Fraudsters ‘exploited gaps’ in Shield and First Guardian collapses
The fraudsters behind the collapse of the Shield and First Guardian funds exploited gaps in the separation of duties between entities that need to be filled, according to the managing director of SQM Research, Louis Christopher.
Christopher, whose own firm has found itself caught up in the collapse fall-out over its ratings approach, told industry participants he believes “all of us in the industry need to reflect and take ownership where appropriate to ensure we learn and improve”.
“One of the big holes the fraudsters exploited was the principal of separation of duties between entities,” he said. “In both instances the responsible entity was owned by the investment managers.”
“REs play a critical role in the monitoring and reporting of positions,” he said referring to how this had impacted SQM’s ratings approach.
“While we took into account this independence risk into our scoring which contributed to the funds not receiving a high investment grade rating, in hindsight, we should have tightened the screws more on this point,” Christopher said.
“Since this event, we have been tightening the screws on this point and will continue to do so going forward. I am also aware of key platforms who have recognised the weakness in the system and have been doing the same.”
Christopher said data integrity had been another issue and that false information had made its way into the chain to platforms, advisers and research houses such as SQM Research.
“This one is more difficult to resolve. ASIC has suggested they should step in and receive plus report on data returns and asset allocation positions. We support this idea, but I suspect that it is going to take a very long time before this is enacted,” he said.
Christopher suggested that lessons could be learned across industry and there needed to be stronger collaboration across the ecosystem.
“Research houses, trustees, advisers, and regulators must work together to improve data validation and share red flags earlier,” he said. “We need to explore stricter standards for managers with internal responsible entities, even if it affects large respected firms.”
Christopher said third party diligence reports such as so-called independent property and loan valuations plus audits, needed to be more closely regulated.
“As part of our due diligence for both the funds, we relied on audited reports and third-party loan valuations,” he said.
Christopher also suggested that ASIC needed to learn some lessons.
“We now know they were warned by the Financial Advice Association of Australia (FAAA) back in 2021 of the specific cold calling. If they had peeled the onion back then we would not be in this mess today,” he said.
So the ATO & ASIC won’t let your local accountants do 1 set of SMSF financials and have a related party audit it.
But somehow this type of related party MIS Manager and Responsible Entity looking after hundreds of millions $$$ of external investors funds is fine without independence ???? WTF
Canberra’s moronic bureaucrats prove to be totally useless misguided regulators yet again.
eg. Let’s spend $10s of millions on Advisers redoing OFA with technically wrong identifiers.
FFS they are so hopelessly lost.
“Learn and Improve” now thats an understatement – $1.2 Billion of every day australians super potentially lost, 12,000 people impacted
So if everyone knew about the problem back in 2021 why didn’t the research house properly investigate the fund before ticking it off as being acceptable for investors? An adviser would lose their job if they were so incompetent. Seems to be a fair bit of finger pointing but no accountability.
Yes, fair enough — but nothing has happened to SQM, Macquarie, Equity Trustees, or the BDO auditor. It’s only advisers who have been hit with bannings.
There weren’t just one, but two funds rated 3.75 “Favourable” by SQM Research — a clear pattern of negligence. If the problem lies with the auditors, then SQM should pursue them separately. What doesn’t make sense is why the failings of every other party are consistently pushed onto advisers.
A close friend of mine — an adviser — has now lost their career over this. They have a family to support. Meanwhile, the very entities responsible for monitoring these products continue without consequence. Louis, your firm’s negligence on multiple ratings has had real human costs, and the platforms’ only response has been to quietly distance themselves from SQM.
The real fault lies with the product failure and the oversight bodies who were supposed to ensure safeguards worked. In a strong ecosystem, all accountable parties would face consequences. Advisers depend on that system functioning properly — and this time, it didn’t.
@Anon,
Your friend, the adviser failed on a number of accounts.
Relying on Research houses ratings to make recommendations was always going to be a big risk to his clients and himself.
1.Starting with the basic requirement, know your client and know your product!
2. Not all products on an APL are suitable for every client.
3.Advisers have always been responsible for doing their own due diligence.
4.Historically, there have always been Research company failures.
For example, before the GFC some Researchers were giving the green light to certain mortgage funds in the USA
like Fannie Mae and Freddie Mac and included them in their model portfolios.
Any adviser worth his “salt” would have done his/her own research and found difficulty in recommending any of these but they did and during and after the GFC, they got into strife and investors lost $Millions!
So, do you think the fault is the Fund Manager, the Researchers or the adviser who made the recommendation.
Big claim. Where do you think the adviser would have been able to see the issue that the ratings house and the auditor arguably didn’t?
Are advisers supposed to be clairvoyants?
@Phil,
Advisers don’t need to be clairvoyants but you’re not doing your job unless you do your own research.
You will know that when you go to a Fund Manager presentation, they will always tell you how good they are.
They are not perfect!
My favorite questions over the past 30 years were
Here’s my point, not one Fund manager ever failed to answer those questions honestly.
The reason is obvious!
When things go wrong after a client has given you $1m, you’re the sitting duck.
The clients expect you to know, you can’t blame the fund manager.
What if the fund manager was making misleading statements?
Also, the three questions you pose would weed out precisely zero funds. That is not a reasonable approach. There’s no evidence base to the quality of answer.
Again, what information would an adviser have come across that an auditor or research house had not based on their own investigation?
I’d put it to you that the auditor and the research house has access to considerably more material than an adviser could ever obtain. This doesn’t make an awful lot of sense.
Yes an adviser is ultimately responsible for the recommendation, but I’d suggest to you that an adviser could have researched this until the cows come home and likely found nothing suspect.
The size of the fund was a concern, but it wasn’t sub $300m or something incredibly small. (There’s a lot of funds on platform with way way less FUM).
I’m not in anyways trying to defend this outcome, or the advisers, but I believe that the pragmatism of your position regarding adviser research is massively overstated and needs to be challenged.
These were very obscure funds that came out of nowhere. Why would they even be on the radar of an adviser in the first place? It seems highly likely there were “marketing payments” made to advisers, or the people in the practice or licensee who controlled the advisers. Being alert to the merits of the fund is a second order issue. Advisers shouldn’t be promoting any product, no matter how good it is, if banned payment arrangements are likely to be involved.
@Anon2
If these were obscure funds that came out of nowhere, how much warning would you need to tread carefully?
The answer “why would they even be on an adviser radar?” to your next question, is obvious!
Why would you or anyone recommend any product that you know Nothing About!
If that’s how any of you operate, ASIC is going to have your backside in a sling.
If your next statement is remotely true about “marketing payments”, then ASIC has a name for that….it’s called conflicts of interest!
If so, do you think if there were, do you think there was any disclosure in SOA’s to clients?
Any adviser worth his/her salt wouldn’t stay with that Licensee whether there was or wasn’t any disclosures.
This was an accident waiting to happen and your last comment is pertinent.
I would have expected that in order to use funds like these, the licensee would likely have had to provide some sort of approval. Surely.
But what if there was no conflicted remuneration to the adviser, what if they were simply a salaried employee? What if the adviser was simply recommending a product that had been recommended to them by their management, director, investment committee, licensee? How would the adviser know of any collusion between the fund and licensee? Particularly if they were employed as an AR under a CAR of a licensee?
Perhaps ASIC should just do it job at the coal face rather than waiting for the fallout and then looking to apportion blame on everyone else other than themselves
They must have insurance. Anyone with an AFSL has insurance, go anfter the insurance companies.