AIST pushes for ban on SMSF borrowing
The industry body has called on Labor to remove the ability for SMSFs to use limited recourse borrowing arrangements, labelling them a "systemic risk".
In its pre-Budget submission, the Australian Institute of Superannuation Trustees stated that borrowing through limited recourse borrowing arrangements creates the potential for systemic risk and should be addressed in the Budget before the risk is realised.
In its submission, AIST referred to the recommendation from the Financial System Inquiry in 2015 that called for the exemption to the general prohibition on direct borrowing for limited recourse borrowing arrangements by superannuation funds to be removed.
“The FSI pointed out that risks are magnified across the financial system by leverage. Types of financial risk impacted by leverage include market risk, credit risk, manager risk and liquidity risk,” the submission stated.
“These have increased at both an investor level, as well as a macroeconomic level. The interconnectedness of our financial system means that should failure in the form of defaults by borrowers become widespread, the spill-over effect may be unable to be contained by ordinary provisioning.”
The submission noted that the government did not proceed with the FSI’s recommendation for a ban, choosing instead to tighten some of the underlying rules, and commissioning the Council of Financial Regulators (CFR) and the Australian Tax Office (ATO) to monitor leverage and risk in the superannuation system and report back to Government after three years.
“The 2019 CFR/ATO report and the 2018 Productivity Commission’s ‘Superannuation: Assessing Efficiency and Competitiveness’ report both noted that the relatively small number of super funds using LRBAs means that such borrowing did not pose a material systemic risk at that time. A closer reading of both reports reveals serious potential concerns about the use of LRBAs,” it said.
“The Productivity Commission concluded that continued growth, coupled with any gross underperformance of the LRBA being underwritten by the age pension could generate systemic risk in the future.”
AIST stated that the conclusions in the report by the Council of Financial Regulators and ATO reveal the regulators “had serious concerns”.
“These concerns remain and should be addressed,” the submission stated.
The submission also stated that evidence presented to the Royal Commission along with ASIC Report 575 released in 2018 had “raised concerns with the number of funds that entered into a LRBA because of poor or conflicted advice”.
“The regulators agree that the presence of leverage in SMSFs through LRBAs has significant implications for the security of individuals’ retirement savings,” said AIST.
Aside from the preferred option of removing the exception to allow SMSFs access to LRBAs, AIST said there are other potential policy interventions that the government could look at to address these concerns.
“These range from truly limiting the recourse of the lender over the asset by prohibiting the use of personal guarantees, to reducing high leverage and concentration risk within the fund by creating prudential responsibilities for the regulator,” the submission stated.