The AFR has reported on the defence mounted by Equity Trustees in the Federal Court regarding the collapse of the Shield Master Fund, and it serves as a case study in the pathology of late-stage financialisation.
The Equity Trustees confess that their “fiduciary” function is rent-extraction. Their complaint is the regulatory state didn’t act as the private equity firm’s unpaid risk-management department.
A trustee of an investment fund performs the function of circulation, safeguarding capital as it moves. Equity Trustee’s defence, however, shows that the trustees wanted to no longer perform their material obligation (protection of the asset in the Trust) while retaining their economic rights to extract fees (from retail “mum and dad” customers).
Equity Trustees argues that it relied on a third-party research house called SQM, which gave the failed product an “investment-grade” rating. Relying on SQM ratings is “standard practice”, confirming that the standard practice is a commodified circle-jerk where Equity is buying an alibi, not expertise. This commodifies due diligence and outsources their duties. By outsourcing the labour of risk assessment to SQM, Equity Trustees wants to charge fees as if it were an active guardian, while being a passive money funnel that siphons money to the executive class in the form of fees and bonuses.
The absurdity reaches its peak when Equity Trustees claims that superannuation regulations are “not fit for purpose” for platform operators because they offer choices not available via traditional funds. This is a demand to maintain the prestige and massive capital inflows of the “superannuation” label, without the stringent “sole purpose test” obligations that come with it.
Equity Trustees claims their processes met “industry best practice”. This is one of the most revealing points. If Equity Trustees followed industry best practice and still funnelled $160 million into a collapsed scheme, then the industry itself is a criminal enterprise. They are effectively saying “we shouldn’t be punished because everyone else is just as negligent as we are.” They are trying to normalise corporate and governance failure as a standard feature of the financial product market.
The core of Equity Trustees legal defence appears to be that the corporate regulator ASIC failed to warn them. They argue that had ASIC issued a stop order in mid-2023, they would have acted.
This is a neoliberal ideology in action. In the boom times, finance capital aggressively lobbies for “light-touch” regulation, arguing that state interference distorts the “efficient market hypothesis.” Yet, in the moment of crisis, Equity Trustees argues that a private corporation cannot be expected to identify fraud unless the state explicitly points it out.
Equity Trustees is effectively demanding that the taxpayer-funded corporate regulator act as its de facto, unpaid compliance officer. They wish to privatise the profits of the inflows while pushing the cost of monitoring onto the public purse. This is the “nanny state” for incompetent rentiers and corporate fraudsters.
The most damning evidence of structural incompetence is the comparison with Macquarie. Macquarie removed the toxic product in March 2023. Equity Trustees allowed inflows to start in April 2023, a full month after a competitor had fled the scene.
This destroys the “efficient market” ideology and defence. The information regarding the toxicity of the Shield Master Fund was available in the market, as evidenced by Macquarie’s exit.
Equity Trustees failure to act was not an “information failure”. It was a priority failure.
The “mum and dad” investors and the 12,000 people exposed are the victims of this asymmetry. Macquarie, arguably serving a wealthier or more institutional client base, acted to protect its capital. Equity Trustees, serving as a wholesale platform for retail investors pushed by predatory “lead generators”, kept the gate open. The retirement savings of the pre-poor, anxious middle classes were used as the liquidity of last resort for a collapsing alleged Ponzi scheme.
The AFR report also says that the Commonwealth government is considering requiring that the lead generators be licensed, to try to minimise the “high pressure” sales tactics that Equity (another’s) use. While this is better that unrestrained predation, the bolder policy response would be to ban lead generation tactics in this industry, where the financial incentives for bad behaviour are so lucrative, altogether.
The Equity Trustees case confirms that financialisation has created and enriched a layer of “financial services” that serve no productive function. By admitting they rely entirely on ASIC to stop them from selling financial poison, Equity Trustees admit they are a parasite attached to the state, requiring public funds to provide their private profits.
They do not allocate capital to production. They facilitated the churning of assets into speculative vehicles (Shield, First Guardian), extracting fees and executive bonuses while doing so.
When the scheme collapsed, they claimed the regulator didn’t stop them fast enough. This is the logic of a parasite that blames the host for not having a stronger immune system.
The fact that this $160 million loss will likely be dumped onto the Compensation Scheme of Last Resort, and thus paid for by levies on the wider industry and potentially the public, completes the cycle of extraction. Equity Trustees extracts the fees; the public pays the compensation.
This latest AFR article connects to my earlier post about the financial advice industry complaining about the Compensation Scheme. It is failures like Shield and Equity Trustees that are forcing the special levy that financial advisers are complaining about. While the advisors cry that the levy is “immoral”, here we see the actual cause: a large ASX-listed company (Equity Trustees) refusing to refund the $160 million it lost, unlike Macquarie and Netwealth who agreed to pay up. Equity is fighting to dump this cost onto the CSLR, meaning they want the public and the wider industry to pay for their specific failure.
Equity Trustee’s defence is the tantrum of a spoiled, parasitic rentier. They want the authority, bonuses and profits of a trustee but the responsibility of a child.
Update:
The collapse of the Shield and First Guardian is reported on in more detail by the ABC, and is yet another warning that far from being a mere instance of “bad apples” or isolated fraud, the “wealth industry” has irreconcilable conflicts of interest. These conflicts are the systemic, inherent contradictions of the financialised retirement system where the state enforces the accumulation of capital, but private rentiers monopolise the management of it.
Losses of $450 million, liquidator fees exceeding recoveries, and the industry levy are all more examples of this pathological neoliberal model of financialising retirement.
The ABC report highlights a critical mechanism of failure: the mass migration of “life savings” from APRA-regulated funds into “less regulated managed investment schemes”. This is regulatory arbitrage. Capital seeks the path of least resistance. By moving funds outside the strict “Sole Purpose Test” of APRA-regulated environments, the predatory “lead generators” and wealth companies like Equity Trustees avoid regulation while benefiting from the “super” label.
Not covered in the original AFR article is the appalling costs of the liquidators. The liquidators, FTI Consulting, have charged nearly $2 million in fees to recover just $1.6 million. The insolvency industry functions as a secondary layer of rent extraction. They exist to ensure that everyday people see as little as possible from bankruptcy events, that every dollar possible is consumed by rentiers to preserve the hierarchy of claims and ensure capital take precedence over workers.
The ABC article presents this as a tragedy of “bureaucratic setbacks”. However, the system is working exactly as designed: The financialisation of retirement requires a constant charging of fees and siphoning of wealth from workers to rentiers and corporate profits. When “innovation” (deregulation and regulatory avoidance) allows funds to flow into “investment-grade” rated Ponzi schemes, the collapse is not an accident; it by design.