Trio Capital exposes APRA's failings

Our politicians and regulators need to finally accept the failures associated with the Trio Capital saga, writes Mike Taylor.

Australia has good reason to be proud of the manner in which its “twin peaks” regulatory system stood the test of the global financial crisis, but it is now clear that the collapse of Trio Capital has pointed to some worrying deficiencies in that system where superannuation regulation is concerned.

Because, in fact, where superannuation is concerned, Australia has a “triple peaks” regulatory system involving the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Australian Taxation Office (ATO).

It is well known that APRA carries most responsibility for the Superannuation Industry Supervision Act (SIS Act), while ASIC looks after a range of downstream advice and governance issues, and the ATO is responsible for administering self-managed superannuation funds (SMSFs).

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For the most part the system works well, but it clearly failed where Trio Capital was concerned, and both our politicians and our regulators need to accept the reality of that failure and address the root causes.

It is simply not good enough for APRA deputy chairman Ross Jones to seek to distance his organisation from its failings by suggesting that APRA was responsible for regulating Trio but not responsible for the hedge funds Trio ultimately invested in.

As the Parliamentary Joint Committee which reviewed the Trio collapse revealed, the performance of both APRA and ASIC left a great deal to be desired in circumstances where, ultimately, it was an industry whistle-blower who acted as the trigger for regulatory action.

It was subsequently revealed during last month’s Senate Estimates Committee processes that the ATO knew only too well about one of the central figures in the Trio collapse, US lawyer Jack Flader, but had not passed that intelligence through to either ASIC or APRA in the context of the Trio/Astarra investments.

The failure of the ATO to pass through this information came despite Treasury telling the Senate Estimates Committee that well-established protocols existed for the sharing of information and intelligence between the three regulatory agencies.

Some time ago, the former ASIC chairman Tony D’Aloisio likened the role of the financial services regulator to that of a policeman arriving at the scene of a car crash and cleaning up the wreckage.

On the face of it, APRA appears to have adopted a similar approach with respect to how it handled Trio Capital and, indeed, some of the shortcomings which led to the losses incurred by MTAA Super.

Simply put, APRA was observing some irregular behaviour within Trio but was still asking for explanations well after most of the money had disappeared into offshore investments, never to be seen again.

Such an approach may tick all the boxes in terms of regulating the activities of the well-disciplined and reputable organisations which represent the vast bulk of the Australian superannuation industry, but it clearly proved ineffective when seeking to identify and act against what amounted to blatant fraud.

Few of the investors who were burned by the Trio collapse and received no compensation understand or respect the explanation provided by Jones, and the Government should consider this fact when reviewing the tenure of those running APRA.

Will APRA act any differently under the increased powers provided to it by the Government’s Future of Financial Advice and Stronger Super changes? Only if those at the highest echelons of the organisation choose to utilise those powers.

Indeed, it is entirely arguable that both ASIC and APRA had the ability to interpret their governing legislation and consequent regulations in a manner which would have seen them acting more proactively than was the case with Trio or, indeed, Storm Financial. They simply chose a different and much less interventionist approach.

In many respects ASIC and APRA could learn a great deal from the well-practiced graduated approach adopted by the ATO – one in which it initially seeks to work through issues with particular companies, but ultimately moves swiftly and punitively when problems are identified.

The regulators need to focus less on the machinery of what they do and more on consumer and investor expectations. Prompt action by the financial services regulators can help minimise the taint created by bad apples.

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