Advisers and accountants who provide certificates for limited recourse borrowing arrangements (LRBAs) may inadvertently provide credit advice in breach of the consumer credit legislation. It could also be a legal service. Either way, the activity may not be covered under your professional indemnity insurance policy.
LRBAs have significantly expanded SMSFs' capacity to borrow to invest. One feature of SMSF loans is that the funded assets need to be held in a separate trust. Because lenders' rights are limited to the assets of the separate trust, they are even more concerned than usual that borrowers understand the nature of the line and will be able to meet the repayments.
For this reason lenders frequently require SMSF trustees entering into LRBAs to have their adviser or accountant complete a ‘Certificate of Advice’. The template certificates required by some lenders contain extensive certifications – for example that the:
- adviser or accountant has reviewed the loan documentation including the loan contract
- client has been advised about the terms, risks, impact or effect of the loan, its suitability for them and/or their ability to meet repayments
- loan is suitable for the client
- client has the ability to repay the loan
There are considerable traps for advisers and accountants when signing such certificates. Some of these include:
National Consumer Credit Protection Act 2009: unless you hold a credit license or are an authorised credit representative, it is an offence to recommend that a client apply for, increase the limit of or remain in a particular consumer credit contract with a particular lender or assist them to do so.
Where the trustee of an SMSF is an individual, limited recourse loans used to purchase, renovate or improve residential property for investment purposes will always be consumer credit. You can provide information about this type of loan or advice about borrowing in general terms without reference to a particular loan with a particular lender. But that is all.
While it won’t be consumer credit if the SMSF has a corporate trustee or the loan is used to purchase different types of assets, eg. commercial property, shares or managed investments, you could still fall into another trap.
Legal services regulation: advising on the terms and conditions of a loan is likely to be legal advice. It is an offence to provide legal services unless you are a qualified lawyer, so tread very carefully if you are asked to review loan documentation.
Professional indemnity insurance: professional indemnity insurance covers acts and omissions that occur in the ordinary course of your business activities. Unless you have told your insurer that you provide lending advice, providing advice on a limited recourse loan, or providing a certificate to the lender could overstep your professional boundaries leaving you vulnerable to claims by clients or lenders that aren’t covered by your professional indemnity insurance.
In 2011, concerned about the risk they would be taking on, one of the joint accounting bodies advised its members against signing these certificates, especially, as frequently occurs, it is a last minute request with inadequate time to perform the necessary due diligence.
What’s the solution?
If asked to provide an advice certificate for a client:
- do read it carefully – understand what you are being ask to certify
- don’t certify that you have provided advice that you are not authorised or qualified to provide, or haven’t in fact provided
- don’t certify as to the suitability of a loan or a client’s ability to repay it – it is the lender’s responsibility to assess this
- do strike through any sections that contain anything other than factual information
- do recommend that your client obtain legal advice on the terms and conditions of a loan if they require it
Don’t forget – some AFS licensees restrict the advice that their advisers can give on direct property and gearing. So, if you are an authorised representative of an AFS licensee, make sure you understand what you are authorised to advise on and don’t certify anything outside those boundaries.
It’s a complex area, so if in doubt, speak to your compliance officer or seek legal advice.
Lesley Thorne, senior lawyer, The Fold Legal