Broad CSLR would have avoided Trio SMSF losses

Parliamentary support is growing for managed investment schemes to be captured by the Compensation Scheme of Last Resort (CSLR) with a key Parliamentary Committee having been told that self-managed superannuation fund investors hit by the collapse of Trio Investments would have been compensated under such an arrangement.

The SMSF Association told the Senate Economics Legislation Committee inquiry into the CSLR that the situation might have been very different for SMSF investors in Trio if compensation arrangements had actually covered such schemes at the time.

“By broadening the scheme to cover MISs those investors would be covered,” SMSF Association deputy chief executive, Peter Burgess told the committee.

Senator Louise Pratt asked the SMSF Association to unpack what might happen if the CSLR was not broadened to cover and require funding from managed investment schemes with Burgess pointing out what happened to SMSF investors caught up in the Trio collapse.

“If there is a failure of a managed investment scheme because of theft or fraud SMSF investors are not entitled to compensation like other members of superannuation schemes,” Burgess said. “So Section 23 of the SIS Act enables the minister to make a grant if compensation to APRA fund members in the event of theft or fraud but that part of the legislation does not apply to SMSF investors.”

“And we saw that through the Trio case where there were SMSF investors who were not compensated whilst members of APRA-regulated funds were,” he said.

“So, by broadening the scheme to include MISs those investors would be covered and we’re talking here not just about ‘advised’ investors but also unadvised investors,” Burgess said.

While the SMSF Association was telling the committee how a CSLR may have seen SMSF investors compensated out of the Trio collapse, the Financial Services Council (FSC) used its time before the committee to argue for the imposition of both minimum capital requirements on licensees as well as minimum requirements with respect to professional indemnity insurance.

FSC acting chief executive, Blake Briggs said his organisation did not want to put undue financial pressure on financial advisers, but it believed that the Corporations Act should specify minimum capital requirements to ensure clients could be compensated without relying on a compensation scheme or relying on a bail-out from their adviser counterparts.

“The other approach is addressing the pretty poor performance of the professional indemnity market,” he said.

“We know that market is problematic but what we would like to see is an obligation on advice businesses to have minimum level of insurance coverage and for them to upload their insurance coverage with the Australian Securities and Investments Commission (ASIC) so that ASIC can do spot checks to identify who the ‘fly by night’ operations are so you can claim on insurance before you have go and stick your hand in other people’s pockets,” Briggs said.