Inside the regulator’s probe into dodgy fund managers

Appearing before the parliamentary joint committee on corporations and financial services on Friday, ASIC deputy chair Karen Chester detailed some of the regulator’s recent work to identify funds targeting wholesale investors with potentially low levels of financial literacy through marketing techniques equating their products with cash.

“What we’ve been doing is monitoring the local funds management space to try and detect where we’ve got fund managers offering high yield for cash-like risk,” Ms Chester said. 

“That was what the true to label project was about – we ran an algorithm across social media to find out how they were targeting wholesale retirees promising high yields, and that is how the Mayfair action came about.”

ASIC took action against the Mayfair 101 group of companies, a number of which have since been placed into liquidation, in April last year over the promotion of several products to wholesale investors that the regulator said were marketed using misleading statements around their similarity to bank term deposits.

Ms Chester said the troubled investment manager was not the only provider in the space seeking to target wealthy retirees looking for easy returns since the bottoming out of interest rates.

“Our MIS team is looking across the other asset classes as well – we’ve gone to those who were particularly targeting retirees no longer getting the returns on money in the bank, promising them higher returns but not at the commensurate risk level they were being exposed to,” she said.

The comments follow the Federal Court ordering the winding up of Mayfair 101 company M101 Nominees in February, after liquidators reported investors were unlikely to see a return from the $65 million raised by investors through the company.

It also follows similar losses suffered by wholesale investors from recent alleged frauds perpetrated by Melissa Caddick and forex investment firm Castle Rock Global Capital, where administrators were recently appointed following the death of the firm’s founder David Hunter Campbell and the disappearance of millions of dollars in investor funds.

Committee member and Coalition MP Bert van Manen asked Ms Chester at the hearing how ASIC was currently “draw[ing] the distinction” between wholesale and retail investors given the movement of much of the financial services industry towards wholesale clients as retail regulations grew increasingly burdensome.

“The law draws that distinction from many years ago before we had a fully mature super system and people were retiring with balances that took them into the wholesale investor category – that’s a matter for Parliament,” Ms Chester said.

“Traditionally ASIC would look after retail investors because we consider they’re a higher risk for harm, but we’re now in a world where wholesale investors are more susceptible to this sort of harm. 

“We’ve got Google to help us out in terms of stopping algorithms that were running behind the scenes, where we see social media marketing is going to wholesale investors who we consider to be very vulnerable like retired farmers who type in ‘cash-like returns’. This is where going forward we have to work out what’s the most effective way for us to stem that problem.”