Regulators raise concerns about rise in non-bank SMSF lending
Off the back of the findings of a report by the Council of Financial Regulators, Treasurer Josh Frydenberg has decided the government will not be making changes to LRBAs and will instead request that the CFR and the ATO continue to monitor LRBAs in the superannuation system, despite regulator concerns.
A report by the Council of Financial Regulators (CFR) and the ATO has found that limited recourse borrowing arrangements held by SMSFs are unlikely to pose a systemic risk to the financial system at this time. You can access the report here.
The report was commissioned by the government as part of its response to the Financial System Inquiry which called for a ban on SMSF borrowing back in 2014.
The Council of Financial Regulators is a non-statutory body comprising the Reserve Bank of Australia, APRA, ASIC and the Australian Treasury.
The report stated that "where the regulators’ preferred option to remove the exception to allow LRBAs is not accepted, further monitoring to track the future growth of leverage and identified risks within the SMSF environment is recommended".
Following the release of Treasurer Josh Frydenberg stated that the report found that LRBAs form a relatively low proportion of SMSF assets overall.
"Only around 8.9 per cent of SMSFs now have a LRBA, holding 5.2 per cent of total SMSF assets or 1.4 per cent of total superannuation assets," he said.
"In light of this, the Coalition Government will not be making any changes to LRBAs and will instead request that the CFR and the ATO continue to monitor LRBAs in the superannuation system and report back again in three years," he said.
The report stated that a report to government in three years would provide further analysis of the ATO’s enhanced SAR data collection and the impact of major banks’ withdrawing from lending to SMSFs.
The report flagged some concerning trends in the area of SMSF lending including some of the loan market changes stemming from APRA regulatory changes.
“The subsequent withdrawal of most major banks from SMSF lending is likely to change market conditions further, including through increased lending by non-ADI lenders and related parties,” the report stated.
“This sector does not have the same prudential scrutiny as larger ADIs. This further adds to concern around highly leveraged low diversified funds.”
With Macquarie announcing that it would exit the SMSF loans space for residential property in the past week, there are now no major lenders left in the SMSF lending space for residential property.
The report also stated that some of the evidence presented to the royal commission and findings by ASIC points to a rise in SMSF one-stop shops.
“SMSF one-stop shops have raised concerns with the number of funds that have entered into an LRBA on the basis of poor or conflicted advice,” the report said.
The report said that reforms to the financial advice sector, including the Financial Adviser Standards and Ethical Authority adviser education standards, will not help protect people from entering into LRBAs in inappropriate or risky circumstances because it is usually based on general advice, not personal advice.
“One-stop shops usually limit their spruiking to general advice, not personal advice, which means they do not have to consider the personal circumstances of the individual they are targeting,” it said.