Sterling First victims have been kicked out of their house and some are still under threat of eviction. ASIC received complaints about Sterling as far as back as 2015 but didn’t start investigating until 2018, when millions of dollars of retiree’s and other investor’s money was at risk.

Transcript

Senator ROBERTS: Thank you, Chair, and thank you, Mr Longo and your colleagues from ASIC. Mr Longo, would you agree that, for ‘buyer beware’ to work, buyers need to have access to all available information?

Mr Longo : The general principle of ‘buyer beware’ is as to availability and also asking. Clearly, as your question proposes, information needs to be made available, but the classic application of the buyer beware principle is: the buyer also has to ask questions and take an active interest in ensuring they’re properly informed before doing things.

Senator ROBERTS: Before getting to my core questions, I need to reference information contained in the redacted internal ASIC chronologies that were provided to the Senate. I know some of the details have been laboured over, yet I need to reiterate them for the purpose of these questions. I’ll make four points. In May 2015, ASIC concluded internally that, firstly, Sterling had likely provided financial services while unlicensed; secondly, Sterling had likely not provided adequate documentation to retail investors; thirdly, Sterling had likely engaged in misleading and deceptive conduct; and, fourthly, Sterling may have breached the requirement to not engage in conduct liable to mislead the public. Are these details correct, or substantially correct?

Dr Bollen : Mr Longo, do you want me to take that?

Mr Longo : I was just talking to my general counsel. Go for it, Rhys.

Dr Bollen : Yes, that’s a reference to an early complaint we received—the first one we received—which was from FOS. At that time it appeared to be one breach without any prior or later concerns. It was about a three-year-old breach already at the time. In the circumstances, with the myriad of other complaints and referrals we had, we formed the view that no further action was needed at that time.

Senator ROBERTS: So they’re correct. Despite these conclusions, ASIC elected to not pursue an investigation at that time due to the age of the conduct and the other workloads et cetera. I will continue to check my understanding. In June 2015, an ASIC staff member raised fresh concerns about Sterling providing unlicensed financial advice or that it may be engaged in misleading or deceptive conduct. Secondly, and this is the last fact I want to check, in September 2016, ASIC received a complaint that a Sterling victim had concerns about misleading and deceptive conduct and was unable to get information about what had happened to their investment and could not withdraw their investment as they had been led to understand they could. Are those two points correct?

Dr Bollen : That is a slight simplification, but, yes, basically, they are the second and third complaints that we received. They’re referred to in our submission as well.

Mr Longo : Can I ask about the line of questioning? These points have been dealt with comprehensively in our written material and I would respectfully ask, in regard to the rather simplistic approach that I’m hearing this afternoon, the committee to expect a supplementary written submission to comprehensively deal with the inferences it appears you wish to draw. But these matters have all been dealt with comprehensively in our written submissions and questions on notice and do not change my earlier evidence that I believe ASIC behaved reasonably at all material times. I do respect the line of questioning, but I would ask the committee to expect a supplementary submission to confirm the position we’ve taken on these earlier reports that I believe were properly handled at the time.

Senator ROBERTS: Thank you for repeating that conclusion of yours. In January 2017, ASIC assumed that Sterling’s conduct fell within the small-scale offer exception for professional investors, despite a track record of complaints relating to retail investors. ASIC suspected that a new and ongoing managed investment scheme was in operation—a managed investment scheme was in operation. Despite all of this, ASIC recommended that no further action be taken in relation to Sterling. Did ASIC commence any type of investigation before concluding no further action was required and, if so, specifically what were the investigation steps?

Mr Longo : Through the chair, could I ask Senator Roberts to ask a question, please?

Senator ROBERTS: Yes. I just did. Did ASIC commence any type of investigation—

Mr Longo : With all due respect there was quite a narrative that preceded your question, which makes it very hard to answer the question fairly, given the premises upon which it was based, which are very hard to follow. So can I ask senators to—

Senator ROBERTS: Certainly, Mr Longo. I’d be happy to do that. This is what I asked—

ACTING CHAIR: Senator Roberts, to make it as easy as possible for us all to follow, can you just go through one by one the introductory points that set up your question so that we understand the preamble that gives the context to our witnesses from ASIC?

Senator ROBERTS: What I’ll do, Chair, is address Mr Longo’s request and ask the question, and then I’ll go through the introductory comments. The question is: did ASIC commence any type of investigation before concluding that no further action was required, and, if so, specifically what were the investigation steps? Some of the earlier comments were—

Mr Longo : What point in time are we talking about?

ACTING CHAIR: Mr Longo, I think Senator Robert is now going to go through the preamble and give you that context so you can answer the question. In particular, Senator Roberts, we’re talking about the timing.

Senator ROBERTS: Thank you for understanding, Chair. In January 2017, ASIC assumed that Sterling’s conduct fell within the small-scale offer exception for professional investors, despite a track record of complaints relating to retail investors.

ACTING CHAIR: Senator Roberts, I will just hold you there. There’s a point you’ve made there, and it’s based on certain premises, so perhaps we can ask ASIC to respond to that point first.

Mr Longo : Thanks, Senator. The idea is that there’s an assumption that we apparently made in January 2017. Rhys, can you comment on the assumption? Can you follow what’s going on here?

Dr Bollen : The senator is referring to the first three complaints and the redacted chronology that was tabled by Senator Hume earlier. Those three early complaints—the one from the Financial Ombudsman Scheme, the second from an internal staff member and the third in late 2016 or early 2017—were all assessed by our intake team, who receive all reports of misconduct, breach reports and so on. We have a large number each year—10,000 or so reports of misconduct and 4,000 or so breach reports. They were all assessed. I wouldn’t describe that as an investigation; it is an assessment. There are policies and procedures that the assessment team follow. They look at the evidence, the number of people who appear to be affected, the amount of money that appears to be involved, the age of the conduct and the likelihood of whether it’s systemic or not. They have to make a judgement, based on the information that we’ve been given by the complainant or in the report, about whether further action should be taken. They necessarily have to be quick judgements to get through that kind of volume. You’re referring to the views that that assessment team formed at the time as to whether it was likely to fit into the small scale exemption and so on. Yes, those assessments were made at the time based on the information in those three early complaints.

Senator ROBERTS: Thank you. What we’re looking at here is trying to get an understanding. I work for and serve the people of this country. They pay my salary, they elected me and I have to serve them. I think that’s what all members of the Public Service have to do as well, including members of ASIC. So what we need to understand is: what does ASIC see as the breaches? Were there breaches of law? Were there breaches of good faith? What’s the core issue? Is it the capacity of ASIC? Is it the capability of ASIC? Is it structural? Is it a legislative or parliamentary fix? What’s the intent going on here? That, overall, is where I’m heading. I can either help you or undermine you.

ACTING CHAIR: Senator Roberts, there’s a lot there.

Senator ROBERTS: No, I’m just explaining. Let me continue.

Ms Armour : Senator, just to go back to your questions about the report of misconduct that came in in 2016 or 2017, I just think it’s important to note—we put this in an answer to a question on notice—that that report of misconduct was from an investor who appeared to have purchased shares in a company called Sterling Residential Syndicate Australia Pty Ltd, so it related to a different type of investment. I thought it would be helpful for you to be aware of that, because it’s a different type of investment from the Sterling Income Trust, which we’re talking about. It’s the same broad group, but that was the context of that one.

ACTING CHAIR: With your indulgence, Senator Roberts, I will ask Commissioner Armour about this: that complaint which was made did not have an attached or stapled residential tenancy—is that correct?

Ms Armour : I’m taking my answer from our answer to the question on notice, which was back in 2019-20. We’re happy to take on notice whether there was anything stapled to that.

ACTING CHAIR: I’m reading this. I have a few with me too. I would be interested to know in relation to it. As you know, in that question on notice which was provided, there were three prior issues which were raised. I think it would be helpful if ASIC could provide as much additional information with respect to those three issues as possible. I would certainly be interested to know whether or not any of them have the hallmarks of the attached residential tenancy as well as the purchase of shares.

Mr Longo : I can give you that assurance now. Those three matters are outside what this inquiry is looking at. I’ve said repeatedly—and I’ve tried to act in good faith with this inquiry—that the meeting with consumer affairs in March 2017 was a significant meeting. Without wishing to oversimplify, that’s when some of the dots started getting joined up and that’s when, as I think the evidence to the inquiry has shown, ASIC’s interest in this matter really started. There’s been a lot of evidence and back and forth about whether we should have done things more quickly or whatever, but, the way I’m looking at it—I wasn’t around at the time; I’m trying to be objective and trying to be professional with the inquiry—to my mind, around March 2017 is a realistic moment to say: ‘Well, there was that meeting with consumer affairs. We started talking with consumer affairs in a way that started looking at the issues that are the subject of this inquiry, and the rest is history.’ Pre March 2017—

ACTING CHAIR: You’ve been very consistent in your testimony about the three prior complaints that were the subject of the answer to the question on notice that Commissioner Armour refers to. From your perspective, you’re quite adamant and quite clear that these matters were totally disconnected from the matters which are the subject of this inquiry. Is that correct?

Mr Longo : That’s correct. But, with respect, I do appreciate that people are wanting to understand: ‘Why not? There were these three wrongs. Surely that must have got you thinking.’ I respect that curiosity, if I can put it that way.

Senator ROBERTS: Concern.

Mr Longo : Concern, absolutely. I was concerned. When all of this came to light, Senator Roberts, with the help of my team I put a lot of time into really trying to understand what happened, and this is my view. It’s my duty to give you my view. I think, from March 2017, as I’ve said to the team, to my mind, that’s when the dots started getting joined. I’m absolutely happy to come back to the committee. There have been a few QON submissions dealing with this point. It might be helpful to the committee to put it all in one place. Hopefully that will clear the air on it. As I’ve said from the beginning, we’ll do that as quickly as we can, and if there are additional questions from the inquiry, saying, ‘We still have some queries,’ we’ll deal with those, too, as best we can.

ACTING CHAIR: Excellent; thank you. Senator Roberts.

Senator ROBERTS: Can ASIC explain to this committee how it interprets the phrase ‘reason to suspect’, as detailed in section 13 of the ASIC Act?

ACTING CHAIR: I’m looking forward to this answer, Chair Longo!

Mr Longo : Well, there’s a lot of jurisprudence on that question! We interpret that phrase in a conservative manner. If there are facts or circumstances that we think could point to a contravention then we may, but are not required to, commence an investigation. I think the practical answer to your question, just reflecting on it, is that it’s a pretty low bar. I don’t think anyone is going to tell you that a reason to suspect is a very high bar. It’s a very low bar, and so it should be. You want agencies like ASIC being able to investigate things without having to jump over a high bar, because that wouldn’t be in the public interest.

The critical question, Senator Roberts—and I hope you’ll forgive me for saying this, because I’ve been saying it repeatedly through most of my professional life—is that we can’t investigate everything. What tends to happen is that a lot of judgement, assessment and analysis goes into all the matters that come to our attention. The really hard part of our job, on the enforcement side, is choosing which ones to investigate, resource, have section 19 examinations for and issue document notices for and which ones not to. I know in this inquiry there have been a lot of questions about: ‘What’s going on here? Your investigation didn’t start until May 2018. Why didn’t it start sooner?’ I’m not here to tell you that there was a big legal impediment. The situation unfolded. We made judgements based on what we knew at the time. We commenced an investigation when we did and we took the steps we took. But it is a low bar. The short answer to your question is: it’s a low bar, and we have to make decisions about which things to investigate and which things not to.

Senator ROBERTS: Are there any internal criteria or operational procedures or guidance as to how section 13 powers are to be exercised by ASIC and when?

Mr Longo : Yes, there are.

Senator ROBERTS: Could we get them as a question on notice, please?

Mr Longo : This question has come up before. I’m looking at my general counsel.

Senator PRATT: That was me. I did ask that question before, and I think we were going to get that provided to us.

Mr Longo : It’s not an uncommon question. We’ll certainly share with the committee what we can. When I say ‘what we can’, there may be some material we would happily share with the committee on an in-confidence basis, because you will appreciate that, as to some of that internal material, it would not be in the public interest for the whole community to know about it! But we’ll certainly provide you with what we can, and, where we think there’s a sensitivity, we will ask the committee to accept that material in confidence.

Senator ROBERTS: Thank you, Mr Longo. Who, at what level of seniority within ASIC, is able to make a determination on whether ASIC can trigger section 13 powers?

Mr Longo : I was about to say ‘relatively junior’, but there’s a system of delegation of powers that we use so that the commission itself isn’t involved in every decision to commence an investigation. Because of the range of matters that come to our attention, we have a process and a system for figuring out which ones to investigate. There’s a governance structure, a committee structure, within ASIC that makes those decisions. I suppose we could include a description of that in the—

Senator ROBERTS: You’re reading my mind now! Thank you very much—that’s exactly where I was going.

Mr Longo : I have to tell you, Senator Roberts, it’s a very risky business thinking I can read someone’s mind!

Senator ROBERTS: I thought you were referring to my mind!

Mr Longo : Can I just generalise, then: I can’t read anyone’s mind.

Senator ROBERTS: I have difficulty, too, reading minds. That’s why I ask short questions, generally. Is there a threshold of evidence that a complaint to ASIC must meet before section 13 powers can be exercised? I think that’s really part of the earlier question, and I think you undertook to give us that.

Mr Longo : There’s been a lot of confusion about this over the years. Just stepping back: ASIC gets matters, issues and concerns brought to its attention by a whole range of sources, as you can imagine. We might learn about something by reading about it in a newspaper and say: ‘Whoa! We need to get on that.’ What you are focusing on—which is really sort of the big part of resources—are those thousands of complaints that Rhys referred to earlier. We have a very systematic—I would like to say, sophisticated—approach to figuring out what to do with each one of those matters, and we have internal benchmarks to make sure they get prompt attention. A lot of them are actually resolved by getting other agencies involved. Sometimes we’re just helping people with a query that we can’t take any further. So, long story short: an assessment is made. Now, some of those matters will become investigations, but that depends on a whole range of circumstances, and I think Rhys touched on quite a few of them. The general principle is: it’s not every matter that could lead to an actionable contravention that we would investigate.

ACTING CHAIR: Senator Roberts, we’re running about 30 minutes over time, so do you have many more questions?

Senator ROBERTS: I think they’re all fairly short, Chair.

ACTING CHAIR: Okay.

Senator PRATT: I have a couple more, too, Chair. My apologies.

Senator ROBERTS: Given the track record of complaints, as to Sterling, how was this threshold not specifically met?

Mr Longo : I’m not sure—I think we really are at cross purposes now. As to the first three, I just don’t think they led us anywhere close to what the inquiry is looking at now. From March 2017, as I said earlier, we had the interaction with consumer affairs, and that triggered what we did and didn’t do. Clearly, we’ve had several days of hearings now and we’re trying to work through what we did do, what we didn’t do and why. So I’m not sure I can really add much more to that story—

Senator ROBERTS: Thank you—

Mr Longo : The formal investigation started early in 2018.

Senator ROBERTS: In the context of Sterling First, it took ASIC one year and two months, from March 2017 to May 2018, to exercise its section 13 powers and commence a formal investigation—only after receiving a complaint from a Western Australian government department, as I understand it. Wouldn’t a reasonable person expect that ASIC would have reason to suspect after receiving a complaint crammed with concerns from a state government department in much less than a year?

Mr Longo : I don’t accept the premise of, or the way you’ve put, those questions. As we’ve gone through in written submissions and evidence, we responded to the material. After all, consumer affairs were aware of this matter for several years. They were aware of the issues with the tenants. They then made the connection and came and spoke to us. We started looking at it, and we’ve taken the steps we’ve taken.

I’m not trying to make excuses. I’m just trying to work through what we did and didn’t do based on what we knew at the time. I respect the fact that some people might say, ‘Well, you should have started your investigation the moment you left the meeting with consumer affairs in March 2017.’ With all due respect, I think that’s entirely unrealistic. That was never going to happen. We’ve tried to work through why that’s the case. But I think the commencement of an investigation in early 2018, in the particular circumstances of this matter, is a reasonable time line.

Remember: we don’t have any visibility into these investments. We’re not there when the investors sign the leases and put their money into managed investment schemes. We’re not there when the product disclosure statements are given to these investors. Indeed, right up until the time we commenced the investigation, the investors weren’t even complaining to us. Then, by the middle of 2018, a lot of investors still seemed relatively happy with what they were getting. These situations, as I’ve tried to explain in earlier evidence, really require a lot of judgement as to when to intervene and how much you need to have before you intervene. It’s not uncommon for investors in managed investment schemes to say: ‘Why did you intervene so quickly? That was all going really well. It’s your fault, ASIC, that this scheme’s collapsed.’ Alternatively: ‘It’s your fault, ASIC, that you didn’t come in here sooner and stop this scheme.’

I’ve really given this a lot of thought, Senator Roberts, and I really think this inquiry is an opportunity to revisit. I’m not here to make excuses; I really want to reassure the committee about that. We have a number of management scheme matters that we’re working on right now that could lead to court action, and there are others that already have. The Sterling situation is tragic, but it is part of a much bigger picture. With all due respect, these are big issues. We’ll do whatever we can to be helpful, but, as far as this particular matter is concerned, I think ASIC acted reasonably. We did, I think, act reasonably quickly with what we had. Could we have moved more quickly? Probably. Should we have issued a media release more energetically? Probably. But with the time the investigation took and the issues we’ve had to deal with, I think we’ve handled that reasonably.

I do respect other views of frustration about this. We’ll do whatever we can to provide additional information to the inquiry to better understand the issues, but, as I’ve said in earlier evidence, this is going to happen again and again and again.

Senator ROBERTS: I accept that this is a complex situation. There are many levels at which it needs to be investigated, and I think that’s happening. Victims, as I understand it, thought they were paying rent in advance—some of the victims. Victims did not make a decision to invest in a managed investment scheme. I think that’s clear as well. Some of the victims did not make a decision to invest in a managed—

Mr Longo : I’m not sure that’s right. With due respect, I’ve got to disagree with you about that. I don’t know what the investors were thinking at the time. What happened here—and I’ve looked at the documents personally—is that they signed a residential tenancy document, and they also signed documents to invest in an income flow that would pay for the rent. They signed documents signing over the income from that managed investment—it went into a bank account—to pay for the rent. I do acknowledge that, many investors, if not all of them, didn’t fully appreciate what they were doing or the risks. But there’s no doubt they signed documents, because, otherwise, this couldn’t have gone ahead.

Senator ROBERTS: I’m done arguing that. Does ASIC not see that some of the victims did not know that it was a managed investment scheme?

Mr Longo : I can’t speak for their state of knowledge.

Senator ROBERTS: Is that a possibility? I don’t expect you to read minds. But where is the deficiency in Sterling? Is it in ASIC’s exercising of powers, ASIC’s analysis, ASIC’s capability? Is it the law? Is it the intent of the people who were putting out this scheme?

Mr Longo : Where I’ve taken your question, Senator, is it’s a bit like talking about crypto or why people buy stock exchange shares or why they put money into superannuation. I don’t know. When someone puts their money into a managed investment scheme or buys shares on the Australian Stock Exchange they are motivated by whatever is going on. I can’t tell you what they were thinking at the time. At the time they had the benefit of marketing material saying that there was an innovative product, that this would enable them to have a higher standard of living, that they could sell their home and put the proceeds into an investment, into something that would generate income to pay for rent. I know there’s sort of a feeling of ‘they’re not investors’ but where did the money come from to pay for the rent? It wasn’t coming from their bank account. It was coming from this other place where they put their money—I’ll call it an investment—and that income went into paying the rent at the so-called ‘stapling’. I’m the first to concede this is a complicated arrangement and it’s risky. With all due respect to the investors, I can’t speak on their behalf as to what they were thinking at the time.

Ms Armour : The responsibility for the success or otherwise of the scheme rests with the people who promote and develop the scheme. That is the model that we’re operating in, where degree of latitude is provided to firms and individuals to develop schemes and to attempt to attract investors into those schemes. They own, if you like, the success or otherwise. There’s a framework they need to operate in but it is really the responsibility of the promoters of the scheme.

Senator ROBERTS: Then we have regulators to oversee the promoters’ intent.

Ms Armour : The regulators work in a framework. We oversee the promoters’ conduct. So, as we talked about previously, a lot of what we do ends up being retrospective because that’s how we’ve set the system up. When things go wrong we take action. But we don’t have the merit powers that would substitute, say, my judgement for an investor’s judgement at the start of the investment.

Senator ROBERTS: Let’s get to my final question then with a statement first that this is a complex situation. Mr Longo has acknowledged that. I’m saying regulations are a double-edged sword, because dishonest people can quite often hide behind regulations, especially complex regulations. What is the core issue in your view, Mr Longo? Is it capacity of ASIC? Is it capability? Is it structural? Is it legislative? Is it the intent of the promoters of the investment scheme? What is the core issue here, or what are the core issues here, and what’s needed to prevent it happening again?

Mr Longo : That’s a really generous question.

Senator ROBERTS: Yes, it is.

Mr Longo : We live in a free country. We’re a democracy. We encourage people to make their own decisions about what they do with their lives, their money and everything. I think one of the really big issues for all of us here is that we know from our life experience that good people, very often highly educated people, do silly things with their money. They put their money into things they shouldn’t put their money into and there are lots of examples over the years. So one big policy question for us all is: should we have a law that makes it harder for people to put their money into investments that a group of people like us in an inquiry like this would say, ‘Gee, that’s a bad idea, that’s really risky and you really shouldn’t do that without getting advice or whatever the rules are’? I think that’s one big question for the inquiry, because this system, as I think Commissioner Armour was just reminding us, is pretty liberal. It basically says that, if you follow what I think you’d have to describe as fairly liberal managed investment scheme criteria and responsible entity criteria under the Corporations Act, then a whole range of ‘investment opportunities’ are opened up to ordinary people. To me, the heart of it is: do we want to change the law to say we’re going to make it much harder for certain people—we’ll call them vulnerable consumers or retail investors—to put their money into something like this without a proper rating or proper counselling or access to proper advice or whatever the safeguards are? So I think that’s a legitimate issue and a legitimate question.

Senator PRATT: I’ve got a follow-up question to this, Chair, when we’re able.

Mr Longo : Then there’s the role of the regulator, and there are big issues there too. We know regulation can be costly, it can be inefficient and it can give people a false sense of security. One of the issues here, I think, is that people say, ‘This managed investment scheme has been registered with ASIC, and the responsible entity has a licence.’ It has this veneer of an imprimatur, if you like, from the regulator. Nothing could be farther from the truth. Our role is essentially a licensing administrative role. There’s some substance underneath it—I’m not saying it’s totally administrative—but the policy objective is to encourage investment and to encourage risk-taking. As Commissioner Armour reminded us, what happens after that is retrospective. It’s reactive. We don’t spend a lot of time—or, in fact, any time—looking at whether the business models work or not or whether the PDSs are accurate or not. That’s another big question for the inquiry: do we want to change that? I could go on and on, but I thought I’d just pick a couple of those. I don’t know whether I’ve missed something fundamental. It’s obviously a very generous question from Senator Roberts. Cathie or Rhys, do you want to add to it?

Ms Armour : It’s a very fundamental question, isn’t it? It’s quite apparent from reading many of the submissions that there is a disconnect between, potentially, what investors anticipate, or some investors anticipate, and what the framework is. It’s a very fundamental question, I think.

Dr Bollen : The only thing I’d add is something we mentioned in our submission. There have been a number of inquiries over the years suggesting improvements to the managed investment scheme regime around how insolvent schemes and nonviable schemes are managed. Indeed, this committee has made recommendations in the past. I think there is fertile food for thought in that area.

Senator ROBERTS: I’d just like to add, Chair, that Mr Longo made the statement that we live in a free country. Thank you very much, Chair. Thank you, Mr Longo, and your colleagues at ASIC.