The recommendation to ban direct borrowing in SMSFs is an “overreaction” to a poorly understood vulnerability in the Australian super system, according to the Financial Planning Association of Australia (FPA).
In its response to the final report of the Financial System Inquiry, the FPA said further information is needed on the actual and potential risks of limited recourse borrowing arrangements (LRBAs) in super.
The financial planning body also said the industry and government need to canvas alternative legal and policy solutions to address those risks.
“Self-regulatory and co-regulatory mechanisms should be considered and constructed to the extent that a self-regulatory and/or a co-regulatory solution are appropriate to the systemic risk and the risk to consumers,” the association said.
In its response, the FPA recommended the government commission a review into leverage within superannuation with a focus on leverage within SMSFs.
The FPA said there are several matters the review should clarify in order to ensure that consumers are protected and systemic risk in the superannuation system is mitigated, including what the current exposure of SMSFs to LRBAs is and whether or not they are being used for short-term liquidity purposes.
The review should also look at how the financial services sector has responded to the risks tied to leverage within superannuation and to what extent personal guarantees “have circumvented the ‘limited recourse’ aspect of LRBAs”, the FPA said.
The response also made some suggestions regarding alternative solutions for addressing the “specific vulnerabilities stated in the FSI report”.
The FPA recommended prudential regulation of leverage in SMSFs and the use of product intervention powers for the distribution of SMSFs.
“For example, legislation could be implemented to prevent retail investors from commencing an SMSF without professional advice from a lawyer, accountant, or a financial planner,” the association said.
The FPA also said that property should be regulated as a financial product.
“Our view is that an outright ban on direct leverage in superannuation through limited recourse borrowing arrangements is unwarranted on the evidence currently available,” the FPA said.
“Serious and considered policy-making initiatives ought to be initiated in this space, while the regulators in this space (ASIC and the ATO) should adopt a regulatory strategy that responds to the consumer risk in the interim.”
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