SMSF property disputes a ‘systemic issue’: AFCA

In its latest Systemic Issues Insights Report 2022–23, AFCA revealed that there were 1,427 COVID-19-related complaints regarding superannuation after the federal government decided to allow people to apply for the early release of up to $10,000 in super if they were struggling during lockdown.

However, during a recent Q&A Shail Singh, lead ombudsman, investments and advice for AFCA said “systemic problems” with property in SMSF also continue to be a major theme for the Authority.

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“Although we say ‘major theme’ from my calculation there were 79 out of 530 disputes, or around 15 per cent of complaints in regard to SMSF that dealt with property,” Mr Singh said.

“And there is a lag time between the conduct and when we get the complaint so that doesn’t mean necessarily that they still exist in the market.”

Mr Singh said the conduct to which AFCA is currently referring occurred between 2014–2018, and they often come in “batches” to AFCA.

“The reason these complaints are with us now is because basically consumers don’t become aware of it before they go to another adviser who points out the problem, or that some of the firms have engaged in remediation and the complainant is not happy with the outcome so come it comes to us,” he said.

“We have had a number of batches of these complaints over the past two to three years. For example, one type of scenario we saw was a consumer with a low-balance SMSF of around $200,000 who was talked into buying a property from a related entity in the group from which they were then supposed to derive a commission. It is basically a development-type property in which the entity couldn’t get finance elsewhere and when that property performed badly the consumer was left in debt when they sold. There can be a group of companies working together where there are all sorts of vested interests.

“A second type is an offer of redeemable preference shares into a company that is in a joint venture with a development company and there are conflicts of interest all over the place.

“In one particular case, the adviser’s father-in-law had interests in the development which weren’t adequately disclosed. It was literally a clear conflict of interest.

“Then there are others where trustees are encouraged to investment in mate’s development via their own SMSF.”

Mr Singh said it is imperative that SMSF trustees go back to first principles if they want to avoid these situations.

“It is a self-managed fund and if you want to commence an SMSF you have to have the time, willingness and financial literacy to manage your own funds – you are a trustee of your fund’s money,” he said.

“People take advantage of other’s naivety and there are incidents we see where there are people with low levels of financial literacy who are involved, and they become very angry about it.

“There is a real power differential between the people who are advising on these sorts of deals and those that end up losing out.”

Mr Singh said as a non-regulatory body, AFCA’s role is to notify ASIC about incidents so it can act if necessary.

“We also have information sharing of the things we are seeing, and they are all on our website,” he said.

“Our role is primarily dispute resolution, identification of system issues and talking about it with advisers, and notification to ASIC.

“The typical defence of those that have been bought before us is that they provided a service that people are interested in – it is defended as a limited advice scenario, but that is not really what it is.

“Whether or not people are interested in these types of products, it is their adviser’s role to take them through it.

“While I don’t believe the vast majority of advisers are doing this, there are pockets who are and are not getting caught out.”