Super Nation is a fortnightly column that examines, explains and analyses key issues in one of Australia's largest, fastest-growing and most important industries: superannuation.
Nobody could accuse the regulators of Australia’s A$4.3 trillion superannuation sector of being asleep at the wheel in the wake of the collapse of the Shield Master Fund and First Guardian Master Fund.
In turns out the the prudential and corporate watchdogs were working right up until Christmas in taking action against those it sees as needing to be called to account over the A$1 billion (US$660 million) of losses that investors suffered.
On 23 December the Australian Prudential Regulation Authority (APRA) announced it had imposed additional licence conditions on Diversa Trustees Limited to address concerns relating to its investment governance frameworks and practices, including oversight of platform investment options made available to members.
APRA did not specifically name Shield or First Guardian in its media release but it has previously has added conditions to the licences of Diversa and the other investment platform that offered Shield, Equity Trustees.
The previous day Azzet had reported regulators had widened their action against superannuation trustees over the collapses to include Diversa, Netwealth Group (ASX: NWL) and Equity Trustees.
Netwealth agreed to pay more than A$100 million to more than 1,000 Australians who invested in First Guardian after its subsidiaries admitted to The Australian Securities and Investments Commission (ASIC) to contravening the Corporations Act and
Netwealth Superannuation Services Pty Ltd and Netwealth Investments Limited failed to obtain, and did not assess, sufficient information while offering First Guardian as an investment option on their super platform.
Macquarie Group (ASX: MQG) had already agreed to compensate investors for A$321 million of losses connected to Shield, in one of four actions ASIC had taken against a trustee in its ongoing First Guardian and Shield investigations
ASIC had also launched action in the Federal Court against Diversa, which is owned by Infrastructure Partners, for allegedly failing to conduct adequate due diligence before allowing members to invest about $300 million in First Guardian.
At the time it was one of 12 cases which ASIC had taken against 20 defendants in an ongoing investigation into misconduct relating to the two collapsed funds.
In the latest action against Diversa, APRA noted the organisation had acted as trustee for 10 registrable superannuation entities and had 291,000 member accounts and over $15 billion in funds under management.
Platform concerns
“The additional licence conditions follow APRA’s recent thematic review of the investment governance, strategic planning and member outcomes practices of superannuation trustees that offer platforms (Platform Trustees),” APRA said.
“Broadly, the review identified deficiencies in Diversa’s onboarding processes and practices, investment option monitoring and reporting, and management of conflicts of interest.”
The review identified specific concerns about:
- onboarding new investment options, including the lack of sufficiently rigorous, well-defined and consistently applied investment selection criteria
- adequacy of operational due diligence in relation to new investment options, and
- adequacy of Diversa’s investment monitoring and reporting framework.
APRA requires assurance, with appropriate oversight by an independent expert, that Diversa’s investment governance framework and practices are fit for purpose in their design and operation.
Under the additional licence conditions, Diversa has to:
- appoint an independent expert to review its platforms’ investment menus and investment governance framework
- develop and implement a plan to address gaps, and provide assurance or attestation the remediation actions are complete and effective; and
- review its investment menus against the enhanced investment governance requirements to determine ongoing suitability of certain investment options.
“Diversa must also refrain from onboarding new high-risk investment options to its platform without first following an enhanced due diligence process, with oversight by the independent expert, and having an accountable person attest that the onboarding of the investment option is in members’ best financial interests,” APRA said.
Warning letter
This follows APRA’s warning in October it would go even harder from a supervisory perspective if superannuation trustees did not lift their game and do more to safeguard members’ investments in platform products.
The regulator wrote to trustees to explain the findings of, and actions arising from, its review of the fast growing $397 billion platforms market, which represents 13.1% of APRA-regulated fund assets.
The letter called on trustees to lift standards, outlines APRA’s observations about industry practices and requires them to confirm Financial Accountability Regime accountabilities, consider if they have breached prudential standards and obligations, and plan actions to lift standards.
APRA Deputy Chair Margaret Cole said the availability of the First Guardian Master Fund and Shield Master Fund managed investment schemes on platforms had exposed members to the risk of significant loss and uncertainty.
“APRA has made clear our expectations around effective investment governance frameworks and practices, including in relation to onboarding and monitoring of investment options, to ensure they are in members’ best financial interests,” Cole said in the APRA media release.
“Trustees play an important role curating the investment options made available to members and their decisions should be underpinned by robust governance."
