Is the issue of property spruiking and individuals entering unsuitable SMSF leveraging arrangements still a pressing concern for the industry? If so what needs to be done?
Yes, and I think it is going to be an ongoing concern for the SMSF sector for some time.
ASIC is obviously paying more attention to the issue, recently seeking a court order against [an alleged] property spruiker in the NSW Supreme Court.
The SMSF Professionals’ Association of Australia (SPAA) has also developed best practice guidelines for providing advice on limited recourse [borrowing] arrangements (LRBAs).
The only real way to solve the risks of entering into limited recourse borrowing arrangements is to either ban it, which I think is a very drastic action, or have more education so that people understand they need to be approaching a qualified professional for self-managed superannuation advice. Someone who has SPAA specialist accreditation would generally be the best person for someone to approach.
Are there large numbers of SMSF trustees using LRBAs to invest in property?
The statistics around limited recourse borrowing are still not necessarily set in stone. The ATO has come out recently saying their statistics in this area are not particularly great, they are not able to adequately provide statistics on the growth in LRBAs. Their statistics don’t measure it well so I think we’ve got to be really careful about the inferences that are being drawn from the so-called statistics that have been coming out from ASIC.
Should leveraging in SMSFs only be prohibited for those with lower balances and close to retirement?
No. I think what would be a better solution would be an appropriateness test, some of sort of tool to measure whether the advice was appropriate to go into a leveraging situation with superannuation. I think that would be a really good starting point with regulation. If someone’s got a problem with the outcome they’ve had then really they need to go back to the advice they were provided with. The biggest issue, of course, is that you have unregulated people being property spruikers, advising people to do this with their SMSFs and that’s outside the sphere of the current regulation requirements. Those people at the moment do not hold licences to give advice through ASIC so they’re not subject to the rules and regulations that the rest of the advice community are subject to and that’s probably for the regulators to have a look at in terms of their enforcement activities.
Do you think it’s an area ASIC will be regulating more heavily in the next few years?
I don’t think they have the resources to do that. In the end it’s not a large percentage of investors that are really being impacted by this. Advice being given by those in the unregulated industry is an ongoing problem for ASIC to pursue, and they have to continue pursuing those people giving advice without being appropriately licensed; certainly that’s got to be an ongoing effort of theirs.
Wherever there is money there is going to be unscrupulous advice; that’s the reality. So ASIC needs to be aware that’s the position and they need to police the rules appropriately.
I confess to getting lost on why this is regulated by ASIC. SMSFs are financial products. Advice on financial products is financial advice/personal advice, and can only be provided by licensed persons; and the advice has to be appropriate to the client and in the client’s best interests.
Advice to set up a SMSF knowing it will be gearing into property (ie disposing of one financial product and acquiring another…) is financial product advice.
I cannot see what SPAA credentials have to do with understanding gearing, property, risk and how they relate to varying individuals. These are not issues directly connected to SMSFs and are generic in nature and outside SPAA’s brief.