Fraudsters ‘exploited gaps’ in Shield and First | Australian Markets

The fraudsters behind the collapse of the Shield and First Guardian funds exploited gaps in the separation of duties between entities that need to be crammed, in keeping with the managing director of SQM Research, Louis Christopher.

Christopher, whose own firm has discovered itself caught up in the collapse fall-out over its scores strategy, informed industry members he believes “all of us in the industry need to reflect and take ownership where appropriate to ensure we learn and improve”.

“One of the big holes the fraudsters exploited was the principal of separation of duties between entities,” he stated. “In both instances the responsible entity was owned by the investment managers.”

“REs play a critical role in the monitoring and reporting of positions,” he stated referring to how this had impacted SQM’s scores strategy.

“While we took into account this independence risk into our scoring which contributed to the funds not receiving a high investment grade rating, in hindsight, we should have tightened the screws more on this point,” Christopher stated.

“Since this event, we have been tightening the screws on this point and will continue to do so going forward. I am also aware of key platforms who have recognised the weakness in the system and have been doing the same.”

Christopher stated information integrity had been one other difficulty and that false info had made its method into the chain to platforms, advisers and analysis homes reminiscent of SQM Research.

“This one is more difficult to resolve. ASIC has suggested they should step in and receive plus report on data returns and asset allocation positions. We support this idea, but I suspect that it is going to take a very long time before this is enacted,” he stated.

Christopher prompt that classes may very well be discovered throughout industry and there needed to be stronger collaboration throughout the ecosystem.

“Research houses, trustees, advisers, and regulators must work together to improve data validation and share red flags earlier,” he stated. “We need to explore stricter standards for managers with internal responsible entities, even if it affects large respected firms.”

Christopher stated third social gathering diligence reviews reminiscent of so-called unbiased property and loan valuations plus audits, needed to be more intently regulated.

“As part of our due diligence for both the funds, we relied on audited reports and third-party loan valuations,” he stated.

Christopher additionally prompt that ASIC needed to be taught some classes.

“We now know they were warned by the Financial Advice Association of Australia (FAAA) back in 2021 of the specific cold calling. If they had peeled the onion back then we would not be in this mess today,” he stated.