Super funds are ripe for shysters and fraudsters NO matter how well the Australian super system is regulated and supervised no one can guarantee that fraud or dishonest behaviour won't hit investors' life savings. The collapse of Trio Capital in 2010 when $176 million was stolen is a case in point. At all times Trio held various licences issued by APRA and ASIC that allowed it to offer retail financial products to Australian investors. Just over 6000 Australians were affected by Trio's failure and about 5 per cent of them were in self-managed super funds. Many of these SMSF investors had received advice from financial planners who held an ASIC-issued Australian Financial Services Licence. Under specific super legislation, APRA-regulated super funds can be compensated for losses that occur due to fraud or theft but not incompetence. The government raises this compensation by imposing a levy on all large super funds. In 2011, the government imposed a tariff on large super funds and raised $55 million to compensate 5400 investors who were Trio investors in an APRA-regulated fund. SMSF investors aren't eligible for any compensation using this mechanism. The federal parliamentary joint committee on corporations and financial services reviewed the Trio fraud and published a comprehensive report in May last year. The committee made 14 recommendations and the Gillard government accepted nearly all of them. One recommendation said that SMSF investors need to be aware that their fund isn't eligible for any direct compensation because of fraud or theft. The parliamentary committee said ASIC should review the advice provided to SMSF investors and suggest ways that it might be improved. To satisfy this request, ASIC has now produced two reports. The first document said that ASIC believes financial planners can provide considerably better information to prospective SMSF investors. Early next year, ASIC intends to mandate that financial planners will have to tell potential SMSF investors that by leaving a large APRA-regulated fund, they will lose access to compensation because of fraud or theft. For SMSF investors, if this compensation mechanism isn't available they may be able to claim against their adviser's professional indemnity insurance. All public practising accountants and ASIC-licensed financial advice firms must hold this type of insurance. If the insurer refuses to pay a claim against an indemnity policy, an investor's final option remains suing the professional's business, or possibly the professional personally, for negligence. The problem for the SMSFs and private investors that put money into Trio is that the professional indemnity insurance didn't cover all their losses and neither Trio nor the financial advice firms involved had the resources to cover all the money owing. One investor told the joint parliamentary inquiry that he and his wife set up an SMSF and then invested in Trio. At the time they weren't aware SMSFs had no statutory compensation scheme for fraud or theft. He said they may well have invested anyway because "we thought it inconceivable that any regulated and approved investment, managed fund, or licensed managers or directors in the Australian financial system could be fraudulent." Clearly there is an expectation gap between what people think our government financial system regulators do and what they can achieve. The Trio fraud came about because the government regulators, as well as external auditors who examine the financial records of fund managers, will never be able to check the bona fides of every transaction. The jobs of regulators and auditors are made doubly hard because superannuation is compulsory for 95 per cent of the workforce but most take little interest and don't bother to check the accuracy of their member benefit statements. Combine our huge retirement savings pool of about $1.6 trillion at June 2013 with investors' general lack of interest and you have an environment tailor-made for shysters and fraudsters. Tony Negline is author of The Essential SMSF Guide 2013-14.