Opening statement by ASIC Chair Joseph Longo at the inquiry into the Sterling Income Trust, Canberra, 16 November 2021.
Check against delivery
Thank you for the opportunity to appear here today at the first hearing into the Sterling Income Trust. I appear with Commissioner Cathie Armour and Senior Executive Leader, Dr Rhys Bollen.
I want to begin this opening statement by acknowledging the devastating financial, social and emotional impact that the collapses of the Sterling Income Trust and the Sterling Group have had on their former clients.
Hopefully in what follows, and in its submission and other material ASIC has provided already to the Inquiry, we can help everyone to better understand what happened.
The investments and the Sterling collapses
I would like to start by explaining the products and investments the Sterling Income Trust and the Sterling Group sold.
The Sterling Group placed its clients into arrangements that were novel, complex and high-risk.
The Sterling Group marketed the Sterling New Life Lease as a long-term, secure residential lease of up to 40 years, enabling retirees and seniors to release cash for the purpose of living a more comfortable retirement. It was sold as an alternative to retirement villages and other more traditional downsizing options for retirees.
ASIC understands that, of the 566 people who invested in Sterling investment products, 101 people entered into a Sterling New Life Lease.
As part of the arrangement, the person, or couple, would enter into a long-term residential lease, becoming a tenant. They were also required to pay a lump sum into an investment product, becoming an investor into either the Sterling Income Trust or in another Sterling Group company, Silverlink. The return on investment was intended to be used to pay rent under the Sterling New Life Lease, with any surplus re-invested in the financial product.
These tenant-investors were told that the returns from their invested capital would be sufficient to enable each tenant to pay all of the rent due on their particular Sterling New Life Lease. At least some tenant-investors were also told that they would not be asked to make any other payments towards rent during the life of the Sterling New Life Lease arrangement.
The Sterling New Life Lease arrangement was legally and financially complex. The documentation given to tenant-investors was often made up of more than 100 pages of contracts, leases and disclosure documents. To help give you an idea of how complicated it was, I refer the Committee to the case studies submitted by ASIC in annexures B and C to the response to pre-hearing questions put to us by Senator Pratt.
This package of documents would be difficult enough for an experienced lawyer to understand, let alone a lay person. Multiple court cases have commenced to try and disentangle this complex mess left by the Sterling Group.
When the Sterling investments failed, the arrangements providing for payment of rent based on investment returns, ceased. This left tenant-investors in a very vulnerable and difficult position.
Apart from the tenant-investors, 465 other people invested in the Sterling Income Trust alone – that is, they did not hold a long-term lease through the Sterling Group. I understand that their losses are not the focus of this inquiry.
Unfortunately, the liquidators of the Sterling Income Trust and the Sterling Group report that there is little chance of meaningful returns to creditors in the winding up of the sterling entities. It is possible that no returns will be made to creditors at all.
ASIC’s role in the financial system
I turn now to some observations about ASIC’s role in the financial system.
As the financial services regulator, we regulate financial products and services, giving us jurisdiction over some aspects of the Sterling Group. This includes the Sterling Income Trust, as a managed investment scheme, and the Silverlink redeemable preference shares. The Western Australian Department of Mines, Industry, Regulation and Safety has responsibility for real estate and tenancy matters.
While it has evolved over time, Australia has been a largely free-market, disclosure-based system, when it comes to investing.
Some financial products are registered with ASIC. Most require some form of licence being held by the issuer and/or the distributor. However, schemes that are novel, risky, illiquid or speculative can be registered and sold in Australia. ASIC is not a merits regulator. This means ASIC cannot and does not express views about whether a particular investment is good or bad.
Product issuers and distributors have the primary responsibility to ensure that their products are compliant and perform as expected.
At the time of the events in Sterling, provided that an appropriately licensed entity operated the scheme, and adequate disclosure was made of the nature, benefits and risks of the scheme, almost any type of collective investment could be sold to Australian retail clients.
This contrasts to some peer jurisdictions like the United Kingdom and the European Union that do not permit higher risk, less liquid schemes based on unconventional underlying assets for retail investors.
Since the Sterling collapses, relevant law reform has been enacted, including the Design and Distribution Obligations which commenced in October 2021. These obligations mean that the situation where any product could be marketed and sold to consumers as long as there was formal disclosure, has changed. Product providers have to identify the class of consumers a product is suitable for and target the marketing of the product accordingly. ASIC also now has the power to make a product intervention order when a financial product, or a credit product has resulted, will result, or is likely to result, in significant consumer detriment.
ASIC’s regulatory role in relation to the sterling income trust
I now turn to ASIC’s regulatory role in relation to the Sterling collapse.
We became involved in the Sterling matter at the time of the referral from the WA Department of Mines Industry Regulation and Safety, in March 2017. We have included a summary timeline at page 31 of our submission to the inquiry.
ASIC took regulatory action when we became aware of serious concerns in relation to the Sterling Group and Sterling Income Trust.
We appreciate that those who have suffered losses have wished for us to move faster at times or to have intervened earlier.
Any action we take must be based on the collection of proper evidence and we must follow due process before we can intervene, particularly in circumstances where there is incomplete or conflicting information.
Our role also requires us to regularly make difficult choices about which reports of misconduct to examine and which apparent breaches to investigate. Our finite resources, as well as those of the prosecuting authorities and courts, mean we cannot pursue all possible breaches of the law.
In this case we are satisfied that the judgements we made were reasonable, based on the information we had at the relevant times.
In ASIC’s view, certain aspects of the conduct involving the sterling group may have been criminal in nature and warrant close consideration by the Commonwealth Director of Public Prosecutions.
Conclusion
Finally, last week I wrote to former tenant-investors of the Sterling Group. I noted that I hoped to be in Perth in the coming months to meet with them, and hear first-hand about their experiences and concerns. ASIC will also continue to keep them updated about Sterling matters via our dedicated page on the ASIC website, where a copy of my letter and ASIC’s submission to this inquiry are both available. We look forward to taking the Committee’s questions.