The regulator has announced fresh legal actions in relation to the Shield and First Guardian fund failures.
ASIC has launched legal action in the Federal Court against financial advice licensee InterPrac Financial Planning and research house SQM Research over alleged failures related to the Shield and First Guardian fund collapses.
On Thursday morning, the Australian Securities and Investments Commission (ASIC) announced it has commenced civil penalty proceedings against InterPrac and SQM for their involvement with the funds, and is seeking “orders to restrain Interprac from carrying on a financial services business”.
In its filing to the Federal Court, the regulator alleged that “thousands of Australians were exposed to poor financial advice and significant risks” from the Shield Master Fund and First Guardian Master Fund through “critical oversight and compliance failures” by Interprac.
“ASIC has commenced civil penalty proceedings in the Federal Court against Interprac for allegedly failing to ensure its former authorised representatives Venture Egg (a corporate partnership), and Rhys Reilly Pty Ltd (together, Representatives), complied with the best interests obligations and for failing to have adequate risk management systems,” ASIC SAID.
“Together, these Representatives advised around 6,843 clients to invest around $677 million of their superannuation into Shield and First Guardian. Both funds have now collapsed, leaving people’s superannuation at risk.”
Among the regulator’s allegations against Interprac are that the licensee failed to:
- have in place an adequate process for approving financial products it allowed onto its approved product list, including Shield and First Guardian, and relied entirely on external research to add those funds to its approved investments list for advisers;
- respond appropriately to the use of lead generators (being Imperial Capital Group Australia Pty Ltd and AGAT Business Pty Ltd (in liquidation));
- respond adequately to news that payments had been made to Ferras Merhi’s companies by entities associated with First Guardian and Shield;
- enforce or maintain a hold on new investments into Shield and First Guardian after Interprac’s managing director and responsible manager, Garry Crole, acknowledged serious issues with both funds;
- prevent the use of a ‘negative consent’ practice, which led to some clients’ superannuation being invested in Shield and/or First Guardian without express consent from those clients;
- respond adequately to significant inflows of investment into Shield and First Guardian;
- provide adequate responses to client complaints about advice from the Representatives to invest in Shield or First Guardian and instead relied on a ‘template’ response which often failed to consider the appropriateness of the advice; and
- respond adequately or impose meaningful consequences in response to serious compliance issues, including failings repeatedly identified in audits.
“Interprac’s alleged oversight and compliance failures exposed thousands of Australians to poor advice and significant financial risk,” said ASIC deputy chair Sarah Court.
“We allege Interprac failed to ensure certain authorised representatives acted in their clients’ best interests, contributing to hundreds of millions of dollars of superannuation being invested in products that were unsuitable, high risk and costly.
“We allege that no competent financial adviser could have recommended Australians invest large amounts of their superannuation in these funds, and that Interprac – as licensee – should have been alert and responsive to the significant risk this conduct posed to clients, but it failed on many levels.”
SQM reports ‘misleading’
In its claim against SQM Research, ASIC alleged that the research house prepared reports containing “misleading representations and its processes fell short of expected standards” when it published “Favourable” ratings for Shield.
SQM rated the different classes of Shield as “3¾ stars, Favourable” in reports it published in October 2021, March 2022 and October 2022.
The corporate regulator has alleged that SQM Research:
- failed to obtain the information it needed to properly assess Shield;
- failed to properly consider inconsistencies in information it received when preparing its reports about Shield;
- misrepresented that it had a reasonable basis for giving Shield a “Favourable” rating and had exercised reasonable care and skill in doing so; and
- made misrepresentations that understated the percentage of funds managed by parties related to Shield and the asset allocation of Shield.
ASIC also alleged that the SQM Research reports “did not accurately depict the standard, quality, value or grade of Shield, and that reflected deficiencies in the processes SQM followed”.
Court noted that the proceedings against SQM Research marked the first time the regulator had taken action against a research house.
“Research houses have a responsibility to ensure they obtain the information needed to prepare their reports, take real care and skill in assessing that information and to present that information accurately,” she said.
“We believe research houses are important gatekeepers and form part of a critical line of defence against poor quality investments or unsuitable products.
“Given the important role research houses play in rating funds and investments, the community is entitled to expect that their reports will be accurate and based on appropriate information and analysis.”
ASIC is seeking declarations and civil penalties from the Court in relation to both InterPrac and SQM Research, and orders to restrain Interprac from carrying on a financial services business.
