The former chief executive of Trio Capital (Trio) has released potentially damaging claims against Australia's financial planning and superannuation funds industry.
Shawn Richard, who was sentenced to close to three years prison in 2011 for his involvement with Trio, used his submission to a parliamentary committee inquiry into the collapse of Trio and any other related matters to allege widespread misleading conduct by financial advisers, industry and retail super funds.
Richard alleged that a large number of financial planners who invested their clients in one of Trio's fund, the Astara Strategic Fund (ASF), doubled their clients' exposure by using margin facilities.
"I am aware of some SMSF [self-managed superannuation fund] investors who, on the advice of their financial planner, not only invested in the ASF but also used margin facilities to invest into the ASF, doubling their exposure," Richard said in his submission.
He said of the "hundreds" of planners and or accountants he met during his time with Trio, there were two kinds of SMSF investors.
The first class of investors were investment savvy and wished to take control of their own investments, while the second class set up SMSFs because they were advised to.
"These people have no investment expertise and employ a financial planner to guide and advise them on all investments. They are 100 per cent reliant on the financial planner's advice exactly the same as investors without an SMSF."
"In relation to the ASF, I strongly believe that 95 per cent of all investors had one thing in common; they were all 100 per cent reliant on the advice of their financial planner to invest their superannuation monies into the ASF."
Richard also claimed that as the Australian Prudential Regulation Authority (APRA) guidelines on superannuation liquidity requirements within the funds management industry are not scrutinised enough, many funds do not meet the minimum requirements.
"Other than with Trio Capital, I have seen many examples including retail and industry superannuation funds which do not meet the APRA's minimum liquidity requirements," he said.
"They simply do a good job at convincing the regulator that they do. This was proven during the GFC (global financial crisis) and still today I'm confident I could easily indentify superannuation funds that would fail the liquidity test."
Richard made the allegations in his submission, received by the Parliamentary Joint Committee (PJC) on Corporations and Financial Services on 27 April 2012, on the basis of being provided parliamentary privilege.
Trio collapsed in late 2009, resulting in the loss of more than $100 million in investor funds.
As well as his allegations, Richard also responded to a number of direct questions from the PJC.
In terms of his own involvement with the ASF fund, Richard said "upon reflection", the formation of the fund as a fund of hedge fund may have allowed for his employers "to take advantage of the lack of transparency that comes with dealing in the hedge fund industry".
He said the establishment of the ASF as a fund that invests in other overseas hedge funds resulted in the standards checks and balances becoming "significantly diluted" once investment funds left Australia. He believes this was the main contributing factor that led to Trio's collapse.
"Upon reflection, one of the weaknesses in Australia's financial services regulatory framework was the general lack of understanding of the hedge fund space and its many complexities in terms of different structures and strategies," he said.
"More specifically, the main problems with funds such as the ASF, which invested in other hedge funds, is the general acceptance throughout the whole financial industry that certain hedge funds can be exempt from offering the same required transparency as all other asset classes.
In explaining further, Richard said once the manager invests with a third party fund manager, many layers of scrutiny, checks and balances disappear.
"This makes it very difficult for all relevant parties to make the necessary checks and balances in order to confirm whether the Australian manager is delivering on its stated strategy, risk profile and liquidity guidelines. It also makes it difficult to detect any dishonest conduct," he said.
Richard said unless the industry can "force a dramatic increase in the transparency" within certain areas of the hedge fund industry, there should be enforced limits or prevention of exposure in regards to superannuation funds and hedge funds.
Richard also used his submission to the PJC to comment on the government's decision not to compensate the self-managed superannuation funds that invested in the ASF.
"In the specific case of the ASF, if the government has considered it appropriate to compensate superannuation investors, it should perhaps consider the circumstances in relation to SMSF investors into the ASF," he added.
The PJC is scheduled to release its Trio recommendations to government next week.
To read Shawn Richard's full PJC submission click here.
