The corporate watchdog has been lashed by a parliamentary committee over a rent-for-life scam that ripped off seniors and left some homeless, concluding it has “serious concerns” about how the regulator handled the rort.
Sterling First marketed itself as pairing up “smart property investors that are looking to get a better rental return with retirees that are looking to sign a long-term lease”.
Retirees involved in the scheme sold their homes to free locked-up capital, then moved into rental properties with the expectation they would stay there for the rest of their lives.
But the Sterling Group and Sterling Income Trust went into liquidation in 2019 – allegedly after trading while insolvent for months – and many of the lessees were forced out while others fought to keep a roof over their heads.
After holding an inquiry last year, the committee handed down its final report on Friday, blasting not just the Australian Securities and Investments Commission, but the entire regulatory framework around managed investment schemes.
“It is clear to the committee that the Sterling Group was promoting a highly complex scheme based on a flawed business model that linked long-term tenancy to the performance of an investment,” they wrote.
“The promoters of the scheme did not have the necessary skills to undertake such a business venture successfully, and the financial products being offered were completely inappropriate for the group targeted.
“The fact that such a scheme could be offered to retail customers in the first place is a poor reflection on the current regulatory framework for managed investment schemes in Australia.
The committee said there was clearly a “broader systemic issue”.
“The experiences of the Sterling investors are but another example in the large number of investment products that have failed and resulted in substantial investor losses,” it said.
The committee said Sterling Group had “preyed on vulnerable Australians” but such “novel, risky, illiquid or speculative” schemes could be registered and sold in Australia “with ease”.
“While the ‘buyer beware’ approach may be a necessary component of financial services regulation, the current regulatory settings are clearly insufficient in protecting the interests of some consumers,” the committee said.
“As shown by the Sterling Group losses and their devastating impact on retirees, the so-called disclosure requirement in the form of a product disclosure statement (when provided), along with the actively misleading marketing material, did nothing to protect consumers.
“This hands-off regulatory regime gave open slather to proponents of the scheme to wilfully argue to ASIC that they were in the right, without any onus on ASIC to investigate until it was too late.”
In its submission to the inquiry, ASIC said in 2015-16 it received three reports of suspected misconduct relating to the Sterling Group, but at the time it considered no further action was warranted.
Despite multiple red flags, it wasn’t until late May 2018 that ASIC began a formal investigation into whether individuals associated with the Sterling Group had been breaching the Corporations Act from June 2012.
“The committee … has serious concerns about the performance of ASIC with respect to the Sterling Group matter, including its under-assessment of the gravity of the risks, the timeliness of its response, and its failure to act proactively,” the committee said.
“It is time for the parliament to undertake a review of the implementation of the recommendations from all relevant parliamentary and government inquiries in relation txjmtzywo financial service regulation since the global financial crisis and an evaluation of the government responses.”
These included the Hayne royal commission into misconduct in the banking, superannuation and financial services industry.
One of the submissions to the inquiry was: “Sterling directors were well known to ASIC as serial Ponzi schemers”.
Under new requirements, company directors must verify their identity by registering for a unique identifier that they apply for once and keep forever.
But it is unclear whether records will be amended so that this unique identifier will capture their corporate history and help retail investors to readily identify directors and key personnel who may have been involved in failed enterprises, the committee says.
Alan Kirkland, chief executive of consumer group Choice, said the stories of financial and emotional harm the committee heard were heartbreaking.
“Sterling Group victims deserve compensation for the misconduct that has occurred, but the government’s proposed Compensation Scheme of Last Resort will exclude them,” he noted.
“The compensation scheme must be expanded to include managed investment schemes or injustices like this will continue to occur.
“If we fail to learn the lessons of the collapse of Sterling Group, similar scandals will continue to occur, with many more people suffering financial loss as the result of misconduct.”
