Hundreds of people are trapped in limbo while they wait for the Federal Government to set up a scheme to compensate victims of companies that have gone broke.
- Pam and Michael Hellen are trying to recover losses they estimate to be over $200,000
- Salahuddin Ahmed is waiting for more than $38,000 in compensation
- Legislation for the compensation scheme of last resort is due to be introduced in June 2021
The scheme was a key recommendation of the banking royal commission and would close a significant gap in the financial system, where people who have won ombudsman decisions against insolvent businesses go unpaid because there is not enough money left over to pay them.
The industry-funded scheme, known as a compensation scheme of last resort, was due to be legislated by the end of this year.
However Treasurer Josh Frydenberg pushed it back until mid-next year to give the financial services industry time to recover from the COVID-19 economic crisis, and there are fears it will not start paying consumers until 2022.
Queensland retirees Pam and Michael Hellen want to access the scheme to try to recover investment losses they estimate to be over $200,000.
They are frustrated by the delays.
“I just don’t understand how the Government can get away with it, just saying, you know, ‘We’re deferring, we’re deferring,'” Mr Hellen added.
“What it means to us is that we’ve got to wait, and the wait means — hopefully not for us, but for a lot of other people in the same situation — that they’re going to die off.”
7.30 can reveal the Hellens are among 620 people who have made complaints against insolvent firms but have had them placed on hold indefinitely.
In April, the Australian Financial Complaints Authority (AFCA), the ombudsman for the financial services industry, decided to stop progressing the complaints until uncertainty around the scope and timing of the compensation scheme was cleared up.
CEO David Locke declined to be interviewed, but in a statement AFCA said it began handling complaints against insolvent firms in February 2019 after the Federal Government announced it would establish the compensation scheme. But the ombudsman decided it could not continue doing so.
“This was because after 14 months of undertaking this work there was little certainty on the timetable for the establishment or the scope,” the statement said.
“AFCA did not feel it was right to ask consumers to invest considerable time and energy in pursuing such matters until it was clear there was a prospect that they may be paid compensation if awarded.”
Another factor in the decision to put complaints on hold was that more of AFCA’s financial industry members have become insolvent in the last year, and the increasing amount of unfunded work on the ombudsman’s operations was a concern.
‘It’s a mess’
More than two years ago Pam and Michael Hellen decided to downsize, selling their Brisbane home and moving into a new development in south-east Queensland.
The development is part of a long-term rental scheme called Sterling New Life, which was marketed as an alternative to going into a retirement village.
Mr Hellen said they saw an advertisement and went to a seminar where they asked detailed questions about the risks.
“You’ve got no rent, you’ve got no rates, your money and your initial investment goes into a trust,” he said they were told.
“We did our due diligence, we looked right into it.
To secure a long-term lease the Hellens paid $210,000 into a managed investment scheme called the Sterling Income Trust, which they said was meant to generate returns large enough to cover their rent.
But in August 2018 the trust was wound up, leaving more than 60 leaseholders in a precarious position.
The Hellens fear they have lost their investment and may be evicted, despite having a long-term lease.
“We did start to pay extra because we were petrified of being evicted. But then we realised, well, we’ve already paid rent [through the investment],” Mr Hellen said.
“So we’ve lost our money, the landlords don’t get paid. So it’s a mess.”
Sterling First and the company responsible for the trust, Theta Asset Management, are now in liquidation.
Corporate watchdog ASIC has launched legal action in the Federal Court against Theta and its managing director Robert Marie.
ASIC alleges the company and Mr Marie breached the Corporations Act, including that they failed to ensure product disclosure statements did not include misleading or deceptive statements and omissions of information required to be disclosed to investors.
Mr Marie declined to be interviewed and did not provide a response to a detailed list of questions, saying he was unable to comment because of the Federal Court case.
‘How can this happen?’
Ms Hellen said it was stressful waiting to find out if they were entitled to compensation.
“It’s nerve-racking, and hard to understand how can this happen?” she said.
The Hellens are among 147 people to make complaints about Theta Asset Management to the financial complaints authority since July last year.
Before suspending decisions on complaints like the Hellens’, the ombudsman made a determination against Theta in favour of another Sterling New Life tenant, awarding compensation of more than $118,000.
Sterling first founder Ray Jones declined to be interviewed.
In a statement he said: “I am not personally familiar with Michael and Pam Hellen, however I am heartbroken for the situation they and other Sterling New Life customers have found themselves in.
“The Sterling Income Trust was offered to investors pursuant to the best legal and professional advice we could obtain.
“There are a number of cases pending at the moment which we hope will result in investors recovering some or all of their funds, however we are not able to make further comment on specifics.”
The Federal Government has said the compensation scheme will cover unpaid AFCA determinations made after November 1, 2018 and will include financial advice, which has been the highest contributor to unpaid determinations.
The former chairman of the Australian Competition and Consumer Commission, Allan Fels, has slammed the Government for the delays to the compensation scheme.
He said that in his opinion, the delays were unreasonable.
“Their lives should not be put on hold for months and years just for the convenience of the financial sector.
“It should have been a priority for implementation well before now, and they should delay no longer, the recommendations are clear. What needs to be done is clear.”
‘You start from zero again’
Salahuddin Ahmed is also waiting for the compensation scheme to start.
In February AFCA found he was entitled to more than $38,000 compensation but he is yet to receive any money.
Mr Ahmed runs a mechanics and LPG business in north-west Sydney and is one of 117 complainants against Equitable Financial Solutions, a company which offered finance in a manner consistent with Islamic beliefs.
In 2015 he took out a home loan to buy a house for his family and paid a deposit, but in April last year he changed his mind and asked for his money back.
But he never received it because the company collapsed in October 2019.
Almost 150 creditors now claim they are owed more than $23 million, and many of those people have complained to AFCA, with 48 determinations finding they are owed a total of $4.7 million in compensation.
However 7.30 understands many of those people, like Mr Ahmed, are waiting to be paid.
“It hurts, you work hard for your own family and your kids,” he said.
“It’s frustrating because it’s not easy … to put the deposit together and someone can take [it] and you start from zero again.”
‘We’re still suffering’
Shadow Assistant Treasurer Stephen Jones argues the increasing number of people with unpaid decisions in their favour or complaints on hold shows the need for the scheme is urgent, and the Federal Government needs to move faster to set it up.
“The longer they delay, the more and more people are going to be out of pocket. The cases are mounting up and it’s going to take a lot longer for these people to get some justice,” Mr Jones said.
In July the liquidator of Equitable Financial Solutions, Said Jahani from Grant Thornton, wrote to creditors like Mr Ahmed to warn they could be waiting for some time before the compensation scheme was up and running.
The liquidator’s report said the Department of Treasury told him the scheme was unlikely to begin until the end of 2021 and “payments from this scheme are unlikely to commence until 2022.”
Mr Ahmed said the delay would set his family back further in their quest to buy a house.
“We still didn’t buy the house, we’re still suffering for the deposit and we’re trying our best to get the deposit back again,” he said.
The director of Equitable Financial Solutions, Usman Siddiqui, did not respond to an interview request or answer a detailed list of questions.
In a statement the Assistant Minister for Financial Services, Senator Jane Hume, said “legislation to implement the compensation scheme of last resort are now scheduled to be introduced by 30 June 2021”.
“The Government is continuing to work on the establishment of a compensation scheme of last resort covering eligible unpaid determinations from 1 November 2018 onwards and further details of the scheme will be announced once finalised.”
Watch this story tonight on 7.30.