WITH THE number of SMSFs hitting the 500,000 mark this year and the sector representing the largest portion of Australia’s super assets, it’s no surprise that the industry has been thrust into the public spotlight. After years of remaining relatively inconspicuous, SMSFs are now firmly front of mind for regulators, industry commentators, and representative associations.
For practitioners in the SMSF space, this year was one of change and triumph. In this reflection on 2013, SMSF Adviser analyses the debates that raged, the legislation and regulation that was proposed and introduced, and the changing face of SMSF advice and trustees.
Despite the seemingly endless scrutiny – and scepticism – the sector faced, looking back on the year that was shows the bulk of SMSF practitioners have clashed and collaborated with one common cause: to grow and preserve the retirement savings of Australia’s ageing population.
THE REGULATORY RADAR
This year saw ASIC develop a virtual fixation on the SMSF industry and its gatekeepers. Given the expansion of the sector and ASIC’s establishment of an SMSF taskforce in September 2012, action by the corporate watchdog seemed inevitable.
In its 2012-2013 annual report, ASIC explained its focus on the SMSF sector, pinning its reasoning to the sector’s “rapid growth” and the importance of secure retirement income for consumers.
ASIC released the first of its SMSF taskforce findings in April of this year, following months of investigation into professional advice given to SMSF trustees. While a majority of advice provided was adequate, the focus was primarily on ASIC finding “concerning pockets of poor advice”, with many cases involving SMSFs being used as a vehicle through which to gear into real property.
These findings generated mixed reactions across the financial services industry, but a relentless defender of the SMSF sector’s reputation came to the fore.
The SMSF Professionals’ Association of Australia’s (SPAA’s) Andrea Slattery called for calm after the first report was released, asking that responders view the findings within the context of the broader advice profession.
“SPAA believes that the limited nature of the report means not too much should be read into it,” she said.
“The research is based on only 100 pieces of advice to low- balance SMSFs plus those advisers that are prolific spruikers of property and borrowing and those that have had consumer complaints made against them.
“This is a very small subset of SMSF advice, only addressing the really [risky] end of advice to the SMSF industry,” she added.
Most recently, ASIC released Consultation Paper 216 (CP 216), on the back of findings of the taskforce, which proposed new guidelines for professionals giving advice to SMSF trustees.
Under the proposed rules, advisers will need to “warn clients that SMSFs do not have access to the compensation arrangements under the Superannuation Industry (Supervision) Act 1993 in the event of theft or fraud” and “explain other matters that may influence the client’s decision to set up an SMSF”.
There was an expected backlash to this proposal from industry veterans, with Townsends Business & Corporate Lawyer’s principal saying the SMSF sector is increasingly becoming the victim of naysayers.
“It saddens me to see that ASIC is buying into these negative arguments by going back to its usual solution of making advisers create more paperwork – more disclosure requirements, more documents that few read or understand, even more transference of liability to advisers – and all to solve a problem that doesn’t really exist,” principal Peter Townsend said.
“Instead of spending time ensuring advisers tell all investors in SMSFs that they don’t have access to the statutory compensation scheme for theft or fraud, maybe ASIC could spend more time ensuring that this theft and fraud doesn’t occur in the first place.”
However, given ASIC’s stated commitment to rid the SMSF sector of unlicensed operators and misleading marketing, it seems the corporate watchdog’s fixation on the industry won’t be easing in 2014.
REFORM LANDS IN THE SMSF SECTOR
The end of the financial year is traditionally a busy time for financial services practitioners. But the end of the 2013 financial year saw hotly anticipated and contested legislation hit the advice sector – the Future of Financial Advice (FOFA) and the Tax Agent Services Act (TASA) reforms.
Within the SMSF space, all eyes turned to the accounting profession, as the phase-out period for the accountants’ exemption officially began. Despite the industry having more than a year’s notice that the exemption would be discontinued, predictions of a lack of interest among accountants in taking up a limited Australian Financial Services Licence (AFSL) appear to have been on the money.
The ATO reported it had received just 19 applications from an industry of around 180,000 practitioners in the three months since the initiative’s launch.
Proposed in June 2012, the initiative was finalised in June this year and enacted on July 1, giving accountants who wish to continue to advise on the set-up and closure of SMSFs a three-year window in which to qualify for a full or limited AFSL before the current accountants’ exemption is removed on 1 July 2016.
The shape of the legislation led the chief executive of accountancy-focused dealer group Count Financial, David Lane, to predict that most accountants looking to move into a licensed environment would prefer to get a full licence rather than “do 95 per cent of the training [to] give 10 per cent of the advice”.
“It really is a very limited licence,” Mr Lane told SMSF Adviser’s sister publication InvestorDaily in June this year. “In reality, you’ll see very few accounting firms take this up.”
While the period of transition has just begun for accountants, auditors have already reached their deadline – they had to be officially registered with ASIC from 1 July this year. By June 30, according to ASIC, 5,935 auditors had registered.
The lead-up to July 1 wasn’t smooth for SMSF auditors, with many finding it difficult to meet the conditions of registration, which included proving they possess relevant tertiary qualifications.
Proving their university degree in accounting included an auditing component was particularly challenging in the case of auditors for whom there had been a significant “passage of time” since they gained their qualifications, Shelley Banton, director of SuperAuditors, told SMSF Adviser.
However, there is still hope that with the new auditing registration regime now underway, compliance standards will be raised and the industry will weed out auditors who are potentially not keeping up with the legislation and auditing effectively.
THE GREAT DEBATES
This year saw SMSFs planted firmly in mainstream debate. Arguably, it was the myriad concerns around property investment that struck a common chord, as the asset class most loved by Australian investors was perceived to be coming under threat.
Most recently, the Reserve Bank of Australia (RBA) suggested that action might be needed to take the heat out of the property sector, with concerns that outflows from SMSFs into property are creating a property bubble.
“One risk of the increase in property investment by SMSFs is that at least some of it is a new source of demand that could potentially exacerbate property price cycles,” the RBA stated in its Financial Stability Review for September 2013.
However, these concerns were quashed by many across the SMSF sector. The SMSF Academy’s Aaron Dunn said the “total hysteria” associated with property has been taken out of context, with no evidence of abnormal growth rates in residential or commercial property against the overall growth of total assets within the sector.
“There probably needs to be a greater understanding of the ‘hype’ in property and actual ‘action’ taken by trustees,” Mr Dunn said.
“Much of the commentary in recent times appears inflammatory towards what is a well-functioning SMSF sector and doesn’t put into context the facts around the supposed boom of property within SMSFs.”
But it was property spruikers that held the constant gaze of the public and SMSF sector alike in 2013, stemming from the corporate regulator’s concern about SMSFs becoming the “vehicle of choice” for spruikers and unlicensed marketeers.
Amid fears that dodgy operators could be luring both potential and current trustees into costly investments, there have been calls throughout the year to further regulate
property investment advice.
Property Investment Professionals of Australia (PIPA) was at the forefront of this push, with chair Ben Kingsley telling SMSF Adviser on a number of occasions that regulation of property investment advice is one solution to protect against “spruikers and unscrupulous operators” in the SMSF sector.
There is “no doubt” that property spruikers have become more active in encouraging investors to set up an SMSF for the purpose of buying property, Mr Kingsley said.
“Unfortunately, real estate agents [and] mortgage brokers who aren’t qualified or licensed to give advice regarding SMSFs are jumping into this space when they shouldn’t be,” he added.
There are also secondary concerns that those who are licensed to give advice do not have the adequate knowledge and education to provide sound property investment advice for their clients, with Mr Kingsley drawing attention to financial planners.
The education debate, however, has deeper roots, with many practitioners advocating that SMSF advisers require a higher level of specialisation. Early in the year, SPAA’s Andrea Slattery said lack of knowledge is a “pervasive” problem within the SMSF industry, with inexperienced and potentially product-driven advisers entering the market.
There is a lot of “clutter” joining the advice market, with practitioners making false claims about their level of specialisation and expertise, Ms Slattery told SMSF Adviser.
She also believes practitioners in SMSF advice should possess at least an undergraduate level of competence. Those meeting only RG 146 requirements “haven’t actually extended their knowledge enough”, she said.
Practitioners who provide advice without adequate competence may not be meeting the needs of consumers, ultimately contributing to a risk of increased regulation and “reduced opportunities” in the SMSF space, Ms Slattery added.
Concerns also surfaced across the industry that some current and potential trustees may also not possess the qualifications or financial literacy required to run an SMSF. As CleverSuper announced its offer of a “free SMSF to every Australian” in August, industry heavyweights came out in force to stress that SMSFs are not for everyone.
SMSFs are not generally appropriate in a mass environment, Mr Dunn told SMSF Adviser, since the level of financial literacy required does not necessarily suit all investors.
“If it goes too far into mainstream, it will then present issues that ASIC is concerned with at the moment ... the fact that people don’t have potentially the financial competencies to be able to make the right decision,” Mr Dunn said.
“They’ll get pushed down a path where they’ll be investing in products that may expose them to risk.”
CleverSuper’s chief executive Chris Appleyard also stated that minimum asset entry barriers to SMSFs are outmoded, and that “you can have an SMSF with 20 bucks
in it if you want”.
Whether there should be a minimum fund balance for SMSFs has long been a point of debate – and one that ASIC raised in CP 216. Many practitioners question whether an SMSF with assets of less than $200,000 can be cost-effective, particularly when compared with an APRA fund.
This debate continued in 2013, with Centric Wealth’s technical specialist, Natasha Panagis, telling SMSF Adviser that SMSFs with a balance of $200,000 or lower are “at risk” of running down the value of their fund and all options should be considered before selecting the self-managed route.
“The costs of running an SMSF are quite high… [We] think that adequate level is around the half-million mark to make it feasible,” Ms Panagis said.
However, Matthew Jones, owner of Capital 19 Global Investments, told SMSF Adviser that justifying the establishment of an SMSF cannot be limited to balance considerations alone.
“Just because you’ve got a certain amount of money that doesn’t mean that an SMSF is suitable for you. I see a lot of people that shouldn’t have one,” Mr Jones said.
“It’s a personal choice and I’d be reluctant to put a dollar figure on it, because I think the other factors are a lot more important.”
It seems inevitable that the SMSF sector will remain on the regulators’ radar in 2014, with ASIC making its intentions clear about safeguarding the sector as it continues to grow. The sector is also waiting to see what regulatory guidance, if any, is released following CP 216.
Although the financial services industry has been left exhausted by reform in 2013, there are certain changes the SMSF sector continues to push for. These include raising the concessional contribution cap limit to above $35,000 and achieving bipartisan government support for superannuation.
Finally, the Cooper Review’s 2010 recommendation of a review of borrowing in an SMSF is now well overdue. With property still a hotly contested issue as 2013 draws to a close, the sector may well find another element of the Cooper Review coming to fruition.
A POLITICAL SPECTACLE
SUPERANNUATION HAS been on the government agenda since the Budget announcement in May by former minister for financial services and superannuation, Bill Shorten.
However, it was the September 7 federal election that saw super become a political drawcard, as both parties attempted to out-do each other in policies and promises. By election day, both the ALP and the Coalition had vowed to make no detrimental changes to the super system.
This was met well across the industry, with the associations in particular stressing the need to remove instability, which could act as a disincentive for Australians to save for their retirement.
The industry rallied again once the Coalition came to power, vowing to hold the new government to account over its promises to restore stability to the super sector. The IPA’s executive general manager, Vicki Stylianou, told SMSF Adviser following the election that the association plans to ensure the government keeps its promise to restore stability.
“We wouldn’t want to see any major changes coming through in the next few years… unless someone came up with some brilliant policy ideas,” she said.
So far, the Coalition appears to have kept its promise, with an announcement in early November that it would scrap Labor’s much-contested proposed tax on member’s superannuation pension earnings above $100,000 in the draw-down phase.
THE TRUSTEE FRONT
AS THE SMSF sector continues on an upward trajectory, the profile of SMSF investors continues to evolve. Once seen as the domain of high net worth retirees, SMSFs are now becoming popular with younger demographics.
Given that superannuation contributions became compulsory in 1992, it’s no surprise that the generations who have known nothing other than saving for their retirement are paying more attention to it than their predecessors.
A report released in July this year by SPAA and Macquarie Bank confirmed this, finding that 44 per cent of investors intending to set up an SMSF and 46 per cent of investors who have recently established an SMSF are under the age of 30.
Signs of this shift emerged in June 2012, when figures from the ATO showed approximately 15 per cent of SMSFs holders were aged under 45. The SPAA and Macquarie report also indicated that a majority of recent SMSF investors are women – approximately 55 per cent. Gary Lembit, analytics insight manager at Macquarie Bank, said gender patterns have changed since the previous survey was conducted.
In addition, the results showed that
one in five recent investors are females with no children who still live at home with one or both parents. The report also indicated 23 per cent of recent investors and 13 per cent of intending investors come from single-parent family households.
Overall, these findings demonstrate that SMSFs are being both considered and established by people with very different demographic traits from those of traditional SMSF members. As the sector and super balances continue to grow, this profile will surely continue to evolve.