Cavendish has told the Financial System Inquiry that systemic risk posed by LRBAs is “significantly lower” than for leveraged investments outside superannuation.
In response to the FSI’s interim report, Cavendish said that given the restrictions imposed on LRBAs and the conservative lending practices of the major financial institutions, the systemic risk posed by leveraged investments outside of superannuation is not comparable to the systemic risk posed by LRBAs.
“We believe there are important differences between 'traditional style' leveraged investments and LRBAs. These differences mean the level of systemic risk posed by direct SMSF leverage is not the same as the level of systemic risk posed by direct leverage outside of superannuation,” the submission stated.
“For regulated superannuation entities, section 67A and section 67B of the SIS Act imposes significant restrictions on superannuation funds which borrow to invest. These restrictions are designed to reduce the investor risks associated with leveraged investments.”
Cavendish also noted that while it has seen an increase in the use of LRBAs by SMSFs, the rate of growth has been more subdued than the interim report suggests.
In addition, Cavendish said the high operating costs of some SMSFs are not cause for concern, noting that the cost of setting up and running an SMSF is only one factor to take into consideration when determining whether an SMSF is appropriate.
“We believe cost, when considered in isolation, is not an appropriate proxy for determining whether or not an SMSF is right for an individual. There can be many differences between the features and services of an SMSF versus an APRA-regulated fund which are often reflected in the costs charged to members,” Cavendish stated.
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