The paper has highlighted the uncertainties that have arisen in the area for SMSFs under the Corporations Act 2001 (Corporations Act).
It states in the context of the Corporations Act, what constitutes a ‘financial product’ in the SMSF context has been “the source of intense disagreement for many years”, explaining that it is unclear whether (and, if so, how) an SMSF investment strategy constitutes a financial product.
“This affects the determination of whether advice given in respect of the SMSF is financial product advice, and, accordingly, whether a financial service is being provided and whether an AFSL must be obtained,” the ALRC states.
“Strategic advice plays a significant role in the SMSF industry. Many SMSF trustees demand strategic advice from advisers as opposed to advice on specific financial products.”
The paper noted in its submission on the issue that the Institute of Financial Professionals Australia stated because SMSFs are complex structures, specialist taxation expertise is often required in SMSF advice, but it is unclear whether such advice is financial product advice or taxation advice and therefore whether an AFSL is required.
Additionally, various submissions have also indicated that there is considerable confusion about the application of the wholesale/retail client test to SMSFs.
“As the SMSF Association stated: ‘The current framework is complex and requires the review of several sections of the Corporations Act 2001 and multiple regulations. As noted in the Interim Report, how the rules apply in the context of a self-managed superannuation fund are unclear. Appropriate guidance is severely lacking. Indeed, there are differing legal opinions on the operation of these rules where an SMSF is involved’.”
The ALRC said under sections 761G(6)(b) and (c) of the Corporations Act, if a financial service (other than the provision of a financial product) ‘relates to’ a superannuation product or an RSA product, the service is provided to a person as a retail client, unless the service provider is a trustee with net assets of at least $10 million or is an RSA provider.
“Under these provisions, it is uncertain whether a financial service ‘relates to’ a superannuation product. In 2004, ASIC issued QFS 150 which stated that a financial service would typically ‘relate to’ a superannuation product if a financial service was provided to a SMSF trustee,” the paper continued.
“Therefore, generally speaking, an SMSF trustee was classified as a retail client, except where the $10 million asset test is satisfied.”
However, in 2014, ASIC changed its position regarding QFS and announced it will not act where a SMSF trustee is treated as a wholesale client under the general test in section 761G, even if the relevant financial service provided may ‘relate to’ a superannuation product and the $10 million net asset threshold is not met.
ASIC also noted its no-action position does “not affect the private rights of action that may be available to third parties” and that providers of financial services to SMSF trustees must make their own commercial decisions after considering the legal risks.
So, how many years does it take regulators to actually understand the statutes that they are enforcing? It was always a stretch to suggest that SMSFs were a product and needed the overcomplicated rules around that. Most of the advice I have seen from financial planners in relation SMSFs has been absolute rubbish and clearly within the interests of the planners other than the client – but who cares?
It’s an interesting one the status of SMSF and its intersection with the Corps Act. In order to understand it, the usual bifurcation of advice given in and around a SMSF is required. Advice to a trustee will be about the fund as a whole. Matters such as the trustee structure, the investment management, administrative requirements. Advice to the member is personal (individual) advice as it involves contribution and withdrawal advice. The member receives the advice and then makes their request to the trustee for implementation. At all times, role demarcation must be observed and at no stage merged for convenience etc.
The Corps Act wholesale test of $10m applies to exempt all advice, both trustee and member advice, from being retail. The standard wholesale test that requires an Accountant’s certificate will only act to make trustee advice wholesale. Where the fund is <$10m, the member advice is at the retail level. It makes sense if you step back and look at the usual wholesale advice category involving investment advice. The Corps Act seeks to identify the subject matters where complexity is apparent for additional testing - super and insurance. As the SMSF is a combination of the two, a stratified system exists.
So, the Trustee listens with the right ear and the member listens with the left ear…..and the individual mustn’t discuss with him/herself what the two ears have just heard lest there be a conflict of interest…..