Opening statement by ASIC Chair Joseph Longo at the inquiry into the Sterling Income Trust, Canberra, 18 November 2021.

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Thank you for the opportunity to appear at the second day of hearings into the Sterling Income trust.

I have listened to much of the evidence, especially from individual witnesses. Their stories show the deep and ongoing impact of the collapse of the Sterling Group on them.

I would like to start by adding an event to the chronology, which I regret did not appear in our original submission. I know the Committee has placed a lot of value on the chronology, however, I do not think that this leads to any change to my, or ASIC’s views.

In February 2013, ASIC placed a stop order on Theta in its capacity as responsible entity of Rental Management Investment Trust, which was the former name of the Sterling Income Trust. The PDS in question related to a proposed listing of the Trust on the Australian Stock Exchange.

In accordance with our usual procedures, our Corporations team considered the matter. We understand there were some non-compliant commercial features of the proposed offering that resulted in a stop order being made.

The PDS related to the aggregation of rent rolls and did not entail any lease for life or similar arrangements. The product offering was completely different to the one currently being considered by this inquiry.

We came across this stop order as a company with Heritage in its name was referred to in this PDS.

ASIC remains of the view, as set out in our submission, that we acted in good faith at each point in this matter, based on the information and evidence available to us at the time. While I acknowledge the tenant investors would have wanted ASIC to move faster and more forcefully, our financial, legal and regulatory system requires ASIC to obtain proper evidence and follow due process before it intervenes.

We note that comments were made that ASIC should have acted more forcefully by seeking an injunction after it received a referral from DMIRS in March 2017.

In 2017, we did not have admissible evidence that would have supported injunctive action being taken in respect of the Sterling Income Trust.

As was noted by Justice McKerracher at the conclusion of his 366-page judgement imposing a civil penalty against Theta:

‘…regulatory proceedings by their nature typically incur greater upfront cost in the preparation of the claim because the regulator must ensure that it knows the scope of the documents relevant to particular issues and that the cooperation of any third parties, as well as officers and employees will be forthcoming. ASIC understandably requires a reasonable degree of confidence in such matters before it can commence proceedings to support and make out any allegations of contraventions.’

There is clear law that injunctions that have the effect of ending a business, as such an order would in practice have done, represent a drastic remedy, likely to cause significant damage to all those involved. It is an action not to be taken lightly and only with the strongest of evidence and reasons, usually entailing fraud – which is a very high bar to establish.

Even where fraud has been established, a court can still be reluctant to make an appointment. This has occurred in a Federal Court matter in the last three months. In 2017 there was no evidence of fraud.

We took the view that our stop order power would have an immediate effect of stopping use of the defective PDS to sell units, which was the immediate problem clearly within our jurisdiction.

As events developed and ASIC became concerned that the scheme may actually be insolvent, in early 2018 ASIC focused on gathering enough evidence to pressure Theta as the responsible entity to close the scheme down, or to obtain court orders if necessary. We remain of the view this was the right thing to prioritise at the time.

Regulators do not take the decision to shut companies down lightly. The appointment of liquidators to a company is an extraordinary step for a court to take, in the true sense of the word.

With the benefit of hindsight, we would have more closely engaged with the responsible entity on whether our concerns with the PDS were addressed. We may well have stopped the replacement PDS.

ASIC could have done things differently, undoubtedly. I’m sure we’ll come to some of those things in the course of your questions. However, no regulator can be held to a standard of perfection. Judgments must be made on the information then available and resources allocated in accordance with the competing priorities we always face.

To that end, I note that between 2017 and 2018, ASIC was supervising 3,600 other schemes, and more than 6,000 other AFS licensees. Over that period ASIC was also dealing with over 10,000 other complaints and reports of misconduct, together with around 4,000 breach reports. ASIC’s targeted surveillance activities continued, as well as a number of administrative actions, together with running around 41 investment product-related court cases.

This is not to make excuses for any missteps, merely to provide perspective.

We look forward to taking the Committee’s further questions.