Yet again in the chequered history of investment scheme failures, self-managed superannuation funds are at the epicentre, this time in the $1 billion collapse of the Shield and First Guardian funds.
Many of the 11,000 victims were unwitting SMSF members. They were convinced by social media posts, cold calls and high-pressure sales tactics from financially incentivised intermediaries to shift their money into Shield and First Guardian.
Now, the bill is coming due for the wreckage and the financial services industry and/or taxpayers will be on the hook for some of the damage.
Macquarie and Netwealth have agreed with the corporate regulator to pay $321 million and $101 million respectively to clients who lost money on their platforms, but Equity Trustees and Diversa are fighting the Australian Securities and Investments Commission in court.
The federal government’s Compensation Scheme of Last Resort (CSLR) will again be called on to make up the shortfall.
The relatively new scheme, which is only two years old, provides compensation up to $150,000 per consumer who are victims of financial misconduct as determined by Australian Financial Complaints Authority (AFCA).
The bailout scheme is a back-up option when a financial firm cannot pay compensation, often because they are insolvent or refuse to pay, and other recovery options have been exhausted.
“As the SMSF levies bite, I expect we would see a lot less punters choosing to shift out of APRA funds, and less CSLR claims as a result.”
The scheme began operating in 2024 based on recommendations from the 2017 Ramsay Review and the Hayne Royal Commission interim report submitted in 2018 under the former Coalition government, which highlighted gaps in compensation arrangements.
Incredibly, fees imposed on the financial services industry to fund the CSLR will be approaching $1 billion by later this decade – much larger than anyone envisaged.
Since its inception, the scheme has raised $345 million from industry.
The scheme’s initial $240 million in costs were overwhelmingly driven by losses incurred by SMSF clients of Dixon Advisory’s poorly performing high-fee property fund, many of them former public servants in Canberra.
CSLR chief executive David Berry released a preliminary estimate that the scheme could cost the finance industry an additional $137.5 million in the 2026-27 financial year alone.
That is a low-ball estimate because it excludes an initial estimate of $125 million that could be paid to some of the victims of the $1 billion collapse of Shield and First Guardian.
Hence, the total cost next year alone is likely to exceed the legislated $250 million annual cap.
Hundreds of millions more will be paid out in future years.
Much of this will be paid to SMSF members who invested in Shield, First Guardian, Dixon, United Global Capital and Global Capital Property Fund, among other failed schemes.
Compensation is funded by extra levies on financial advisers, brokers, banks, fund managers and insurers.
Assistant Treasurer Daniel Mulino revealed last month that large and regulated retail and industry superannuation funds will be forced to pay into the scheme, to help spread the financial burden as thinly as possible across the finance sector.
The $1 trillion SMSF sector has so far been excluded, but large superannuation representatives raised with Mulino the prospect of levying SMSFs.
This columnist has previously expressed strong reservations about the existence of the scheme and its widening net.
The CSLR is a scheme where good operators bail out consumers for the deeds of bad financial players.
The risk is growing that the CSLR is becoming a catch-all for investors who make unwise investment decisions.
The bailout scheme may be indirectly inciting more risky behaviour by both financiers and investors, in a classic case of moral hazard.
But the fact is, it exists, after being progressed by the former Coalition government and ultimately legislated by Labor in 2023 with bipartisan support.
Why SMSFs should chip in
The more one thinks about it, the more convincing it becomes that the 650,000 SMSFs should pay an annual levy if they want to be covered for losses.
Like any form of insurance, if SMSFs can make claims on the CSLR, they should also pay an annual premium.
Clients of financial advisers, banks, insurers, managed funds and stockbrokers (and soon big superannuation funds) already indirectly pay the fees that are inevitably passed on to them, so why not also make pay SMSFs who the biggest users of the bailout scheme?
It is not often that a free-market, small-government Liberal says so.
Company director and former investment banker Angus Barker was working as chief of staff to former Liberal superannuation minister Jane Hume when the Coalition was setting up the CSLR.
Barker had philosophical reservations about the scheme’s moral hazard. He says it has since been worsened by AFCA finding a backdoor way to broaden compensation for “faulty advice” relating to investors in failed managed investment schemes. The Coalition deliberately excluded MISs due to their high risks.
“SMSFs are the root cause of exploding CSLR costs,” Barker says.
“SMSF members make an active choice to take their money out of the safety of professionally managed, APRA regulated super funds.”
Barker has no doubt SMSFs should be among the first levied. He suggests that a levy of, say, $150 a year, on the 653,000 SMSFs would generate about $100 million for the CSLR.
Or $100 fee on the 1.2 million SMSF members would generate $120 million per year.
“If as a society we want less of something, we tax it,” Barker says.
“We want to see less SMSF-generated claims to the CSLR.
“So SMSFs should be levied for the claims they cause and see what happens: As the SMSF levies bite, I expect we would see a lot less punters choosing to shift out of APRA funds, and less CSLR claims as a result. Mission accomplished.”
This ticks the boxes of the economic policy principles of price signals, cost recovery and user pays.
Treasury last year warned the government it is too easy for criminals to exploit the more than a million people who direct their own retirement savings, suggesting the barriers to setting up SMSFs are too low.
“There are … few barriers preventing people from quickly establishing an SMSF and little-to-no restrictions on the class of assets a trustee can invest in,” the advice from Treasury said.
“This includes the products offered by the entities referred to in this brief [Shield and First Guardian].
“The same ease-of-establishment [is then] used to sign people up to high-risk, illiquid, and/or poorly diversified investments [and] is also exploited by scammers to steal retirement savings from SMSFs,” Treasury said.
The government has flagged it is considering introducing rules that would slow how quickly workers could switch super products.
Meanwhile, according to the head of a national financial advice firm with many SMSF clients, “SMSFs should not be able to claim against a pool of funds they don’t contribute to.”
“Arguably, SMSFs are the most at risk for a claim as there is no education requirement to establish a fund, there is little oversight and dodgy advisers use this to take advantage of people,” he says.
“There is far less compliance and regulation than the large funds and there is no large trustee to make good when a SMSF loses money, so it’s the last-resort pool funding for every person when something goes wrong.”
If SMSFs oppose paying an insurance premium, there is another easy solution.
“Legislate so SMSF trustees cannot make a claim against financial advisers for faulty advice or against MISs in any situation,” Barker says.