Shield and First Guardian – the next "black swans"

Concerns about potential future large-scale CSLR matters were reinforced by a recent media release from the operator of the scheme.

While the media release was focused on an underspend of the 2024/25 CSLR levy, it included a clear warning: “Beyond [Dixon Advisory], the CSLR has seen multiple large-scale firm failures within the personal financial advice sector, with at least two of these failures potentially leading to more than 800 claims." 

Previously-released average claim values for Dixon Advisory and United Global Capital (UGC) have been around or above $120,000. So the "more than 800 claims" the release is referring to could easily add up to $100 million – or more. 

The advice profession has already been stung very hard by the CSLR's exposure to Dixon Advisory and UGC, and many advisers are concerned about when and where the next major event will come from. It appears there are two on the horizon. 

These two matters, which have received a lot of media coverage over the past 12 months, are the Shield Master Fund and the First Guardian Master Fund. There are striking similarities between them; they both involve the collapse of investment funds that appear to have been invested in property development, property loans and other business loans. 

Shield Master Fund first came into the media spotlight as a result of an ABC article in July 2024. This article described the business model as being based on cold calling and high-pressure sales tactics. A specific advice firm, Venture Egg, was named.

First Guardian, meanwhile, didn't generate media attention until earlier this year – although the fund had suspended withdrawals in May 2024. From what's been said in the media, it seems that each of these funds had around half a billion dollars in client funds under their management.

Understanding the relevance to financial advice

This raises a question as to why the collapse of two investment funds has a direct impact on the advice profession's exposure to the CSLR.

First, it shouldn't, unless the provision of personal financial product advice to retail clients is involved, and unless the (likely successful) AFCA claims are large enough to bring down one or more of the licensees who were involved. If numerous licensees were involved and none were overly exposed, this is less likely to be a material factor impacting the CSLR.

ASIC’s web pages on Shield and First Guardian clearly set out which licensees – and, for some licensees, which advice practices – the regulator believes have been involved in the distribution of these products. We have included these details in the table below:

 
ASIC’s table above suggests that only four advice licensees were involved with Shield and three with First Guardian. Concerningly, however, two licensees were involved with both, and it's also understood that Venture Egg and Financial Services Group Australia are controlled by the same person.

What's further alarming is that Next Generation Advice and United Global Capital are already in liquidation, so complaints related to these licensees are likely to end up with the CSLR.

ASIC also published the following details on the superannuation platforms that seem to be involved with these matters:

Estimating the likely impact

At this stage, we don't know the scale of losses in either Shield or First Guardian, but it's possible the losses will be substantial. It appears that many of the clients affected ended up with large percentages of their portfolios invested in either one or both of these funds. 

We also don't know the extent of each licensee's exposure to these funds, but there are some useful insights in what's been publicly reported so far: 

• An AFR article from February this year reported that the "turbocharged funds flow into Shield in 2022 and 2023 was from a small group of financial advisers in Melbourne."
  
  This article  also includes a statement attributed to the owner of Venture Egg, explaining that the firm, an authorised representative of Interprac, has "5,000 clients with about $250 million in Shield." 
  
  
• In March, The Australian reported that "Venture Egg has about 3,600 clients with $192 million invested in First Guardian."

Based upon these two articles, it would appear that Venture Egg has an exposure of around $442 million to Shield and First Guardian.

On February 27, ASIC issued a media release confirming that the Federal Court had frozen the assets of Ferras Merhi, Venture Egg's owner. This would suggest that ASIC is taking this matter very seriously.

Interprac’s authorisation of both Venture Egg and Ferras Merhi ceased on May 31. And on June 13, ASIC announced the cancellation of the AFSL for Financial Services Group Australia and the permanent banning of the sole responsible manager.

Licensee response

Sequoia Financial Group, the parent entity of Interprac, issued an ASX statement and media release on April 7th to acknowledge ASIC’s investigation of Interprac and Ferras Merhi. Sequoia also said Interprac would be reviewing the obligations of rating houses, the conduct of the funds, the obligations of trustees, auditors and custodians and the obligations of platform providers.

We will need to carefully monitor the progress of the Shield and First Guardian matters to understand the likely impact on the CSLR. At this stage, though, the warning sirens are already going off.