ASIC slow off the mark as retirees lose millions in Managed Investment Scheme

The Australian Securities and Investments Commission (ASIC) has launched an internal investigation in respect of whether the securities regulator did everything it could to stop the marketing of Sterling First (Aust) Ltd and associated companies (Sterling First) to vulnerable elderly investors, after serious concerns were raised by the Western Australian Department of Commerce in 2017. 

Sterling First and its eleven associated entities have been placed in either voluntary administration or liquidation, in February 2019, taking millions of dollars of life savings of 101 retirees who are now facing eviction from accommodation leased under the complex managed investment scheme. It is not clear when ASIC’s internal investigation report will be released to the government.

Red flags raised with ASIC

In about 2016, the Sterling First group created a managed investment scheme where the group raised funds from elderly investors who wished to downsize and enter a lifetime lease scheme where, in exchange for approximately between $250,000 to $350,000, the elderly investor could receive a 40 year lease outside retirement villages and free-up capital for the rest of their lives. The Product Disclosure Statement (PDS) did not disclose any risks and scheme involved a complex convoluting arrangements where elderly investors were required to obtain units or shares in the Sterling First group managed investment scheme.

Western Australian State regulators became aware of the red flags surrounding the lifetime lease scheme in 2017 and asked ASIC to act. However, it took the regulator eight months to take action then only issuing interim “stop orders” against one entity and which allowed Sterling First to side step the interim order and continue to entice many elderly investors and accelerate millions of dollars of losses which may have been preventable if earlier action had been taken by ASIC. 

Sterling First group went into voluntary administration in 2019, approximately $15 million had been taken from elderly investors who now face the prospect of eviction from the landlords who own the properties as a result of not being paid by the fund. The Sterling First group had been marketed as an alternative to a downsizing option which would result in freeing up cash to give retirees a more comfortable lifestyle and a long-term secure residential lease. However, the scheme has ended in disaster for over 100 elderly investors who may be evicted from the accommodation that they leased as a result of their rent not being paid. The real story appears to be what ASIC did when it received complaints from elderly investors and a referral from the Department of Commerce of Western Australia.

As one elderly investor voiced at the administrator’s meeting, that “they would not be in this situation if ASIC had taken action when it was alerted, way back in March 2017.”

Reasons for failure of the Scheme

The reason for the failure of scheme appear to be because of:

  • the complexity of the organisation and operational structure which ultimately resulted in higher operation costs and a level of organisational dysfunctionality,
  • the uncommercial pricing structure under the master deed assignments which as a result in reduction in rental income failed to reflect the cost of running a business placed it into a loss-making position,
  • reliance of capital raising to fund operations.

There have been serious allegations made against the directors concerning risk and misrepresentations regarding the product, which was directed at elderly and vulnerable investors. There has also been a hearing on this matter before the Senate Estimates Committee where the ASIC Commissioners were grilled about the inaction of the regulator in stopping the scheme from escalating in 2017. ASIC is continuing to investigate the matter.

The most important question is, did the regulator fail to act in the circumstances where there is evidence that it should have? It is hope that this question will be answered by ASIC’s internal review that will consider how a complex PDS was targeted at vulnerable investors and the regulator waited nearly a year before it took any action, allowing the scheme to restructure and bypass red flags leaving eleven companies in voluntary administration or liquidation, fifteen months later with many elderly investors out of pocket and out of accommodation.

Was there a failure to act by ASIC?

In March 2017, the Western Australian Department of Commerce raised concerns about the marketing of the investment scheme to elderly investors. ASIC had also received complaints that the scheme was being marketed at various venues to retirees in 2016. In addition, in early 2017, the Department of Mines, Industry Regulation and Safety (DMIRS), which regulates the Western Australian real estate industry, queried whether the lease arrangements being offered in the PDS breached Section 27 of the Residential Tenancies Act as tenants should not be required to make a payment to secure a lease. Companies associated with the Sterling First group obtained legal advice from commercial law firm HWL Ebsworth.

Even though ASIC was assessing the information in March 2017, the Department of Commerce of Western Australia, had formally written to ASIC asking it to take action and informed ASIC that it was commencing surveillance on marketing of the scheme and had serious concerns.

It was not until October 2017, (some eight months later) that ASIC issued an “Interim Stop Order” on the marketing of the PDS. The directors were prevented from selling the product but under restructure and sell another product with a re-drafted and new PDS in October 2017, right under the nose of the regulator, who was supposed to be monitoring their activities, Sterling First restructured and effectively sold the same product.

ASIC then issued new Section 30 or Section 33 Notices of the Corporations Act for further information. Despite ASIC’s investigation, the Sterling First group continued to market the scheme to the public and attract investors and continued to cold call retirees and the managed investment scheme grew substantially. For example, in 2017, it had approximately $417,000 of funds under management and this increased substantially in 2018 to approximately $15 million.

Assistant Treasurer of Western Australia, Michael Sukkar said there was clearly a “whiff of impropriety” that piqued ASIC’s interest and he wanted to know whether the investigation was thorough and proactive enough. “It seems curious to me that there was a red flag here … and what efforts were really made to make sure – when they saw these individuals, regardless of the product, that was being flogged by them – that they were aware there was something that might not have been quite right from the regulator’s perspective”.

The Deputy Treasurer questioned why there was no enforcement action was taken for more than a eight months leading to the direct losses to over 100 elderly investors and was looking to the outcome of ASIC’s own internal investigation.

Analysis – could ASIC have done more?

ASIC’s Commissioner Price, appeared before the Senate Estimates Committee on 13 September 2019, and was questioned by Senator Gorman who asked “Was there anything, when that first Notice was received (March 2017) that could have help stop more damage than ended up happening?”

Mr Price replied, “It is important to realise that once we were contacted by the relevant government department – as I say – my recollection is in March 2017 – we then did a more in-depth assessment of the disclosure that was being done for the individuals …”

The reality of this situation is that appears a less than candid reply to Parliament given that ASIC was aware that there were serious red flags and the targeted market was vulnerable consumers and that even a State regulator, the Department of Commerce was conducting surveillance on the Sterling First group in March 2017 and was doing more than ASIC but did not have the powers to stop it.

Why did ASIC wait seven months to put a “Interim Stop Order” on the PDS of the Sterling First group and associates and did not take any enforcement action. It also had other regulatory tools, such as obtaining an urgent injunction in the Federal Court of Australia or placing a permanent ban on any of the products until it fully collected all of the information.

What has transpired, is that ASIC was totally “outfoxed” by the directors of the Sterling First group and its associates, who, after being stopped in relation to one PDS in October 2017 simply restructured the same product and continued the marketing to elderly individuals. ASIC has also indicated in numerous news releases that they will take action, particularly in the areas where vulnerable consumers are involved. Clearly not in this case.

ASIC has a new product intervention power which comes into force in April 2021. However, at the time it had ample resources and regulatory options to stop the marketing product back in March 2017, before it escalated into a multi-million-dollar financial failing, causing financial devastation to investors.

It appears, ASIC failed to act when it had sufficient information and was too slow to stop a predicted calamitous situation occurring. Commissioner Hayne, in the Financial Services Royal Commission, raised many concerns about the inaction of ASIC in its failure of dealing with banks who failed to act in the interest of their customers.

Concluding remarks

Unfortunately, one of the recommendations in relation to a compensation fund for investors, similar to the one that exists in the UK, has yet to be implemented by the Government and with the companies going into liquidation, and the directors having few assets, it is unlikely that investors will recoup any money. An internal report is yet to be released by ASIC.

Niall is a senior regulatory intelligence expert, Asia Pacific.  He joined Thomson Reuters in 2013 from FTI Consulting, where he was managing director for investigations in Australia.  Prior to that, he was was a senior specialist advisory for the Australian Securities & Investments Commission (ASIC) and the director of enforcement for the Dubai Financial Service Authority (DFSA).

Niall is a Barrister of the High Court of Australia and has over twenty years experience in financial markets and international regulation. In 2002, he was awarded an ASIC Australia Day Honour Medal for his work in corporate investigations.  He has written a book on corporate investigations published by Thomson Reuters and has been a commentator in the Australian Financial Review and television on financial crime, regulation and compliance.

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