The Trio Capital fracas may never have happened if an external Responsible Entity (RE) had oversight, and even if the collapse had still occurred, an external RE could have ensured some funds were returned to investors.
Equity Trustees' head of EQT corporate fiduciary Harvey Kalman said numerous collapses - Trio Capital, Great Southern, and Madoff - had the common flaw of an in-house RE which did not acknowledge conflicts of interests.
The misunderstanding begins when internal REs mistake the IFSA unit re-pricing -pricing guidelines for legislation. They think that if there is a 30 basis points or less error, then they don't have to reprice the fund, according to Kalman.
This is the problem - that the mechanics for repricing do not compensate the investor, he added.
"Some internal responsible entities are incorrectly using this as an error cut-off for compensation," Kalman said.
He pointed out one of the Trio mistakes was that funds were "invested in a trust that not exist off-shore. No assets were held in the trust's name through a recognised custodian".
One solution Kalman suggested would be that if a smaller fund wanted to hold non-domestic assets, then they must be through a unit trust domiciled in Australia that had a recognised external custodian.
He advocated two levels of financial licensing: one "simple", the other "complex" which had due regard for the complex fund's illiquidity, property investments and gearing. These must have the necessary capital, experience, and insurance.
"The complexity must be mapped to the investor, the liquidity to the assets, and the transparency to the service providers and investment process," Kalman said.
