ASIC compensation loophole under fire as ripped off investors demand accountability

Investors stung by failings of the Australian Securities and Investments Commission are fighting to close a little-known loophole that protects the regulator over “defective administration”.

Nationals MP Pat Conaghan has formally lodged in parliament a 2,000-strong petition seeking action over the loophole, which allows ASIC to avoid accountability when it bungles the handling of dodgy schemes.

The lead petitioner is Sonja Boric, who is among the hundreds of investors burned by the failed $122.5 million Lion Property Group.

ASIC allowed Lion to continue to operate, despite it being an unlicensed “managed investment scheme”, and refused to wind it up, leaving it to investors to take court action.

“These innocent Australians, through no fault of their own, have been robbed of their life savings, their financial security and their retirement safety net,” Mr Conaghan told parliament.

“ASIC had been alerted to concerns about Lion’s conduct for years prior to the collapse, without taking protective action, despite a later Supreme Court finding it was an unlicensed managed investment scheme.”

Mr Conaghan said investors had sought compensation for “defective administration” by ASIC under the Federal Government’s Scheme for Compensation for Detriment caused by Defective Administration (CDDA Scheme).

Yet they had discovered that the scheme did not apply to ASIC, which was the “only entity not formally included in the CDDA framework”.

“Claimants have sought compensation under the (CDDA Scheme) … on the basis that ASIC’s handling of the matter amounted to defective administration,” Mr Conaghan said.

“Their requests to date have been denied.”

A decade of exclusion

Mr Conaghan said the parliament needed to be aware the loophole and that it must be closed.

“For more than 11 years Australians alleging defective administration by ASIC have been denied access to the Commonwealth CDDA framework,” he said.

“(The petition) asks that the house be made aware that the Commonwealth compensation scheme, publicly represented as available to citizens harmed by defective administration, has in practice been unavailable to anyone raising it against ASIC for over a decade.

“On behalf of the 2,057 Australians presented here in this petition, I request that the Government take the necessary steps to resolve the pathway for Australians alleging defective administration by ASIC to ensure they have the same access to assessment determination and review processes as claimants concerning other Commonwealth entities,” Mr Conaghan told parliament.

Ms Boric, of Noosa, said the petition was “about something that’s been known” for over a decade.

“If there is defective administration by the Department of Housing, the Department of Defence or the Department of Social Services you can make a claim,” she told Australian Property Investor Magazine.

“ASIC is the only one that’s blocked and you have to ask yourself why?

“I know why; it’s because the liability is real, and it’s ugly,” Ms Boric said.

Under the CDDA Scheme, non-corporate Commonwealth entities, other than ASIC, who engage in “defective administration” are required to compensate individuals who have financially suffered as a result.

The petition has been found to be “in order” by the parliamentary Standing Committee on Petitions, and the minister has 90 days to respond.

The responsible minister for ASIC is Jim Chalmers and the minister for Financial Services is Daniel Mulino.

Accountability vacuum

Ms Boric said ASIC was currently operating in an “accountability vacuum”.

“ASIC cannot simultaneously be entrusted with holding corporate Australia to account while being uniquely insulated from the Commonwealth’s own mechanism for holding government administration to account,” she said.

“This is not regulatory independence; it is an accountability vacuum.”

Lion spruiked 18 property developments in Melbourne, Brisbane and the Gold Coast, citing “targeted returns” as high as 65 per cent over three years.

As previously reported, Lion was wound up last year after investors launched court action, after ASIC refused to do so.

That came over a year ASIC itself gave Lion the green light, despite it at no time being a licensed “managed investment scheme” and therefore operating illegally.

Compensation scheme of last resort

The CDDA Scheme petition comes as Mr Mulino has announced a string of proposed changes to the Federal Compensation Scheme of Last Resort (CSLR) in moves critics say could leave some worse off.

The CSLR is a “last resort” compensation scheme for investors harmed by failures of certain financial products and services.

It is designed to cover investors, including in major financial collapses, where the Australian Financial Complaints Authority determines compensation must be paid, but the culpable entity is unable to pay.

The scheme is funded by levies on the financial industry.

Mr Mulino said the changes to the scheme would provide for a more predictable framework, reducing the financial liability of those sectors with little connection to wrongdoing.

While the changes were generally welcomed, industry groups warned a key change would leave many investors worse off.

The change means investors will only be able to claim the actual money lost, as opposed to other losses including legal costs and the opportunity cost of having funds in limbo, as had previously been the case.

“If the Government makes this change, it will mean many Australians who have lost it all will be tens of thousands of dollars worse off,” said Drew MacRae, Principal of Policy Development at the Financial Rights Legal Centre.

Regardless, the CSLR scheme is not open to Lion investors, as it specifically does not include “managed investment schemes” (whether or not they are licensed) or “scams”.