Regulatory and Platform Accountability in Superannuation Fund Failures: Assessing Risks and Remediation Mechanisms for Investors

The collapse of the First Guardian and Shield Master Funds in Australia has exposed systemic vulnerabilities in the superannuation sector, leaving over 12,000 investors with more than $1 billion in losses to their retirement savings [1]. This crisis, rooted in governance failures, fraudulent activities, and inadequate oversight, has sparked urgent debates about regulatory accountability and the role of financial platforms in safeguarding investor interests. As the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) grapple with the fallout, the viability of remediation mechanisms like the Operational Risk Financial Requirement (ORFR) remains a contentious and unresolved question.

Governance Failures and the Role of Financial Advisors

The collapses of First Guardian and Shield were not isolated incidents but the result of a coordinated failure across multiple stakeholders. Financial advisors, including Ferras Merhi, were accused of pushing clients into these high-risk funds while receiving millions in fees and marketing payments [3]. ASIC has taken legal action against Merhi, alleging unconscionable conduct and misleading Statements of Advice [4]. These practices highlight a critical flaw in the advice-giving model: conflicted incentives that prioritize financial gain over investor protection.

Equally alarming is the role of superannuation trustees, who acted as gatekeepers for these funds. Equity Trustees, Macquarie, Netwealth, and Diversa—all major platforms—failed to exercise due diligence in vetting the funds they promoted [1]. ASIC has already initiated proceedings against Equity Trustees for its alleged negligence, with critics labeling the trustees’ actions as “catastrophically failed” [6]. This underscores a broader issue: the lack of robust gatekeeping standards in the superannuation ecosystem, which allowed high-risk investments to infiltrate retirement portfolios.

Regulatory Responses and the ORFR Dilemma

ASIC’s enforcement actions have focused on holding individuals and entities accountable, but systemic reform remains elusive. The regulator has defended its delayed response to early warnings about the funds, citing the complexity of the case [4]. Meanwhile, Sequoia and its subsidiary InterPrac have championed the activation of the ORFR—a reserve designed to protect investors from operational failures—as a potential remedy. The ORFR, funded by contributions from superannuation members, is intended to cover losses arising from governance failures or systemic risks [2].

However, the legal and practical viability of ORFR activation in this context is uncertain. While APRA’s updated Prudential Standard SPS 114 (2025) expands the allowable uses of ORFR to include remediation and preventive measures [5], there are no precedents of its activation in past superannuation failures. Critics argue that trustees may lack the authority to redirect ORFR funds toward investor compensation, particularly for self-managed super fund members [1]. Furthermore, liquidation processes for First Guardian have yielded minimal recoveries, with only $2.2 million retrieved from $441 million in assets [6], raising doubts about the adequacy of existing mechanisms.

Platform Accountability and the Need for Systemic Reform

The collapses have also exposed the limitations of Australia’s superannuation platform model. By allowing third-party funds to be listed on their platforms, trustees effectively outsourced due diligence to entities with conflicting interests. For instance, Equity Trustees’ failure to scrutinize the Shield Master Fund’s governance structure—a fund managed by Falcon Capital, which later collapsed—has drawn sharp criticism [2]. This raises a critical question: Should platforms bear greater liability for the funds they promote?

Advocacy groups like Super Consumers Australia argue that trustees must take responsibility for losses incurred by investors who relied on their platforms [6]. Yet, the current regulatory framework does not impose clear liability on trustees for such failures. This gap in accountability has left investors in a legal limbo, with compensation capped at $150,000 per individual through the Australian Financial Complaints Authority (AFCA) and only available to those who received advice [3].

The Path Forward: Strengthening Investor Protections

The First Guardian and Shield collapses serve as a wake-up call for regulators, platforms, and investors. To prevent future crises, several measures are essential:
1. Enhanced Gatekeeping Standards: Trustees must adopt stricter due diligence protocols for listing funds, including independent audits and transparency requirements.
2. ORFR Clarity: APRA should issue explicit guidance on the use of ORFR for remediation, ensuring it functions as a reliable safety net for systemic failures.
3. Liability Frameworks: Regulators must clarify the legal responsibilities of platforms and trustees, potentially introducing liability caps or insurance mechanisms to deter negligence.
4. Investor Education: Financial advisors and platforms should prioritize educating investors about the risks of non-traditional funds and the importance of diversification.

Conclusion

The First Guardian and Shield collapses are not merely financial failures but a failure of accountability. While ASIC’s enforcement actions and Sequoia’s advocacy for ORFR activation are steps in the right direction, systemic reform is needed to address the root causes of this crisis. Investors must remain vigilant, demanding transparency and stronger safeguards from both regulators and financial platforms. As the superannuation sector evolves, the lessons from this debacle will shape the future of retirement savings in Australia.

Source:
[1] Thousands caught in First Guardian, Shield collapse told '... [https://www.abc.net.au/news/2025-09-04/superannuation-fund-platforms-shield-first-guardian-compensation/105731472]
[2] The $6.4b not invested by super funds on behalf of members [https://financialnewswire.com.au/superannuation/the-6-4b-not-invested-by-super-funds-on-behalf-of-members/]
[3] ASIC takes further action against Ferras Merhi over First Guardian and Shield superannuation advice [https://www.asic.gov.au/about-asic/news-centre/find-a-media-release/2025-releases/25-184mr-asic-takes-further-action-against-ferras-merhi-over-first-guardian-and-shield-superannuation-advice/]
[4] APRA amends operational risk financial requirements for superannuation [https://www.apra.gov.au/news-and-publications/apra-amends-operational-risk-financial-requirements-for-superannuation]
[5] Superannuation operational risk financial resources changes [https://www.kwm.com/au/en/insights/latest-thinking/superannuation-operational-risk-financial-resources-changes.html]
[6] Super trustees 'catastrophically failed' with Shield, First Guardian [https://www.ifa.com.au/news/36161-super-trustees-catastrophically-failed-with-shield-first-guardian-sca]