Is Hume’s attitude to the CSLR an abandonment of the uninformed?

COMMENT

It is all very well for the Minister for Superannuation, Financial Services and the Digital Economy, Senator Jane Hume to claim that investors should understand that products generating higher returns are generally higher risk but the reality is that few investors genuinely understand that truism.

Indeed, if Hume took the time to read the more than 50 submissions from “mum and dad” investors to the Senate Economics Committee inquiry into the collapse of the Sterling Investment Trust she would have been not nearly so dismissive in her comments to a superannuation and investments conference in Sydney yesterday.

Those more than 50 submissions make it very clear that the “investors” in the Sterling scheme simply did not sufficiently understand what they were getting into. And they can be forgiven for that because the Australian Securities and Investments Commission (ASIC) has also struggled to understand the complexities of the scheme.

As has been the case with many complex investment schemes, all too many of the victims of the Sterling Investment Trust were unadvised.

It is also disingenuous of Hume to suggest that requiring that the purveyors of MIS schemes to pay their share of the cost of the compensation scheme of last resort (CSLR) will make it prohibitively expensive. She must know that with suitable changes to the legislative regime surrounding such schemes they will become less dangerous for less informed investors.

The introduction of the design and distribution obligations (DDO) will go some small way towards ensuring that complex structured schemes are not inappropriately sold to the uninformed and the unwary but much more is needed.

Indeed, at the same conference which Hume addressed yesterday the chair of ASIC, Joe Longo spoke of the MIS regime in the context of the emerging investment regime around crypto-currency and noted the need for investors to understand what they are getting into.

“In my view consumers should approach investing in crypto with great caution. The maxim ‘don’t put all your eggs in one basket’ comes to mind. Those here who are directly involved in the broader managed investments sector will understand the serious implications of investing without understanding. It is not an approach to be undertaken lightly,” Longo said.

“The demand-driven nature of the rush into crypto has thrown up some unique challenges. At present many crypto-assets are probably not ‘financial products’, making it difficult for financial advisers to offer counsel. So, what can they do when clients are banging down the door wanting to divert their savings into Ethereum or Dogecoin, a currency originally conceived as a joke?”

“ASIC has already provided some guidance on exchange traded funds linked to crypto-assets – they at least are financial products, and traded on a licensed exchange, so there will be some protections there – but for the most part, for now at least, investors are on their own.”

Longo knows the damage inflicted on the those who did not understand the Sterling product. He knows it’s a jungle out there.