SMSFs could have to pay victims of financial misconduct

Melinda Kee thought her financial ordeal was almost over.

But more than 12 months after she lodged a financial complaint to try to recover almost $400,000 of her retirement savings, she's still fighting for compensation.

In November 2023, Ms Kee was given financial advice to switch her super from a retail fund into the now-collapsed First Guardian managed investment scheme.

She is one of 11,800 investors who collectively lost more than $1 billion in retirement savings after they moved their super into the First Guardian and Shield managed investment schemes, which later went under.

After numerous delays and many tears and sleepless nights, Ms Kee, who leads investor advocacy group SOS Save Our Super, says her fight for compensation has stalled due to legal action.

Many other investors are still working through the complaints process.

"The AFCA (Australian Financial Complaints Authority) process has been a long, tedious and very frustrating process for all investors, myself included," Ms Kee told ABC News.

"You've got people that are waiting for their superannuation for cancer treatment, for hip surgery. It's a huge amount of time for people to be waiting and going through that constant anxiety of what's happening."

On April 10, AFCA determined that InterPrac Financial Planning — which sits under publicly listed Sequoia and is one of the companies that licences financial advisers who advised investors like Ms Kee to place their retirement savings into the First Guardian fund — should pay Ms Kee $368,093.11 plus interest.

But InterPrac is taking AFCA and Ms Kee to court to challenge that determination.

A spokesman for InterPrac said the company could not comment as the matter was before the court.

As a result, not only has Ms Kee's payout been delayed, but AFCA has had to put all determinations related to First Guardian and Shield cases linked to InterPrac on hold.

If Ms Kee cannot enforce the AFCA determination, she must rely on what is known as the Compensation Scheme of Last Resort (CSLR). But that is capped at $150,000, leaving investors like Ms Kee, who have lost hundreds of thousands, and in some cases, more than $1 million, well short.

Assistant Treasurer Daniel Mulino is looking to revamp funding for the CSLR, saying that large super funds, as well as people with self-managed super funds, could be asked to chip in.

Mr Mulino told ABC News that with more investors losing money through First Guardian, Shield and other high-profile cases, the CSLR is facing "huge pressure", far beyond what was originally anticipated when the scheme was established.

Currently, the CSLR is funded by a levy on financial advisers. Mr Mulino wants to widen the funding base.

He is considering a three-tier "waterfall model" where future shortfalls would be allocated based on a sector's alleged connection to the underlying losses.

CSLR faces massive funding shortfall

As ABC reported last week, there's now more than a $170 million shortfall in the amount required to fund victims making claims under CSLR.

The scheme was introduced after the banking royal commission to assist victims of financial misconduct when all other avenues for compensation have been exhausted.

About 5,800 people invested a total of $480 million of their retirement savings into Shield, which superannuation trustee Macquarie has reimbursed $321 million to 3,000 investors.

Of the roughly 6,000 people who invested $446 million into First Guardian, Netwealth reimbursed about $100 million to about 1,000 investors.

But, like Ms Kee, many investors are yet to receive compensation. Some are contemplating joining a class action.

"Just under 12,000 Australians lost over a billion dollars and what this showed is, firstly, that the risk of these major collapses is higher than anyone would like to see,"

Mr Mulino said.

"But secondly, that the size of these collapses, and some other collapses before them, is putting the scheme under pressure and calling into question its sustainability."

Mr Mulino said in an ideal world, when an investor takes their complaint to AFCA, the party against whom the determination is made will quickly make that payment.

"The CSLR comes into play where the party against whom determination is has either gone bankrupt or there are other reasons why they can't or won't make the payment," he said.

"And that's where delays can come into play.

"We want a system that works as quickly as possible."

How a three-tiered 'waterfall model' for funding the CSLR would work

Under the proposed waterfall model for levies, Mr Mulino says the primary sector responsible "would be the first port of call".

"The waterfall model as proposed in the [Treasury] discussion paper would basically contain some tiers, if you will, or layers, where the sector, the sub-sector, are immediately responsible for the cause of the loss," Mr Mulino said.

"So in the case of … First Guardian and Shield, that would be the financial advice sector. It would be the first port of call and it would be possible under the waterfall model to levy up to $40 million off that sector in addition to the $20-million sub-cap.

"Then there would be other sectors, where I as minister would determine that they are more proximate than other parts of the financial services sector. This might be other parts of the super sector, for example, that are closely related to the provision of advice.

"And then finally, there would be all of the other parts of the sector that I, as minister, decide to allocate to."

Mr Mulino said "some of the large financial companies that own financial advisors currently aren't contributing" to the levy.

He said the levy may also include self-managed superannuation funds (SMSFs), which are a fast-growing chunk of the $4.4 trillion superannuation sector.

"It's still a question that we're determining as to whether SMSFs would be part of this," Mr Mulino said.

"The first option when it came to SMSFs is that if they aren't to contribute, then one option would be to say that they can't benefit from the CSLR.

He says, to date, SMSFs have received a very significant proportion of CSLR funding.

"And the other two options that we posed in the discussion paper were an opt-in and an opt-out model where SMSFs would only be able to benefit from CSLR coverage if they either opted in or didn't opt out," he said.

How about claimants who would have been better off with appropriate advice?

The $150,000 cap under the CSLR is another point of contention.

Mr Mulino says he doesn't want to change the cap.

But there's another change under consideration that could lower people's payouts.

The Treasury discussion paper includes a proposal to exclude "but for" claims.

AFCA's "but for" process considers whether a claimant would have been in a better financial position had they received appropriate advice and earned interest. But it's come under criticism from some in the advice industry for using a definition that's too broad.

Mr Mulino said APRA-regulated super funds, whose members could be asked chip in, are not at fault and there is "a question over whether it [the CSLR] should be a little bit more tightly framed than the determinations made at AFCA".

Super Consumers Australia chief executive Xavier O'Halloran says he wants to see the compensation scheme broadened so that more financial services providers are contributing, and he wants the "but for" test to remain.

"Punishing victims by taking away their compensation is not the solution here. I think collectively government, the industry has failed to be good custodians of the system. And that's what led to these losses. Now they're all responsible for fixing those problems and making sure they don't occur again."

But the lobby group for industry superannuation funds, the Super Members Council led by Misha Schubert, is resisting the levy applying to their members.

She wants to see compensation limited to actual losses, removing payments for "but for" investment returns.

"Our strong view is that the compensation levy should not be pushed across onto millions of everyday Australians, including the lowest wage earners in our country," Ms Schubert said.

"Instead, [the levy] should be paid by those who bear the closest proximity and accountability for the sorts of harms that have unfolded for consumers."

Investor Ms Kee has been advocating for a "pay now, recover later" model, saying investors should not be the ones left waiting years for justice.

"They operated within the financial system, and it's the financial system that let them down," Ms Kee said.