASIC require annual online compliance reports from regulated entities, insist on regular independent governance reviews, and expand auditors’ briefs to assess the effectiveness of internal controls (compliance systems, complaints handling, etc.). The core point is stronger supervision and enforcement.
The article says auditors typically perform three separate audits (Compliance Plan, Fund Financials and AFS Licence Financials) but suggests they should expand their brief to audit the overall effectiveness of internal controls — something APRA-regulated entities already face.
When a fund collapses or is frozen, administrators such as FTI Consulting can be appointed (in LM’s case by the directors) to manage the company’s affairs, realise assets and deal with creditor and investor claims. The article describes them as the parties who step in to manage the aftermath of a collapse.
The article argues that more laws and red tape aren’t the solution; instead, proper enforcement and supervision of existing rules by regulators like ASIC are essential to protect investors and prevent further collapses.
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