The SMSF safety net debate continues to surface
In the period since the Trio collapse, the debate about compensation schemes for SMSFs has not dissipated. But why are we still talking about it?
While many in the broader super industry claim lack of access for SMSFs to a scheme as a downside to having an SMSF, most in the SMSF industry do not support a compensation scheme for this sector. What is clear, is that Trio raised a number of issues that needed to be addressed and certainly awareness for trustees around compensation schemes, or lack thereof, was one of them.
What happened in Trio?
The Trio collapse was the largest case of superannuation fraud in Australia’s history. Approximately $176 million held in super funds was lost or went missing as a result of fraud in two managed investment schemes for which Trio Capital was the responsible entity.
Around 6,090 Australians were victims of this fraud and lost their invested money as a result. 5,400 of these people held their money through an APRA regulated fund, 415 were direct investors and 285 invested through a self-managed super fund.
The result of this fraud was devastating for investors but what was highlighted from this case was that only those who invested through an APRA regulated fund were eligible, and granted access to, $55 million in compensation under the provisions of Part 23 of the Superannuation Industry (Supervision) Act 1993 (SIS Act). SMSFs and direct investors were not compensated.
What is the existing compensation scheme?
Part 23 of the SIS Act gives powers to the relevant minister to grant financial assistance to certain superannuation entities - regulated super funds (other than SMSFs) and approved deposit funds - that have suffered a loss as a result of fraudulent conduct or theft. Super funds need to apply to the Minister for relief, providing relevant supporting documentation. The Minister will then decide whether or not to grant financial assistance and if so, how much. Compensation monies will be funded firstly from consolidated revenue but then recovered by the government via a levy imposed on all super funds (other than SMSFs). Because of the levy imposed, compensation for APRA regulated funds and their members is ultimately paid for by the members of other APRA regulated funds.
Compensation is not automatic and is not paid in all cases of fraudulent activity. Payments, including the amount paid, are at the discretion of the relevant minister.
An SMSF compensation scheme?
Any compensation scheme for SMSFs would need to operate on the same basis as currently laid out in the SIS Act. So the question becomes would this be appropriate for SMSFs? The answer is probably no. SMSFs by their very nature are a self-directed retirement savings vehicle and members/trustees need to take responsibility for their decisions, particularly around investments.
It’s worth noting that if trustees use the services of advisers and the advice is deemed inappropriate, then they may have cause to make a claim on their adviser’s professional indemnity insurance.
Would a scheme encourage riskier behaviour?
One of the arguments also run against SMSFs having a statutory compensation scheme is the behaviour that it might encourage and the impact on other SMSFs. Arguably, if SMSF trustees did have access to such a scheme, it may encourage riskier behaviour by some trustees. Unfortunately, any negative outcomes from this would impact on other SMSF trustees, many of whom could be highly risk averse and conducted the activities and investments of their fund accordingly.
Responsibility for decisions means the awareness of compensation arrangements becomes more important so that trustees are making decisions with “eyes wide open”.
Interestingly, during the Senate enquiry into the Trio Collapse, investors, including SMSF trustees, gave evidence that although they were not aware they did not have access to a compensation scheme, they had comfort in the fact that both APRA and ASIC had regulatory oversight of key stakeholders in the arrangements. One commented that it would have made no difference to her decision even if she was aware because of the involvement of these two bodies.
Prospect of change?
It is not likely that a statutory compensation scheme for SMSF investors will be seen any time soon. The current government has not expressed an appetite to pursue the matter – in fact quite the opposite. Furthermore, the SMSF industry is not supportive of one either.
As with many aspects of SMSFs, education and awareness will be the best protector for SMSF trustees.
Liz Westover is head of superannuation at the Institute of Chartered Accountants Australia.