Elephant leans on Shield/First Guardian dam wall, cracks it

Has the dam wall just cracked?

Have the 12,000 Australians who acted in good faith, but have lost about $1.2 billion of retirement savings after the collapses of First Guardian, Shield and Australian Fiduciaries just seen the first indication that the system will look after them?

The Australian Securities and Investments Commission (ASIC) announced that Macquarie Investment Management Ltd (MIML) has committed to paying $321 million to cover the losses of 3,000 superannuation fund members for which it was a trustee and who were invested into the collapsed Shield Master Fund through Macquarie’s super platform.

Macquarie will fully restitute all of those members, having admitted to contraventions of the Corporations Act.

It’s a hefty commitment, even for a company worth $80 billion on the share market and which turned over more than $17 billion from ordinary activities last financial year.

But will it set a precedent for other trustees and platforms, even though they are arguably downstream of the main offenders?

And, ultimately, who should pay?

“In terms of reimbursing clients, the natural order is: involved entities, principals, trustees, platforms. The primary legal responsibility lies with the fund managers and advisers. It was blatant misconduct,” says Jaxon King, adviser and managing director of Scion Private Wealth.

ASIC says it is examining the conduct of various parties including marketing lead generators, financial advisers/firms, superannuation trustees that made First Guardian Master Fund and Shield Master Trust available through platforms, research houses, the auditors and operators of the managed investment schemes. ASIC deputy director Sarah Court told a parliamentary joint committee that 140 licensed advisers were being examined for their role in the Shield and First Guardian collapses: she said 20 had been taken to court, 50 were under investigation and 70 more were on an ASIC follow-up list. “The buck stops with all of those people that were involved in this,” said Court.

But if the responsible entities and their associated companies go into liquidation and victims don’t get a claim in before then, the assets are frozen, and there could be years before a declaration of a fractional pay-out, considering the illiquidity of some of the assets and the slow turn of the legal wheels. The buck may stop where it belongs, but there are more bucks lost than ever come back.

There could be professional indemnity insurance cover for the advisers and dealer groups involved, but that is not going to be able to cover anywhere near $1.2 billion of losses – and if the entity involved has entered liquidation, that avenue is closed.

The next step is supposed to be the Compensation Scheme of Last Resort (CSLR) program, which started operation in 2024 to provide victims of financial misconduct with up to $150,000 each. But the CLSR is capped at $250 million a year – and that has to cover all complaints relating to personal financial advice, securities dealing and credit. And, of course, any new claims must share potential refunds with the ongoing CSLR payments to the victims of the Dixon Advisory collapse.

The obvious, well-canvassed fault with CSLR is that it is an industry-wide scheme funded by advisers who had nothing to do with the collapses and skulduggery they collectively redress. “Advisers who had nothing to do with Shield or First Guardian should never have been on the hook through CSLR. That was a design flaw from the beginning,” says Robert Baharian, director at Melbourne wealth management firm Longview Capital Partners. “But advisers who actively pitched these products on the back of outsized returns, they can’t just walk away, either. If you sell the dream, you need to own the fallout.”

The “numbers no longer work” for advisers paying for the whole CSLR, says Phillip Alexander, founder of Sydney-based Gill & Co. Advisory. “Not if the CSLR continues to only be funded by the advisers, and the advisers are on the hook for Shield and First Guardian and Australian Fiduciaries and the legacy Dixon Advisory claims. It’s not tenable now, and that’s assuming that adviser numbers don’t fall further, which is your other variable,” he says.

Philosophically, says Alexander, if the losses suffered by the clients cannot be fully funded by PI cover or seizing the assets of the guilty parties who made the actual recommendations, the industry has to work out “some sort of formula” to which all stakeholders contribute. “Just making up percentages for example purposes, it could be that 50 per cent is contributed by the platforms; 10 per cent by the research houses, which gave the ratings; some recovery in terms of individual assets; and, say, 20 per cent of it will be funded by advisers under CSLR – well, they wouldn’t like it, on top of Dixon, but at least it becomes tenable. Full weight on CSLR would put some smaller operators out of business, and worsen the advice gap even further,’ he says.

Baharian says the “real accountability” sits with the trustees and institutions behind these structures. “They were paid to provide oversight and protect investors. Instead, they collected fees while risk piled up. That’s why Macquarie’s admission, and its commitment to cover affected investors, matters so much. It proves the point that accountability belongs with the entities that had the power, not with the advisers who didn’t. This not only relates to the retail funds, but also the wholesale trusts, where Equity Trustees was trustee.”

The deeper issue, he says, is the imbalance in the system. “Advisers are regulated to the millimetre under ‘best interests,’ while product issuers and trustees get away with a light touch. ASIC saw the risks and waved it through anyway. That’s the real failure.”

The tragedy isn’t that a product failed, says Baharian; that happens in markets. “The tragedy is that the system keeps making the wrong people pay. Maybe this is the moment where accountability starts to shift to where it belongs – with the entities and trustees that control the money, not the advisers left picking up the scraps.”

Having taken its medicine, Macquarie has ratcheted-up the pressure on Netwealth, whose superannuation platform hosted First Guardian Master Fund; and Equity Trustees, whose subsidiary Equity Trustees Superannuation Limited (ETSL) oversaw the investment of around $160 million of members’ retirement savings into Shield Master Fund over 2023 and 2024. ASIC says ETSL “failed to meet the due diligence and monitoring standard that ASIC considers should apply when a superannuation trustee makes a new investment product available for selection, or permits increased exposure to an investment product, by members and their financial advisers on a superannuation platform.” Equity Trustees says it will defend the allegations in the Federal Court.

The share market does not like it: Equity Trustees’ shares have lost 22.4 per cent (at time of writing) since ASIC filed its action in August, while Netwealth shares have walked back 17 per cent. Broking firm Citi says the Netwealth reaction is overdone: while it says Macquarie’s compensation action could be a “precedent,” it estimates Netwealth’s maximum exposure to First Guardian at about $106 million and potential additional penalties, with the maximum exposure likely to be even lower from recovery of payouts from liquidation proceedings.

If not precedent, Alexander believes Macquarie’s decision to compensate the clients whose investments it handled will become the “elephant in the room” for other platforms, and research houses. “It doesn’t necessarily mean that they will, or have to, stump up, but I think it’s definitely ‘moral’ pressure,” he says.

Scion’s King agrees that it is “comforting” to see Macquarie take some responsibility and agree to pay its members $321 million, and that ASIC is suing Equity Trustees. “At the very least this will set a precedent, but this still leaves Netwealth etc. But we’ve got to address the real question, which is, how did we get here in the first place? No-one is really focusing on this, the fact that due diligence failed on multiple occasions with multiple parties. That’s what we still have to address,” he says.

James Dunn

James is an experienced senior journalist and editor of The Inside Network's publications.