The ineffectiveness of the single, internal responsible entity in protecting investor rights as seen in the Trio Capital (Trio) collapse is costing Australia institutional investment.
The Trust Company head of responsible entity services, Rupert Smoker, said the so-called safeguards built into the Managed Investments Act 1988 had failed again.
"The single responsible entity model is a source of consternation, if not strong aversion, from many overseas institutional investors, especially in the [United Kingdom] and Europe," Smoker said.
Even when the scheme sponsor had "an excellent pedigree", many institutional investors would not invest in any vehicle that did not have an independent trustee, he said.
The potential for conflict in the single responsible entity regime was "unacceptable by many foreign investors, and the regime flies in the face of what is regarded as internationally accepted investment standards".
Long-term, less portfolio investment money could come in to Australia and "to that extent, the country will be worse off", he said.
On 3 August 2010, The Trust Company was appointed the replacement responsible entity of nine registered schemes and as trustee of one wholesale trust formerly operated by Trio.
The Trust Company identified and reported a number of issues within the Trio funds including a lack of governance, risk and compliance arrangements.
The Trio funds were layered with a series of cross-investments between super funds and registered schemes, and between separate registered schemes.
These investments were ultimately managed by an investment manager, Astarra Asset Management Pty Ltd, a company that was an associate of Trio Capital Ltd.
Smoker said there was little evidence to suggest these conflicts were adequately managed "with the degree of appropriate caution a reasonable fiduciary would exercise discharging their obligations".
The motivation for these complicated cross-investments was "difficult to appreciate", however at every level within these layered investments "fees appeared to be payable to Trio Capital", he said.
Contrary to industry practice, Smoker said, Trio did not operate a separate bank account for the Trio funds, so cash and assets of the schemes were pooled in an omnibus account held by the custodian.
"This method of pooling cash and assets required a lengthy and difficult reconciliation process," Smoker said.
"Once The Trust Company replaced Trio Capital. The pooling system adopted by Trio Capital exposed the schemes to increased risk of mistakes, misallocations and loss of control."
