Need to know
- The government's new compensation scheme is limited in scope and places low caps on payouts
- The Australian Financial Complaints Authority stopped processing complaints against insolvent investment schemes in April 2020 – it now has a backlog of 1165 cases
- CHOICE talks to victims of recent investment scheme collapses who've lost everything
Many hundreds of Australians who've lost their life savings to dodgy financial advisers and failed investment schemes have filed complaints and been awarded compensation.
But, despite rulings in their favour by the Australian Financial Complaints Authority (AFCA) and its predecessors, they remain empty-handed. Why? The financial firm in question went bust and there was no money to be found.
For nearly a decade, CHOICE and other consumer advocates have been calling for the establishment of a compensation scheme of last resort funded by the financial services industry to address this issue.
The federal government committed to establishing one by 30 June 2021 in line with one of the chief recommendations of the financial services royal commission report back in 2019. It missed that deadline, but released a paper outlining its proposed workings of the scheme in mid-July.
Government proposal falls short
In our February 2020 joint submission to government, advocating for the establishment of the scheme, CHOICE called for a broad approach, where compensation would be available to out-of-pocket customers of any financial service that's required to be a member of AFCA, including credit providers, insurance and superannuation.
In July 2021, the government released draft laws that cover a limited number of products and services. Crucially, the draft laws excludes victims of managed investment schemes, an area where many collapses have occurred and left blindsided investors in their wake. (We highlight the stories of some of them below.)
When the Government released its response to the banking royal commission, it gave victims of financial scandals hope that they would finally be compensated. For many victims, those hopes have now been dashedCHOICE CEO Alan Kirkland
The government also proposes that unpaid AFCA determinations that are paid though the scheme be capped at $150,000.
In our submission, we argued that victims of financial misconduct should be compensated for their full loss, but that if caps had to be set to ensure the financial viability of the scheme, they should be no lower than AFCA's cap on compensation, which is $542,500 for individuals.
"When the Government released its response to the banking royal commission, it gave victims of financial scandals hope that they would finally be compensated. For many victims, those hopes have now been dashed," says CHOICE CEO Alan Kirkland.
Marsha Barber, 80, and her husband David lost most of their life savings in the collapse of the property investment scheme Sterling First.
Sterling First collapse leaves retirees high and dry
Marsha Barber, 80, and her husband lost most of their life savings in the collapse of the property investment scheme Sterling First in 2019. The scheme was marketed as a cheaper option than going into a retirement village. Older Australians were persuaded to pay hundreds of thousands in upfront fees for long-term property leases. (The name of the scheme was later changed to Sterling New Life.)
Marsha and her husband sold their unit in a retirement village to enter into the Sterling First scheme, thinking they'd live out their days in secure accommodation.
"We've lost $126,000 roughly," Marsha says. "Emotionally it became very difficult for me because my husband had developed Alzheimer's and he could not understand what was going on. So I pretty well coped with things alone and looked after him at the same time."
The Barbers were evicted from the unit and ended up with no place to live. Finding another home was not easy.
Emotionally it became very difficult for me because my husband had developed Alzheimer's and he could not understand what was going on.Marsha Barber
"It was dreadful," Marsha says. "There were very few properties available. Some of them were in areas you don't want to be but you don't have much choice."
The Barbers have pinned their hopes on government-mandated compensation.
Annette Taylor, 69, lost her entire nestegg of $220,000 and now lives on the age pension.
'It has destroyed me'
Annette Taylor, 69, another victim of the Sterling First collapse, lost her entire nest egg of $220,000 and now lives on the age pension, half of which goes to rent. Before going into the scheme, she owned her home. Now she struggles to make ends meet and can no longer afford internet access.
It's just shocking, and the government has done absolutely stuff all to help usAnnette Taylor
When she read in the news that Sterling First had gone into receivership, "I felt absolutely sick," Annette says. "Our money was supposed to be in a trust fund, protected. That was my impression of what a trust fund is. Where was our money going? That's what I'd like to know. To do this to pensioners, some in their 80s and 90s... it's just shocking, and the government has done absolutely stuff all to help us. It has destroyed me. I just want the money back and to get on with my life."
When Graeme and Sheryl Sofield's Sterling First investment disappeared, they lost their life savings, about $155,000.
'Anxiety is through the roof'
When Graeme and Sheryl Sofield's Sterling First investment disappeared, their options were few. They lost their life savings – about $155,000.
"Our anxiety was just through the roof," Sheryl says. "Sleepless nights. Devastation. If it wasn't for our two children helping us out, I don't know how we would have survived. It's been a very hard two years. "
The Sofieds had lodged a complaint with AFCA, which got about halfway through the case, "and then, bang, it just stopped", Graeme says.
If it wasn't for our two children helping us out, I don't know how we would have survived. It's been a very hard two yearsSheryl Sofield
They thought they were investing in a legitimate scheme that would secure them a long-term place to live as they grew older. They now live in government housing.
"There were no red flags whatsoever," Sheryl says. "We first got wind that something wasn't right when ASIC rang us."
Like other victims of the collapse, the Sofields see a compensation scheme as their only hope.
Peter Holden, 69, has been just getting by since the Sterling First collapse and says he'll probably file for bankruptcy soon to get out from under his credit card debts.
'I put everything I had into it'
Peter Holden, 69, has been just getting by since the Sterling First collapse and says he'll probably file for bankruptcy soon to get out from under his credit card debts. He bought into the scheme after he retired.
"It's very stressful, it's very worrying," Peter says. "Some people were fortunate enough to have some money in reserve, but I put everything I had into it with the understanding that I could take it out whenever I wanted. That's what they promised in the paperwork."
As with other Sterling First clients, the further promise was that the money would earn interest "and you would end up with more than what you put in".
Some people were fortunate enough to have some money in reserve, but I put everything I had into itPeter Holden
As it stands, Peter hasn't been able to recover any of the $154,123 he paid for what was supposed to be a 20-year lease on his unit, with an option to renew for another 20 years.
Peter does volunteer work in the area "to keep myself occupied and keep my mind off it".
Some victims of financial scams have lost their entire life savings. But will the government's new compensation scheme help them all? Or will some miss out and be left empty-handed?
'You've lost all your money'
Alan Fardoe heads up a group that has banded together to recover their Sterling First losses.
He says he went into the scheme with eyes wide open. "We were looking for a lifestyle option and this one seemed to be the one that suited us best. I had a degree of confidence because the money was going to Sterling income trust, not realising that the word trust doesn't have to be a proper trust."
Alan received the bad news in person.
"We were called to a meeting in May two years ago," he says. "Robert Marie [the managing director of the financial entity behind Sterling First] had the guts to actually attend the meeting. And he started it by saying, well, unfortunately, I've got bad news for you. You've lost all your money and you're about to be evicted. So that was quite a sobering meeting. At that stage I said 'We're not going to take this lying down'."
Alan has been awarded the only AFCA compensation so far in the Sterling First case, a determination of $118,957, which initially came as great news. But that didn't last.
I had a degree of confidence because the money was going to Sterling income trust, not realising that the word trust doesn't have to be a proper trustAlan Fardoe
"The administrator [Worrells Solvency and Forensic Accountants] said 'yes we accept that claim, here's your $120,000, minus the $100,000 excess from the clause in the insurance policy', so that was quite the roller coaster of emotions."
(The $100,000 excess was apparently applied due to a clause in Theta Asset Management's professional indemnity insurance policy.)
"What we've got is their [Worrells'] word that each and every claim will require a $100,000 excess," Alan says.
He says, the group's pro bono law firm, Clayton Utz, as well as ASIC and the WA Department of Consumer Affairs "have all tried to get some sense out of Worrells, but they're not playing ball".
We asked ASIC about the matter but the regulator wouldn't comment on the specific issue.
"ASIC's investigation into the conduct of a number of entities and officers within the Sterling Group of companies continues and we are monitoring relevant developments," an ASIC spokesperson tells us.
A Worrells spokesperson tells us the firm couldn't comment.
"The insurance arrangements of Theta Asset Management Limited (TAM) are confidential," the spokesperson says.
"In its capacity as TAM's Liquidators, Worrells is bound by those confidentiality obligations and is therefore not in a position to provide the explanation sought. Any claims lodged with AFCA in respect of TAM will be considered on a case-by-case basis."
$2 million fine won't be collected
In November 2020, Theta Asset Management, the financial entity behind the Sterling Income Trust scheme, was fined $2 million by the Federal Court in Western Australia. Its managing director, Robert Patrick Marie, was fined $100,000 for, among other things, issuing misleading product disclosure statements.
In May 2021, Marie was banned by ASIC from providing financial services for four years. (ASIC says it won't collect the $2 million fine since it would reduce the amount investors may get back.)
When Sterling went bust, about 100 people lost a collective $18.5 million or so. That money now seems to be gone.
'They shouldn't have had a licence to begin with'
Another dudded investor we recently spoke to, Patrick Dunn, won a $90,000 determination in October 2019 from AFCA after a trading platform he was using went into liquidation and his funds disappeared.
This company had a valid AFSL, they had all the checks. But they shouldn't have had that license to begin withPatrick Dunn
The platform was run by Berndale Capital Securities, whose Australian Financial Services Licence (AFSL) was cancelled by ASIC in November 2018.
"This company had a valid AFSL, they had all the checks. On paper, if I'm an investor, it all looks kosher. But they shouldn't have had that licence to begin with," says Patrick.
Patrick is still out of pocket. "The company has 30 days to pay a determination. It's been a lot longer than 30 days," he says.
Patrick believes his best hope is a government compensation scheme rather than waiting for the liquidators "to find money under a rock".
Hundreds remain uncompensated
When AFCA became the one-stop shop for complaints in November 2018, it inherited cases from its predecessor schemes in which about $30 million had been awarded to around 400 people over the previous decade. But as with others who have filed complaints since AFCA was established, these people have yet to see any money.
(AFCA took over complaints that were originally filed with the now decommissioned Financial Ombudsman and Credit Investments Ombudsman services and the Superannuation Complaints Tribunal. Other dispute resolution services such as tribunals and courts have also awarded compensation that remains unpaid.)
Complaints against defunct firms on hold
The proposed compensation scheme would only cover unpaid AFCA determinations made after AFCA was established in November 2018.
But in April 2020, AFCA made the decision to stop processing complaints against schemes that have been wound up until a last resort compensation scheme is established, a proposal that AFCA strongly supports.
AFCA is concerned about putting consumers through the whole complaint resolution process if they still might not have any chance of getting compensationThe Australian Financial Complaints Authority
As of July 2021, 1165 AFCA complaints were on hold because the firms in question are insolvent. The potential amount of compensation awarded could easily exceed $30 million.
"AFCA is concerned about putting consumers through the whole complaint resolution process if they still might not have any chance of getting compensation," the agency said in 2020. It reaffirmed that stance for CHOICE in July 2021.
Despite the pause in processing such complaints, ASIC recommends that people who've lost their money to insolvent schemes still file AFCA complaints. The hope is that they'll be processed once a compensation scheme is finally established.
While some victims of the Sterling First collapse we interviewed were not optimistic about compensation, one, Alan Fardoe, says, "I have faith that eventually we will get the money back through AFCA."
"If we don't keep fighting we let them win," says Annette Taylor, another Sterling First victim. "They're [the people behind Sterling Trust] living the lives of Riley while we're living in poverty."
Stock images: Getty, unless otherwise stated.