In response to questions received on notice from the Parliamentary Joint Committee on Corporations and Financial Services, ASIC said it may be worth adding additional requirements for the establishment of SMSFs.
ASIC was asked by the PJC what ASIC reports 575 and 576 say about SMSFs, and what range of policy solutions should be considered in terms of member education, financial advice, requirements when setting up SMSFs and compliance.
Both reports were released in June this year and highlight that many SMSF members lack a basic understanding of their SMSF and their legal obligations, said ASIC.
Report 575 found that in ten per cent of the files reviewed the client would be significantly worse off following the advice.
One of the policies that could be introduced to improve outcomes for members, ASIC said, is extending the proposed design and distribution obligations regime to the establishment of SMSFs.
“This could involve imposing an obligation on SMSF promoters to consider the type of consumer whose needs would be addressed by establishing the SMSF and the channel best suited to distributing the SMSF as a product class,” ASIC said.
It also said the “consideration could be given to prohibiting limited recourse borrowing arrangements (LRBAs) and mandating a minimum SMSF balance”.
“We note the Council of Financial Regulators is currently considering LRBAs and is due to report to government by the end of this year.”
Consumers could also be required to undertake SMSF trustee education prior to setting up an SMSF.
“At the moment training is available but it is not compulsory,” it said.
ASIC noted that the new training and education standards to be set by the Financial Adviser Standards and Ethics Authority (FASEA) should improve the quality of financial advice provided to Australian consumers.
“ASIC has suggested that it might be appropriate to require specialist training for persons providing advice to set up an SMSF,” it stated in its response.
As part of its own compliance activities, ASIC said it will continue its focus on poor quality SMSF advice and investigate a number of SMSF one-stop-shops with a view to taking enforcement action.
“ASIC is also continuing to take enforcement action in relation to misleading and deceptive conduct in relation to SMSFs,” it said.
Thomson Reuters senior tax writer Stuart Jones said while creating more “tick-a-box rules” for SMSF setups and investments may make it easier for the regulators to police the industry, it won’t necessarily improve member outcomes.
“The royal commission showed that the worst cases of inappropriate LRBAs were driven by advisers who were motivated to package expensive insurance add-ons to generate commissions, rather than the strict rules that allow SMSFs to borrow,” said Mr Jones.
He also noted that while ASIC is right to be concerned about some SMSFs investing in a single asset class, business real property is still appropriate for some SMSFs where the members truly understand the asset and its risks.
“The issue is more about ensuring that the fund’s investment strategy has regard to the additional risks for the fund,” he said.
“Given the reduced contribution caps and account balance limits, LRBAs remain relevant for SMSFs looking to purchase appropriate high-value growth assets.”
Rather than banning LRBAs for all SMSFs, Mr Jones said, the additional compliance rules and risks associated with an LRBA can be addressed via the investment strategy process.
“SMSF trustees who are guided through this process and plan for the additional risks over the life of an investment are likely to be much better placed to achieve their retirement savings objectives.”
Mr Jones previously flagged concerns about a potential LRBA ban following some of the “horror stories” that emerged from the royal commission.
“The problems identified by the royal commission around borrowings by SMSFs have largely revolved around inappropriate financial advice rather than the actual rules that allow SMSFs to borrow under strict conditions,” he said.
“The superannuation industry will be hoping that the government does not overreact and throw the baby out with the bath water in response to these inquiries.”
I have had a SMSF for 22 years and I am sick of all this rubbish. ASIC has got a track record like a ruptured duck and now they are trying to make up for it with a plethora of regulations produced by the grey cardigan corps of Canberra. Why don’t they leave SMSF alone? Because they see it as a new cab off the rank where they can score a few points to justify inflated salaries and boost their self importance.
I agree with majority in that property advocates and the like should be financial planner licensed to advise and transact in this space. Real Estate agents likewise who for years have been giving off the cuff advice, they need a new accreditation in the space. On another note, how about you need to obtain advice to be able to open a CommSec trading account? This is more dangerous than someone setting up an SMSF and zip regulation there.
Here’s a novel idea. We are told by the government, ASIC and the PJC that superannuation is a significant part of an employee’s wealth. Why not teach the basics at school and perhaps household budgeting. Then not only would SMSF trustees be aware of what they are getting into but so would retail and industry fund participants.
If a minimum balance is required, then maybe the Banks should be required by legislation to apply a minimum cash saving rate equal to the RBA cash rate of 1.5% instead of the Banks ripoff 0.1% to 0.7%
The answer is not banning LRBA or setting an SMSF minimum balance, it is in strengthening the Best interest duties and making sure ASIC actually regulates advisers activities. Banning just helps ASIC shirk its responsibilities. Clearly, ASIC has not learned from the Royal Commission. Enforce the current laws before demanding more powers and rules.
The majority of the “really” bad examples I have seen don’t involve advisers. It is people who are unlicensed and selling real estate that is 20% overpriced (ie) the one stop shop. Traditionally the SMSF’s were set up via an accountant within the business but this is now outsourced to an administration company with it being “client directed”. ASIC would know who they are if they used Google (I have always assumed ASIC use BING because they can never find these people) as these one stop shops have great marketing arms. Best Interest doesn’t really apply if they are unlicensed but the current laws do allow them to stop to these operations — they just choose not to.
Just because some people do the wrong thing or provide bad advice does not mean it is bad or not suitable for everyone and should be banned. We have seen from the royal commission that people take out home loans they can’t afford, does that mean that ASIC ban home loans? It is also akin to saying that young people are not responsible drivers, so all young drivers should be banned from driving. Again, it is ASIC being ASIC and failed.
Interesting. If the main concern is property spruikers then cause them to be SMSF licenced…. oh that means they have to be degree qualified down the track etc just like any other adviser. Real estate is the largest asset class in Australia apparently, yet is pretty much unregulated. Make every person who advises upon real estate to be licensed under the same rules as everyone else, Make Real Estate a financial product. That will stop a lot of speculation in its tracks.
As for mandated minimum SMSF balances – that is utter rubbish. Just another bureaucratic uneducated statement by someone that has no idea of real world. SMSF is not about cost in most cases. It is about control and accessing assets that the client wants and can make more money from. WIth the imposed contributions caps and all of the other over-regulation of SMSF it is hard enough for all concerned… it is already limiting the type of person who goes into SMSF.
We dont need further regulation here when the past changes have not had their full effect.
Get a grip on reality, ASIC. Bleating about something more for you to control when you couldn’t regulate the banks behaviours is not something that we want to hear and pollies are even less connected to the real world so you are treading a dangerous line. Leave SMSF alone … leave it to the professionals and ASIC, go after cowboys properly… that is a community requirement of you.
Mr Jones comment that SMSFs issues, including LRBAs, can best be addressed via the investment strategy process still leaves a big hole. In my role as auditor, I read many investment strategies. In most cases, they are generalised strategies, system generated and designed to comply with the regulations. They are generally vague in content. Furthermore, the ‘annual review’ is again a system generated clause in annual minutes that states the strategy has been reviewed. I have no doubt that 90% of trustees would have never read the investment strategy of their fund, set up by their adviser. If we are to make the investment strategy actually relevant, it needs to be simplified, and to some extent historical. That could be achieved by each trustee signing an annual statement reviewing the investment ranges that were held at the end of each financial year, with a statement as to why that range of investments was chosen. That could be done in a single page. If the strategy review does not coincide with the actual investments, a qualified audit would follow. That, of course, still does not answer the ultimate question. Do the trustees actually read every page that is placed in front of them to sign, and do they actually understand what they are signing?
Big banks exit LRBA space – ASIC says ‘Hold my beer’..
Lets consider every option but the most sensible one. Ban people from spruiking for property in a SMSF unless they have a financial licence. Everything else is just designed to place barriers in the way leading to greater cost and less efficiency.
It would be disappointing if ASIC got its way with a broad brush approach taken to the set-up of SMSFs to require Trustee Training, etc. Agree with Stuart, the investment structure isn’t the problem, it is the advice associated with the establishment and ongoing compliance that is wanting.
SMSF as a financial product isn’t delivering the right outcomes, a carve out in Corps Law is required, not to dilute the requirements around SMSFs, but to recognise them as closely held trust vehicles that house superannuation savings. It isn’t beyond the realms of possibility, but the language that ASIC uses indicates they have no appetite to get to really understand SMSFs.
Now that Hayne J has told them they need to get their big pants on, I guess we will see lots of huffing and puffing from them.
How about some ethics and a little bit of common sense, in stead of more legislation. Say something similar to what accountant do.