Review of the Managed Investments Act 1998

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ASSOCIATION OF INDEPENDENT RETIREES INC.

REVIEW OF MANAGED INVESTMENT LEGISLATION

Prepared By Alan Beaton-For Association of Independent Retirees Inc.

TO REVIEWER - MR MALCOM TURNBULL

Submission prepared by Alan Beaton in the capacity of President of the South Australian Division - National Councilor of the Association of Independent Retirees Inc.- Chairman of the Association's Standing Committee on Investment Fraud - charged with the responsibility of presenting AIR policy on issues of protection of invested funds of

A.I.R. members and Retirees at large .

INTRODUCTION

On 9th August 2001 the Commonwealth Treasury announced details of its Review of The Managed Investment Act 1998. The inquiry's terms of reference included an examination of the effectiveness of extant arrangements for the regulation of managed investments introduced by the Managed Investments Act contained in Chapter 5c of the Corporations Act 2001, to determine whether:

    • The arrangements have delivered benefits in terms of:

      - better protection of investor's investments;

      - greater certainty as to the responsibilities, obligations

      and liability of scheme operators [known as `responsible

      entities' under the legislation]:

      - the rights of investors in managed investment schemes; and

      - reducing the cost of investing in managed investment schemes;

    - the arrangements have strengthened compliance practices,

      procedures, and awareness amongst responsible entities and

      others involved in the managed investments industry;

    - the arrangements cater for the diversity of managed investments,

      including consideration of the way in which the Legislation is

      administered by the Australian Securities and Investment Commission;

    - refinements could be made [whether requiring legislative amendments

      or not] to enable the arrangements to operate more efficiently and

      effectively, while not unnecessarily detracting from the protection

      afforded to investors.

In the interest of efficiency, and recognising the complexity of the subject matter,

The Association of Independent Retirees Inc.limits comment to the first three listed reference items.

PREAMBLE

It is an established fact that Corporation Law has been amended over twenty times and that each change was made to increase investor protection as examples of financial/ corporate mismanagement or malpractice became evident.

The implication of that statement is that mismanagement/malpractice within the Finance Industry has long been a serious concern warranting the introduction of regulatory measures by government to protect investor interests.

That the position has worsened in the interim is not disputed. This is evidenced by an endemic increase in - failure; fraud; fiduciary neglect; misappropriation of investor funds: counterfeiting; non-professional behavior etc. reported in the media and other mass communication channels.

There is proven evidence of malpractice; professional misconduct; lack of due care and diligence at concerning levels including Financial Servicing; Legal , Accounting, Valuation Auditing and even within government services such as land title offices and, particularly, registration and maintenance of professional qualification.

The Association of Independent Retirees Inc. [A.I.R.] believes there is an urgent need to review, increase/improve, investor protection in recognition of the unprecedented number and wide demographic distribution of new and potential investors entering the investment market. Regulation of finance industry laws; rules; and practices should not occur only in response to evidence of concerted malpractice but rather in response to regulatory audits. The current Review might profitably consider the relationship between the Government trend towards encouraging individuals to self or part fund for retirement income; the imminence of the influx of the baby-boomer population into the retirement arena in early 2006, and the need to have in place adequate protective measures against the distinct possibility of an even harsher increase in schemes to misappropriate investment funds. A.I.R. believes there is a distinct possibility that Superannuation funds represent future risk. It is there, it is tempting, it is accessible.

A.I.R. stresses that stringent measures for the protection of investor funds must be regarded as a priority measure - [a] to reduce opportunity for fraud - [b] in support of the governments policy to reduce reliance on Social Services as a way of life - [c] to reinforce badly battered investor confidence in the adequacy of legal or statutory enactment's to protect investment capital from illegal intrusion.

The Review is urged to adopt as its ration d' etre, the notion that it is harder to recover money lost through fraud than it is to prevent it happening in the first place.

Historical Influences

1.We draw the Reviewer's attention to the Australian Law Reform Commission -Companies and Securities Advisory Committee - Collective Investment Schemes Discussion Paper No 53 [October 1992] .

2.The Report eventuated primarily as a consequence of losses incurred by small investors

in the Australia-Wide Management Ltd. Trust, whose collapse resulted in $1 billion of investors money disappearing. The Report's significance is that little has changed to date.

3.Relevant factors contained in Discussion Paper No 53 highlight that the loss of very significant funds would not have occurred if legislation had been in place to ensure that Permanent Trustees observed their fiduciary and legal responsibilities and the lending institution - [State bank of N.S.W.] - had been prevented from approving finance for the purchase of the `key' property asset - No1 O'Connell Street Sydney, on a first mortgage basis in circumstances where it was established that it was aware, or should have been aware, that Australia Wide-Flexi Property Fund Unit-holders already held a prior established first Mortgage on the property.

4.Had due diligence been observed, and adequate consultation with unit holders taken place, the debacle that resulted from basic regulatory failure would not have occurred. Years of costly litigation would have been avoided and honest citizens would not have suffered acute loss of investment funds.

5.The referred Law Reform Commission Paper was further influenced by the Estate Mortgage collapse which resulted in $643 Million of investment capital being lost in circumstances in which Trustee fault was a prime factor.

6 The two referred examples were the principal reasons why Trustees were removed from the provision and protection of the Managed Investment Act 1998 and the concept of `Sole Responsible Entity' introduced as a reaction to deficiencies in corporate practices in the 1980's.

7. It is of major concern to the Association of Independent Retirees, Inc. that notwithstanding the inclusion of new regulatory provisions after the unlisted property crisis in 1990; aimed at the provision of strict guidelines for the valuation of property assets there is evidence of continuing and increasing spread of improper practices associated with the Finance Industry in a number of States . This indicates an urgent need to review the role and responsibility of A.S.I.C, A.P.R.A. Valuers , Auditors, Solicitors and law firms, also Government entities providing financial and related services.

8. Share holder and investment groups supported the government's controversial Managed Investment's Bill mainly because it offered the introduction of a

"compliance plan," vetted by the Australian Securities Commission to ensure investor protection - an intention that, regrettably has not eventuate. Arguably, because of the `toothless tiger ` approach adopted by A.S.I.C.and other regulatory bodies. In retrospect, the trust placed by investors was too readily bestowed.

9. A.I.R Inc.is, therefore, supportive of the need to review regulatory legislation and to address the current situation which provides deficient, flimsy and inadequate protection to investors; in particular, to retiree investors, who can be shown to be the major target group of unscrupulous financial and associated practitioners.

10. Although A.I.R. Inc.was not represented at the earlier hearings referred to, it has examined records of the various proceedings and indicates its support of the measures proposed by A.S.A -.[Australian Shareholders Association] A.C.A.- [Australian Consumers Association] - and also the position taken by the A.L.P.- [Australian Labour Party at that time which called for added protection for private investors and also transparency in corporate/commercial financial transaction. Aims and objectives that are a more pressing priority in 2001 than they were in the early 1900.

11. Reference to the Senate Select Committee on Superannuation and Financial Services hearing dated Thursday 15 June 2000. Provide supportive comment that point to the need

to review and amend where necessary , deficiencies and abuses that coexist within the Finance Industry . These are noted below for ease of reference:

Comment on deficiencies /Abuses within the Finance Industry

Page 335 - Refers to the superannuation guarantee:

"Even though superannuation is a priority in the liquidation of companies,

this is not a well known fact". AIR supports the recommendation that there

should be some promotion and publicity about the fact that it is one of the

first items on the list that is required for payment.

Page 367- Refers to the cost of running superannuation accounts:

" The cost of actually running supperannuation accounts differ from an

administration basis, and insurance is very different for a range of funds.

Most funds provide death and total and permanent disability insurance, but

now funds are offering options of income protection and a range of other

services" AIR offers the view that varying cost of fund administration

could place fund members at a possible disadvantage unless they possess

the ability and experience to compare `apples with apples' when presented

with variables or options. We believe this is an area in which there is an

urgent need for transparency and free actuarial advice to entering

members.

Friction Between Regulators

Page 371-3 Refers to the roles of APRA and ASIC from the perspective of the Chair of

a Corporate Super Association.

" I think there is certainly confusion in the roles at the ground floor in both

organisations. There is certainly confusion at the receiving end of their

tender mercies. Both seem to ask for the same sorts of information. Both

seem to inquire about the same sorts of things and you get different

responses, which is not productive ,in my experience. There is no doubt a

territorial war going on between the two organisations".

AIR expresses its concern that two such key regulatory authorities are at

substantial variance as to the quality and content of information supplied.

Such situation can only add confusion to an already confused area of

Business and one that deals almost exclusively with the public's money.

An examination should be conducted into the relative competencies of

what seems to be competing organisations - a situation seems to have

developed where the right hand doesn't know what the left is up to.. It is

well understood that the basic distinction is supposed to be prudential

supervision by APRA and consumer protection in ASIC's court.. As

demonstrated by the H.I.H. debacle and the endemic spread of fraud across

the financial board, both organisations require examination and definition.

The Value of Regulation

Page 377- Refers to the quality of regulation provided by APRA or, its absence.

"regulation represents a cost and when regulators are not stable in the sense

that you are not dealing with the same person from one review to the next.

We are sensitive to regulation which does not seem to add much value"...

We are not happy with APRA is the general view that we want to convey,

But we do accept that they need to be there and they need to be regulated".

AIR shares the view that there is an indicated need to monitor the

performance, of regulatory bodies which may otherwise obscure reality

with regulation and to address the need to ensure that staff are adequately

trained before being empowered to make mistakes. In the First Report of

the Senate Select Committee on Superannuation and Financial Services

dated August 2001 at page 12, Mr. Kevin Casey, then Senior Strategy and

Technical Advisor with the A.M.P. voiced concern at the level of practical

Experience of operational level regulators... He informed the Senate

Committee that APRA staff have a good understanding of the law, but do

not have a great feel for the financial system they are overseeing.

AIR shares the concerns expressed and adds its awareness of, and

concern for, the perceived lack of depth experience and qualification

of Registered Financial Advisors/Practitioners. AIR can

produce evidence of gross and criminal malpractice within the finance

industry which is attributable to an absence of regulatory scrutiny.

Compliance/Enforcement Levels

Page 379- Refers to [1]. Prudential Supervision, Consumer Protection, Banking and

Financial Services and [2].at Compliance or Enforcement levels.

Comment made to the Senate Committee, page[380] to the effect that

"there are not a lot of resources left in APRA from a review point of

view of the industry" causes concern and must give rise to apprehension

and act as a prompter to remedial action.

AIR shares the concerns expressed and is of the view that improvement is

necessary in the area of member investment choice and member choice

which encompasses the disclosure regime and the whole issue of

management expense ratios. As things stand at the moment, if people are

going to have member investment choice they are going to experience

difficulty in choosing between funds in comparing costs and investment

returns because there are no real standards of disclosure that are standard

across different funds.

Another role that AIR directs urgent attention to is the part played in the

Finance Industry by Auditors,Valuers, Accountants, Lawyers etc.

There are strong indications that these service providers are becoming

increasingly associated with less than acceptable professional standards,

and may , in a number of examples, have contributed to actual loss of

investor funds.

Review of Risk Management

A.I.R refers the Reviewer to a report tabled to the June 2000 Senate

Select Committee by Mr. Richard Rassi ,Partner, Deloitte Touche

Tohmatsu entitled, `Top10 issues from1999 - a post mortem

summary report of audit findings'. There are a number of issues there

and in Mr. Rassi's background comment that " there are a lot of

inefficiencies and a lot of examples of non-compliance that still exist

out there in industry, is too important to lack investigation,

particularly [Audit Issue No2 - Review of Risk] -

Management Statements not conducted on a regular basis'

.

Mr. Rassi identifies audit item No 8 as warranting serious attention.

It refers to errors in the reconciliation of assets with membership records

which , of course, increases the risk of error and fraud. Mr Rassi's

comment to the Committee that, " we know that fraud is very much alive

and well in superannuation. It is a number that is growing", causes

concern within AIR for its members interests and it urges special

consideration of the legal implications of the warning given to the Select

Committee and to the duty of care it confers.

Quality of Regulation

AIR is concerned to ensure that the issue of consumer protection is

adequately addressed. Consumer protection requires that access to

redress is built into the investment system. Attention being paid to

superannuation schemes and the quality of regulation that should be

in place is laudable but it government concern must not end there.

The massive increase in finance industry related fraud demands that

equal attention be extended to investors who are outside the

superannuation system.

The sort of consumer protection AIR looks for was fully outlined to

The October 1999 Select Committee on Superannuation and Financial

Services It can be briefly described as the institution of a `Finance

Industry Default Indemnity Fund' contributed to by both parties to an

investment contract on a ratio of, say, 0.2% of the transaction amount.

The core intention is to address the need to provide a mechanism that

will restore misappropriated investment capital directly from the fund

in established cases and leave it to Fund Managers to initiate legal

or other appropriate action to reimburse the fund from defaulter resources

where possible.

The Adequacy of Redress Mechanisms

The adequacy of redress mechanisms is, of serious concern to AIR

The 1999 Senate Committee commented at page 69 of it's August 2001

First Report on its "concern at the vulnerability of older investors and at

the difficulty faced by investors".

It also noted that the United Kingdom has established a Financial Services

Ombudsman as a single entry point for consumers with complaints or

grievances. AIR contends the this is a worthwhile consideration provided

it is adequately resourced to establish a capability to provide

representative/legal assistance to those impoverished by finance industry

associated fraud.

Notwithstanding that ASIC has overall responsibility for consumer

protectionism in the finance industry, it has failed to recognise that it's

empowerment includes the needs of individual consumers as well as

corporate defaulters. In the present context of the adequacy of redress

mechanisms, it is of grave concern to AIR that individual needs in this

context are not being adequately met.

Summary of AIR's Comment and/or Concerns

1 There is an urgent need to review ,increase/improve investor

protection against fraud or fiduciary failure.-page 2

2 There is a need to regulate/increase the regularity of Audits.- page2

3 Schemes to misappropriate Investment funds to be guarded against-page2

4 Improper practices to be identified and eliminated - page3

5 Regulatory legislation to be amended to afford more security-page3

6 Priority of superannuation on wind-up to be publicised.-page4

7 Members entering Super funds to be assisted re choice.- page4

8 AIR is concerned at indications of friction between regulators.-page5

9 Monitoring the financial performance of regulatory bodies needed.-page5

10 Necessity for regular review of risk management provisions -Page6

11 Necessity to Legislate for provision of Fin.Ind. Default Indemnity Fund- Page6

12 Quality/Adequacy of existing legislation is cause for concern. Page6

13 Adequacy of Redress Mechanisms need urgent examination.Page7

14 Inadequacy of government funding to regulatory authorities.Page9

15 Inadequacy of severity of judicial sentencing for fraud.Page9

Concluding Comment.

AIR, in its address to the 2000 Senate select Committee, stressed the need to determine and establish a mechanism that would make provision for the return of invested funds in circumstances where unlawful misappropriation of investment capital has occurred in provable default circumstances.

Whilst the normal risks associated with investment capital is accepted, the emergence of deliberate and sophisticated fraudulent practices perpetrated against investors in endemic proportions by registered members of the rapidly growing finance industry is considered to be unacceptable and untenable.

The membership of AIR has resolved to petition government at all levels to legislate for restoration of capital where fraud has occurred through deliberate action by members of the finance industry.

AIR is supportive of any submission to government for an increase in funding for both APRA and ASIC in the belief that inadequate funding is wholly or partly attributable to decisions by both bodies to concentrate efforts to major; :high profile cases to the exclusion of individual or smaller impact cases.

It is accepted that ASIC is not currently structured or empowered to initiate direct action to restore equity to defrauded community members. Consideration might profitably be given to amalgamating ASIC/APRA to achieve economies of scale/cost and improve efficiencies across the board and to consider how AIR's objective might be achieved.

An obvious and inescapable conclusion must be that in the present context, Financial Service institutions are not responsible to the public in default circumstances. Government action to protect the asset entitlements of workers etc is laudable but also highlights a deficiency in provision for return of capital where proven illegal activity is at fault. There must, in AIR's submission, be an internal accountability provision built into finance industry administration.

Authorities Have Already Recognised This Requirement:

• The Attorney General of S.A. referred publicly to the "vulnerability of the investor

public when unscrupulous dealers target older people"

• ASIC, W.A. regional commissioner James Ogilvie said, " It was unacceptable that

Investors should be exposed to losses as a consequence of maladministration.

AIR's submission to the referred 2000 Senate Select Committee lists additional detail dealing with public awareness and alarm over escalating finance industry crime and the need to

    W.A.'s ex- Minister for Fair Trading, Mr Doug Shave is on record as saying, "Consumers were not warned last year about disreputable finance companies for

    fear of hurting investor confidence"

AIR is grateful for the opportunity to contribute to what it considers to be a warranted and urgent review of aspects of the finance industry which give rise to public concern. Thank you for considering AIR's submission and be assured that it will give support to

any proposal which responsibly regulates this troublesome industry.

O.A. Beaton For and on behalf of Association of Independent Retirees,Inc

 

 

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