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Opening statement to the inquiry into the Sterling Income Trust – 15 December 2021


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Opening statement by ASIC Chair Joseph Longo at the inquiry into the Sterling Income Trust, 15 December 2021.

1. Good afternoon Chair. I would like to make a brief opening statement today.

2. In recent weeks, we have heard more details about the devastating impact of the Sterling collapse on former tenant-investors and general investors. I am meeting with victims here in Perth later this week, to hear first-hand about their experiences.

3. I have also extended an invitation to meet with the WA Minister for Environment, Climate Action and Commerce.

4. In this final opening statement, I would like to make some observations that go to key aspects of ASIC’s submissions to this Inquiry.

5. ASIC is a conduct regulator and its regulatory powers largely arise retrospectively. We can usually only step in once the law has been breached.

6. ASIC registers managed investment schemes like the Sterling Income Trust, if they meet minimum standards, but does not assess their merits. This means that we don’t make an assessment as to whether an underlying investment is good.

7. Product Disclosure Statements are not filed or stored with ASIC. We have little or no discretion when it comes to registering managed investment schemes and licensing responsible entities.

8. In practical effect, a wide variety of potentially very risky investments are consequently registrable as managed investments in Australia. The barriers to entry for a new managed investment scheme like the Sterling Income Trust are modest.

9. As noted earlier, it is not ASIC’s role to assess whether these are good or bad investments. That is a matter for the investor.

10. Product issuers and distributors have the primary responsibility to ensure that their products are compliant and perform as expected.

11. For this reason, and because of the large numbers and range of managed investment schemes, we do not conduct proactive surveillances on them and their responsible persons – that is, their managers – seeking a licence.

12. Moreover, the Sterling Group of companies did not have an Australian Financial Services Licence. This meant that the relevant legal tests for AFSL holders were not applicable to Sterling. These tests were only applicable to Theta as the licensed responsible entity for the Sterling Income Trust.

13. While with the benefit of hindsight we may have done things differently, ASIC acted appropriately and in good faith given what was known at the time, our regulatory remit and powers, and competing priorities.

14. ASIC’s compliance and enforcement resources are always limited, and decisions must be made about resource allocation within the context of competing priorities. During the critical period between 2017 and 2018, ASIC received over 10,000 other complaints and reports of misconduct, together with around 4,000 breach reports. We were running around 41 investment product-related court cases, engaged in targeted surveillance activities and a number of administrative actions.

15. ASIC’s regulatory role does not involve preventing all consumer losses or ensuring compensation for consumers in all instances where losses arise. Our underpinning statutory objectives, regulatory tools and resources are not intended or able to prevent many of the losses that retail investors and financial consumers will experience. This is true of every financial market regulator. Regulators have to make difficult choices about where to apply their limited resources.

16. ASIC did investigate whether there were sources of compensation for former investors. Early in the Sterling investigation, ASIC officers assessed whether there were any assets available to return to the tenant-investors, either within the trust or the companies involved, through insurance or from parties responsible for investor losses in the Sterling. There were no such assets.

17. Although it will not be confirmed until the liquidation process is completed, the liquidators of the Sterling Group and of Theta both anticipate little, if any, return to unsecured creditors and investors. In ASIC’s experience, in more than 95% of liquidations, the dividend to creditors is 10c in the dollar or less.

18. Some submissions to this Inquiry have suggested that investor monies were inappropriately taken from a ‘trust account’ and used to pay the general operating costs of the Sterling Group. However, while the Sterling Income Trust was a trust, it was not a trust of the type that consists of a segregated bank account, like a solicitor’s bank account.

19. On the evidence we have, there was no breach of trust or fraud that ASIC could have pursued. Under the trust deed, the funds were able to be used for the operating costs of the Sterling Group and were indeed used in that way.

20. In my view, ASIC used appropriate powers available at each point in time:

  1. ASIC used an administrative stop order power in August 2017 as the most efficient and effective response at the time to prevent the Sterling Group signing up further clients at that time.
  2. In 2017 there was not admissible evidence that would have supported injunctive action being taken in respect of the Sterling Income Trust.
  3. Following the issue of the administrative stop order, ASIC’s investigation continued. ASIC used different tools at different points in the matter as appropriate based on the circumstances at the time.
  4. Finally, court-based action was considered and used where appropriate.

21. ASIC is reflecting on what we could have done differently in the circumstances. We could have been better at disseminating the media release following the stop order on the Sterling Income Trust PDS in August 2017. ASIC does not have a broad directions power that would have enabled us to direct Theta to contact existing tenant-investors and general investors and inform them of the defective PDS and their right to complain or seek a refund if they wished to do so.

22. With the benefit of hindsight, we could perhaps have moved more quickly once we became aware of the problems with the PDS. But it is important to stress that our judgment at the time remains reasonable, given the organisation’s competing priorities. ASIC does not proactively survey the performance of managed investment schemes, and not every concern raised with us will lead to an action.

23. We understand the desire of Sterling tenant-investors for compensation. Many of them are in difficult circumstances. Ultimately, whether investors in managed investment schemes like the Sterling Income Trust are covered by a government guarantee or compensation scheme is a policy question for government and the Parliament.

24. We look forward to taking the Committee’s further questions.

This news item was originally published by the Australian Securities and Investments Commission (ASIC AU). For more information, please see the Source Link.

Regulator Information

Abbreviation: ASIC
Jurisdiction: Australia

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