Stumping up

"No one can predict a fraud in advance. We're not clairvoyants."

The chair of Diversa Trustees, Vincent Plant, testified before last month's parliamentary committee inquiry into the collapse of the Shield and First Guardian master funds.

The two funds were marketed as high-returning alternatives to mainstream super. They collapsed in 2024, costing more than 12,000 Australians about $1.1 billion in retirement savings.

As a trustee, Diversa has one main legal responsibility: selecting the universe of investments Australians can invest their super money in. Think onboarding new funds, due diligence and continuous monitoring of their financial prudence.

In August 2020, Diversa gave the go-ahead to the First Guardian Master Fund, which led to 2079 of its members losing close to $240 million of their life savings.

In his opening statement, Plant argued Diversa was also defrauded along with investors by First Guardian.

"It wasn't an investment which lost money. It wasn't bad management or bad forecasting. It was fraud," he said.

No amount of due diligence by Diversa would have led to that discovery, he claimed, as it involved inherent dishonesty and misrepresentation.

Even as Diversa claims it did all that was in its power, the corporate watchdog contests this. ASIC is suing Diversa over its lack of proper oversight in allowing the First Guardian fund pass through its screening process.

The regulator alleges if Diversa had done its job right and caught the fund in its due diligence process, its members would still have their money.

The failure of these funds has also prompted the government to bring about reforms to prevent Australia's nearly $4.8 trillion savings pool from major consumer loss events in the future.

In his first address at the National Press Club in Canberra in August, assistant treasurer Daniel Mulino introduced a package of reforms, part of which empowers ASIC to recover money from trustees in case they fail to meet their obligations.

Mulino asserted the government's position that if there is a "reasonable suspicion" trustees have failed to meet their obligations, ASIC can commence a remediation process, and trustees must compensate their members' full capital losses.

"If a prudentially regulated superannuation platform places a product before consumers and the trustee of that platform fails to discharge its responsibilities, consumers should not be left facing years of uncertainty while they pursue redress through multiple avenues," Mulino said.

"They should have a clear and practical pathway to meaningful compensation."

Entireti group chief executive Neil Younger says under the current model the responsibility ultimately finds its way back to the advice licensee, which then has to remediate within its capacity, generally supported by professional indemnity insurance.

"What Dr Mulino is trying to achieve is to effectively look more closely at those that are participants to take responsibility for parts that they are involved in before it ultimately defaults back to either the licensee or the Compensation Scheme of Last Resort (CSLR)," Younger says.

"I think that's sensible. It certainly means those who participate in the system that could have done things in different ways are more directly responsible."

Mulino added the government hopes parties with more direct involvement in the collapse are the ones "stumping up", rather than the cost ending up on the CSLR and being spread across the whole financial sector.

The CSLR is an industry-funded safety net through which victims of financial misconduct can claim up to $150,000 of their losses.

Financial Advice Association Australia (FAAA) chief executive Sarah Abood notes the compensation by trustees will be limited to due diligence failures, which are different from investment failures.

"What the government's trying to do is clarify what level of risk is acceptable with somebody's super funds, because there's an implicit assumption by many people that because this is mandated, because the super system is controlled by government... People have higher expectations of the safety of that," she says.

"What's happening is we're tightening up controls around ensuring that due diligence is tight when options are put on platforms, those options are tightly monitored, and that if the platform fails in its duty, then a consumer can expect recompense.

"But it doesn't mean that you're protected from poor returns or loss of capital. That can still happen. It's just ensuring that it won't happen as a result of the failure of a duty by a super trustee."

With the new reforms, Super Consumers Australia director of policy Jessica Spence, hopes consumers will be compensated faster. She notes the speed of recovery will depend on ASIC having a reasonable belief the trustee has failed in their obligations.

"That means ASIC is still going to need to do some kind of investigation. They're still going to need to collect evidence, and there's still going to need to be some form of procedural fairness obligation where the trustee has an opportunity to try to present some evidence that they haven't breached the law," Spence says.

"I think what we do know is that it will probably be faster than ASIC going to court."

ASIC is currently suing two trustees - Diversa and Equity Trustees - which have refused to compensate members and chosen to stand behind their due diligence procedures.

Two other trustees caught in the Shield and First Guardian collapse - Macquarie and Netwealth - have taken a different route and agreed they failed in their due diligence and have chosen to compensate members in full.

Macquarie and Netwealth have both remediated members with $321 million and $101 million in losses respectively.

"In the situation with Shield and First Guardian, we saw a huge difference between the way that the Macquarie and Netwealth members were treated and how they're managing their lives now compared with people who are still waiting for compensation," Spence says.

"So, it's always better for customers to get compensated as soon as possible when something has failed."

Financial Services Council (FSC) chief executive Blake Briggs however says it is important ASIC's power doesn't lead to scope creep and proper review mechanisms are available to trustees.

"If a trustee is like, 'No, actually, ASIC, you've got this fundamentally wrong. We did everything we could possibly do, and it was actually a fraud by someone else', then they need to be able to seek review of ASIC's decision to require compensation," Briggs says.

"There needs to be constraints around it. But if you get those right, you're on the hook for what you are legally responsible for."

Briggs also highlights the industry has learned the lessons of Shield and First Guardian and taken steps to uplift governance on its own.

FSC Standard 31, introduced before Mulino's August reforms, sets out governance guardrails for trustees to protect members while preserving the investment choice available on them.

It commenced in July 2026 and gives members a six-month transition period before becoming mandatory in January 2027, with earlier compliance encouraged.

The standard sets out three obligations for platform trustees: conduct due diligence before listing a fund, checking its track record, fees, liquidity and conflicts of interest; monitor it continuously once live, watching for red flags and removing it if needed; and document every decision.

"I think there is a recognition of the things the industry has done itself to lift things like platform standards. It's good to be able to show when there is a failure like Shield and First Guardian, the industry's learned the lessons themselves and acted on it," Briggs says.

"And then if there are still gaps in the legislative framework that need to be closed through government regulation, accepting those need to happen. You don't need to layer up stuff unnecessarily because the industry is willing to fix its own house."

In his address, Mulino also set a requirement for super trustees to maintain an additional capital reserve, which would ensure trustees have the means to compensate members in the case of due diligence failures.

He gave the power to the prudential regulator APRA to set these capital requirements for different trustees based on the level of high-risk investment options offered by them.

"What we're saying is that where you're operating a platform, you've got to demonstrate that you have the wherewithal to back up your obligations," he said.

"If you've got those obligations and you don't meet them, you fail to live up to those obligations, you have to have the ability to compensate, to give people the capital back."

The minister added the approach was driven by what happened with Macquarie and Netwealth, who stepped up to compensate members and got capital back to consumers quickly.

However, Briggs says the requirement will fall hardest on platform trustees, which offer a broader range of investment options - unlike industry funds, which typically hold a small number of diversified options and face less chance of a Shield or First Guardian-style failure slipping through their screening.

"But if you're a platform with a large range of investment options, including single-sector private credit or something like that, then the chance of your due diligence process not picking up a Shield or First Guardian-like issue is a bit higher," he says.

This article is featured in Financial Standard's fortnightly newspaper Volume 24 Number 19. To keep reading click here. To subscribe, sign up here.