Impact of Regulatory Framework on Fund Management Fraud

Abstract

Australia1 is the third-largest fund management market in Asia.2 At 31 December 2016, Australian-managed funds institutions held around $2,649.2-billion worth of assets.3 Superannuation represents approximately seventy-five per cent of the unconsolidated assets in the managed funds industry and thus confidence in the regulation of the industry must be preserved. Recently, the Australian fund management industry has been exposed to significant financial fraud.4 A parliamentary inquiry into the largest superannuation fund in Australia’s history — Trio Capital — reported significant weaknesses in the superannuation industry.5 In Trio Capital’s case, approximately 6,000 victims lost approximately Aus. $122-million in retirement savings. Five years after this fraud, the underlying weaknesses of the Australian funds management industry remain unaddressed. This article evaluates how corporate structures used in the industry, and applicable policies, laws, and governmental agencies responsible for the regulation of the industry, impact the regulatory framework to prevent investment fraud. Also explored is the role of the financial adviser and how conflicts of interest can lead to fraud. This research mainly focuses on the funds management industry in Australia, while drawing comparisons with the United Kingdom and the United States. This international comparison has significance in that the structure and regulation of offshore hedge funds provides a useful point of comparison.