PC proposal to require ‘serious documentation’ from SMSF advice firms

The design and distribution obligations were introduced into Parliament in September last year and, once passed, will require financial services companies to provide specific design requirements to ASIC that explain who the target audience for the financial product is.

Under the measures, financial service providers are required to specifically determine the segment of the consumer market that they’d be targeting with their service and ensure that the product is distributed in accordance with that determination. The current measures before Parliament do not apply to SMSFs.

Sophie Grace Compliance director Sophie Gerber said that, given the way in which the exposure draft for the current measures has been drafted, if the obligations were extended to include SMSFs, this would most likely require SMSF firms to prepare an internal document which sets out the kinds of individuals it would recommend SMSFs to.

“You wouldn’t need to submit it to ASIC; however, I think advisers need to be aware it’s something they’d be required to document internally and it would be quite serious documentation,” Ms Gerber explained.

“They would have to document everything up front. I don’t think people have previously documented that kind of thing so heavily, but that’s what ASIC would be looking for.”

Based on the basic premise of these obligations, SMSF practitioners would most likely need to document who they’re going to recommend SMSFs to, who they think SMSFs are appropriate for and then stick to that criteria, she explained.

Ms Gerber said that it would be comparable to something like a procedures document for the Anti-Money Laundering and Counter-Terrorism Financing Act, which is not that prescriptive.

“I think that’s where people would feel really uncomfortable in the beginning while the requirements were still being bedded down further. As people receive commentary from ASIC then the market would evolve and everybody will get better at it,” she said.

“To some extent, this is just an expansion of the best interests duty for those who give personal advice, but it extends it from those just giving personal advice to people giving general advice as well.”

For financial advisers who already provide appropriate advice on setting up SMSFs, it’s unlikely it would be a significant change, she assured. However, those who are out selling SMSFs to anyone who comes through the door would likely be scrutinised by ASIC, she warned.

“That’s where there is going to be problems because you have to document who you’re willing to sell it to up front and not sell the product to anyone outside of those parameters,” she said.

“Advisers who are doing the right thing shouldn’t be concerned. They might get some basic feedback from ASIC, whereas those who are doing the wrong thing will really feel the weight of it.”

Ms Gerber also warned that because these proposed obligations are risk-based rather than a black and white set of requirements, it’s possible that ASIC may take a different view to advisers on who is an appropriate candidate for an SMSF.

“They may come in for whatever reason and have a look and think that you’re being too wide with how you’re distributing the product, and unless you go to court over it and have an extensive legal argument about it, then you’re going to have to take their view on it,” she explained.

“It’s a bit like when ASIC says to someone, ‘We think you’ve engaged in misleading and deceptive conduct’ and it’s not really clear whether you have or haven’t, but that’s their view and unless you’re going to argue with ASIC all the way to the top, it’s probably easier to just accept that and stop doing what it is that ASIC isn’t happy with.”