FULL SPEED AHEAD
With regulatory technology already making waves in the SMSF space and showing no signs of abating, what will SMSF compliance look like in the future?
The SMSF industry has made some huge leaps on the technology front in the past decade, particularly with the introduction of cloud-based software. Integrations between the SMSF administration platforms and third-party providers has enabled greater automation with transactions and eliminated a lot of simple and repetitive tasks associated with SMSF administration and compliance. While the use of artificial intelligence and big data in the SMSF industry is only at the very beginning, further advances will continue to see the development of predictive compliance tools, greater digitalisation and reductions in manual processing.
DATA FEEDS AND INTEGRATIONS
Over time, Smithink founding director David Smith expects that the SMSF administration platforms will continue to build more links with third-party providers in order to try and automate the entire SMSF administration process. While it’s difficult to tell at this stage what kind of impact developments such as the new payments platform for financial institutions will have on the quality of data feeds, he says, it’s inevitable that data feeds will become increasingly better, more reliable and more efficient, he says.
“What the new payments platform promises to deliver is a greater level of information with transactions. The more information you can deliver with transactions, the greater the chance of being able to auto-code the transaction,” he explains.
“I think you’ll see the data feeds becoming more reliable and enriched with more information, which will enable greater automation.”
Class chief executive Kevin Bungard expects it will take a while for the rich metadata from the new payments platform to start flowing through to data feeds as providers and financial institutions will need to spend some time adding in additional data fields and bringing all of their systems up to speed with the new platform.
“I think one of the things that you’re going to see around the new payments platform and the open banking initiative is that transaction rules will no longer be needed,” he says.
“In fact, you will have enough metadata coming in about payments and what they were related to, that much of what we need to do to reconcile the transaction can actually just be dealt with straight off the data.”
The open banking initiative will also see developments with how institutions and providers deal with identity and the security protocols around that, which will help to streamline authority processes and tighten the security practices around things like multi-factor authentication, says Mr Bungard.
This may lead to developments such as single sign-on for authorising data feeds.
“Using single sign-on you’ll log in, go to activate the feed, and it’ll switch you across to your banking provider, you will authenticate with that institution, and then your data will start flowing into the system,” he explains. “So that creates a very seamless experience for the investor in terms of what they’re doing and how they’re connecting their various digital solutions together.”
“ONE OF THE THINGS THAT YOU’RE GOING TO SEE AROUND THE NEW PAYMENTS PLATFORM AND THE OPEN BANKING INITIATIVE IS THAT TRANSACTION RULES WILL NO LONGER BE NEEDED” — Kevin Bungard, Class
One of the other challenges for SMSF administration software providers, according to Mr Smith, is pulling in all the other bits of the administration service and determining how automation can happen with the rest of that process.
“For example, the vast majority are building links with document providers to be able to do things like automate the creation of a super fund or creating documents where there’s an unusual transaction requiring specific documents,” he explains.
Mr Smith predicts that the SMSF industry will also see greater sophistication with how these systems deal with more complex transactions such as corporate actions.
“They’ll build it out so that the system can process foreign transactions or integrate with rental systems for residential property, so receiving data feeds from those might start to
happen,” he says.
However, there continues to be assets and documents for which data feeds are still unavailable.
Tax statements, for example, continue to be a disaster, says BGL Corporate Solutions managing director Ron Lesh, with most of the tax data for SMSFs still coming in manually. There are also very few real estate systems that have data feeds or application programming interfaces (APIs) at the moment, he says.
One of the ways software companies are attempting to combat this issue is by developing document readers, which can read PDFs and enter the data into the system automatically.
“We already use this for contract notes but we’re looking at a whole range of other areas where we can do this where there’s no data feed available,” says Mr Lesh.
“We’re not going to be able to pick up every painting or whatever else people put in their SMSF, but if we can start with the major ones our clients are using such as rental properties, then that’s going to really help users.”
“IT WILL PROBABLY GET TO THE STAGE WHERE IF YOU TRANSACT ON A MONDAY THE ATO KNOWS ABOUT IT ON THE TUESDAY, SO IT’S GOING TO SEE ANY COMPLIANCE ISSUES DEALT WITH IN A MUCH FASTER PERIOD OF TIME, AND POTENTIALLY THERE WILL BE EARLIER INTERVENTION BY THE ATO” — Kris Kitto, Intello
Artificial intelligence, Mr Lesh says, is already being used to alert SMSF practitioners that clients have exceeded certain thresholds and caps.
SMSF administration software is able to send alerts to users when a client has exceeded
contributions caps or when they’ve exceeded the transfer balance cap. It also sends alerts where the member’s total superannuation balance is over $1.6 million or above the $1 million threshold, which requires them to commence event-based reporting on a quarterly basis.
However, SMSF software providers, he says, are “only just scratching the surface” with the potential applications of artificial intelligence for SMSFs and there is much further to go.
As artificial intelligence becomes increasingly smarter, it will be able to apply complex rules within the SIS Act and Tax Act to SMSF data and identify whether the member is compliant with those rules or not, he explains. Mr Lesh says his firm has already identified 22 rules in the SIS Act where this could be used.
As the quality of data becomes richer, Mr Bungard expects that SMSF administration systems will be able detect where a transaction will contravene the rules of the trust deed.
“For example, if someone has a fund and it’s a QROPs fund, and therefore their trust deed has restrictions on what they can do in terms of early access, and someone in that fund tries to take money out under the age of 55, or whatever the contravention was, the system would send an alert to them,” explained Mr Bungard.
“The system will alert the user that they can’t do that because the trust deed of the fund actually says that’s prohibited, even though it might not be prohibited in another fund.”
It will be able to inform the user of what they can or can’t do based on the various documents relating to their fund.
“In this particular case it would just be prohibited because it’s important that the member stays within those rules to qualify for the QROPs provisions,” he says.
Transaction matching is another key area where artificial intelligence and machine learning can be applied, according to Mr Lesh.
“With transaction matching we’ve got all these rules and the problem is that it is all really dependent on having a rule, and having data there, and finding stuff and matching stuff, but what happens if you didn’t need a rule? What happens if the whole idea of data input rules as we’ve got them at the moment disappear from transaction matching?” he questions.
“It disappears because you don’t need it anymore. What we’ve been playing with is taking something that’s thousands of lines of code in a computer sense and bringing that down to 15 or 20 lines of code, where the machine learns using AI.”
A simple example of this, he says, is with a bank transaction where the computer looks at the patterns, analyses those and comes up with suggestions and instead of creating a rule, the machine actually learns and the next time it will automatically process that transaction.
“So the whole idea of you having to say put it here or put it there — it actually doesn’t need you to do that,” says Mr Lesh.
The software system will only automatically post the transaction, however, if there is at least a 90 per cent probability of the transaction being sent to the right place, he clarifies.
“If it’s less than 90 per cent then we’ll highlight it for the person to post,” he says.
In the past, software providers generally had to apply certain types of data input rules to specific funds, he says, whereas this technology can be applied in the same way across all funds.
“We are heading to zero touch transaction matching. Can you imagine that with SMSFs where you don’t have to actually match a transaction?” says Mr Lesh.
“We’re using the power of the cloud, the power of the data with some machine learning and some AI to actually get away from doing a whole lot of things manually.”
The SMSF administration platforms are gathering huge amounts of information about SMSFs and their transactions, says Mr Smith, and over time they will be able to understand more about what SMSF trustees are doing.
“This treasure trove of data can be used for two purposes. One of those is working out the difference between a well-managed and well-performing fund, versus one that isn’t,” says Mr Smith.
“The second purpose it could be used for is to look for transactions that potentially have an issue with them if they haven’t been processed correctly, and to flag those for an administrator to look at and investigate why that’s an unusual transaction.”
Mr Lesh says that patterns and trends are currently pulled from the data in a fairly manual way, which is something he would like to change.
“What we’d like to be able to do is have that information available for people in real time. So, rather than getting a report every six months saying this has happened or that has happened, we’ll be able to say well across our clients’ funds that this happened yesterday or this is where things are at the end of this month and this is where they were at the end of last month,” he explains.
“It will give us the ability to do a lot more live reporting, comparisons and benchmarks.”
Intello executive director Kris Kitto predicts that big data will be leveraged to provide users with personalised responses to questions they have. This might be through applications that use natural language processing to interact with users, he explains.
“So taking the sorts of insights that the big administrators report on, but taking it to the next level and making it a lot more personalised,” he says.
“It could be a question like ‘tell me all the clients that have investments in a particular stock?’ Very quickly the adviser will be able to interrogate their database and find clients that are suitable for a particular strategy, based on the data that’s available.”
This is largely a manual process at the moment that requires people’s knowledge of the clients to be able to narrow down the list, and then using data to confirm that strategy is actually appropriate for those clients.
Chatbots are a similar tool to this that are already being adopted by some SMSF firms.
“I think chatbots are going to be an interesting little tool that come out more and more across different areas,” says Mr Kitto.
Automated bots, he explains, are able to leverage big data to assist users whether they’re accountants, advisers or trustees.
“We’ve actually put a little bot in our portal and it invites advisers to ask a question, and depending on what they ask, it’ll search for keywords in our articles and find potential answers depending on what they ask. So it’s a very simple self-service type of bot.”
The expansion of mobile technology is also likely to be strong focus for SMSF software companies.
“I think we’ll see the SMSF administration software companies implementing a lot more mobile technology to provide functionality to administrators and trustees and enable them to see what’s happening in their fund and actually administer the fund on a mobile device,” says Mr Smith.
An SMSF might be able to sign documents sent by an administrator on their mobile device and send it back to the administrator.
“It’s possible that auditors may even start using mobile technology as well to improve their efficiency. It’s clear that mobiles have a very important place not just for SMSFs, but in nearly all the types of things that administrators and accountants do,” he says.
Mr Kitto says there is a gap in the market at the moment for a provider that can connect SMSF trustees with SMSF professionals. SMSF administration companies he believes may extend their reach and develop a platform to provide this kind of service.
“While they provide the software to do the accounts and the compliance, they haven’t actually created a platform like an app to connect both sides of the equation yet,” he says.
The major software providers in the wider accounting space already allow users to search for certified accountants in their area, so it’s likely this kind of technology will appear in the SMSF sector also, he says.
The use of e-signatures is another development leading to greater efficiency in the SMSF compliance process, according to Deloitte, national leader financial services, assurance and advisory, Frances Borg.
It is very important for trustees to be able to review their documents whether its financial statements, declarations or minutes, says Ms Borg, and the ability to do that electronically helps clients keep on top of it. Rather than sitting on the shelf, documents can be reviewed and signed there and then.
“No need to get to a post office or see their financial adviser to lodge the accounts. In this way technology helps with compliance as well,” she says.
E-signatures, she explains, can generally be used to sign financial statements and other compliance related documents such as investment strategies.
“They cannot be used for all documents though. Some documents like trust deeds need to be manually signed by law. At present there’s no comprehensive clarity around where digital signatures are acceptable, but we do know the ATO accepts digital signatures for tax returns and financial statements.”
THE FUTURE OF SMSF ADMINISTRATION
Looking ahead into the far future, there’s a question of whether automation will reach a level of sophistication that sees the SMSF administration platforms bypass the administrators and go straight to the trustee, says Mr Smith.
“Now I don’t think that’s likely in the short term, but in the longer term it’s possible. [However], I still think trustees will need experts to deal with the sophisticated issues with their SMSF,” he reassures.
Mr Kitto agrees that automation will eliminate a lot of the basic roles in the industry that don’t involve specialist expertise.
“The SMSF space is not for amateurs anymore. It’s not for accountants who do SMSFs part time, it’s fairly specialist because what happens is automation starts at the bottom and it starts automating and reducing the mundane and repetitive work, and we’re already starting to see that,” he explains.
“The people doing the daily processing stuff, they’re not going to have their jobs in probably three to five years. Their jobs are going to look so different, they’re not going to be doing the same thing and they’re going to have to move further up the value chain if they still want to work in the sector.”
The role of auditors has shifted from being very transactional in nature to having a greater focus on exceptions and areas of judgement, according to Ms Borg.
“It is really important to understand what the end-to-end process looks like, and what controls are in place to mitigate errors and confirm the reliability of the data provided for accounting and audit,” she says.
“Rather than being focused on one transaction to the next, the professional focuses on the exceptions, or where a transaction looks abnormal, or there has been a compliance failure.”
The audit technology she uses, has various APIs to share registries that confirm the holdings for share balances, and APIs to the titles registry to confirm the titles of property.
All of the SMSF administration software providers have quite comprehensive APIs available that take the effort away from traditional document processes, she says.
“We are able to get all of the necessary financial data, to prefill our audit work papers. That doesn’t mean there’s no testing done, there is certainly testing done, but a lot of the manual entry is taken away through the use of APIs,” she says.
Moving forward, Mr Smith says there is going to be an increasing push on SMSF administration systems to adopt quality standards that auditors can rely upon.
“If an auditor is able to see that the admin platform itself has a level of quality assurance on it, then they can place more reliance on that system without having to check every transaction,” he says.
“I think that reliability will improve a lot in the future and I think we’ll see the admin platforms either do it on their own bat or be forced to adopt some level of quality assurance on their own systems.”
“[AUDITORS] WILL ALSO BE ABLE TO USE BIG DATA FROM AN ANALYTICAL PERSPECTIVE TO DETERMINE WHETHER OR NOT THE FUND LOOKS AS THOUGH IT’S BEEN PROCESSED CORRECTLY BECAUSE THEY’LL BE ABLE TO COMPARE HOW ONE FUND LOOKS AGAINST A WHOLE POPULATION OF FUNDS” — David Smith, Smithink
Big data and data analytics, Mr Smith believes, will play an important role in the audit space and will soon enable systems to be able to audit 100 per cent of transactions and flag for the auditor the transactions which are unfinished or a duplicate which require further analysis.
“[Auditors] will also be able to use big data from an analytical perspective to determine whether or not the fund looks as though it’s been processed correctly because they’ll be able to compare how one fund looks against a whole population of funds.”
Continuous auditing is another potential development the industry may see. This would involve audit firms having programs that continuously run on administration platforms and essentially audit on the fly all the time, Mr Smith explains.
“So at any one time it would be possible to get an auditor perspective on how the fund looks right now,” he says.
“Whilst I think it’s technically feasible I’m just not sure that the demand for that sort of thing would necessarily be there. It could be that the government chooses to legislate to require that, but there’s doubt as to whether people actually need that level of auditing.”
TOOLS FOR THE REGULATOR
The ATO, along with other regulators, are going to be using big data and data analytics in a very large way and not just to regulate SMSFs but the whole tax system, says Mr Smith.
“What it allows them to do is much more quickly and efficiently highlight the particular funds that might be a potential concern without having to look at all of them,” he says. “They can use the analytics to analyse all of them and flag the ones that require further examination. That’s a very efficient way to run the tax system.”
The ATO is already processing some individual tax returns in a fully automated fashion, says Mr Bungard, and while they’re still a long way from being able to do that for SMSFs, it doesn’t mean that they don’t have that as a distant goal.
“Rather than having annual processes, we may move to a system where things are basically being dealt with as they occur,” he says.
“I think the more real-time data the ATO has, the more effectively they can monitor as a regulator and spot problems. Exactly what that means in terms of the mandate they have as a regulator and how they interact with the industry on that, I think there’s still further debate on how that will unfold, but I think that’s the path we are going down.”
Mr Kitto says the industry can expect to see the ATO become more pro-active with its compliance activities.
Illegal early release is one compliance issue that might become easier to detect through greater access to data, he says.
“If there is someone who loses their job [for instance], and the ATO doesn’t see the data coming through the single touch payroll anymore, and if they’re also a member of an SMSF, that might immediately put them on higher alert,” he explains.
“We also don’t know what’s going to happen with the new payments platform. There may be some other sort of information they can glean around compliance issues around loans to a related party and illegal early access.”
With a lot of the breaches for SMSFs occurring in these areas, this is already a key focus for the ATO, Mr Kitto says.
“The transfer balance cap reporting does provide some insight into that, but it’s still going to take a bit of time,” he says.
He expects that the ATO is going to want to know a lot more information going forward, “I don’t think their appetite is sated yet, I think once they start getting more regular reporting they’re just going to want it on a more and more regular [basis],” he says.
“It will probably get to the stage where if you transact on a Monday, the ATO knows about it on the Tuesday, so it’s going to see any compliance issues dealt with in a much faster period of time, and potentially there will be earlier intervention by the ATO.”
COLLABORATING WITH THE REGULATOR
Earlier this year, the ATO and the SMSF Association set up the SMSF Future Think Tank. The think tank is aimed at improving access to timely and accurate information and leveraging technology as a way of driving engagement and improving outcomes for individuals in retirement. The major SMSF administration software firms each play a key role in the think tank as foundation members.
SuperConcepts chief technology officer Kurt Groeneveld says the forum will enable SuperConcepts, along with the other major software providers, to collaborate together in order to drive innovation and, ultimately, better outcomes for SMSF trustees.
“We’ll be sharing insights on key topics the group has begun to explore, including the efficiencies available in dealing with the ATO at the electronic level by taking advantage of the many existing ATO interfaces. We’ll also be exploring additional services that might become available,” Mr Kurt Groeneveld explains.
Mr Groeneveld says the think tank is also looking at what the appropriate levels of security and data integrity are, and how to support flexibility and simplicity alongside that.
“There is a clear desire from the ATO to support more meaningful and timely data and this could lead to some real improvements between the industry and its major regulator.”
This feature article was first published in the May edition of SMSF Adviser magazine