ISA calls for tougher consumer protections on SMSF advice

ISA stated in the submission that members in SMSFs bear far greater responsibilities and risks compared to members in other super funds.

The submission referenced an extract from the Productivity Commission review report, which stated that “many SMSF owners lack even a basic understanding of their legal obligations and over 40 per cent of SMSFs persist with low balances, high average costs, and low average returns”.

ISA noted that the decision to switch from an APRA regulated fund to an SMSF is also often made by a consumer after attending a seminar or using an online establishment tool — that is, without personal advice or after only receiving general advice.

“This is particularly concerning given this is one of the most significant steps a consumer can take in relation to their retirement savings,” the industry body stated.

“ASIC has also long been concerned about inappropriate advice being given to consumers on establishing and/or switching to an SMSF. This inappropriate advice has resulted in SMSFs being sold to consumers for whom they are not appropriate, leaving these consumers worse off in retirement.”

The submission stated that “despite these risks, the design and distribution obligations — which provide an important safeguard for consumers where general advice or poor personal advice is given — do not currently extend to SMSFs”.

ISA said these obligations should be extended to SMSFs to mitigate the risk of SMSFs being inappropriately distributed and sold to consumers.

“ISA appreciates that applying the design and distribution obligations to SMSFs is not straightforward and may require some adjustment in the regulatory settings given the issuer of the SMSF is also the trustee,” it stated.

“However, this should not prevent its application. This approach would also strengthen ASIC’s regulatory toolkit when it comes to overseeing the provision of advice relating to SMSFs.”

In its Pre-Budget submission, the SMSF Association stated that including SMSFs as part of the design and distribution regime obligations would result in unnecessary complexity and cost with no consumer benefit.

While SMSFs do meet the definition of a financial product when considered within the DDO/TMD framework, the SMSF Association explained that it is a structure in which to house financial products.

“Those financial products will need to comply with the DDO/TMD regime obligations. There are no consumer or public benefits to be gained by extending the DDO/TMD provisions specifically to the SMSF structure itself,” the submission stated.