For its first quarterly statement released in December, the Council of Financial Regulators (CFR) discussed a report to government on leverage and risk in the superannuation system, as requested in the government’s response to the Financial System Inquiry.
The CFR is the coordinating body for Australia’s main financial regulatory agencies, including APRA, ASIC, the Australian Treasury and the Reserve Bank of Australia.
In the quarterly statement, the CFR said that while the use of limited recourse borrowing arrangements has risen over time, it remains relatively small.
“Leverage by superannuation funds can increase vulnerabilities in the financial system, though near-term risks have reduced with the shift in dynamics in the housing market,” it said.
In an online blog, Smarter SMSF chief executive Aaron Dunn said that with all the major banks and AMP having exited the loans space for SMSFs, there has been a slowdown in activity in the space, with a more specific set of second-tier lenders now operating.
“Clearly, this outcome has had an impact on the CFR and this recent statement,” Mr Dunn said.
Whilst Mr Dunn said that the CFR has “given the use of LRBAs a pulse again”, the Labor Party, he said, has made it clear that it plans to scrap the ability to borrow within superannuation by repealing section 67A of the SISA.
“This was a result of the Labor Party coming out in support of all recommendations made from the Financial System Inquiry,” he said.
“Therefore, whilst LRBAs appear to have a level of reprieve for now, a change in government may again put the use of borrowing within superannuation in jeopardy.”
As part of the housing affordability plan it announced in April 2017, Labor said that it would restore the general ban on direct borrowing by superannuation funds to “help cool an overheated market”.
The announcement was met with strong backlash, with the SMSF industry disputing the idea that SMSFs pose a systemic risk to superannuation or the broader financial sector.
Thomson Reuters senior tax writer Stuart Jones also previously warned that some of the horror stories that emerged around inappropriate advice to establish an SMSF and borrow to invest in property could also drive a ban on LRBAs.
Both the ATO and ASIC have also flagged SMSF property investment and borrowing as a “live policy issue” last year, with concerns with one-stop shops and riskier mezzanine lenders continuing to surface.
The AIST has come out hard against SMSFs. I did two presentations at AIST national conferences suggesting that Industry Funds may want to set up a SMSF division for their members. That fell on deaf ears. The essence of Industry Super Funds is to pool their resources into wholesale funds controlled by the unions that are now starting to eke out a sizable interest in the Australian economy. Anything that helps them boost their FUM, such as saying SMSFs are poor investors or the Labor Party doing away with refundable franking credits, negative gearing and LRBAs, only helps the cause.